Who Controls India's Airfares?

In Brief: Indian aviation's fare structure is not set by airlines. Five of its six cost layers are controlled by actors that include the government, regulators, private concession holders, and international lessors, who face no competitive pressure from airline pushback. This piece disaggregates those layers, names each controller, and states plainly whether airlines have any leverage over what they pay.

The current fuel crisis and the six government interventions it triggered in eight weeks are symptoms of that structure, not causes. The pattern is not new. In 34 years of private aviation, the cost terrain has remained intact through every shock, casualty, and market cycle, because each layer serves a beneficiary with more structural leverage than the airlines paying it.

This matters beyond the crisis. The same structure that makes Indian domestic aviation nearly unviable during shocks is the tollgate every carrier must absorb on the way to the international routes that justify the business case. Understanding who controls each layer, and under what conditions that control could change, is the starting point for anyone with capital exposure to how Indian aviation develops from here.

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IndiGo posted a net loss of ₹2,394 crore in FY26. When the foreign exchange impact is stripped out, the underlying position was a profit of ₹7,502 crore. That gap is one year of rupee movement on a cost structure the airline cannot hedge.

From 1 June 2026, Air India cut 22% of its domestic flights and IndiGo cut 5-7% of domestic operations and removed several international destinations as well. Fuel prices more than doubled in April 2026. The government capped domestic supply, Maharashtra cut its ATF VAT (Aviation Turbine Fuel Value Added Tax). India’s airlines added fuel surcharges alongside. While the headline explanation is fuel prices broke two airlines at the same time, there’s a deeper structure beneath it.

Both Air India and IndiGo do not share a business model, cost philosophy, or an ownership structure. Their identical response was because they operate in the same cost terrain, which their business model can only control a small portion of. Six government interventions in eight weeks is itself the symptom. Indian carriers have always paid 35-40% of their OPEX on fuel against a global norm of 25-28%. The import parity formula, the state VAT stack, and the absence of competitive domestic supply created that gap.

The December 2025 operational meltdown is the same symptom. When a regulation bit hard enough, the market had no redundancy to absorb it. A 66% market share is a cost structure that makes new entry almost impossible to produce over time. India’s growth has allowed airlines with large conglomerate and promoter balance sheets to absorb the costs, banking on rising demand to cover the unit economics. But in 34 years of private aviation, the cost structure that makes domestic aviation unsustainable during a crisis hasn’t been addressed. Either the government steps in or an airline casualty.  

At what point does the cost structure get interrogated? The cost terrain that keeps five of its six structural layers outside airline control is what converts each variable into a market-wide event. The same margin environment that couldn’t absorb a fuel shock also couldn’t build the leadership depth that might have navigated one- a pattern Aeraltus examined separately. This piece breaks down layers of the airfare structure and who controls which layer. It matters for people with capital exposure to India’s airlines.

 

The Six Layers

Figure 1- The ATF block alone spans five separate government-controlled pricing decisions before airport charges, ground handling, or lease costs are reached. What remains for the airline sits at the top.

Layer 1- The Aviation Turbine Fuel and associated taxes

These are controlled by the central government, state government, and the three oil marketing companies (Indian oil, Bharat Petroleum, Hindustan Petroleum). Pricing is set by an import parity formula revised fortnightly, plus state VAT ranging 4-30%, plus central excise duty, plus GST (Goods and Services Tax), on ancillary charges (ATF itself remains outside of GST), plus throughout charges approved by the Airports Economic Regulatory Authority (AERA). Airlines cannot negotiate or source fuel from alternative domestic suppliers. Airlines have to settle for the price government sets

Layer 2- Airport Charges

AERA sets the regulatory framework after which private operations (Adani, GMR, BIA) set tariff proposals within the AERA consultation periods. The charges include User Development Fees (UDF), Passenger Service Fees, landing and parking fees. Airline can participlate In the formal AERA regulatory process but cannot exit metro hub airports regardless of the outcome. So airlines are parties to the AERA process but cannot control the outcome. They can only decide whether to operate there or not.

Layer 3- Ground Handling

Concession holders at individual airports control them, who operate at a monopoly or duopoly in 90% of India’s airports. Therefore airlines have limited choice. Industry data shows monopoly market ground handling costs run 20-40% above competitive market rates. This layer represents 7-12% of airline costs globally., but receives a fraction of the strategic attention in route planning and cost modelling, and also an under-analysed cost in Indian aviation

Layer 4- Aircraft Lease and ownership costs

Lessors domiciled primarily in Dublin and Singaporem with lease rates and residual value assumptions set at contract signing. The entire exposure is dollar-denominated, and the rupee-dollar exchange rate runs against them for the full lease term. IndiGo, Akasa Air and Air India have been trying to hedge with their own GIFT City subsidiaries to reduce the dollar denominated lease obligations. However, the effect of this decision will only be visible in 2030, as currently most of their aircrafts are contracted with the current Dublin lessors, and with leases being paid in dollars.

