The Collapse of Go First: Unraveling the Risks of the Airlines Business | Spring Money

Last month, India witnessed its highest-ever domestic passenger traffic (4,56,082) on a single day, reflecting an upward growth trajectory in the Indian airline industry. Meanwhile, one of India’s largest aircraft companies, Go Air, has filed for insolvency under Section 10 of the Insolvency and Bankruptcy Code (IBC) in the National Company Law Tribunal (NCLT) and stopped its operations on 2nd May.

The airline has suffered losses for years and has struggled to maintain its operational efficiency. For instance, Go First had the worst on-time performance in March at 49.2% at 4 major airports.

Go First, in its statement, has blamed the US company, Pratt and Whitney’s International Aero Engines LLC, for supplying the faulty engines and spare parts of the aircraft since 2019. This caused the airline to strand 7% of its fleet in December 2019, which rose to a whopping 50% in December 2022. As of May 2023, 25 aircraft are not operational, and only 13% of the fleet is functional. It has led to losses of 10,800 crore rupees in revenue and additional expenses. As far as debt is concerned, Go First has reported a debt of 6,521 crore rupees to the NCLT. However, the cumulative debt from banks, government, vendors, financial institutions and aircraft lessors is 11463 crores.

P&W seems to be failing to fulfil its other promises as well. For instance, Indigo also ordered engines from P&W, but it could not deliver them. However, unlike Go First, Indigo ordered spare engines from other companies as well so that it does not have to depend on a single buyer.

Though the airline has stated that they can restart their operations from August or September this year if the P&W sends them spare parts, history highlights that no airline in India could ever restart its operations after 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 Pratt and Whitney, unlike other airlines that have diversified their suppliers.

The Go First Officials said that P&W has not complied with the order of the Singapore International Arbitration Centre (SIAC), which asked the latter to supply 10 usable spare engines by 27th April and 10 spare leased engines every month till December. Simultaneously, Go First has filed an emergency petition in the US court against P&W for compliance with the SIAC order.

Why is Airline Business a Risky Venture?

Go First is the second airline to file for insolvency in just 4 years after Jet Airways in 2019. Whereas Air India has been sold by the government to Tata Group as it could not handle the losses. The entire Airline industry has been in trouble for quite a few years. The problem is exacerbated as the airline sector is a capital-intensive market, whereby very few players enter, and if any player suffers losses, it adversely impacts the lenders and investors, ultimately having severe ramifications for both passengers and airlines in the highly competitive aviation market. For instance, lenders of Go First, Bank of Baroda and Central Bank of India’s stocks went down substantially as the airline filed for bankruptcy. They cumulatively loaned 1300 crores to the Group.

The core issue of the failure of airlines relates to two factors:

1. Fuel Costs

2. Passenger’s pocket

Mostly, airlines in India fail as they cannot cover their costs, particularly fuel costs, in the long run. The problem exacerbates as the government holds a monopoly over Railways, which is still the most prominent mode preferred by Indians for long-distance travelling. Airlines have to reduce ticket prices to attract cost-conscious passengers who are already accustomed to artificially lower train tickets. Therefore, services are not the exceptional factor that impacts the passenger’s mindset; instead, it is the cost of the ticket.

Moreover, the jet fuel tax is levied by both the Central and State government, causing a further increase in operational costs. The issue gets exacerbated due to the rise in the US dollar’s value as India imports 85% of its crude oil from other nations. Secondly, the aviation infrastructure in India still needs massive improvements to save costs for Airlines in such a capital-intensive business. Thirdly, when the demand is low, the airlines still have to maintain their aircraft, pay high salaries to their staff, pay airport charges etc. So there is a high fixed cost and a minimal scope of flexibility vis-a-vis demand.

Impact on Indian Airline Industry

With the global economic slowdown due to the Russia-Ukraine war, Covid-19 and impending uncertainties, the global and Indian Airline industry has been suffering from losses for several years now.

In the last 3 years, the Indian Airline industry has incurred losses of over $10 billion, and the projected losses in 2023-2024 stand at $1.6-1.8 billion. Moreover, job losses are also incurred due to constant hiccups in the industry. For instance, more than 5000-6000 pilots are unemployed, as said by the Chief of DGCA, Arun Kumar. Now with Go First filing for voluntary insolvency, the number of unemployed people will further increase, causing a wide gap in the demand-supply equation. The airline has already indicated to its employees that they should start looking for other avenues for employment.

The situation is also grim in the global market. As per International Air Transport Association (IATA), except for American and European airlines, all other regions are suffering from billions of losses, and the situation is not projected to change in 2023-2024 as well. For instance, Asia-Pacific Carriers reported losses of over $10 billion, while Latin American carriers suffered losses of over $2 billion.

Competitors

As per the Directorate General of Civil Aviation (DGCA), Go First held 7.8% of the domestic market share in the January-March quarter, making it the third largest company in India.

