Air India Proposes Fuel Levy to Offset Financial Burden of Pakistan Airspace Closure

Tata Group-promoted Air India has proposed a levy on aviation fuel purchased in India by domestic and foreign airlines, according to industry sources. The proposal is designed to help offset the financial impact that Pakistan's airspace closure has created for Indian carriers.

Under the proposed mechanism, a nominal levy would be applied per litre of aviation turbine fuel (ATF) uplifted in India by both Indian and foreign operators. Collections gathered from Indian carriers would be returned through a special bulk discount. Meanwhile, funds collected from foreign airlines would be utilized to finance additional discounts specifically for Indian carriers affected by the airspace restrictions.

The proposal addresses a significant cost disadvantage. While Indian carriers operating Europe and North America services are forced to take longer routes—resulting in increased flying time, higher fuel consumption, and challenges regarding crew deployment and aircraft utilization—foreign airlines retaining access to Pakistan's airspace avoid these diversions and operating conditions.

Previously, it was estimated that the closure could result in an annualized financial impact of around ₹5,000 crore on Air India alone. Additional operational difficulties have also emerged from restrictions affecting Gulf airspace, requiring intermediate stops and leading to extra expenditures such as landing charges.

The proposal intends to partially cover these airspace-related burdens without requiring direct budgetary support from the government. However, the final implementation, including the levy rate and the allocation method for additional discounts, remains dependent on the acceptance of the proposal. Air India and the Ministry of Civil Aviation have not commented on the matter.

This development unfolds as Air India and other carriers attempt to contain expenditures and minimize wastage. Financial pressures have intensified for the airline group. Foreign exchange fluctuations, high fuel costs, and airspace closures contributed to widening Air India Group's net loss to over ₹6,000 crore in the first quarter of FY27, compared to more than ₹3,000 crore in the corresponding period a year earlier. The group concluded FY26 with a consolidated loss exceeding ₹22,000 crore, up from nearly ₹11,000 crore in the previous fiscal year.

Addressing the Aviation India and South Asia 2026 summit, Air India Chief Executive Officer Tewolde Gebremariam noted that elevated fuel prices continue to affect the broader industry. He emphasized that Pakistan's airspace closure imposes an additional, unique burden on Air India that competitors do not face. Gebremariam also highlighted that reducing costs is an immediate priority, noting that the airline's cost per available seat kilometre currently exceeds its revenue per available seat kilometre.

"This proposal highlights the severe operational challenges and cost asymmetries traditional carriers face due to geopolitical airspace restrictions. When structural overheads like fuel consumption and longer routes significantly outpace revenue per available seat kilometre, airlines must explore creative industry-level mechanisms to level the playing field. Managing profitability amid widening losses will require a strategic focus on cost optimization and efficient resource utilization rather than relying on external market adjustments alone." — Dr. Shishir Gupta, Founder & CEO, StartupLanes