Layer 5- Crew costs and operations

The airline can control this but it is constrained by the absence of institutional depth that decades of underinvestment in training produces. That absence embeds an expat premium into leadership and senior technical roles that a normal competitive labour market would have arbitraged away. Aeraltus has deeply explained this in an earlier analysis. Additionally, fleet choices that standardise costs or add complexity is also in airline control albeit their constraints on aircraft supply.

Layer 6- Maintenance, navigation, insurance

This is split across MRO providers (heavy maintenance is predominantly dollar-denominated), the Airports Authority of India (AAI) for navigation fees, and international insurance markets. The dollar denominated exposure is structurally similar to Layer 4. Heavy MRO capacity in India remains insufficient, pushing line maintenance abroad and concentrating the dollar exposure further.

What remains is the margin. That margin is useful if an airline has a monopoly, such as IndiGo’s in most sectors, especially in traffic that radiates out of Chennai, Hyderabad, Kolkata, Pune, Ahmedabad as well as between fast growing tier 2 markets within the smart city list. Incumbent Akasa Air, Spice Jet Air India Express and Air India are essentially flying on sectors that overlap with IndiGo, forcing them to reduce the price and sacrifice margins for the sake of being competitive. That is also compounded by the fact that India’s domestic market is notoriously price sensitive not just at the leisure/VFR level but even at the government and corporate level. A domestic corporate will still book an economy class, unless they’re part of an MNC. That is also why India has large share of the market dominated by low cost carriers, and Air India is essentially flying domestic as a feeder for its international routes, allowing its budget arm Air India Express to absorb the volume and growth of domestic travel.

IndiGo managed to become profitable with 60:30 ratio of domestic to international largely because it also has a monopoly on most domestic routes. And seeing IndiGo absorb that, new entrant Akasa Air’s network is essentially overlapping with IndiGo as there are barely any major monopoly markets that haven’t been touched by IndiGo.

Why Airlines Stay Anyway

The international sectors are the real prize. They are what every Indian major carrier is building toward, whilst the domestic sector is the tollgate. Here’s why

The international sectors are organically the opposite of the less lucrative domestic sectors. International Flights to North America, Europe, Australia, Asia-Pacific even to nearby ASEAN and Gulf are quite lucrative because they have enough demand that can be absorbed by the high margins that LCCs can have as well as the business and premium economy demand that pays premium for better seats in full service carriers, eventually giving the real return on investment for airlines. During government ownership, that is why Air India Express turned out to be profitable as it had only served gulf international routes from South Indian cities with almost no domestic losses to absorb. After the merger with AirAsia India, the domestic losses came with it. That International sector was also the sector Vistara was built to target and what previous defunct carriers like Jet Airways, Air Sahara and Kingfisher Airlines were meant to target. Aeraltus covered this in great detail with the Singapore Airlines investment case into Air India. Link to analysis here

Figure 2- Vietnam's lower ground handling and fuel costs reflect SKYPEC and VIAGS subsidiary integration. China's lower fuel share reflects the CAAC semi-marketised surcharge mechanism.

India and Indonesia share the same structural conditions and the same margin

The comparison is not about operational efficiency or management quality. Vietnam Airlines' margin advantage comes from owning two of the layers that Indian carriers pay external parties to provide, such as ground handling via VIAGS and fuel supply via SKYPEC. China's margin reflects a regulatory architecture that allows automatic fuel cost pass-through when prices breach a government corridor, and state airport ownership that removes the private capital recovery dynamic entirely. Indonesia sits closest to India with the same fuel share, same dollar lease exposure, same crisis response in April 2026, because the structural conditions are closest to identical.

What the columns show is that margin is not earned in the air. It is determined on the ground, before the aircraft pushes back, by who set the price of each layer the airline just paid.

