India’s aviation sector is one of the fastest-growing in the world. With over 152 million domestic passengers carried in 2023-24 and a government target of 300 operational airports by 2030 under the UDAN scheme, the industry has been on a remarkable growth trajectory. But between April 2025 and mid-2026, India’s airlines have faced a near-perfect storm of geopolitically-driven crises: a bilateral airspace closure with Pakistan following Operation Sindhoor, the ongoing West Asia (Iran-Israel-US) conflict driving Aviation Turbine Fuel (ATF) prices to historic highs, and the lingering ripple effects of the Russia-Ukraine war on global fuel supply chains.

Part I: The Pakistan Airspace Closure — Operation Sindhoor’s Invisible Economic Strike

1.  What Happened and Why It Matters

On 24 April 2025, Pakistan closed its airspace to all Indian carriers following the Pahalgam terror attack and India’s retaliatory strikes under Operation Sindhoor. This was not unprecedented Pakistan had shut Indian carriers out of its skies after the Balakot airstrikes in 2019 but the 2025 closure has proven far more prolonged and economically damaging. As of late 2025, Pakistan’s NOTAM (Notice to Airmen) was being extended repeatedly, with coverage through both Pakistan Flight Information Regions Karachi and Lahore at all altitudes.

Pakistani airspace is a critical transit corridor for Indian airlines flying north and west. Flights from Delhi, Amritsar, and other northern Indian cities to Europe, North America, Central Asia, and the Gulf traditionally fly over Pakistani territory. With that corridor shut, airlines have been forced onto longer routes via the Arabian Sea or the UAE adding up to 1.5 hours on many routes and up to 4 hours on some North American sectors

2.  The Financial Damage: Airline-by-Airline

The cost to Indian carriers has been staggering and well-documented. Industry reports submitted to India’s Ministry of Civil Aviation estimated a consolidated annual loss of approximately ₹7,000 crore for Indian airlines due to extended flight paths, increased fuel consumption, and route cancellations

Table 1: Financial Impact of Pakistan Airspace Closure on Indian Airlines (2025)

Air India’s case is particularly illustrative. The airline still rebuilding after its privatisation by Tata Group in 2022 reported a loss of over SGD 3.56 billion (₹26,700 crore) for the fiscal year ending March 2026. The Pakistan airspace closure alone is estimated to have cost the carrier $455 million in potential annual profit exceeding its full reported FY2024-25 loss of $439 million. Air India has since lobbied the Indian government to negotiate access to China’s Xinjiang airspace as an alternative northern corridor, underlining the depth of the network disruption.

3. Airport Closures: The Domestic Dimension

Beyond international route economics, Operation Sindhoor triggered the temporary closure of 24 civilian airports, including strategically important ones like Srinagar, Amritsar, Chandigarh, Ludhiana, Jammu, Jaisalmer, Jodhpur, Leh, Pathankot, Bhuj, and others primarily in northern and western India. Around 1,000 Air India flights were cancelled during the peak conflict period, affecting approximately 7,000 passengers directly. Across all airlines, Parliament data tabled by the Minister of State for Civil Aviation confirmed that over 2,400 flights were disrupted in the first half of 2025 due to a combination of geopolitical disturbances and regulatory constraints.

Part II: The West Asia Crisis — ATF Shock and the Iran Factor

4. Fuel: The 40% Cost That Became 60%

If the Pakistan airspace closure dealt a structural blow to Indian aviation’s route economics, the West Asia conflict delivered a direct financial shock through fuel prices. Aviation Turbine Fuel (ATF) typically constitutes 30–40% of an airline’s total operating expenses in India — already higher than the global average due to high domestic taxes (including 11% central excise duty and state VAT ranging up to 25%). The Iran-Israel-US conflict escalation in early 2026 pushed crude oil above $125 per barrel, causing ATF’s share of operating costs to surge to 55–60% for Indian carriers, per the Federation of Indian Airlines (FIA). At this level, airlines are operationally paralysed unable to raise fares enough to cover costs in a price-sensitive market, yet unable to absorb the losses.

The Middle East corridor is India’s largest westbound flight corridor. With simultaneous Pakistani and Iranian airspace disruptions and Iraq and Israel also closing their airspace at various points Indian airlines faced a compound rerouting crisis with no clean alternative paths available. The CEO of Indian aviation consultancy Avialaz warned that IndiGo and Air India would be “heavily impacted” by the Middle East corridor’s effective closure.

Table 2: ATF Price and Airline Operations Impact (2022–2026, India)

5. The Passenger Impact: Fares, Disruptions, and Eroding Confidence

The cascading effect of war-driven ATF spikes reaches the ordinary Indian air traveller through higher ticket prices, flight cancellations, and reduced connectivity. In June 2026, Air India reduced 22% of its domestic flights and 27% of international operations, while IndiGo cut domestic capacity by 5–7% and international capacity by 17%. These are not marginal adjustments at IndiGo’s operating scale of ~1,950 daily flights, even a 7% cut removes over 135 flights a day from schedules.

