Higher fuel costs for IndiGo likely to keep profits under pressure

IndiGo's market dominance, fleet expansion and international growth offer long-term upside, but elevated fuel costs continue to weigh on margins

Warren Buffett had once pointed out that aviation is a financially unstable cyclical business. It requires huge capital investments, and operational costs depend to a large extent on the volatility of fuel prices.

 

The recent past has seen airlines struggling to cope with rising fuel costs, and the demand for seats has also been affected by geopolitical tensions and slowing economic activity. This has led to pressure on revenues and expenditures.

 

Nevertheless, InterGlobe Aviation (aka IndiGo) is viewed bullishly by many analysts. The argument is that gains in market share, and cost control has driven it to dominance in the world’s third-largest aviation market. It has a long growth runway since India is under-penetrated and IndiGo is gaining global market share.  

 

 

As disposable incomes rise, and schemes like UDAN improve connectivity further, IndiGo could see a path to greater profitability. The long-term growth drivers include fleet expansion, international network surge, a strong balance sheet with ₹52,900 crore cash, and investments in maintenance repair and overhaul (MRO).

 

IndiGo reported a fair FY26 and a weak Q1FY27 as higher fuel prices and lower aircraft utilisation offset price hikes. Operating and net profit remained under pressure. The management guided for over 25 per cent year-on-year (Y-o-Y) passenger revenues per seat kilometre (PRASK) growth in Q2FY27 despite low capacity growth.

 

There are concerns about an airport operator's potential entry into airline operations, but that faces serious regulatory hurdles. It would breach global norms given the obvious conflict of interest.

 

Fuel costs are high and will remain high and volatile until the Iran war sees a resolution. Domestic aviation turbine fuel (ATF) price hikes were temporarily capped by oil marketing companies (OMCs) until early June.

 

Fuel cost/available seat km (ASK) in Q1FY27 rose 81 per cent Y-o-Y and 63 per cent quarter-on-quarter (Q-o-Q) to ₹2.49. Fuel expenses amounted to 44.1 per cent of revenue (30 per cent in FY26 and 32.4 per cent in FY25).

 

The management is prepared to offset higher costs through pricing and fuel surcharges, but margin recovery may depend on supply normalisation.

 

If IndiGo maintains pricing, and there is a reduction of fuel prices to below 35 per cent of revenues, there would be substantial margin expansion. The management believes the recent price hikes may be structural, rather than cyclical. A post-Covid price expansion in FY22 and FY23 was sustained through FY24–FY25.

 

The management expects the current pricing to be sustainable even with fuel price normalisation, due to resilient demand.

 

Given good load factors, and guidance of PRASK growth being achieved, Q2FY27 could be strong. IndiGo has a dominant market share of 65 per cent (July 2026). The second-largest operator Air India has 26.7 per cent. Moreover, Air India’s poor financial performance could place constraints on its ability to remain competitive.

 

IndiGo is opting for higher fleet ownership (as opposed to leasing), investments in engines and international expansion.

 

It is targeting 40 per cent international capacity by 2030. India is an underpenetrated outbound market, with passport penetration of around 9 per cent.

 

Given rising middle-class incomes and a large growing diaspora, there’s an upside. IndiGo has the domestic network to capture overseas traffic from Tier-II and III cities, as well as best-in-class cost structure. It can offer competitive fares, and the fleet pipeline of over 900 aircraft leaves it in a good position to capture future global traffic.

 

In July, IndiGo signed an agreement with CFM International (a joint venture between GE Aerospace and Safran) to procure 1,000 LEAP 1A engines for its fleet of 510 Airbus A320neo aircraft, alongside long-term MRO support.

 

This could provide a big competitive advantage, enabling future growth.

 

The strategic shift from leasing to owning is more nuanced. Increasing ownership from 22 per cent currently to 40 per cent by FY30 (via its GIFT City leasing platform) may reduce recurring lease costs and forex exposures. The Bengaluru MRO facility is in-house, which will reduce costs and improve resilience.

 

IndiGo generates high free cash flow and on a cumulative basis. This amounted to ₹42,400 crore (net of lease repayments) over the last five years.

 

It reported forex losses, which come from marking up forex-denominated lease liabilities rather than instant cash outflow.

 

Raising fleet ownership, rejigging treasury operations to increase hedge coverage from 15 per cent to 33 per cent, and localising MRO (which is another source of forex outgo) would reduce exposure to forex volatility.

 

The investment narrative seems convincing enough and the airline seems to be doing the right things. But investors will need to wait on geopolitics because high fuel costs remain a drag on profits.