A Structurally Hostile Industry

Globally, airlines operate in one of the most structurally hostile sectors in the modern economy. They face high fixed costs, volatile demand, and often weak bargaining power within the aviation value chain. Aircraft and engine leases, crew, maintenance, slots, and IT systems together largely stitch up the fixed cost base. 

Demand is highly sensitive to the country’s economic cycles, pandemics, wars, along with fuel prices. The result? Revenue can collapse quickly while obligations remain.

The value chain is also skewed. Aircraft and engine makers, lessors, and major airports are concentrated oligopolies, while airlines are numerous and often thinly capitalised, limiting their ability to push back on prices or terms of condition.

Over long periods, global airline returns have barely covered the cost of capital, and many carriers run with high leverage and lease liabilities that magnify even modest shocks. In effect, airlines combine the capital intensity and regulation of utilities with the volatility of discretionary services but without corresponding pricing power.

India’s Rise As Third-Largest Aviation Market

Over the last decade, India’s aviation market has expanded rapidly to become the third largest domestic market behind the United States and China. Policy initiatives such as the UDAN regional connectivity scheme, expansion of metro and non-metro airports, and private participation have coincided with rising incomes and discretionary spending to bring more Indians into the skies.

The number of operational airports has roughly doubled from about 74 in 2014 to around 160 by 2026 and the government’s Vision 2047 documents target roughly 350 to 400 airports by the mid-century mark. Fleet and traffic projections suggest total passenger volumes could reach about 1.1 billion annually around 2040, supported by a fleet of roughly 2,300 to 2,400 aircraft, with aviation and allied sectors supporting tens of millions of jobs in a projected US$ 10-trillion economy. 

In broad terms, this implies total traffic of 600–700 million passengers by 2030, crossing one billion around 2040-41, and staying above that level by 2047. 

At present, the major airlines that operate in the country comprise IndiGo, Air India along with Air India Express, Akasa Air and SpiceJet. Besides, there are a few regional airlines.

The Growth Paradox

Despite this picture, Indian carriers, driven by the Tata Group owned Air India, collectively posted a cumulative loss of about ₹5,289.73 crore, indicating that the sector failed to earn its cost of capital even during a strong demand phase.

The combined net loss for the Indian aviation industry in the 2025–26 financial year surged to be around ₹17,000-18,000 crore.   

This coexistence of rising traffic and weak profitability reflects structural issues on both cost and revenue sides. The cost base is rigid and heavily fixed, requiring very high load factors and utilisation. On the revenue side, consumers are highly price-sensitive, and political sensitivities around “high” fares often become a talking point. 

The current problem has got aggravated with the fall of the Indian rupee against the American greenback – most revenues are in rupees, but major costs such as leases, engine overhauls, spares, and insurance are dollar-denominated, exposing airlines with thin equity to currency swings and higher risk premia. 

The result is an industry that delivers rising consumer surplus — cheap fares and more connectivity — but inconsistent producer surplus.

ATF Taxation: The Invisible Tax On Every Seat

A strong fiscal distortion in India is the treatment of aviation turbine fuel (ATF), which remains outside the Goods and Services Tax (GST) framework and is taxed instead via state-level value added tax (VAT).

Therefore, airlines cannot obtain input tax credits on ATF and the tax burden cascades through the cost structure and raises effective fuel costs relative to many competing aviation hubs.

VAT on ATF at major metro airports has historically been in the 20%–30% range — for instance around 29% in Tamil Nadu, 25% in Delhi, and 18%-25% in parts of Maharashtra.

Even after some recent reductions, the blended tax component in fuel costs for airlines was estimated in one televised analysis at around 25%–27%, once central excise and average state VAT are combined. 

As a result, ATF typically accounts for about 40%–45% of an Indian airline’s operating cost base, one of the highest fuel shares globally.

Comparative Benchmarking: India Vs China And Peers

Comparatively, India’s ATF tax burden is significantly higher and more distortionary than that of many peers, including China’s.

China operates a national value added tax system with a standard VAT rate of around 13% and reduced rates of 6% to 9% for specific sectors, with exports typically zero-rated. Jet fuel for scheduled passenger services is generally treated within this VAT framework, with the effect that airlines can claim credits on input taxes in contrast to the multi-layered VAT structure that Indian carriers face.

Blended effective tax on ATF in India is often significantly higher as a percentage of fuel value, compared with a creditable single VAT rate around the low teens in China.

