The ₹10,000 crore lifeline provided by the state to the Indian aviation industry affords a breathing space. What New Delhi does with that window remains to be seen whether they will mend a broken fuel-tax architecture or just punt the issue down the runway is a question the industry has been asking for 10 years.

In its essence, the decision taken by the Union cabinet on Wednesday to approve a ₹10,000 crore Aviation Turbine Fuel Price Stabilisation Fund is a sensible emergency response to an extraordinary scenario. It is not and New Delhi dare hope it is not a fix.

The figures behind this intervention are truly alarming. ATF prices have surged by 135 percent in almost 60 days from ₹60.50 per litre in March 2026 to ₹142 per litre in May, due to the escalating conflict in West Asia and disturbances in the vicinity of the Strait of Hormuz. That sort of price shift is far from pleasant in an industry where fuel costs typically make up 40 to 60 percent of operating costs during regular times and could account for 65 to 75 percent of costs during crises. It's a threat to the very existence of balance sheets.

Careers under threat through aviation industry. ATF Price Trajectory: March to May 2026. The highest-ever spike in ATF prices in India over a span of two months was due to the West Asia crisis and the disruptions in the shipping of oil from the port of Hormuz.

Evidence of sector distress is now present in quarterly filings. IndiGo, India's market leader by seat share, reported a net loss of ₹2,536.9 crore in Q4 FY26 compared to a profit of ₹3,067.5 crore in the corresponding quarter of FY25. In May, Air India's chief executive told its employees that they should have a "relentless focus on costs", as the airline deferred the annual salary hike by at least a fourth, and Air India's losses have more than doubled in FY26 at ₹26,000 crore from ₹10,859 crore in FY25. An ICRA report had pointed out that in FY26, the sector could incur losses between ₹17,000 and 18,000 crore before the worst of the fuel price spike.

But the fuel issue hasn't come alone. But Pakistan's airspace closure for Indian carriers, brought about in the wake of the Indian-Pakistani tensions, has caused aircraft on the routes to Europe, North America and Central Asia to reroute thousands of kilometres further, thus increasing their fuel burn in the process, at precisely the time when fuel costs are highest. Between June and August, Air India slashed up to 22 per cent of its domestic flights. IndiGo has reduced its domestic capacity by 5 to 7 percent and international programme by 17 percent. As of March 2026, international passenger traffic was already down by a steep 36 percent year-on-year.

The ATF share of an airline's operating cost in India is about 35-40 percent and even a minor cut in VAT on ATF will make a significant difference in large airports.

The actual working of the Fund.

The mechanism, which was approved by the Cabinet, is not a subsidy to airlines. However, the government will offer interest-free loans of up to ₹10,000 crore to its Oil Marketing Companies (IOC) Indian Oil, BPCL and HPCL under the Ministry of Petroleum and Natural Gas. These OMCs will then sell ATF to willing airlines at the benchmarked price set by the government, which will absorb the difference between the benchmarked price and the import parity price. When international prices drop below the benchmark, the procedure is reversed, and airlines are paid a little more, and the margin goes back to the OMCs, which in turn pays off the advance made by the government.

It is an agreement for 36 months with annual review and is subject to a MoU between the airlines, OMCs, the Civil Aviation Ministry and the Petroleum Ministry. What is key is that for the period, participating airlines are to obtain all their ATF from OMCs, which invariably removes any access to independent fuel suppliers and keeps the aviation fuel supply chain firmly within the public sector orbit. That's a question worth bearing in mind as to whether that lock-in effect will prove to be its own inefficiency three years from now.

India's reaction to aviation fuel crises is almost ritualistic. A shock comes and the sector bleeds, the government implements a short-term solution, commentators say that it does not solve the underlying structural issue and then it stabilises until it is deferred once again. This has been repeated at regular intervals for 15 years or more.

The issue is this: India imposes heavier taxes than most aviation markets in the world on ATF. The central excise duty is about 11 per cent of the base price. To top it all, there are also state taxes the VAT which are also different from state to state and state governments often play games with rates; just recently, the Delhi government reduced the VAT from 25 percent to 7 percent for a period of six months as an experiment, and the Maharashtra government cut the rate in Mumbai from 18 percent to 7 percent. As per the estimates of the aviation industry, Indian carriers had paid about ₹1.62 lakh crore in taxes on aviation fuel between 2014 and 2026. Historically, ATF in India is 45-60% higher than ATF in the United States, even when crude feedstock costs are taken into account.

ATF Cost Premium: India vs Global Benchmarks Approximate all-in ATF cost index (Global average = 100)

India's multi-layer tax system (Central excise and state VAT) provides a built in cost disadvantage to Indian carriers across all routes flown.