The Federation of Indian Airlines (FIA) representing Air India, IndiGo, and SpiceJet wrote urgently to the Union Ministry of Civil Aviation on 26 April 2026, warning that without immediate government intervention, airlines faced the prospect of aircraft grounding and mass flight cancellations. Their demands included:

• equalising domestic and international ATF prices,
  • temporary postponement of the 11% central excise duty, reduction of state VAT rates,
  • emergency financial support mechanisms.

Some state governments moved quickly. Delhi reduced VAT on ATF from 25% to 7% for six months; Maharashtra followed with a temporary reduction to 7% through November 2026. These are welcome first steps, but they remain insufficient to offset fuel costs that have doubled in weeks.

6. India’s Unique Structural Vulnerability

India’s exposure to war-driven aviation disruptions is more acute than most comparable economies for three structural reasons:

First, import dependence on crude oil: India imports approximately 85% of its crude oil requirements roughly 4.2 million barrels per day. Even a moderate increase in global crude prices materially worsens India’s energy economics, current account deficit, and puts pressure on the rupee. As Rystad Energy’s senior VP noted, “a few dollars’ increase in prices can materially affect

energy economics.” A weakening rupee compounds ATF costs since jet fuel is priced in dollar- equivalent terms.

Second, high domestic taxation on ATF: India’s ATF is among the most heavily taxed jet fuel in Asia. Unlike mature aviation markets where fuel is zero-rated or lightly taxed, Indian airlines pay central excise duty of 11% plus state VAT of up to 25% on ATF. This structural cost inflation means that any external fuel shock is amplified not absorbed by the domestic tax structure.

Third, geographic corridor dependency: India’s westbound routes depend heavily on Pakistani and Iranian airspace. Unlike European airlines that can reroute around Russian airspace over a vast alternative geography, Indian airlines have limited viable corridor alternatives when both Pakistan and the Middle East are simultaneously disrupted. This double-airspace closure, which materialised in 2025-26, represents a worst-case scenario that Indian aviation had never faced before.

Part III: India’s Defence Aerospace Boom

7. Geopolitical Tensions as Rocket Fuel for Defence

While commercial aviation suffers, India’s defence aerospace sector is experiencing its fastest growth in decades. The same geopolitical tensions that ground civilian aircraft are driving unprecedented defence procurement, budget allocations, and indigenous manufacturing capacity.

India’s domestic defence production reached a record $15.1 billion in FY2023-24, registering 16.8% year-on-year growth. The India Aerospace and Defence market, valued at $28.68 billion in 2024, is projected to reach $56.95 billion by 2034 at a 7.1% CAGR.

The Union Budget for FY2024 allocated ₹6.21 lakh crore to the Ministry of Defence a 4.3% increase from the prior year, constituting 13.04% of the total Union Budget. This sustained commitment to defence spending has created a healthy order pipeline for domestic manufacturers.

8. HAL and the Atmanirbhar Bharat Dividend

Hindustan Aeronautics Limited (HAL) stands as the centrepiece of India’s defence aerospace ecosystem. In March 2025, the Ministry of Defence signed contracts with HAL for 156 Light Combat Helicopters (LCH Prachand), 66 for the Indian Air Force and 90 for the Indian Army in a significant indigenous procurement milestone. HAL’s FY2025 results reflected this momentum: revenues of ₹309.8 billion (up 2% YoY), net income of ₹83.6 billion (up 9.8%), a profit margin of 27%, and revenue growth forecasts of 17% per annum for the next three years.

Beyond HAL, the ecosystem is deepening. Bharat Electronics Limited (BEL) signed an MoU with Israel Aerospace Industries in 2023 for Short Range Air Defence Systems. Tata Advanced Systems, Mahindra Aerospace, and Adani Defence & Aerospace are emerging as credible private sector players. India’s defence export target of ₹50,000 crore by 2028-29, alongside successful BrahMos missile export deals, signals that India is transitioning from a defence importer to a technology provider a shift accelerated by the very geopolitical instability that is punishing its commercial airlines.

5.  The Two-Speed Aviation Economy

Table 3: Commercial vs. Defence Aviation in India

Part IV: Historical Precedent — What Past Conflicts Teach India

India is not encountering these dynamics for the first time. The 2019 Pakistan airspace closure after Balakot which lasted approximately six months imposed significant costs on Indian airlines and offered a preview of what a prolonged closure could mean. At the time, analysts estimated daily losses in the range of ₹3–5 crore for major carriers. The 2025 closure is far more severe: longer in duration, compounded by simultaneous Middle East disruptions, and occurring at a time when Indian airlines are already financially fragile post-COVID.

