Go First insolvency: Why the airline was staring at a crisis for long

The signs of any crisis are long visible before it explodes in the face and the current mess at Go First is no exception. Be it frequent delays to staff salaries, an attrition rate that is among the highest in the Indian aviation sector or frequent postponements to the company’s plans of listing, the writing has long been on the wall. When the Mumbai-based low-cost carrier (LCC) filed an application for voluntary insolvency resolution with the arbitrator, the National Company Law Tribunal in Delhi on May 2, it didn’t leave aviation observers surprised.    

Squarely blaming Pratt & Whitney (P&W) for the decision to temporarily suspend operations, Go First in a statement said the US-based engine maker had refused to comply with an award issued by the Singapore International Arbitration Centre (SIAC) for the despatch of 10 engines per month until December 2023. The grounding of close to 50 per cent of the carrier’s A320neo fleet had resulted in it incurring “`10,800 crore in lost revenues and additional expenses,” the statement said. The airline currently has a fleet of 54 Airbus A320neo and five Airbus A320ceo, according to its website. Several other airlines—including Lufthansa, Air Hawaiian and Air Tanzania—have reported problems with P&W’s geared turbofan engines, especially under hot and dusty conditions.

Citing faulty engines as a major reason behind Go First’s failure, an aviation industry insider, requesting anonymity, tells Business Today, “The above incidents with Go Air are just symptoms of low revenue and high costs that have set in motion a deeper operational malaise comprising lack of capital and profitability. Engines are a big part of that.” However, Satyendra Pandey, Managing Partner at aviation services firm AT-TV, sees engine defects as only one part of the problem. “No doubt the engines have had issues, but what is not being spoken about is alternative capacity plans, contingency plans and flying with a substantially reduced schedule.” IndiGo, the country’s largest carrier by fleet and market share, has so far successfully navigated the challenge despite having to ground over 30 A320neo aircraft for the same reason. Similarly, LCC SpiceJet managed to avoid any major cancellations after it was asked by the aviation regulator the Directorate General of Civil Aviation (DGCA) to operate only 50 per cent of its scheduled flights for more than two months after technical issues were reported with its fleet of Boeing aircraft in July last year.

Go First claims that the percentage of grounded aircraft due to faulty engines has grown from 7 per cent in December 2019 to 50 per cent in December 2022. The airline has also moved a Delaware federal court for the enforcement of the SIAC award. In a series of media interactions following the May 2 statement, Go First CEO Kaushik Khona—the airline’s eighth CEO in 17 years—said the claims from P&W are in the range of $1.1 billion. However, the argument has failed to cut ice with many in the industry. “Is there another instance where a problem has lingered for four years? Did the airline only look at the problem or did it also try to look for a way out?” asks Jitender Bhargava, former ED of Air India. In a statement, P&W noted that as part of its commitment to customers, it was “complying with the March 2023 arbitration ruling related to Go First.” Sources at P&W separately say the airline has had a long history of missing its financial obligations by often reneging on contractual terms. Multiple attempts by BT to contact Khona were unsuccessful.

In view of the cancellation of flights and initiation of insolvency proceedings, the DGCA has issued a show-cause notice to Go First under the relevant provisions of the Aircraft Rules, 1937, for their failure to continue operations. The airline has also been directed to stop booking and sale of tickets with immediate effect until further orders.

Also, at a time when air traffic is recovering to pre-Covid-19 levels, experts warn that the development at Go First could have  repercussions on India’s aviation growth story. “There are still 40-plus aircraft that are on lease to Go First and the lessors are scattered all over the world... The lessors are keen to learn how the Indian courts will react to the situation, how regulators such as the DGCA will move and to what extent the lessors will be able to pull their equipment out in a timely manner,” says Ajay Kumar, Managing Partner at the law firm KLA Legal. “If the lessors realise that India continues to be a risky jurisdiction, the lessees will have to pay a risk premium on new lease rentals. Overall, it’s not a good situation for anyone.”

The insolvency’s impact is expected to flow through to other airlines, 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. At best, they will receive a fraction of their dues,” says AT-TV’s Pandey. Bhargava feels the situation could have been avoided if the DGCA or the Ministry of Civil Aviation had proactively taken cognisance of the consistent drop in the airline’s performance. Agreeing with Bhargava, Pandey says the regulators could also look at auditing the airlines. “Because in the final analysis, it is the flying public that loses out.” The same holds true for employee rights. The carrier wants employees desperately looking for placements to serve notice periods ranging from three to six months before they are issued a no-objection certificate, say company sources.     

@manishpant22