Fuel, forex and conflict hit airlines: Domestic carriers’ profits may fall 15% this year

Operating profits of Indian airlines are expected to decline 10-15 per cent this fiscal year as elevated aviation turbine fuel (ATF) prices, airspace restrictions and rupee depreciation caused by the Middle East conflict weigh on the sector, a Crisil report said on Wednesday. The rating agency estimated that the combined operating profit of domestic airlines could fall to Rs 16,000-17,000 crore in the current fiscal from around Rs 19,000 crore recorded in the previous financial year. Crisil said the impact of higher costs, limited ability to raise fares and capacity rationalisation would keep pressure on airline profitability despite a possible easing in fuel prices following a potential resolution of the Middle East conflict. ATF prices remain key challenge for airlines Fuel costs remain the biggest concern for airlines, with jet fuel accounting for nearly 40 per cent of an airline's operating expenses under normal conditions. During periods of extreme volatility, this share can rise to nearly 60 per cent. The Middle East conflict pushed global ATF prices more than 50 per cent above pre-conflict levels, significantly increasing operating expenses for carriers, Crisil said. Although global ATF prices have started declining from around $145 per barrel in the week ending June 5 to below $125 currently, they remain higher than the average of around $90 recorded in the previous fiscal, the report added. "The surge in global fuel prices following the onset of the conflict has increased the operating cost of airlines significantly. Even with the expected moderation in fuel prices, they will remain above the levels of last fiscal," said Manish Gupta, deputy chief ratings officer at Crisil Ratings. The rating agency said any reopening of the Strait of Hormuz, a crucial global energy route, could provide further relief by easing fuel prices. Lease costs, rupee depreciation add pressure While lower fuel prices could provide some relief, ongoing fleet expansion by airlines is expected to increase lease rentals, putting additional pressure on their finances. The report said lease rental expenses are expected to rise around 15 per cent to Rs 27,000-28,000 crore this fiscal. The increase, coupled with moderating operating profits, could weaken airlines' ability to service leases through internal accruals. The depreciation of the rupee has further intensified cost pressures as a large portion of airline expenses, including fuel, aircraft leases and maintenance costs, are paid in foreign currencies. The report noted that the government's decision to cap domestic ATF price hikes at 25 per cent from April 1, 2026, has provided some cushion against the immediate impact of the post-conflict fuel spike. Global aviation sector also faces turbulence The challenges faced by Indian carriers come amid broader pressure on the global airline industry due to geopolitical disruptions and rising fuel costs. The International Air Transport Association (IATA) has lowered its global airline profit forecast for 2026, citing higher jet fuel prices and disruptions to flight routes due to the Middle East conflict. IATA director general Willie Walsh said the combination of rising fuel costs and operational disruptions had significantly affected profitability expectations. "There are two major factors: one is the significant increase in jet fuel prices, which has gone way higher than I think anybody would have expected, and then the disruption to the airlines in the Gulf region," he said. Despite pressure on margins, passenger demand globally remains resilient, with airlines expected to benefit from strong traffic growth. However, higher costs and capacity constraints are likely to keep fares elevated and profitability under strain.