Iran War Jet Fuel Shortage Hits Airlines, Exacerbated by Rupee Slide

Aviation Turbine Fuel Price Hike Erodes Airline Margins

The ongoing Iran war has led to a significant surge in jet fuel prices, resulting in airlines absorbing the bulk of the cost increase. The price of aviation turbine fuel (ATF) has risen faster than crude oil, amplifying the pain for airlines with dollar-linked costs.

ATF prices have increased by nearly 160% in under a week to approximately $225 a barrel, according to industry officials. To mitigate the impact, airlines have imposed limited fare hikes, including:

• Air India: a flat Rs 399 fuel surcharge on domestic routes, $20–$30 on Southeast Asia and Africa sectors, and $25–$50 on long-haul routes to Europe, North America, and Australia.
• IndiGo: a distance-based surcharge, ranging from Rs 425 to Rs 2,300 per passenger.
• Akasa Air: a levy of Rs 199–Rs 1,300 per passenger.

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However, airline executives acknowledge that fare increases barely offset the surge in fuel costs, with the fuel surcharge covering only about 17% of the additional cost on domestic routes. The remaining 83% is being absorbed by the airlines.

Brokerage estimates suggest that the limited surcharges will have a minimal impact on airline yields. Jefferies estimates that IndiGo's surcharge could lift yields by just Rs 0.30–Rs 0.35 a seat against an annual base of about Rs 5.1, while Citi expects a relatively higher, but still constrained, yield impact of 8–10%.

Structural cost disadvantages in India's aviation market are further exacerbating the stress. Unlike Europe, where aviation fuel attracts minimal or zero taxes, levies in India account for 20–40% of ATF costs. Fuel itself makes up 30–50% of airline operating expenses in India, compared with 20–25% in Europe, leaving carriers far more exposed to price shocks.

Airlines have renewed calls for tax reforms, urging the government to convert ad valorem levies into fixed charges and to bring ATF under the GST regime, which would allow input tax credits and ease cost pressures. Additionally, the Indian rupee has weakened by about 7% in FY26, inflating expenses for airlines with significant dollar-denominated obligations, further compounding the impact of higher fuel prices.

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