However, accessing that market for Indian airlines is the barrier because it requires a new airline to be able to fly 20 aircrafts domestically first. That means deploying 20 aircrafts, hoping they get delivered in quick sucession, fly them on domestic sectors and then be able to fly the first international sector. And within the domestic sector, they need to allot a specific percentage of flights to Category III routes which are in North East India, Jammu and Kashmir. These are sectors which are not profitable with weak demand but mandatory to serve. Vistara managed to fly its first international flight only in July 2019, four and half years after its first flight. Akasa Air started in 2024, which was two years. But even when they flew international, they needed enough sectors that could offset the domestic losses. In Vistara’s case, they reported their first and only quarterly profit in 2022, seven years after inception. Vistara had the backing of TATA and Singapore Airlines. A new carrier may not have that much leeway to wait that long.

What the Terrain Produces

That terrain produces exactly the outcome of Jet Airways and Kingfisher. They were trying for the international long haul sectors hoping that demand offsets it but the domestic cost structure was too unforgiving when it reached a shock. GoFirst’s failure was triggered by Pratt and Whitney engine groundings, which is a supply chain shock instead of a demand problem. But the cost structure meant there was no margin to absorb it. Whilst IndiGo had it for a subsection of the fleet, this was also because they had enough international sectors and enough monopoly sectors where they could control the price.

For any new airline, it produces a market where only deep-pocketed incumbents survive long enough to reach the prize, and any carrier without that backing hits a shock and fails before it gets there. Kingfisher, Air Deccan, Jet Airways, Go First, none of them had the runway to wait.

What Would have to change

Each layer has a beneficiary with no structural incentive to concede

ATF Taxation has been discussed since aviation was deregulated in 1992. GST inclusion of ATF has been on the table since 2017 and hasn’t moved because it requires consensus across states that currently set their own VAT rates between 4 and 30%. Each state treats ATF as a revenue line. The central government uses import parity pricing as a fiscal tool. As a result, neither changes without a replacement revenue mechanism that no state has been offered.

Airport charges are set within a regulatory framework that was designed to make private infrastructure investment viable. Adani and GMR financed their concessions on the assumption of tariff recovery over a defined period. AERA cannot reduce charges below the level that makes that recovery viable without triggering concession disputes. This was shown from the TDSAT (Telecom Disputes Settlement and Appellate Tribunal) ruling over how AERA calculates HRAB (Hypothetical Regulatory Asset Base) calculations, which is the methodology that determines how much capital airport operators can recover through aeronautical charges. Airline can participate in the AERA process, but can’t change the underlying logic that drives it.

Ground handling at privatised airports is increasingly a vertically integrated problem. Adani’s entry into ground handling at its own airports means the concession holder and the infrastructure owner are the same entity. No regulatory lever exists short of rewriting concession terms that were competitively awarded and legally binding.

Aircraft lease costs have a change mechanism, i.e. GIFT City, with a visible timeline. While Akasa Air is the latest carrier to launch a leasing subsidiary there, the effect on airline cost structures will not be visible before 2030.

Crew and operations remain the one layer airlines genuinely control. IndiGo's cost structure is the proof of concept. It has single fleet type, cold meals, fast turnarounds, on-time departure discipline. The constraint is that the talent pipeline that decades of thin margins never funded. Aeraltus covered that separately.

The reforms are known but the blockers of those reforms are accumulated interests of every beneficiary the current structure serves. Right from state governments, private airport operators, concession holders, and international lessors each extract predictable returns from layers the airline cannot negotiate. That is the market working exactly as the incentive structure was built, instead of a market failure.

What incentives does the government have to remove route dispersal guidelines that serve regional connectivity and political commitments simultaneously? If a new carrier could access international routes at inception, what would that do to the incumbents who absorbed years of domestic losses to get there? And for private airport developers, what incentive exists to bank on future volume when immediate capital recovery through tariffs is available and legally protected?

 

Closing Thoughts

Two airlines that share nothing in ownership, philosophy, or commercial model produced an identical response to the same shock. More than a coincidence, it is the expected output of a cost terrain where five of six structural layers sit beyond airline control, and where each of those layers has an incumbent beneficiary whose returns depend on the current arrangement continuing.

The six layers are not independent variables. ATF pricing sets a floor that compounds every other cost decision. Airport charges are layered on top. Ground handling runs at monopoly rates within the same concession structure. Lease obligations are dollar-denominated on a rupee revenue base. The result is a margin that is structurally thin in normal conditions and structurally insufficient during a shock. When the fuel price doubled in April 2026, there was no buffer because the terrain does not produce one.

