Temporary Blip

For most of the last decade, Indian aviation had one dependable assumption: traffic goes up. Airports were designed, financed, tariffed and bid on the expectation of high single-digit or low double-digit growth, and almost every year the market delivered it. The post-pandemic recovery made the assumption look conservative.

DGCA data shows that in the first five months of FY2026-27, April to August 2026, domestic airlines carried 668.0 lakh (66.8 million) passengers, against 675.3 lakh in the same period of FY2025-26. That is a 1.08% decline. May was the only month that grew, up 9.49% year on year. Every other month fell: April by 3.48%, June by 1.03%, July by 4.80% and August by 6.34%, when airlines carried 121.3 lakh passengers against 129.5 lakh a year earlier. The decline is getting steeper as the financial year goes on.

Load factors show that this is not only a capacity problem. Airlines have cut flights and are still not filling the seats that remain. IndiGo's passenger load factor fell from 86.4% in May to 79.2% in August. Air India Group's fell from 85.5% in June to 77.0%, and Akasa's from 92.5% in May to 87.6%. For all three, August was the weakest month of the calendar year so far. Averaged over April to August, IndiGo ran at 83.2%, Air India Group at 81.5% and Akasa at 91.2%.

The market has also become more concentrated. Between April and August, IndiGo carried 65.7% of domestic passengers and Air India Group 25.0%, together more than 90% of the market. Akasa held 5.8%. SpiceJet's share fell from 3.4% in April to 1.2% in August, or 2.2% across the period, and the remaining regional carriers together carried about 1.4%. When two groups carry nine-tenths of domestic passengers, their network decisions largely determine traffic at most Indian airports.

The national picture is similar. ICRA estimates total airport traffic for FY2025-26 at about 420 million passengers, only 2% above FY2024-25. Its September 2026 outlook puts FY2027 growth at 1-3%, or 424-432 million passengers, with aircraft movements growing 0-2%. Much of the capacity reduction was forced on airlines by fuel costs and grounded aircraft, but falling load factors show that demand has weakened as well.

Anatomy of a Stall

Four factors have had an impact at the same time, and only some of them will pass quickly.

The first is fuel. The conflict in West Asia disrupted oil flows and sent crude prices higher. IATA's June 2026 outlook expects jet fuel to average about US$152 per barrel this year, against US$90 in 2025, and the global industry fuel bill to reach roughly US$350 billion. IATA halved its 2026 global airline profit forecast to US$23 billion, a 2.0% net margin. For Indian carriers, for whom fuel can account for up to 40% of operating costs, the effect was immediate. Air India cut up to 22% of domestic frequencies between June and August, IndiGo trimmed capacity by 5-7%, and fares rose by around 15%.

The second is the Gulf. Dubai, Doha, Abu Dhabi and Muscat are India's main gateways to Europe, Africa and North America, and they carry much of its diaspora traffic. Between April and June 2026, India's international traffic fell about 9% to 17.2 million passengers, and international traffic on Indian carriers fell 27%. Air India Express and SpiceJet lost more than half their international volumes. Air India suspended 145 weekly international flights between June and August.

The third is geography. Pakistan's airspace has been closed to Indian-registered aircraft since April 2025, and the latest notice extends the closure to 24 October 2026, the seventeenth extension. Westbound flights from northern India now take longer, burn more fuel and sometimes need technical stops. With fuel prices high, that cost matters far more than it was a year ago.

The fourth is supply. Engine-related groundings, flight duty time limitation (FDTL) rules and delivery delays have limited how much capacity airlines can put into the market even when demand recovers. ICRA lists these supply-chain problems alongside fuel and geopolitics as its main headwinds.

Some of this is already easing. A US-Iran interim agreement was signed in June. Middle East passenger demand, down 61% year on year in March, was down only 9.5% in July. Jet fuel prices have come off their peak, and Air India restored most international services from 1 September. The important point is that none of these risks appeared in the demand forecasts behind India's current airport investment cycle.

The Capex Mismatch

Airports are long-lived, lumpy and mostly debt-funded, and the investment cycle is already under way. CRISIL estimated that private airport operators would spend more than ₹60,000 crore between FY25 and FY27, around 70% of it debt-funded, based on domestic traffic growing 8–9% a year. ICRA now puts sector capex at more than ₹1 lakh crore over four to five years. Navi Mumbai, Noida and Bhogapuram have opened within eight months of each other, and terminal expansions are under way across the privatised network.

When traffic runs at 1-3% instead of 8-9%, the gap compounds. Over three years, 8.5% annual growth adds about 28% to the base. Growth of 2% adds about 6%. For a 40-million-passenger airport, that is a difference of roughly 9 million passengers in FY2029, which is about the size of a terminal phase.

