At a time when India has emerged as the brightest spot in global aviation, the developments at the Mumbai-headquartered Go First could potentially lead to a significant rise in operational costs for domestic carriers.
For instance, presently two of the country’s largest carriers IndiGo and Air India have perhaps the best-negotiated deals with original equipment makers Airbus and Boeing.
National flag carrier Air India’s February order for a staggering 470 narrow and widebody aircraft estimated to be worth over $70 billion may actually be worth $38.52 billion after calculating a 55 per cent discount, according to a back-of-the-envelope calculation by Business Today.
Similarly, the country’s largest carrier IndiGo had inked the world’s sweetest deal with Airbus in 2005, when it had ordered 100 aircraft even before launching operations.
However, such deep discounts may well be a thing of the past following the low-cost carrier (LCC) Go First filing an application for voluntary insolvency resolution with the arbitrator, the National Company Law Tribunal (NCLT) on May 2, taking the global aviation industry by surprise.
Among other things, the development would impact the global perception of the Indian market. With more than 40 aircraft still on lease to Go First, leasing companies across the world are literally waiting in the wings to repossess them.
“This will be a test of commitments made by India under the Cape Town Convention and Protocol. Although India is a signatory to the convention, its certain provisions are in conflict with the country’s bankruptcy laws. If the lessors realise that India continues to be a risky jurisdiction, the lessees [airline companies] will end up paying a risk premium on new billings,” cautions the managing partner at the law firm KLA Legal, Ajay Kumar.
The primary aim of the Cape Town Convention and Protocol is to smoothen the challenge of obtaining certain and opposable rights to high-value aviation assets, viz. airframes, aircraft engines and helicopters that by their very nature, have no fixed location. Nations’ legal systems have different approaches to securities, title retention agreements and lease agreements, creating uncertainty for lending institutions regarding the efficacy of their rights. This hampers the provision of financing for such aviation assets and increases the borrowing cost.
The lessors are, therefore, keen to learn how the Indian courts will rule on the matter, how regulators such as the Directorate General of Civil Aviation (DGCA) handle the situation and the time taken to reclaim their equipment.
And in the eventuality of Go First going insolvent, its impact will flow through to other carriers.
“Be it via higher risk premiums, additional guarantees or even eroded trust, stakeholders from oil marketing companies to airports to transport providers all stand to lose out,” averred managing partner at aviation services firm AT-TV, Satyendra Pandey.
Pandey and Kumar felt that the expected increase in overhead costs would get passed on to the passenger in the final analysis.