The principles of physics mandate that a leaner aircraft will go faster and smoother at heights of more than 30 km above the ground. The economics of the airline business are not too dissimilar. The best way to deal with hurdles of rising cost is to make the business leaner.

Unfortunately for domestic airlines, the cycle of high costs has returned and, seemingly, earlier than most expected. It has been less than four years since domestic airlines started to enjoy the fruits of a low cost cycle. Last year this time, such was the confidence in the industry that aggressive expansion plans—which required high capital expenditure—were charted out. Large aircraft orders were placed by most large airlines.

In hindsight, those plans were too bullish, too soon. Today, with crude oil prices finding a new normal at $70-75 a barrel and the dollar at Rs 68-69, costs have started to pinch carriers in a manner which led to the closure of Kingfisher Airlines in 2012 and the change in ownership of SpiceJet in late 2014. To put things into perspective, on how a weak rupee and high oil prices are strangling airlines, here are a few comparisons: Since April 1, 2018, aviation turbine fuel prices in Delhi, one of the country’s largest airline hubs, has been higher than Rs 60,000 a kilo-litre; it even touched Rs 70,000 a kl in June. At the same time, the Indian basket of crude oil, the price at which local oil refiners source crude oil, ranged between $69 a barrel and $75 a barrel. The last time aviation turbine fuel was more than Rs 60,000 a kl for more than three months at a stretch was between September 2014 and December 2014. Back then, the Indian basket of crude oil ranged from $96.96 a barrel to $77.58 a barrel.

Not only is the weak rupee making aviation turbine fuel costlier than it was in the past, but it is also increasing the expenses of domestic airlines. For most domestic airlines, their largest expense items—such as aircraft lease rentals—are dollar denominated, while their income is largely in rupees.

To borrow a phrase from the world of boxing, the left and right combination of fuel prices and weak rupee has started to hurt local airlines. Their bottom line, which was looking healthy barely a year ago, is now precariously close to red.

For those who have tracked the aviation sector closely, pessimism about the industry’s prospects is a normal feeling. Despite the bullishness that was offered through the financial results of domestic airlines in the fourth quarter of 2017-18, the stock markets pre-empted the turbulent future.

From April 1, domestic airlines have shed nearly Rs 18,000 crore in market capitalisation on the BSE. IndiGo, the biggest loser with a Rs 12,774 crore drop in market capitalisation, was the first one to announce the first quarter results for 2018-19; already, there is a sense that this will be bad year for the airline business in India.

In a business which is known for losses and cash burn, IndiGo has been an outlier. It has been known to make profits—that too on a consistent basis. The last time it had a loss was when the airline was in its infancy. But in the first quarter of 2018-19, it came perilously close to a net loss. Its net profit was just Rs 27.8 crore. The call with investors that followed the announcement of the results was an indication of the uneasiness that exists in airlines right now.

For nearly an hour, analysts grilled the IndiGo top management which included Rahul Bhatia, co-founder and interim CEO of the airline; Greg Taylor, senior advisor (Taylor is waiting for regulatory clearances to take over as CEO); Rohit Philip, chief financial officer; Wolfgang Prock-Schauer, chief operating officer, and others. The key question on analysts’ lips was whether the current revenue and cost structure in the domestic airline industry is sustainable. In other words, can IndiGo remain profitable or worse, can another Indian airline go bust?

The management took the safe option of reminding everybody about the long-term potential of an underserved Indian market as its larger message. But it also interspersed suggestions on how it is cutting costs. Last August, the airline had indicated that it wants to start owning aircraft rather than acquiring them on a ‘sale-and-leaseback’ model. The plan would have required a much larger capital expenditure budget and has been put into cold storage for now. Six months ago, IndiGo was keen to fly to long-haul international routes including, several in Western Europe, by purchasing much larger aircraft like the Airbus A330s. Those plans, too, have been shelved.

It is a similar story at SpiceJet. The plans of expansion into long-haul international routes have been halted and the focus is now to maintain profitability. Legal tussles between the airline’s current promoter Ajay Singh and former promoter Kalanithi Maran are not showing signs of getting over with Maran set to take the battle all the way to the Supreme Court. Singh owns roughly 60% of SpiceJet but already nearly half of these shares are pledged with banks. SpiceJet will announce its financial results later this month.

At Vistara, an old saying—necessity is the mother of all inventions—is taking shape. The still privately held airline joint venture of Tata Sons and Singapore Airlines, is yet to make a profit. However, till now the revenue line and expense line were moving in a direction where profitability was not unimaginable in the medium term. That is till the high cost cycle returned. From August 2, it changed its fare structure in a manner where on the same aircraft, services will range from low-cost carrier offerings to the very high-end offerings of full-service carriers. Lucrative international routes, which help in shoring up revenues, will only start by the end of this year.

Over at Jet Airways, the board will meet on August 9 to discuss the performance of the first quarter of 2018-19. But already the vultures are circling. Reports of employees being asked to take a 25% cut in salaries were followed by those that suggested that the airline’s cash reserves will dry up after 60 days. The airline has strongly refuted that it is on the brink of closure but it does admit that the times are precarious. Jet Airways, headed and majority owned by the wily old man of Indian aviation, Naresh Goyal, would know high fuel price cycles in India typically witness an airline going bust. It has been in the business since 1993 and over the years it has seen the likes of ModiLuft, East West Airlines, Damania Airways, Air Sahara, Air Deccan, Kingfisher Airlines and SpiceJet succumb to cost pressures. If history is anything to go by, Goyal—who still owns 51% of the airline and none of his shares are pledged—will need to infuse more cash into the airline for no amount of cost cutting will help if the airline inducts over 200 aircraft into its fleet in the coming years.

Another churn in the Indian airline sector has well and truly started. Given that in the U.S., air trips per capita stands at nearly twice that of India, the long-term potential of a market which has a population of over 1.2 billion is undeniable. However, these short-term cycles of high cost have the potential of completely re-shaping the industry. What remains to be seen this time is if there is a casualty and an airline goes bust. Rest assured that the punters will watch this space closely and any sign of imminent airline failure will be headline news.

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