Mayday! How Go First insolvency could dent India’s aviation sector

In aviation industry jargon, ‘Mayday’ is a distress signal made by aircraft during an emergency. It was Mayday on May 2 for Go First, the country’s fourth-largest airline by market share (after IndiGo, Air India and Vistara), when it announced its decision to make a figurative emergency landing by filing a voluntary bankruptcy resolution application with the arbitration panel, the National Company Law Tribunal (NCLT). The Mumbai-headquartered airline claimed that technical glitches with next-generation geared turbofan (GTF) engines supplied by Pratt & Whitney (P&W) had hit normal operations, grounded its aircraft and led to mounting losses. The next day, the airline also suspended all its flights, leading aviation regulator Directorate General of Civil Aviation (DGCA) to issue it a notice under the relevant provisions of the Aircraft Rules, 1937, over failure to continue operations.

The news came even as India—often described as the world’s fastest-growing aviation market—and, therefore, a bright spot in global civil aviation, registered a 43 per cent increase in domestic traffic from January to April 2023. Amid the hullabaloo generated by the development at Go First, hardboiled aviation industry insiders were left unfazed. “This problem has come purely due to lack of foresight, planning and wisdom from Go First management and lack of interest in running the airline on the part of the promoters,” the CEO of an Indian carrier tells Business Today matter-of-factly over the phone. “Although P&W engines do have a history of early removal for maintenance due to various production, quality and performance-related issues, other airlines have done a far better job of managing those challenges.” Several international carriers including Lufthansa, Hawaiian Airlines and Air Tanzania have reported problems with P&W’s next-generation geared turbofan engines, especially under hot and dusty conditions, but none has grounded operations.

P&W officials tell BT that the company has been constantly working to improve the engine’s lifespan: “As with any engine development programme, especially with the technology that’s new and revolutionary like the geared architecture, we continue to develop solutions to improve engine durability.” Maintaining that the Go First litigation was purely a commercial and contractual dispute, the officials say P&W is already complying with the Singapore International Arbitration Centre (SIAC) order seeking the company take all reasonable steps for despatch of engines to the low-cost carrier (LCC). Go First had approached SIAC seeking compensation in excess of Rs 8,000 crore, other final relief and interim emergency relief, citing P&W’s chronically faulty engines, its decision to suspend MRO activity from May 2022, and its proposal to give minimal induction slots.

The carrier’s decision to pursue litigation despite obtaining a favourable ruling in SIAC puzzles many. They say the aggression displayed since May 2 by the airline—promoted by the more than 250-year-old Wadia group—may have been prompted by a desire to jump the queue for engines over other customers. They also feel the airline’s stated claim of seeking a staggering $1.1 billion in damages from P&W would have to be amply substantiated in foreign jurisdictions. “Whenever we approached them with a solution, they [Go First] would display extreme hostility,” informs another P&W executive.

BT could not get Go First’s version on these claims, as it declined to comment saying the matter is sub judice.

In a press release issued the day it made the bankruptcy filing, Go First said that nearly 50 per cent of its Airbus fleet was compromised due to faulty engines. The airline has a fleet of 59 A320neo and A320ceo aircraft, according to the company website. In a statement, the airline claims that apart from 28 of its A320neo aircraft, around 50 aircraft of IndiGo and 20 turboprop aircraft of SpiceJet were also grounded due to issues with P&W’s engines. However, neither of its competitors has witnessed any significant curtailment of operations. Market leader IndiGo, which correctly anticipated a crisis brewing due to problems with the new GTF engines, started switching to Commercial Fan Motor (CFM) in 2019. But Go First stuck to P&W.

A Turbulent Journey

Go First was launched as Go Air in 2005 (even before IndiGo) by Jehangir ‘Jeh’ Wadia, the younger son of Wadia group Chairman Nusli Wadia, at a time when low-cost aviation was slowly finding a foothold in India. A savvy communicator, one could speak to him on everything from government policy to rock music for hours. Among staff at the company’s Paper Box House office in Mumbai’s Andheri East suburb, he was known as a tough taskmaster who was also open to experimenting with new ideas. Within a few months of its launch, the LCC started a direct flight between Mumbai and Srinagar against the advice of industry veterans. However, the flight proved to be a hit with both leisure and business travellers. As time went by, Jeh began to realise the cash-burn nature of the airline business. Other problems surfaced, too, including a high attrition rate and postponements to the company’s IPO plans. Eventually, following serious differences with his father, Jeh exited the company in 2021, taking the brand Go Air with him.

“But even while helming the company, he had already started scouting for a buyer, with feelers sent to potential investors as early as 2019,” says a Wadia group insider who was privy to the discussions. “The list included the promoter of one of the country’s largest conglomerates. However, the deal couldn’t take off. But the search for a suitor continues to date.” Following Jeh’s departure, the airline was subsequently renamed Go First and positioned as the country’s first ultra-low-cost carrier (ULCC). “The classification of Go First as a ULCC was inaccurate. Until the time it suspended operations, it continued to be a LCC even though it did not have the lowest cost base in the industry,” states an aviation consultant requesting anonymity.