Operators do have some protection. ICRA expects airport revenues to grow 6-8% in FY2027 and operating margins to stay near 50%, supported by non-aeronautical income and tariff resets. But the protection is uneven. It is weakest where traffic risk has been passed to the private party with no reset mechanism, and where new capacity opens into a market that has stopped growing.

Where the Stall Bites Hardest

Regulated tariffs. Under the Airports Economic Regulatory Authority's (AERA) hybrid-till approach, aeronautical charges are set to recover a target revenue built on forecast traffic. If actual traffic falls short, the airport under-recovers and a true-up adds the shortfall to the next control period's charges. That protects the regulated asset base in theory, but in a weak demand market it raises per-passenger charges exactly when airlines can least absorb them. Hyderabad's fourth control period order, effective 1 September 2026, sets the departing User Development Fee (UDF) at ₹515 for domestic and ₹1,030 for international passengers. Airlines can be expected to resist future orders that use it as a benchmark.

Greenfield ramp-ups. New airports depend on network migration, and airlines are reluctant to open new bases during a capacity squeeze. Navi Mumbai handled 638,394 passengers in its first three months and launched its first international route only in July. The plan to move a third of international movements from Mumbai's T2 has already met resistance, with Air India citing operating costs. Noida, which opened on 15 June, has the same issue: an airport with a new terminal but few carriers.

Non-aeronautical revenue. Retail, F&B, parking and property income are meant to offset regulated charges, and under the hybrid till, 30% of that income cross-subsidises aeronautical tariffs. These revenues depend on dwell time and passenger spend, and both fall when fares rise and travellers become more price-sensitive. A flat passenger count with lower spend per head erodes the offset, so the tariff pressure lands on airlines anyway.

Phasing triggers. Many concession agreements and masterplans link expansion phases to dates or to design-year forecasts, not to observed demand. In a flat market, a date-based obligation can require terminal capacity years before it is needed, while the airport's binding constraint may lie airside or landside.

Avinia's View: Plan in Ranges, Not Points

We do not think India's long-term growth story has changed. India's propensity to fly is still a fraction of that in comparable economies, the middle class is still growing, and the airline order books (IndiGo's 60 A350s, Akasa's reported talks for more than 200 additional 737 MAX aircraft) show that the carriers are still betting on growth. What has failed is the planning method. A single-point forecast describes one expected path and says nothing about the variance around it, and 2026 has been a high-variance year.

Our recommendation has four parts.

First, forecast probabilistically. Airports should replace single forecasts with fan charts, generated, for example, by Monte Carlo simulation over an econometric base, with fuel price, GDP, airline capacity and shock scenarios as explicit drivers. The output is P10, P50 and P90 demand paths. Capacity is then sized to P50, with the design protected for P90.

An example shows the benefit. A mid-sized airport handling 15 million passengers today, with a P50 path of 6% annual growth, might see P10 and P90 values of roughly 16 and 23 million in five years. A single-point plan builds for 20 million by a fixed date. A range-based plan sizes the core terminal for 20 million, safeguards land and utilities for 23 million, and schedules the next module only when throughput reaches an agreed share of declared capacity. Construction spend follows actual demand, and the design still allows for the upside.

Second, trigger phases on demand. Expansion obligations in concession agreements and masterplans should depend on observed peak-hour or annual throughput crossing a defined threshold, with a fixed lead time for delivery. That protects both the concessionaire and the grantor from building too early or too late.

Third, stress-test the tariff path. Operators and AERA should run a flat-growth case alongside the base case in every control period submission. That makes visible the true-up that would result and its effect on per-passenger charges and airline economics, before the order is issued.

The regulator has a role as well. AERA already reconciles actual against forecast traffic at each reset. Publishing the forecast ranges it accepts, not just the point estimates, would give airlines, lenders and investors a common basis for judging the risks in each order and would make true-ups less contentious.

Fourth, protect the balance sheet. Lenders already model downside cases. Concessionaires should negotiate covenants and capex draw schedules that match the P10 path, not the P50 path, so that one bad year does not force a refinancing.

Conclusion

The 2026 stall will probably be remembered as an interruption, not the end of India's growth. But it has shown how thinly the country's airport investment case is protected against shocks. Fuel price volatility, geopolitical disruption and supply-chain limits are now permanent features of the industry, not rare events. The airports that come through best will be those whose plans, tariffs and financing were built for a range of outcomes. The ones that assumed traffic would always rise will find their forecasts were the weakest part of the plan.

Source: DGCA, ICRA, CRISIL, IATA