Industry stakeholders, analysts and various committees in successive aviation ministries have long recommended making ATF a part of the Goods and Services Tax rate-making mechanism that would establish a uniform rate applicable across the country, enable input tax credit, and remove the distortions caused by the state-to-state variation. The Chief Minister of Delhi openly admitted the structural fault while announcing the May cut in VAT, calling it a “work around” due to the crisis. Admission by a state government is both important and somewhat damning it means all have become aware of the system in disrepair, and they are opting to patch it instead of fixing it.

The impact of GST on ATF

According to industry modelling, rationalisation of the ATF rate, probably 12-18 percent, under the GST framework could enable Indian airlines to save 15-20 percent on the current price of ATF, save ₹985 crore in annual revenue distortion (just for the city of Delhi) and bring about the cost certainty that is essential for fleet investments and route planning by the airlines. The constitutional power of the GST Council is at play. The problem that has not been addressed is a lack of political will among state governments loath to give up fuel tax revenues.

This debate is completely avoided in the case of the ₹10,000 crore fund. It has no effect on the VAT system. It won't make ATF GST! What it does is provide a temporary subsidy to offset the difference between the artificially high international prices and a floor price established by the government, and pass the subsidy through OMCs, instead of directly to airlines. This is good in that the improvements are reversible the improvements can be paid back but it also doesn't address the chronic structural cost disadvantage that Indian carriers face even in times of normal fuel pricing.

Beyond aviation's cascading effects.

The government's message about the stabilisation fund, which underscores the importance of the fund in protecting 77 lakh jobs of people in airlines, airports, ground handling, travel agencies and hospitality, is not hyperbole. Aviation has strong links to tourism, trade logistics and regional economic development. Since the inception of the UDAN regional connectivity scheme, setting up connectivity to more than 70 tier-2 and tier-3 cities, it relies on the viability of the economics of short-haul domestic operations. The airport infrastructure developed over the last decade starts to bear losses of sorts, if fuel costs make the routes there unprofitable for the airlines to operate.

The Financial Stress Indicators in Indian Aviation Sector. Net losses (in ₹ crore) – estimates for FY25 and FY26. The consolidated losses of Air India more than doubled in FY26 on back of the combined impact of ATF costs, closure of Pakistan airspace, and currency depreciation.

The international scene contributes texture too. On long-haul routes, Indian carriers are going head to head with the Gulf carriers Emirates, Etihad, Qatar which refuel at Dubai, Abu Dhabi and Doha with a zero VAT and the advantage of procurement by state-owned entities. Now on the same routes Indian airlines are flying longer arcs due to the Pakistan airspace closure, and possibly spending 15–20 percent more fuel on some of these sectors than the airlines flying out of the Gulf. This disadvantage is partly mitigated by the fund, but not eliminated.

The rupee factor is also there. The depreciation of the rupee, which fell by around 5 percent against the US dollar in the fourth quarter of FY26, further exacerbated the effect of the dollar-denominated fuel purchases. Foreign exchange losses were among the reasons for IndiGo's quarterly loss of ₹2,536 crore. At the same time, Air India's dollar-denominated aircraft lease commitments, which are significant in view of its fleet expansion plans, were also impacted by the currency headwind.

What Comes Next and What Should, The short-term stabilisation rationale of this fund is hard to dispute. So, some state intervention is warranted when a sector which carries 167 million domestic passengers a year, and supports almost eight million jobs, is hit by, at the same time, a compressed fuel shock, airspace closure, currency depreciation and a weak international demand. The revolving mechanism, interest-free advances to be paid back once prices go back to normal is fairly well designed. It provides the mechanism with three years to weather, subject to annual review, what is hopefully a short-term geopolitical disruption.

However, this window also is an opportunity. It is only over the next 36 months that the government should be negotiating with state finance ministers for the inclusion of ATF in the GST. Not a phased study. No more committee report. A real decision by the GST Council to remove the state VAT rates of 25–30 percent, which make Indian aviation structurally uncompetitive and catastrophically vulnerable in crisis situations. The Chief Minister of Delhi has already admitted that the system is corrupt. When the pressure is too high, Maharashtra has shown interest in reducing the rates. Political foundations are in place.

But, if the situation in West Asia stabilises by the end of 2026 we have some diplomatic hints of that, but dim ones then the price of fuel will ease, the OMCs will start getting their money back, and crisis framing will fade. The problem is, once that does happen, the discussion about structural fixes will die down once more, until the next blow and the next bailout and the next deferred reckoning, and the industry keeps circling back one more time.

India is likely to be the world's third largest aviation market this decade, with more than 300 million passengers expected to fly every year in the early 2030s. True, it's a growth story, and it's backed up by demographics, incomes, and real infrastructure investments. But growth targets based on a structurally costly fuel regime (where airlines pay ₹1.62 lakh crore in fuel taxes over a span of 12 years without an input credit regime) are growth targets built on sand. The immediate position is supported with the fund of ₹10,000 crore. The question is will anyone during the quiet in the South block do the more difficult task?