IndiGo’s Relative Outperformance

Within this challenging environment, low cost carrier IndiGo has emerged as a rare example of a large Indian airline that has delivered sustained profitability, albeit with setbacks as conditions change.

In FY2024-25, Interglobe Aviation, the promoter of IndiGo, returned net profit of about ₹7,258 crore, down 11% from the previous year profit of ₹8,172.5 crore, even as revenue grew about 17% to ₹80,828 crore. 

Total expenses rose at the same time – 17%, driven by higher fuel costs, engine rentals, and airport charges, squeezing margins despite strong top-line growth.

IndiGo’s relative advantage rests on a few strategic pillars. Its fleet is dominated by a single narrowbody family (A320 series), which simplifies maintenance, training, and operations, reducing CASK and enabling rapid turnarounds.

With around 60%–64% domestic market share, IndiGo benefits from network scale and density on trunk routes. Finally, ancillary revenues — from seat selection, baggage, and other add-ons — contribute to revenue per passenger beyond base fares.

However, FY2025-26 has been turbulent for IndiGo as well. In Q3 FY2025-26, its net profit dropped 77%–78% year-on-year to around ₹550 crore, largely because of exceptional costs of roughly ₹1,546 crore linked to new labour code implementation and massive disruption costs from large-scale cancellations triggered by pilot fatigue rules and operational issues. This episode underlines that even a well-run low-cost carrier can see profits evaporate when regulatory adjustments, labour, and operations misalign.

Air India’s Deep Losses And Compressed Transformation

On the other side of the spectrum, the Tata Group-owned Air India Group illustrates the cost of a compressed, capital-intensive turnaround.

Under Tata ownership, Air India is simultaneously renewing its fleet, upgrading cabins and services, integrating multiple brands, and repositioning as a global network carrier. These moves are occurring while it still carries a legacy cost structure.

The Air India Group recorded a loss before tax of about ₹9,568–9,808 crore in FY2024-25. Within this, Air India (including merged Vistara operations) posted a loss of roughly ₹3,976 crore, while Air India Express losses were ₹5,600–5,800 crore.

The ballooning of Air India's losses is driven by an intense combination of legacy factors, cost of modernisation and fleet expansion, geopolitical headwinds, operational hurdles, elevated jet fuel prices, supply chain constraints and fleet delay, and market constraints.

Airport Capacity And The Bottlenecked Sky

Major aviation hubs like Delhi and Mumbai continue to face slot scarcity, congestion, and airspace constraints that cause delays and raise airline operating costs translating into higher aeronautical charges and user fees as PPP airports seek to recoup large capital investments, which directly raise airline CASK and ticket prices.

Congestion and limited runway capacity reduce aircraft utilisation and increase fuel burn due to holding patterns and ground delays, undermining the efficiency advantage.

Why Indian Airlines Keep Winding Up

India’s experience with airline failures — Damania Airways, East West Airlines, Air Deccan, Kingfisher, Jet Airways, Go First, among others — reflects the interaction between global structural challenges and domestic distortions.

Ever since the opening of Indian skies in the 1990s (after four decades of state monopoly), 36 plus airlines have come and folded. High, non-creditable ATF taxes raise fuel costs and amplify volatility. Dollar-denominated leases and maintenance expenditures sit on thin equity cushions, exposing airlines to currency swings.

Regulatory and policy volatility—over slots, UDAN route economics, labour regulations, and safety rules— hit carriers unevenly, especially newer or smaller players. High airport charges, capacity constraints, and intense fare competition on trunk routes further squeeze yields.

The result is a boom-bust cycle. New carriers enter during growth phases and undercut fares to gain market share, but most fail to survive fuel spikes, rupee depreciation, or regulatory changes.

Structural Fixes For A More Investible Sector

Turning India’s aviation growth into an investible, structurally profitable sector requires reforms that go beyond short-term relief.

Key fixes include, among others, an independent, well-resourced Civil Aviation Authority with clear mandates for safety, economic regulation, and consumer protection, to reduce policy volatility and conflicts of interest.

The focus also needs to be on fiscal rationalisation – bringing ATF under GST with rational rates and full input credits, while negotiating transparent compensation mechanisms for states that currently depend on ATF VAT. 

Airport economic regulation, ensuring predictable, multi-year aeronautical charges, is equally critical coupled with robust leasing and insolvency frameworks, aligned with Cape Town Convention norms, to reduce risk premia and minimise abrupt collapses. 

India’s skies are set to get busier. The core question is whether the country can engineer a fiscal, regulatory, and industrial framework in which full planes reliably pay for themselves.