Thirty-four years of private aviation have not changed this. The reforms are not obscure. GST inclusion of ATF, competitive ground handling, AERA methodology revision, and the 20-aircraft rule are all on the record. Each has stalled because the beneficiary of the current structure has a stronger and more immediate interest in preserving it than any airline has in displacing it. States treat ATF as a revenue line. Airport operators structured their concessions around tariff recovery. Concession holders at ground handling have no incentive to invite competition. The market is working as its incentive structure was designed.

For capital with exposure to Indian aviation, the relevant question is not which airline manages the terrain best. IndiGo's dominance demonstrates what best-in-class terrain management produces: thin profitability interrupted by periodic losses when an external variable moves sharply enough. On current trajectory, the one layer with a visible change mechanism is aircraft leasing through GIFT City subsidiaries, and that effect will not reach cost structures before 2030. The others require a political economy shift that has not moved in three decades.

The international routes that justify absorbing this terrain are genuinely lucrative. Gulf, Southeast Asia, North America, Europe carry the yield and the premium demand that the domestic sector structurally cannot. That prize explains why conglomerate-backed carriers keep entering a market that has produced no sustainably profitable full-service airline in three decades. The tollgate is expensive enough to eliminate anyone without a deep balance sheet. It has not been expensive enough to stop those who have one.

 

Authors Note

This analysis is based on public information including carrier financial filings, AERA tariff orders and consultation papers, OMC pricing notifications, DGCA regulatory records, and IATA cost benchmarks. The open questions directed at practitioners are genuine. Aeraltus does not hold a position in any Indian carrier, airport operator, lessor, or related entity.

About Aeraltus

Aeraltus produces structural aviation analysis and intelligence on emerging markets across Indian subcontinent, ASEAN and Africa. Custom aviation analysis is available for aviation industry professionals that include institutional investors, airline strategy teams, lessors and corporate development groups. If you want a tailored read on a specific carrier, route system, fleet decision or deal, using data that can’t be discussed publicly, Aeraltus runs bespoke engagements alongside the published work. Contact info@aeraltus.com

 

Sources

1. InterGlobe Aviation (IndiGo) — FY26 Annual Results and Earnings Disclosures, public filing, 2026

2. Singapore Airlines — Annual Report FY2025-26, public filing, May 2026

3. Indian Oil Corporation, Bharat Petroleum, Hindustan Petroleum — ATF pricing notifications and fortnightly SAED revisions, April-June 2026

4. Ministry of Petroleum and Natural Gas — domestic ATF cap notification, April 1 2026

5. Cabinet Secretariat — ₹10,000 crore Jet Fuel Stabilisation Fund approval, June 3 2026

6. Maharashtra state government — ATF VAT reduction notification, May 15 2026

7. Delhi state government — ATF VAT reduction notification, May 17 2026

8. Airports Economic Regulatory Authority of India (AERA) — tariff consultation papers, Delhi and Mumbai airports

9. Telecom Disputes Settlement and Appellate Tribunal (TDSAT) — ruling on Hypothetical Regulatory Asset Base calculations, Delhi and Mumbai airports, July 2025

10. Navi Mumbai International Airport — proposed aeronautical charges consultation document

11. Directorate General of Civil Aviation (DGCA) — FDTL Phase 2 implementation and exemption notifications, November-December 2025

12. Civil Aviation Administration of China (CAAC) — domestic fuel surcharge mechanism and adjustment notifications, April 2026

13. Civil Aviation Authority of Vietnam (CAAV) — fuel cost impact estimates and surcharge proposals, March 2026

14. Vietnam Airport Ground Services Company Limited (VIAGS) — company profile and operational scope, established January 2016 as Vietnam Airlines subsidiary

15. Vietnam Air Petrol Company Limited (SKYPEC) — company profile, subsidiary of Vietnam Airlines, into-plane fuelling operations at major Vietnamese airports

16. PT Pertamina — domestic avtur pricing notification, April 1 2026

17. Vietnam Airlines — FY25 Annual Results, public filing, 2026

18. Air China, China Eastern Airlines, China Southern Airlines — fuel surcharge adjustment statements, April 2026

19. PT Garuda Indonesia — FY25 Annual Results and fuel surcharge statements, 2026

20. IATA — World Air Transport Statistics, fuel share benchmarks and ground handling cost data

21. Aeraltus — "Market Power as Regulatory Leverage," December 2025

22. Aeraltus — "Why Ground Handling Costs Are Important in Airline Route Economics," January 2026

23. Aeraltus — "GIFT City and the Captive Leasing Question," 2025

24. Aeraltus — "The Singapore Airlines Investment in Air India," May 2026

25. Aeraltus — "Why AirAsia's A220 Order Is an Indonesian Bet," 2026