ICRA revises domestic air passenger growth to 4–6% in FY26 as U.S. tariffs will weigh on trade sentiments in coming quarters

Ratings agency ICRA said on Friday that it has lowered its forecast for domestic air passenger growth to 4–6% in FY26, lower than its previous expectations of a growth of 7–10%, reaching 172 million to 176 million passengers, following a 7.6% year-on-year increase in FY25 to 165.4 million passengers. For the international air passenger traffic growth of Indian carriers, ICRA revised its estimates to 13-15% in FY2026, from previous projections of 15-20% last month.

ICRA attributed the revision in growth rate to cross-border escalations that led to flight disruptions and cancellations, as well as travel hesitancy following the aircraft accident tragedy. “These factors, coupled with trade headwinds stemming from U.S. tariffs, are set to dampen business sentiments in the coming quarters, bringing more circumspection to travel,” ICRA said in a note. The business outlook is expected to be stable, with the Indian aviation industry expected to report a net loss of ₹95–105 billion in FY26.

In August, domestic air passenger traffic was estimated at 131.7 lakh, 0.3% higher than the 131.3 lakh recorded in August 2024 and 4.5% higher than the 126.1 lakh in July, according to ICRA. The airlines’ capacity deployment in August 2025 was 5.8% lower than in August 2024 and largely flattish compared to July 2025.

For the five-month period in FY26—April-August 2025—domestic air passenger traffic was 677.5 lakh, corresponding to a year-on-year growth of 2.2%, ICRA noted. In July, international passenger traffic for Indian carriers reached 29.6 lakh, representing a year-over-year growth of 6.7% and a sequential increase of 6.8%.

“This growth was driven by a recovery in air travel, following a year-over-year growth of only 1.9% in June 2025, which had been adversely impacted by geopolitical tensions and weakened consumer sentiments due to the aircraft mishap,” said ICRA. For the four months in FY26—April-July 2025—international passenger traffic for Indian carriers stood at 117.3 lakh, a year-over-year growth of 10.2%.

For FY25, domestic air passenger traffic stood at around 1,653.8 lakh, a year-on-year growth of 7.6%. This was in line with ICRA’s estimates of 7-10% year-on-year growth for FY25. Furthermore, international passenger traffic for Indian carriers reached 338.6 lakh for FY25, representing a year-on-year growth of 14.1%, which was again largely in line with ICRA’s estimates.

ICRA expects net loss to widen from ₹55 billion in FY25, primarily due to a slowdown in passenger traffic growth amid a period of rising aircraft deliveries. It should be noted that the estimated net loss for FY25 and the expected net loss for FY26 have been increased from ICRA’s earlier estimates of ₹20-30 billion for both years, following an expanded sample of Indian airlines.

Notwithstanding, the expected losses are significantly lower compared to ₹216 billion and ₹179 billion reported in FY22 and FY23, respectively. The industry’s interest coverage ratio is projected to be at 1.5-1.7 times for FY26.

The aircraft-on-ground situation caused by Pratt & Whitney engine failures has increased operating costs. Expenses have risen due to grounding, higher lease rentals for additional aircraft (mainly wet leases) to cover the capacity gap, increasing lease rates, and decreased fuel efficiency from using older aircraft on spot leases as substitutes. “These factors have negatively impacted airlines’ cost structures. However, healthy yields, high passenger load factors, and partial compensation from engine OEMs are helping to mitigate the impact," ICRA noted.

In FY25, the industry faced challenges with pilot and cabin crew availability, leading to numerous flight cancellations and delays. These problems affect capacity and heighten customer complaints. The impact of the June 2025 crash on Boeing’s aircraft deliveries will be an important aspect to watch, according to ICRA. In response to the accident and other operational challenges, Air India temporarily reduced its international flight capacity by approximately 15% for wide-body aircraft.