Indian aviation: Is more trouble in store after Go First bankruptcy?

On May 2, the Mumbai headquartered low-fare airline Go First withdrew all flights for a few days and filed for bankruptcy. On May 10, NCLT (National Company Law Tribunal) admitted the petition and granted Go First (formerly known as Go Air), protection under moratorium from recovery of loan and dues by banks and lessors. NCLT also directed initiation of Corporate Insolvency Resolution Process, ordered the suspension of the management of Go First and asked it to extend all support necessary to IRP to maintain status of airline as a going concern. The tribunal also ordered that no employees are to be laid off.

While filing for bankruptcy, Go First's statement said the reason for the airline's failure was the grounded fleet due to the "ever increasing number of failed engines supplied by Pratt and Whitney" resulting in a grounding of 25 of its A320 aircraft, comprising 50% of the airline's fleet, up from 7% in December 2019. The grounding, as per the company's claim, has set it back by ₹10,800 crore in lost revenues and additional expenses. The statement points out that the company is forced into this position despite the founders pumping in ₹3,200 crore in the last three years, of which ₹290 crore was infused in April alone. Go First has sued Pratt and Whitney and the two are locked in a legal dispute in which Pratt has alleged that the airline has a "lengthy history of missing its financial obligations to Pratt."

Small But Vital Player In Sector

While the engine trouble might have triggered this latest crisis, it has not been a very smooth sail for Go First. It took to the skies in 2005 ahead of most rivals, but remained a small player in the Indian skies with 59 aircraft as against market leader IndiGo's fleet of over 300. The airline had frequent changes of CEO, right from Wolfgang Prock Scaheur, who earlier had long, non-controversial and productive stints with other airlines including Jet and IndiGo; followed by Akasa founder Vinay Dube. It also saw 12 different chiefs of human resources in as many years. Faced with a similar crisis with Pratt & Whitney, IndiGo, for instance, replaced its engines with CFM's for the second set of its 300 aircraft. Go First's reliance on Pratt & Whitney engines eventually resulted in the current crisis. Emails and detailed questions sent by Fortune India to the airline for this story remained unanswered till the time of publishing.

More Trouble Awaits Indian Aviation?

While Go First has gone into bankruptcy, recently one of its rival low-cost airline Spicejet's Ireland based lessors moved NCLT asking for the airline to be declared bankrupt since it had not paid the dues owed to this lessor.

Industry sources argue SpiceJet has also been reduced to a fraction of what it was pre-pandemic. It has been under immense pressure with mounting lessor payment and vendor dues and delays, and failure to meet statutory payments and obligations, including TDS and provident fund. A substantial portion of its fleet is grounded (26 out of 76) due to a shortage of spares and parts, leading to a shrinkage in its market share over the last three years. The airline's chairman and CEO Ajay Singh has been fire-fighting against all odds to stay afloat, securing a stake sale of 7% to Carlyle Group Inc. at a valuation of $1.5 billion for its fairly robust cargo operation set up during and post the pandemic. It has more recently secured ₹550 crore of the government's ECLGS (emergency credit loan guarantee scheme) funds to bring around 20 aircraft back into service.

Sources from Ministry of Civil Aviation (MOCA) and industry warn that despite all efforts, it may be "too little, too late" unless it gets some of its grounded fleet back in the air rapidly and is able to raise enough money to start taking delivery of its remaining Max aircraft, of which only 12 are currently flying. Taking delivery of Max would help bring in some sale and lease back income, although to do so the airline has to make some payments upfront. "I fear intent and effort alone may not be enough for SpiceJet from where it finds itself today," says a former senior management member of the airline. He says that besides the pandemic, SpiceJet has been particularly unlucky with its Max grounding episode. Had the Max not been grounded and delivered as per original schedules, the airline might have been in a very different position today.

Aviation Sector Getting a Reputation

At one level, the Go First bankruptcy is bad news for the other airlines in India and the aviation industry in general. One player going bust makes bankers, lessors, vendors and all other stakeholders wary as the Indian aviation space is getting a reputation for frequent airline failures. This translates to higher interest rates on any money lent to the sector and more stringent contracts for all - be it with lessors or MRO vendors. "The sector was still reeling from the shock of Jet Airways downfall in 2019. At a macro level, this was the last thing it needed," says a Tata Group insider, currently with Air India.

But at an individual airline level, if one door closes, another opens. The exit of one or two players will free up almost 15% of the market share, some valuable slots and frequencies and some specific routes where Go First may have dominated which can be filled by the low-fare wing of Air India, Akasa and of course IndiGo, which may be best placed to take advantage. On Go First's frequent schedule changes, delays and cancellations, the airline said it had been forced to cancel 4,000 flights in the last month alone.

"Go First was strong on certain sectors and specific routes - Mumbai-Goa and from the metros to Srinagar, Leh and Phuket to name a few - so these could soon be free. It could be an opportunity for Air India and its recently merged low fare airline and Akasa to grab some of this market share by filling in slots and frequencies that might get vacated," points out a MOCA official.

What Lies Ahead?

At the NCLT hearing on May 10, the airline was granted relief from recovery by lessors and vendors. The remaining 23-odd aircraft lessors had sought an Irrevocable De-Registration and Export Request Authorisation (IDERA) on May 5, post the first NCLT hearing. At the first hearing, NCLT reserved its judgment on the matter but the airline's legal counsel had urgently sought a moratorium to stop the lessors from taking possession of the remaining aircraft, which has now been granted.

As this story went to press, very few (including MOCA officials) expect Go First to resume flights in a hurry. Many in the sector argue that over the last few years - and in particular post pandemic and the sale of Air India leading to more consolidation - running airlines appears to have become a thankless job with very little reward on the horizon.

While commanders, pilots and staff of Go First had begun resigning, but no objection certificates required by crew (NOCs) were proving difficult to obtain due to DGCA's six month notice period requirement.

An Industry That Refuses to Grow Up

But many in the industry hold the view that it is perhaps time for a clean up and consolidation in the sector with the smaller and weaker airlines winding up and new, more robust players replacing them.

There's need for the government and all concerned to tighten the rules and norms to ensure that airlines don't keep sinking with unerring regularity. This requires an overhaul of governance within these airline companies and a strong, independent board that keeps an eye on the managements, promoters and founders to ensure running a profitable and successful business. A former Jet Airways executive who witnessed its closure from close quarters argues that the situation is even worse with privately-held companies than with the listed firms since the latter have to comply with SEBI rules and norms and are subject to greater oversight.

Moreover, many say that a minimum cash reserve should be insisted upon in the case of airlines, which is sufficient to cover periods of crises like the COVID-19 pandemic, sharp fuel hikes and other emergencies. Market leader IndiGo currently has free cash reserves that would allow it to sustain operations for at least three months, in the absence of any revenue inflows. "Indian carriers need to be better capitalised and a minimum cash reserve at all times must be made mandatory by law," says a former DGCA official. As things stand, in addition to the safety audits, DGCA conducts financial audits of all airlines but this remains more on paper than anything else. "The financial audits we conduct are only in letter not spirit," he admits.

Airlines going bust is a global phenomenon since aviation remains a high risk business for those with very deep pockets but the sector often attracts those seeking  glamor and fame and lacking the commitment, business savvy and level headedness it requires. This has been particularly true in India with its long list of failures right from the days of ModiLuft and Damania to Kingfisher Airlines. History has shown time and again that running a tight ship in calm seas and running the same in choppy waters are two very distinct things. Go First's failure is not the first in India's aviation space and is unlikely to be the last.