Airline stocks fly into rough weather again

Since the Iran war began, airline shares have dropped up to 18.9 per cent, compared with a 5.64 per cent fall in the Sensex.

India’s aviation sector is facing fresh turbulence, with rising fuel costs, the Ministry of Civil Aviation’s free-seat directive, and geopolitical disruptions in West Asia clouding near-term earnings visibility.

Shares of SpiceJet and InterGlobe Aviation (IndiGo) have corrected 56.15 per cent and 13.97 per cent, respectively, since the start of 2026, against the Sensex’s 10 per cent decline, according to Ace Equity. Analysts, however, caution that the worst may not be over yet.

“Escalating tensions in Iran-war-hit West Asia have rendered large parts of its airspace a ‘no-go’ zone, forcing flight cancellations and rerouting. Increased flight times, along with a spike in fuel costs due to rising crude oil prices, will weigh on airlines’ profitability and margins in the near term,” said analysts at Emkay Global Financial Services.

Since the Iran war began, airline shares have dropped up to 18.9 per cent, compared with a 5.64 per cent fall in the Sensex.

Fuel bills blow a hole in profits

A sharp rise in global crude prices amid escalating West Asia tensions remains the sector’s biggest overhang.

While Brent crude has eased from $120 to $100 a barrel, analysts say uncertainty persists.

Airlines, including IndiGo and Air India, have introduced fuel surcharges ranging from Rs 400 to Rs 16,600 per route. Independent market analyst Ambareesh Baliga said, however, that these charges will not fully offset rising oil costs, clouding near-term earnings visibility.

Aviation turbine fuel, which tracks crude movements, has climbed to 85 per cent since the West Asia crisis began.

Fuel accounted for 30-35 per cent of total operating expenses for IndiGo and SpiceJet at the end of the third quarter of financial year 2026 (Q3FY26).

Analysts warn that such sharp cost increases could erode margins Q4FY26 and possibly Q1FY27.

Free seat rule clips airlines’ wings

Adding to the pressure, the government asked airlines on Wednesday to keep 60 per cent of seats free of charge, limiting their ability to monetise from seat selection.

Analysts say the move could dent ancillary revenues, an increasingly critical profitability lever for carriers.

“Seat pricing, a sizeable chunk of ancillary revenue, had been rising steadily.

"Freeing 60 per cent of seats will hurt realisations,” Baliga said.

Chokkalingam G, founder and managing director of Equinomics Research, added that the government move, combined with rising fuel costs and reduced Gulf flights, is negative for the sector.

“If this directive becomes permanent, it could kill the industry,” he warned.

Airline stocks in a crosswind: Buy or bail?

Analysts advise investors to avoid these stocks until the Iran war subsides.

Several international routes in the Gulf, a key market for Indian carriers, have been disrupted, while travel safety concerns are beginning to weigh on passenger sentiment.

“Leisure travel is expected to take a hit, especially ahead of the holiday season,” Baliga said, recommending investors hold off as the financial impact unfolds over the coming quarters.

Kranthi Bathini, equity strategist at WealthMills Securities, said that while IndiGo’s price-to-earnings valuations have corrected, they remain high at 37x.

“Oil price movements will be the key monitorable, as margins are expected to stay under pressure in the near to medium term,” he said.

Chokkalingam, however, believes much of the short-term pain may already be priced in, and long-term investors could consider buying the dip.