The Russia-Ukraine war offered a global template. As documented by ScienceDirect (2023), the closure of Russian and Ukrainian airspace caused flight costs to increase by 13.32% for 6.23% of all global international flights with European airlines bearing a disproportionate burden. Finnish carrier Finnair, whose entire hub strategy depended on Siberian overflight, effectively lost its primary competitive advantage overnight. India’s Air India and IndiGo face an analogous structural risk from prolonged Pakistani airspace closure particularly Air India, whose North America strategy relies heavily on the northern corridor via Pakistan.

The lesson from these precedents is clear: war-driven airspace closures are not temporary inconveniences. They restructure competitive dynamics, force network redesigns, and impose permanent cost increases that outlast the conflict itself.

Conclusion

India’s aviation sector finds itself caught between two powerful forces: the relentless growth ambitions of a young, mobile population driving domestic air travel demand upward, and the persistent turbulence of geopolitical conflicts that fracture the global airspace and inflate costs. The data is unambiguous commercial aviation is structurally punished by war, while defence aerospace is structurally rewarded. Unless India’s policymakers address both sides of this

equation with equal urgency, the commercial aviation sector risks becoming a perpetual casualty of crises it neither caused nor controls.

The following constructive recommendations are offered, grounded in the evidence presented above:

Restructure ATF Taxation Permanently

India remains one of the few major aviation markets that taxes ATF at the state level, creating a patchwork of high fuel costs that amplifies every global fuel shock. The government should standardise ATF as a declared good under GST, enabling a uniform, reduced national tax rate. The temporary VAT cuts by Delhi and Maharashtra in 2026 are a step in the right direction but they must become permanent structural reform, not crisis-mode patches. A reduction in ATF’s effective tax burden by even 10–12 percentage points would restore meaningful margin headroom for Indian carriers.

Develop Diplomatic Airspace Corridors

India’s dependence on Pakistani and Iranian airspace for its westbound routes is a strategic vulnerability that cannot be resolved by airlines alone. The Ministry of External Affairs and the Ministry of Civil Aviation must work together to develop alternative diplomatic airspace agreements with Central Asian republics, China (for Xinjiang access, as Air India is already exploring), and Gulf states so that Indian carriers have viable rerouting options when primary corridors are closed. Aviation connectivity is a strategic national interest, not merely a commercial one, and must be treated as such.

Create a Geopolitical Risk Compensation Fund

When Indian foreign policy decisions such as Operation Sindhoor directly cause commercial aviation losses through airspace closures, there is a legitimate case for government compensation to affected airlines. A dedicated Geopolitical Risk Compensation Fund, analogous to mechanisms used by some EU governments to support airlines during COVID, would allow the government to act decisively in national interest without imposing the full financial burden on airlines. The ₹77 crore weekly operational cost increase cited by the Ministry of Civil Aviation during the Pakistan closure provides a useful baseline for fund sizing.

Accelerate Fuel Hedging Policy for PSU Carriers

Air India, as a recently privatised but strategically important national carrier, must implement a robust multi-year fuel hedging programme. The absence of hedging or inadequate hedging leaves the airline fully exposed to every geopolitical fuel shock. ICAI and the Ministry of Civil Aviation should issue advisory frameworks for fuel risk management, modelled on best-in-class international practices from Southwest Airlines or Singapore Airlines, making hedging a standard expectation for Indian carriers of scale.

Channelise the Defence Boom into Civil Aviation

The defence aerospace growth that geopolitical tensions are enabling through HAL, BEL, Tata Advanced Systems, and others creates an opportunity to build indigenous MRO (Maintenance, Repair & Overhaul) capacity that benefits both military and civil aviation. India currently sends substantial foreign exchange overseas for aircraft MRO services. A dedicated policy to link defence aerospace manufacturing capacity with civil aviation MRO development through PLI (Production-Linked Incentive) schemes and public-private partnerships would create dual-use infrastructure that helps India’s commercial airlines reduce maintenance costs while strengthening strategic self-reliance.

India’s aviation sector cannot afford the luxury of treating geopolitical conflict as an exogenous variable an external shock that one simply weather and recovers from. The data from 2019, 2022, and 2025-26 demonstrates with mounting clarity that conflict-driven disruptions are becoming a structural feature of the operating environment, not an exception. India’s airlines have shown remarkable resilience domestic passenger growth of 7.34% in H1 2025 even amid the airspace crisis is a testament to that. But resilience without structural reform is simply endurance. And endurance alone will not build the aviation sector that India’s 1.4 billion people deserve.

The skies above India are contested not just by weather and traffic but by history, diplomacy, and war. It is time India’s aviation policy was built to account for all three.