India’s aviation sector to see temporary slowdown, recovery likely in FY2027: ICRA

India’s aviation sector is navigating a turbulent phase marked by operational disruptions, regulatory changes and cost pressures, yet the overall growth outlook remains stable, according to rating agency ICRA.

In its latest assessment, ICRA retained a stable outlook for the industry even as it projected a net loss of ₹170–180 billion in FY2026, noting that the recent disruptions impacting passenger traffic are expected to be temporary. Domestic air passenger traffic in FY2026 is now forecast to grow by 0–3 per cent, reaching around 165–170 million passengers, a sharp moderation from the earlier estimate of 4–6 per cent growth.

The downward revision follows a combination of adverse developments, including cross-border geopolitical escalations, the impact of an aircraft accident in June 2025, and reduced business travel amid headwinds from higher US tariffs. A significant contributor to the slowdown was a major operational disruption at IndiGo between December 3 and December 8, 2025, which led to the cancellation of nearly 4,500 flights.

According to the report, the disruptions were largely triggered by the implementation of stricter Flight Duty Time Limitation (FDTL) regulations, particularly tougher norms governing night duties and landings, compounded by adverse weather conditions and technical issues. IndiGo’s heavy reliance on high aircraft utilisation and extensive night operations left it with limited operational flexibility, making it more vulnerable than its peers.

As a result, domestic passenger traffic in December 2025 declined 3.9 per cent year-on-year to 143.4 lakh passengers, even as the sector’s passenger load factor remained robust at an estimated 94 per cent, indicating sustained underlying demand.

Financial pressures continue to weigh on airlines. Fuel remains the single largest cost component, accounting for 30–40 per cent of operating expenses, while a significant portion of costs such as aircraft leases and maintenance are denominated in US dollars. The weakening of the rupee against the dollar in the second quarter of FY2026 led to sizeable foreign exchange losses for airlines, many of which are yet to be realised.

Operational challenges have been compounded by ongoing supply-chain constraints, with engine issues grounding around 133 aircraft as of March 2025, equivalent to 15–17 per cent of the total industry fleet.

Looking ahead, ICRA expects a stronger recovery in FY2027, with domestic passenger traffic growth projected at 6–8 per cent. While credit metrics and liquidity positions remain under pressure for several carriers, some airlines continue to benefit from the financial strength of their parent groups.

In the near term, relief from the Directorate General of Civil Aviation has provided some breathing space. The regulator has granted IndiGo temporary exemptions from the new FDTL norms until February 10, 2026, a move ICRA believes will support a partial recovery in passenger traffic growth over the coming weeks.

(With inputs from ANI)