The airline would be hoping to make a comeback, utilising the breather provided by NCLT’s moratorium on its financial obligations and transfer of assets to enable it to work out a restructuring plan. After the airline replied to the DGCA notice on flight suspension, the aviation regulator asked it to submit a comprehensive and sustainable revival plan by June 22. “The revival plan once submitted by Go First shall be reviewed for further appropriate action in the matter,” says Vikram Dutt, Director General of DGCA in a message to BT. However, industry insiders are apprehensive as carriers that once suspend operations rarely make a comeback. “Go First is history. The best course of action for the airline, its vendors and its lessors would be to gracefully bury the dead, settle the lawsuits and move on,” says an industry insider requesting anonymity.

As the situation unfolds, it is the passenger who is the ultimate loser. “The grounding of Go First and the inability of lessors to repossess their airplanes will lead to higher market risk for parties exposed to the sector. This translates to a higher cost of doing business, which means cost escalations, lower margins and higher airfares,” avers the aviation consultant quoted earlier. This might even have an impact on the way Indians travel. “The short-term impact is increased fares and increased anxiety about the availability of tickets at reasonable prices. Also, passengers might have to plan trips much in advance. And for those who would have booked their tickets through Go First, they will have to rework their itinerary as well,” says Jagannarayan Padmanabhan, Senior Director at CRISIL Market Intelligence.

Importantly, there’s an unease about India that has been playing in global aviation circles for a while, and Go First’s case has made them queasier.

Local Trouble, Global Impact

With a series of bad precedents, airline defaults, red tape and a low credit rating, lessors and financers have long perceived India as a risky market to do business in. In leasing circles, a closely knit group that is forever cautious about deploying assets in places deemed even remotely treacherous, conversations often happen about how many of their ilk lost their aircraft assets in India after many private airlines folded up in the post-liberalisation era in the late 1990s. Even in 2012, the US-based International Lease Finance Corp. (ILFC) didn’t have a very pleasant experience while repossessing aircraft from Kingfisher Airlines.

And now, the NCLT moratorium seems to have dented India’s image further. Plus, ever since its bankruptcy news broke, the story of Go First vs P&W has taken on the hues of a modern-day David vs Goliath battle. “This narrative might be great for domestic consumption and great if Indian carriers would be happy to rely on Russian and Chinese aircraft in the future,” an international lease financing expert tells BT caustically over the phone. “However, nobody seems to be asking why western lessors should take a country risk on India in the future. Okay, you might get to keep my aircraft for now, but then why would I or any of my peers put aircraft here going forward?” The perception of higher risk may result in the lease rent factor (LRF) on leased aircraft going up from 0.65 per cent currently to 1.10 per cent, depending on aircraft type, airline, terms of the contract, etc. “Furthermore, lessors may ask for higher deposits or, in the case of financing, banks, including export credit agencies, may demand higher processing fees, higher interest, lower term, lower loan-to-value or a combination of all the above,” says the airline CEO quoted earlier.

“With all these shenanigans happening and neither the ministries of law nor civil aviation intervening, this may very well mark the end of the growth phase in Indian aviation. If these questions are not resolved, in another six months’ time, India will have to reopen bilateral flights for Middle Eastern airlines because we won’t be able to meet the outbound demand!” exclaims an alarmed industry veteran Shakti Lumba. Such unease with India could have been pre-empted had Parliament ratified the Cape Town Convention Bill pending since 2018. Concluded way back in 2001, the primary aim of the Cape Town Convention and Protocol is to resolve the challenge of obtaining certain and unopposable rights to high-value assets such as airframes, aircraft engines and helicopters that, by their very nature, have no fixed location. While India became a contracting state to the Convention in 2008, some of its provisions are in conflict with the country’s bankruptcy laws. Interestingly, India today stands alongside Afghanistan and South Africa among only three nations that have not aligned their legal framework with it.

The overarching legal opinion is that the Convention must become law. “Overseas lessors and financiers would wish India to be a fully Cape Town Convention and Protocol-compliant country. Also, the economic benefit which will flow from the legislation is that it would make India eligible to be placed on the Organization for Economic Development and Cooperation (OECD) discount eligibility list for the signatories,” emphasises Ajay Kumar, Managing Partner at law firm KLA Legal. “Aviation is a global industry; in many other industries, one can do with the peculiarities of the way business is done in India. Not in aviation. We have to align our laws with the rest of the world,” says the industry insider in agreement.

As the Go First case plays out over the coming weeks and months, it is important for India to ensure that it doesn’t dent the larger goal of the country’s aviation industry to become a comprehensive, globally connected ecosystem of aviation-related services. 

@manishpant22