Go Air, one of India’s leading aircraft firms with almost 8% of the market share, recently filed for insolvency at the National Company Law Tribunal (NCLT) under Section 10 of the Insolvency and Bankruptcy Code (IBC) and has ceased its operations since May 2.
Also, it has simultaneously filed for an emergency lawsuit at the US Court to enforce an arbitration ruling against US engine supplier Pratt and Whitney’s International Aero Engines LLC (P&W).
The airline alleged that the problem was caused due to P&W’s failure to comply with an order delivered by the Singapore International Arbitration Centre (SIAC), which required P&W to provide 10 operational spare engines by April 27 and 10 additional leased engines every month until December 2023.
What Exactly Happened to Go First?
Go First’s press release criticized the US corporation for selling faulty aircraft engines and spare parts since 2019. Due to this, the airline had to leave 7% of its fleet stranded in December 2019.
This number increased to a startling 50% in December 2022. Only 13% of the fleet was operational as of May 2023, which resulted in revenue losses of 10,800 crore rupees along with additional costs.
Meanwhile, Go First has reported a debt of 6,521 crore rupees to the NCLT.
But, the company’s total debt is 11463 crores, which has been taken from various lenders, including the government, vendors, banks, financial institutions, and aircraft lessors. The airline has been losing money for years and is struggling to keep its operations running smoothly.
P&W is struggling to fulfill its promises to other companies as well. For instance, Indigo also ordered engines from P&W, but it could not deliver them, causing Indigo to strand a few of its aeroplanes.
However, Indigo did not depend on a single supplier for spare parts, unlike Go First.
Although Go First has hinted that they can restart their operations from September 2023 if the P&W sends them spare parts, past data shows that no airline in India could ever restart its operations if the flights are suspended for more than 24 hours.
There seems no end to the problem in the short run as all the Go First’s engines are powered by P&W, unlike other airlines that have diversified their suppliers.
Why do Airlines fail?
The airline industry has faced significant challenges over the past few years. Recently, Go First became the second airline to declare insolvency within a span of four years, following Jet Airways in 2019.
Air India was sold by the government to Tata Group due to its inability to manage financial losses.
The situation is worsened by the fact that the airline sector requires substantial capital investment, limiting the number of players involved.
When any airline experiences losses, it has a detrimental effect on lenders and investors, resulting in severe consequences for both passengers and airlines in the fiercely competitive aviation market.
A concrete example of this can be seen in the decline of stocks for Go First’s lenders, the Bank of Baroda and Central Bank of India, when the airline filed for insolvency.
Collectively, these banks had provided a loan of 1300 crores to the group.
There are two primary reasons behind the failure of airlines. Firstly, pricing flexibility and secondly, the cost of jet fuel.
The imposition of jet fuel tax (JFT) by both the Central and State governments further adds to the operational expenses. This issue is intensified by the increase in the value of the US dollar, as India relies on imports for 85% of its crude oil.
The aviation infrastructure in India requires significant improvements to reduce costs for airlines operating in this capital-intensive industry.
Airlines face challenges when demand is low, as they still need to maintain their aircraft, pay high salaries to their staff, and cover airport charges.
As a result, they face high fixed costs with minimal price elasticity in response to demand fluctuations.
Furthermore, airlines in India struggle to cover their costs, especially fuel costs, in the long run. This problem is exacerbated by the government’s monopoly over the railways, which remains the preferred mode of transportation for long-distance travel among Indians.
To attract cost-conscious passengers who are already accustomed to artificially low train fares, airlines are forced to reduce ticket prices.
The cost of the ticket becomes the primary factor influencing passengers’ decision-making rather than the quality of services provided.
Still, New Players Want to Enter this Market!
Despite the collapse of several airlines in recent years, new airlines continue to emerge and seek a share of the market.
The growth of the Indian airline industry has been remarkable, with a consistent annual growth of 15% from 2014-15 to 2019-20. This growth is accompanied by a rise in the number of passengers choosing air travel.
An example of this upward trend is the record-breaking domestic passenger traffic of 456,082 individuals in a single day, which occurred last month, highlighting the positive trajectory of the Indian airline industry.
The government has made substantial investments through the UDAN Scheme to enhance aviation infrastructure, including the development of new airports across India.
This has significantly contributed to improved air connectivity within the country. The Airports Authority of India (AAI) and private entities are actively involved in the expansion, modification, and strengthening of existing and new terminals, as well as the enhancement of runways.
It is projected that a capital expenditure of Rs 98,000 crore will be allocated in the next five years for these airport-related activities.
However, the profitability of airlines hinges on two crucial factors: time slots and operational efficiency. Suppose an airline is allocated more time slots during peak hours. In that case, it naturally increases the likelihood of attracting a larger number of passengers.
The aviation department assigns time slots to airlines based on various factors such as airport infrastructure, the number of terminals, and the air traffic volume on specific routes.
In the event of an airline’s collapse, these time slots can be filled by existing or new players, enabling flights to operate at full capacity due to increased passenger traffic. This translates into higher profits for each takeoff.
To secure additional time slots, an airline needs a larger fleet of aircraft to utilize those slots effectively. However, this endeavour carries a certain level of risk, as it requires significant capital investment in purchasing planes, hiring staff, and procuring fuel.
There is no turning back in this business once committed, as sustainability necessitates growth not only in terms of profit but also in terms of assets.
To illustrate this point, let’s consider the example of Go First (formerly Go Air) and Indigo, both of which started operations in the same year. Presently, Go First possesses only 50 aircraft, with over 85% of them grounded.
In contrast, Indigo operates with a fleet of 300 aircraft, including some held in reserve. With a larger fleet, airlines can not only secure key time slots but also disrupt the time slots of competitors with smaller fleets.
For instance, if a company like Akasa Airline operates five aircraft on different routes during peak hours, Indigo, with its greater number of planes, can utilize its reserve fleet to operate on the same route and time slot, offering lower prices.
This provides Indigo with the option to maintain profits from its other fleets while the competing airline suffers significant losses on that route due to passenger diversion, resulting in aircraft operating below their optimal capacity.
Operational efficiency, particularly the turnaround time of an airline, is another crucial factor impacting profitability. Go First has been grappling with this aspect for several years, adversely affecting both the passenger experience and the potential number of passengers.
If the US court rules in favour of Go First, it may resume business by September and withdraw their application from the National Company Law Tribunal (NCLT).
If the reports are accurate, the NCLT will examine the matter, and if the application is accepted, the company’s assets could be put up for bidding.
The Wadia Group, however, might seek an exemption from this rule that prohibits promoters from bidding on their own company. Additionally, since the company has not been declared a non-performing asset (NPA), it still has the right to present a Resolution Plan under Section 29 of the Insolvency and Bankruptcy Code (IBC).
Currently, Go First has urgently requested the NCLT to issue orders, urging government authorities and suppliers of essential goods and services not to take any adverse actions against the company.
At present, the NCLT has suspended the board of Go First and appointed an interim resolution professional to oversee the airline’s affairs.
Meanwhile, several aircraft lessors have filed petitions in the NCLT and requested the Directorate General of Civil Aviation (DGCA) to repossess the aircraft.
It remains to be seen how Go First will navigate through the current crisis, especially at a time when the airline industry is facing challenging circumstances.