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Go First airline files for bankruptcy, may not take off for now

ICICIdirect 13 Mins 09 May 2023

Indian airline companies have rarely had a smooth run over the long run. Very few have taken off well over the long term. Following the turbulent journey and failure of the likes of Kingfisher Airlines, Jet Airways and Paramount Airways, Go First (Go Air earlier) is the latest addition to list of airline companies that have gone under. Go First filed for bankruptcy on May 2, 2023. A key reason it cited was the inability of its airplane’s engine vendor, Pratt & Whitney, in supplying fault-free engines as per schedule, resulting in the grounding of its flights and the resultant financial losses.

What led to this sequence of events for a once-successful airline? What are the implications for banks, operational creditors and passengers? What is the way forward for Go First?

Coming at a time when passengers carried by domestic airlines are at record levels of 3.35 crore in January-March 2023, growth of 51.7% YoY, here’s all that you need to know about Go First’s tumultuous flight and the broader ramifications for stakeholders.

Large airline runs into rough weather

Go First has been in operation for nearly 18 years from 2005 onwards. It was among the top four airlines in the country with a healthy 10.6% market share of passenger traffic for the year 2019, behind Indigo, Air India and SpiceJet. Even as recently as the year 2022, Go First had 8.8% passenger market share, third highest in the country.

Its passenger load factor – which measures the ratio of the seats filled to the total capacity of an airline – for Go First has generally remained around the 90% level. It was able to run 200 flights every day, and about 185 flights closer to its bankruptcy. It carried 8.95 lakh passengers in March 2023.

That’s where the good part stops.

Source: DGCA

The airline’s troubles go back in time. The GTF (geared turbofan) engines supplied by Pratt & Whitney to airlines with A320 neo airplanes around the world – including to Indigo and Go First in India – were found to be defective.

The earliest problems arose in 2017. By 2019, the issues were serious enough for the Indian aviation regulator DGCA (Directorate General of Civil Aviation) to ask airlines using the faulty engines to ground them until the defects were rectified.

Unfortunately for Go First, from 7% of its flights being grounded in December 2019 and 31% by December 2020, the proportion rose to as high as 50% or 25 of its Airbus A320 neo aircraft fleet as of December 2022.

Go First filed an arbitration case against Pratt & Whitney. The Singapore International Arbitration Centre (SIAC) had asked Pratt & Whitney to deliver at least 10 serviceable spare leased engines by April 27, 2023 and a further 10 spare leased engines per month until December 2023. Unfortunately, none of the engine deliveries happened. Go First has claimed that had these engines arrived on time, it would have returned to full operations by August or September this year.

For its part, the engine maker has claimed that Go First did not make payments and had a history of defaults on financial obligations.

Indigo, too, faced these issues, but was able to get back to its feet quickly due to a much larger fleet size and stronger finances.

In the meantime, 2020 saw the COVID-19 pandemic and the resultant lockdowns seriously hurt the entire airline industry, with Go First also facing the heat.

In the aftermath of the pandemic, inflation soared with crude oil and a host a commodity prices soaring, further worsened by the Russia-Ukraine conflict.

These events jeopardised an already financially fragile Go First, which called back its intended IPO in 2022 due to volatile market conditions.

Indigo was able to overcome the issue as the airline re-inducted some of the defective plane engines after fixing them. Also, currently the majority of its A320 neo aircraft are now powered by CFM engines instead of those from Pratt & Whitney, according to reports.

After Jet Airways’ failure in 2019, Indigo gained further strength and has more than half the domestic market share. The ailing government-run Air India was also bought by the Tata group. With Vistara and Air Asia already under its wings, and Air India added to its repertoire, competition became even more severe for Go First, as it was already troubled with grounded aircraft.

Financial woes and eventual grounding

The promoters of Go First pumped in Rs 3,200 crore over the past three years, of which Rs 2,400 crore was injected in just the last two years. They had reportedly ploughed in Rs 6,500 crore totally since the airline’s inception.

Given the post-COVID airline industry woes and with half of its fleet grounded, Go First could not function as usual, especially given the surging fuel and operational costs. Given the losses and curtailed operations, the promoters were not keen to plough in any more equity into the airline.

The airline has claimed that the grounding of 50% of its aircraft meant that it suffered a revenue loss of a whopping Rs 10,800 crore and incurred additional operational costs. It further claimed that Pratt & Whitney’s actions had also “driven some lessors to repossess aircraft, draw down letters of credit and notify further withdrawal of aircraft.”

It also claimed to have paid Rs 5,657 crores to lessors in the last two years, of which around Rs 1,600 crores was paid towards lease rent for non-operational grounded aircraft from the funds infused by the promoters and the Government of India’s Emergency Credit Line Guarantee Scheme.

Go First has sought Rs 8,000 crore in compensation from Pratt & Whitney for the loss in the SIAC.

In fact, Go First’s staff salaries were delayed in recent months and were not given on time.

Lenders face anxious times

The financial and operational troubles of Go First aren’t isolated problems. It has loans of Rs 6,521 crore that it needs to repay. It has serviced interest for the month of April 2023, but the future remains uncertain.

Central Bank of India, Bank of Baroda, Deutsche Bank and IDBI Bank are among the key lenders to the airline. The outstanding exposure of Central bank of India was Rs 1,305 crore and was almost similar for Bank of Baroda as well. Go First had also taken Rs 1,292 crore loan from the government’s emergency credit scheme announced during the COVID crisis.

In addition, the airline has defaulted on payments to operational creditors, including Rs 1,202 crore to vendors and Rs 2,660 crore to aircraft lessors.

In all the total liabilities stood at Rs 11,463 crore for Go First. Some reports suggest that a few of the bankers are open for negotiation in repayment. Others suggest that the recovery for banks may not be more than 25-30% of the outstanding loans.

Airfares soar, revival chances weak

Go First had cancelled flights till May 5 earlier, but has extended the suspension by a week to May 12 now.

Given that this is the peak summer season, there is huge air traffic to cater to for airlines as passengers head out to various destinations for their holidays.

As Go First has been grounded, the capacity available is reduced, thus increasing fares massively.

Some airlines are reportedly charging Rs 28,000 for the Delhi-Mumbai route as spot fares. Mumbai-Goa fares have risen to Rs 15,000 from Rs 6,000 a week ago according to reports.

In most cases spot fares have doubled or in a few instances the tickets are now 3-4 times costlier than they were a week ago, according to news reports.

Given the surge in air travel, it is unlikely that the fares would come down any time sooner and airlines would look to make the most of it, thus burning a hole in the pockets of passengers.

For Go First, the path to revival seems extremely challenging at the moment. The airline has filed a petition in Delaware to force Pratt & Whitney to implement the arbitration award of the SIAC.

In addition, the insolvency proceedings before the NCLT (National Company Law Tribunal) may not get a hearing very soon.

According to experts quoted in the media, even if Go First wins compensation from the engine maker – which in itself may be lengthy process – it remains to be seen if that would enough to repay the lenders and operational creditors. Again, mere payment won’t be enough as the defective engines need to be replaced by sound ones before Go First can run full-fledged operations as before. That seems to be a tall order now.

Source: Company press release

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