India’s aviation sector is expanding at full throttle, but persistent headwinds continue to test its altitude. Despite becoming the world’s third-largest aviation market, the sector remains highly vulnerable to supply-side shocks — from Aviation Turbine Fuel (ATF) price spikes and shutdown risks driven by West Asia tensions, to tightening operational regulations like the revised duty hours norms and infrastructure bottlenecks. Passenger demand continues to soar, but beneath the growth story lie chronic unprofitability, fragile balance sheets, and a long history of airline collapses, exposing deeper structural fault lines. Indian aviation is not on a smooth ascent. It is growing through turbulence.
As of 2025, India has around 9-10 operational scheduled airlines, yet nearly 90 percent of the market is controlled by two airlines — the Air India Group and IndiGo — effectively characterising the sector as a duopoly.
Over the past decade, India’s aviation demand has expanded at an annual rate of roughly 10–12 percent, with an estimated flying population of roughly 14.5 percent (as of 2024), positioning it among the fastest-growing air travel markets globally. Passenger traffic is projected to reach nearly 1.1 billion by 2040, with the national fleet expected to expand almost sixfold over the same period. From a growth perspective, aviation plays a critical role in emerging economies like India by generating employment, improving market access, enabling agglomeration effects around airports and logistics corridors, boosting tourism, and attracting foreign direct investment. As of 2025, India has around 9-10 operational scheduled airlines, yet nearly 90 percent of the market is controlled by two airlines — the Air India Group and IndiGo — effectively characterising the sector as a duopoly.
Despite strong demand fundamentals, several Indian airlines, particularly full-service carriers, have collapsed over the past decade, with many current operators continuing to struggle with profitability due to constrained market structures, a price-sensitive demand base, and external pressures. Even relatively successful and profitable airlines rely on ultra-lean operating models to sustain margins, leaving them highly exposed to even minor external shocks, as recent disruptions have shown.
The trajectory of India’s aviation sector and its capacity to weather exogenous shocks is shaped jointly by three core stakeholders: passengers (demand), airlines (supply), and the regulator. Each plays a decisive role in determining whether the aviation machinery operates smoothly or slips into disruption.
The Growth of Price-Sensitive Demand
In India and much of South Asia, aviation demand moves in tandem with economic growth. Rising incomes, upward mobility, and the emergence of a new middle class directly translate into higher air travel affordability and usage. Air travel demand in the region is shaped by several factors, including per capita incomes, foreign direct investment, flight frequencies, and jet fuel prices, but income effects arguably remain the most decisive driver. With a young population and household incomes expected to approach USD 35,000 by 2030, India’s demand base is structurally strong. In this light, large aircraft orders and aggressive capacity expansion plans are not speculative; they reflect an aviation market where demand fundamentals and economic realities clearly add up.
Given India’s income distribution across groups and the growth-air travel demand nexus at the individual level, the core aviation demand base is concentrated within the top 10 percent of earners and segments of the middle 40 percent — both inherently price-elastic groups — producing a market where volume growth often comes at the expense of profitability.
While scale and passenger growth remain firmly in India’s favour, they come with a significant trade-off: weak pricing fundamentals. India’s aviation market continues to operate within a structurally price-sensitive demand environment, where average incomes, despite improving, remain relatively low. In essence, passenger behaviour in India is highly fare-sensitive, particularly given the continued availability of lower-cost substitutes such as rail transport. As a result, demand is largely centred around affordable point-to-point connectivity rather than premium ancillary offerings or high-yield services. Given India’s income distribution across groups and the growth-air travel demand nexus at the individual level, the core aviation demand base is concentrated within the top 10 percent of earners and segments of the middle 40 percent — both inherently price-elastic groups — producing a market where volume growth often comes at the expense of profitability.
These demand-side features have made the Indian aviation market fertile ground for Low-Cost Carriers (LCCs), while simultaneously undermining the viability of traditional Full-Service Carriers (FSCs). Today, the Air India Group remains the only major full-service operator — having transitioned from state ownership — yet it too continues to face financial pressures amid intense competition and thin margins. IndiGo, by contrast, remains the market leader and the sector’s sole profit-maker.
Supply-Side Issues
On an average Indian airline’s cash flow statement, Aviation Turbine Fuel (ATF) remains one of the largest expenditure items. Earlier accounting for nearly 30–40 percent of operating costs, fuel expenses have now risen to nearly 50–60 percent for several carriers amid the escalating West Asia crisis and the resulting surge in global energy prices. The Federation of Indian Airlines has called for government intervention in ATF pricing, warning that sustained cost pressures could push airlines towards operational shutdown. This challenge, however, is not unique to India. Globally, airlines are witnessing a structural shift in their cost dynamics as fuel volatility increasingly alters the economics of aviation.
From a broader supply-side perspective, Indian aviation over the past decade has been characterised by rapid expansion alongside persistent financial fragility. High fuel costs and taxation, dependence on foreign Maintenance, Repair and Overhaul (MRO) services, airport congestion, foreign exchange exposure, connectivity and infrastructure gaps, shortages of skilled aviation personnel, and, more recently, geopolitical disruptions causing airspace closures and volatility in input costs continue to constrain the supply side of passenger aviation in India.
On the market front, Indian aviation has increasingly evolved into a loss-making industry, marked by limited contestability due to its oligopolistic structure, intense fare competition among Low-Cost Carriers (LCCs), limited product differentiation, and persistent pressure on profitability. A broader institutional concern also emerges: the lines between regulator, operator, and stakeholder often appear blurred, as was evident during the recent Flight Duty Time Limit (FDTL) controversy.
Conclusion
India’s aviation sector has witnessed remarkable expansion, alongside growing foreign interest, supported by a favourable investment environment that permits FDI ranging from 49 percent to 100 percent depending on the category of investor, as well as 100 percent foreign ownership across segments such as airport infrastructure, MRO services, and technical training institutions.
The result is a near Pareto-optimal equilibrium: during stable periods, consumers benefit from low fares while dominant players consolidate gains, but the broader aviation ecosystem bears the costs.
Yet this growth rests on a fragile foundation, producing a highly vulnerable, concentrated, and dominant market structure. The pursuit of inclusivity and affordable airfares has simultaneously created deep-rooted structural distortions that now characterise modern Indian aviation: persistent airline failures, product homogenisation, weak resilience, and limited space for profitable growth. The result is a near Pareto-optimal equilibrium: during stable periods, consumers benefit from low fares while dominant players consolidate gains, but the broader aviation ecosystem bears the costs. In periods of distress or external shocks, however, vulnerabilities extend across the entire industry, eventually affecting consumers as well.
While rising incomes and passenger demand will continue to support long-term traffic growth, immediate interventions such as prudential reforms, stronger regulatory oversight, the induction of new airlines, and targeted fiscal support remain necessary. Ultimately, the structural challenges of Indian aviation cannot be resolved through sectoral policy alone. A durable transformation would require deeper shifts in India’s consumption demand profile itself, which remains contingent on sustained economic growth, rising incomes, and greater upward mobility.
Manish Vaidya is a Research Assistant with the Centre for New Economic Diplomacy at the Observer Research Foundation.
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