IndiGo may face further downgrades as Iran conflict clouds outlook

IndiGo's earlier positive outlook has been upended by the Iran conflict, with airspace closures, rising fuel costs and operational disruptions raising the risk of further valuation downgrades

IndiGo operator InterGlobe Aviation had a mildly encouraging third quarter in financial year 2026 (Q3FY26). Prior to the Iran conflict, analysts were mostly positive on the stock. Reported operating profit beat the consensus and net profit adjusted for exceptional items of ₹1,547 crore would also have beaten consensus. Management guided for a 10 per cent year-on-year (Y-o-Y) increase in the key metric of available seat kilometres (ASKs) in Q4, after reporting 11 per cent Y-o-Y growth in ASKs in Q3. It was still taking aircraft deliveries.

 

But the conflict is a Black Swan event that throws all projections out of gear. Disruption of Gulf airspace, and the Dubai shutdown affects operations, while the spike in fuel costs poses a financial risk. According to one sensitivity analysis, every $5 rise in Brent leads to a 12-13 per cent drop in IndiGo’s earnings per share (EPS), assuming a constant rupee. The airline has limited fuel hedging. 

There are several key factors that are impossible to assess. One is the duration of conflict. Second is fuel prices which are volatile and may increase exponentially if the conflict is prolonged, with an additional currency risk as well on this account. A third unknown is damage to energy infrastructure across the region. The extent of damage to key civilian airports also cannot yet be assessed.

 

As the market leader, IndiGo has better cost structures and higher market share. But this is a critical short-term dampener. The indefinite timelines and reported damage to Dubai and Abu Dhabi airports could mean long-term constraints leading to enforced capacity rationalisation, and deep margin compression.

 

Airspace closures in GCC are affecting operations. Hundreds of flights have been cancelled, including in Europe, US and Canada, since the Middle East airspace is also closed. There is also a negative working capital impact as refunds for cancellations and delayed receivables pile up.

 

Aviation turbine fuel (ATF) constitutes about 30-40 per cent of airline operating costs. IndiGo also has to contend with possible rupee depreciation as crude prices spike. The airline devotes 30 per cent of capacity to international flights and around 18 per cent of that is constituted by GCC.

 

Given the earlier guidance, the airline expected ASK growth of 10 per cent, to around 46,375 million for Q4FY26, of which about 18 per cent would be GCC-related. Attempting to fine-tune impact very accurately may not be meaningful in the circumstances, since every variable may change. Fuel costs could spike, the rupee may drop and load factors may also change.

 

A fast ceasefire could lead to fast normalisation of operations, although sentiment could still be a dampener affecting load factors if there isn’t a rapid business recovery. In Q3, domestic passenger traffic rose 4 per cent Y-o-Y (and 7 per cent M-o-M to 15.2 million in Jan-26 over Dec 25), supported by rebound by IndiGo, following disruptions in early December 2025. Daily trends in February 2026 indicated just 2 per cent Y-o-Y growth. IndiGo regained lost market share, rising 400 basis points M-o-M to 63.6 per cent in January, returning to November 2025 levels.

 

Passenger load factor (PLF) plummeted across key airlines in January 2026, with Air India reporting the highest monthly decline of 300 basis points to PLF at 86.5 per cent. Akasa and SpiceJet reported M-o-M decline of 200 basis points and 160 basis points, with PLFs down to 93.2 per cent  and 85.9 per cent, respectively. IndiGo’s PLF declined 40 basis points M-o-M to 87.7 per cent. PSU OMCs hiked domestic ATF prices for March 26 by 6 per cent M-o-M to ₹96.6/litre (in Delhi), due to an 8 per cent uptick in crude oil prices before the conflict started.

 

Obviously every airline is affected by fuel cost risks, but IndiGo’s GCC exposures make it more sensitive to the conflict. Investors should be prepared for further valuation downgrades if the conflict is prolonged.