When Growth Takes Off but Profits Don’t: The Indian Airline Story
A High-Flying Industry with Grounded Profits
India’s aviation sector has seen a boom in demand, with domestic passenger numbers growing at nearly 5% year-on-year, yet most carriers still can’t seem to become profitable. First, to understand this paradox better, let us understand the basic economy of an airline. Revenue includes ticket sales and ancillary services like baggage fees, seat selection, in-flight meals, or loyalty programs, while costs include fuel, labour, aircraft leasing, maintenance and airport charges. As one recent study states, though the Indian market has surged in passenger numbers and aircraft orders, it also faces considerable financial challenges with soaring costs that have pushed many into distress and bankruptcy.
Fuel Costs: The Biggest Burden
Fuel is by far the largest expense for any airline. In India, Aviation Turbine Fuel (ATF) can account for about 40–50% of an airline’s operating costs which is far above the global average. ATF is not covered by India’s Goods & Services Tax, instead each state levies its own Value Added Tax (VAT) on fuel. Because ATF sits outside GST, airlines cannot claim any input tax credit on any VAT paid. This cascading tax burden directly inflates costs and ticket prices. Beyond fuel, many other major expenses for Indian carriers have princes in terms of US Dollar. Few airlines in India own aircraft, most lease them from foreign lessors. Lease rentals and borrowing costs are usually USD-denominated-so every rupee devaluation makes those payments costlier in INR. Most of the Maintenance and overhaul (MRO) work is also done abroad or by foreign firms. These two factors-ATF prices and rupee-dollar moves-are the factors that influence airline profits.
Airport Charges and Infrastructure Constraints
While fuel accounts for the majority of the costs, aircraft lease payments and aircraft and engine maintenance costs and servicing debt are highly sensitive to currency movements. To put it another way, a weak rupee or higher fuel prices inflate costs across almost every category of expense.
Airlines also have to pay steep airport and regulatory charges in India. Landing, parking, and route fees charged by the Airports Authority of India (AAI) and private operators are among the highest in Asia since they are partly to finance India’s $8 billion annual airport modernization plan. Major hubs like Mumbai and Delhi suffer slot shortages, single-runway constraints and dense traffic force higher turnaround times and delays, which reduce an airline’s aircraft utilization and increase costs (crew overtime, fuel burn, etc.)
Revenue Pressures in a Price Sensitive Market
On the revenue side, too, Indian airlines face several challenges. While traffic is growing, yields remain low because customers are very price-sensitive. Fierce competition puts industry players in two minds and forces them to enter into fare wars. Many private, low-cost carriers in India expanded by way of attracting price-sensitive passengers. Another issue is that of seasonality. During festivals and holidays, demand zooms up, while during monsoon seasons, winter depresses travel, making revenues a bit lumpy. Growth of airlines is also expected to decelerate to 4-6% in FY2026 on account of geopolitical issues.
The Missing Piece: Ancillary Revenues
But in India, airlines have largely made very little from non-ticket sources, also called ancillary services which comprise baggage fees, seat selection, loyalty programs, or in-flight sales. Worldwide, these ancillary revenues are a significant chunk of airline income. However, this may be changing. Since the Tata takeover, Air India has expanded its ancillary services, growing revenue from ₹700 crore in FY22 to ₹1,700 crore in FY24, up by 142 percent. Even with this leap, ₹1,700 crore or approximately 200 million dollars is still small when weighed against the 65 million passengers Air India carries every year. Compared to that, big global airlines sometimes raise ten to twenty percent of their revenues through these ancillary services. Since Indian airlines have relied almost entirely on ticket sales, earnings are very sensitive to changes in fares and passenger numbers.
IndiGo: The Profitable Outlier
Amongst all Indian airlines, IndiGo is the rare success story. It was founded in 2006 as a low-cost carrier; ever since, it has always managed to make profits over the last few years. Indigo controls around 60–65% of the domestic market and earns higher ticket yields than its competitors. The IndiGo success comes from a sharp focus on cost efficiency with razor-sharp attention to scale. IndiGo presently flies its one kind of aircraft, the Airbus A320 family, cuts the maintenance and training costs of IndiGo. One important innovation is IndiGo’s sale-leaseback aircraft financing, in which jets are bought at bulk prices but immediately leased back. The deal frees up capital and keeps its debt lower than rivals. Being the biggest carrier gives IndiGo some pricing power, too, with India’s domestic market effectively divided between IndiGo and Tata-owned airlines. This gives room for selective price increases without scaring off passengers. In Q4 FY2024, IndiGo posted profits of ₹18.94 billion (≈$228 million), roughly double the same quarter last year, while competitors continued to struggle. IndiGo proves that disciplined cost management and strategic scale can drive profits even in a tough environment.
Strategic Interventions Going Forward
Several reforms are needed for other Indian airlines to turn profitable:
Reforms in Fuel Tax: Aviation turbine fuel is highly taxed and outside the GST, hence combined taxes are worked out at 30-35%. Bringing ATF under GST or initiating a uniform fuel cess can bring down these costs drastically.
Increase the Domestic MRO Capability: Local maintenance, repair, and overhaul facilities would decrease foreign dependence, reduce costs, and also lead to employment generation. Recent GST reductions on aircraft parts are a positive step.
Airport and Regulatory Reforms: Night flights, parallel runways, and smart slot management can improve aircraft utilization. Reassessing airport charges by considering congestion pricing or slot auctions may also tend to relieve the costs somewhat.
Diversify Revenue: Airlines could finally get serious about loyalty programs, credit cards, upselling premium services, and bundling travel options. Regulators could also support ancillary services such as more packages for e-boarding.
India’s growth in the aviation sector is viewed as a reflection of increased income and greater access to transportation for most people. However, the ongoing financial difficulties faced by nearly all airlines in India indicate a much more complicated issue related to government regulation and business practices themselves. Profitability in aviation is not an accident but the outcome of various policy choices and operational discipline for these carriers.
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