Now with the collapse of the airline and the beginning of the holiday season, other competitors, including Indigo and SpiceJet, will receive higher passengers and enhanced profits. This is evident from the fact that the stock prices of both companies skyrocketed as the news about the bankruptcy of Go First floated. For instance, the share price of InterGlobe Aviation Ltd, which runs Indigo, soared to its 52-week high on 3rd May.

However, for the passengers, this seems to be bad news. As per experts, the prices of tickets will rise further in the short to medium term by 10-15%. The prices have already been high after Covid-19 due to inflation, the Russia-Ukraine war and the global economic downturn. Moreover, other aircraft are already working at their full capacity and could not fill the gap created by Go First, that too at a time holiday season. Therefore, as the demand for other airlines rises, it would lead to supply chain disruptions. The government has also highlighted the issue, and the Civil Aviation Ministry is constantly in touch with the Go First officials to cull out the issues.

Why do new Players want to enter into this market?

Though several airlines have collapsed in the last few years, new airlines, such as Akasa, launched by Rakesh Jhunjunwala, are still emerging to get a share of this market. But why?

The reason seems to be the growth potential in the Indian market. In the last few years, the airline industry of India has grown by 15% from 2014-15 to 2019-20 every year, and more passengers are now travelling from aeroplanes as well. Moreover, under UDAN Scheme, the government has invested thousands of crores in improving the aviation infrastructure, including new airports all across India, thus giving a major boost in air connectivity within the country. The Airports Authority of India (AAI) and private players are developing and upgrading new and existing airports with a projected capital expenditure of Rs 98,000 crore in the next 5 years for expansion and modification of existing and new terminals and strengthening of runways.

Moreover, several factors result in the profitability of an airline:

1. Time slots

2. Operational Efficiency

So if an airline gets more time slots during peak hours, the chances of higher passenger footfall automatically increase. Airlines usually receive time slots from the aviation department, depending upon the infrastructure of the airport, how many terminals it has and the air traffic on that route.

So if an airline collapses, the existing or new players can fill in those time slots, and the plane can fly at its full capacity due to higher footfall. This allows higher profits in a single takeoff.

Now in order to capture more time slots, an airline requires higher fleets of aeroplanes so that it can fill in those slots with its aircraft. Now, here the risk comes as it requires pumping in more capital to buy planes, staff and fuel. So there is no moving back in this business. Sustenance requires growth not just with profit numbers but assets as well.

To understand this with an example, both Go First (formerly Go Air), and Indigo started in the same year. However, today the former has only 50 aircraft, out of which more than 85% are grounded. Whereas, Indigo has 300 aircraft in operational condition, with a few of them in reserve.

Now with a higher number of fleets, airlines can not only cover major time slots but also damage the time slots of airlines with lesser fleets. So if a company has 5 aeroplanes for different routes at peak time slots, Indigo, with a higher number of planes, can use its reserve fleet to run on the same route at the same time slot at lower prices. Now Indigo has the choice to maintain its profits from its other fleets, while the other airline will have to suffer significant losses on that route because now passengers are divided, causing aircraft to run not in their optimal capacity.

Another essential factor that impacts profitability is operational efficiency in terms of the turnaround time of an airline. Go First has been suffering on this aspect as well for quite a few years now. Better turnaround time results in improved passenger experience and higher footfall.

What’s Ahead for Go First

Go First has applied for the voluntary insolvency proceeding at the National Company Law Tribunal under Insolvency and Bankruptcy Code. Simultaneously, it has also filed for emergency proceedings at the US Court for implementation of an Arbitration Order against P&W. Although it would be too early to predict anything as of now, if the US court gives the order in favour of the Airlines, then the company might restart its business by September and withdraw the application from NCLT.

Otherwise, as the reports suggest, NCLT will look into the matter, and if it accepts the application, then the assets might go for bidding. However, the Wadia Group might request for exemption to this rule as it bars the promoters from bidding on their own company. Moreover, as the company is not declared NPA, it still has the right to present the Resolution Plan under Section 29 of IBC.

However, Go First has asked the NCLT to urgently pass the orders, requesting that Government authorities and suppliers of essential goods services shall not take any adverse action against the company. As of now, NCLT has suspended the board of Go First and appointed the interim resolution professional to look after the affairs of the airline. Meanwhile, several lessers of the aircrafts have filed petitions in the NCLT and requested the DGCA for the repossession of aircrafts. Therefore, it remains to be seen how Go First will cope with the current crisis that too at a time when the airline industry is witnessing gloomy days.

"Nayan Mishra is the Author and Researcher having expertise in the field of geoeconomics, international & business law, international relations and personal finance. He has worked with multiple organizations across industries with the aim to build a content ecosystem that fosters the reader’s psyche and organization's authority."