Go First Insolvency: What Should The Airline Do Next?

In a surprise announcement on Tuesday, Wadia Group's Go First filed for bankruptcy.

The low-cost carrier airline said that it could no longer continue to meet financial obligations, blaming U.S. engine maker Pratt & Whitney's faulty engines for the grounding of 50% of its fleet, which impacted operations.

Go First has also said that it has cancelled flights scheduled between May 3 and 5 due to operational reasons, with no mention of scheduling for future periods.

The Directorate General of Civil Aviation has sent a notice to the airline for the flight cancellations and asked it to respond within 24 hours, failing which the decision will be taken ex parte.

The decision to seek voluntary insolvency resolution proceedings has come at a time when the country's aviation sector is on an upward trajectory, with a higher load factor, higher fares, and a profitable period.

Promoters of the airline have infused funds worth Rs 3,200 crore in the last three years. Out of the total, Rs 2,400 crore were injected in the last 24 months. An amount of Rs 290 crore was pumped in April this year. "This brings the total investment in the airline since its inception to approximately Rs 6,500 crore," the airline said in a statement.

BQ Prime spoke to aviation experts to understand what is next for Go First and what its insolvency means for the airline's competitors.

"Go First's situation is not comparable to other carriers who shut operations. The company had its own problems. Since 2005, their pace of growth was tardy; they took their own sweet time to start international operations, and the number of chief executives who came in and went out was high, indicating no stability," said Jitendra Bhargava, former executive director, Air India. Over the last six to eight months, the aviation industry has been going through a purple patch, and a company like Go First is filing for a voluntary bankruptcy resolution, he said.

"There is no structural or fundamental problem with Go First. The company can get back on track; however, it will need a significant capital infusion, and Pratt and Whitney will have to clearly resolve its issues," said Dhiraj Mathur, IAS (Retd), an aviation expert.

P&W will prefer settling the issue out of court, which will lead to some cash coming into the company, according to him. Also, promoters would have to assess the possibility of raising money and injecting money from their own sources.

However, Ajay Awtaney, founder and editor of LiveFromALounge.com, is not too optimistic that Go First will come out of bankruptcy court quickly. "It is a bad situation on the ground for the company. It is important to look at the way contracts were structured between Go First and P&W and between its peers and P&W. On the back of Go First halting operations, we will see airfares inching higher," he said.

Awtaney hopes that peer airlines will start increasing flight frequency and operating more flights. Go First's approximately 8% market share means an impact on nearly 30–35,000 passengers on a daily basis in the domestic market alone.

"When Go First had a lesser number of flights versus what they had earlier for the summer schedule, it would have left enough cues for DGCA. Why did DGCA not catch the crisis then?" Bhargava said.

What disruption will the Go First bankruptcy cause in the aviation market? According to Bhargava, it could:

• Lead to consolidation in the industry for a better and healthier aviation sector in the country, with players like IndiGo and Air India.

• Airfares will go up in the short term.

• There will be a difficult situation for passengers with respect to refunds and getting accommodated with other airlines.

• Employees will be impacted.

When asked about what Go First should do, Bhargava said that it is key that the company restart operations.

Mathur agrees. "It is important for the company to continue operations at a lower scale and not shut operations completely," he said.

"What we need to see is if Go First will be admitted to NCLT or not. Believe that the airline should try to keep up its operations because if they shut down, there is no coming back. It is hard to establish credibility in this business. If they wind up now, it will be a long road ahead for them," said Awtaney.

Also, the selection of the right interim resolution professionals is key. Lastly, P&W and Go First need to get together and come up with a solution, according to Awtaney.

"Aviation companies are always in a tight spot. Domestic fuel costs are 15% higher than international prices. India being a price-sensitive market, competition is not from peers; it is going to be from Vande Bharat trains. Advise to stay away from the aviation sector from an investment perspective." said AK Prabhakar, head of research at IDBI Capital Markets & Securities Ltd.

Speaking about the exposure to banks, Prabhakar said the quantum is very small. "Do not see it as a concern. Promoters can come in and pay off the exposure to banks as group companies have the capability to pay off the bank loans."