Go First crisis: Fallout from the bankruptcy can be contagious for India's aviation sector

At a curtain-raiser recently to announce the next edition of Asia’s largest civil aviation event, Wings India 2024, Rémi Maillard, President of Airbus India and MD of South Asia, raised eyebrows when he described the Mumbai-based low-cost carrier (LCC) Go First’s bankruptcy filing as a “depressing development”. The event was attended, among others, by Jyotiraditya Scindia, Minister of Civil Aviation, the entire top brass of the Ministry of Civil Aviation, and members of the diplomatic corps. Maillard’s assessment was in sharp contrast to the usually bullish forecasts put out by the Toulouse-based plane-maker on India, the world’s fastest-growing aviation market.

Go First, which was operating with an all-Airbus fleet, filed an application for voluntary insolvency with the arbitrator, the National Company Law Tribunal (NCLT) on May 2, and suspended all flight operations, taking the global aviation industry by surprise. Promoted by the over 250-year-old Wadia Group, the airline has cited troubles with engine-maker Pratt & Whitney’s next-generation engines as the reason behind the grounding of its entire fleet. Soon after the news broke, experts told Business Today that the development might create a negative perception of the Indian aviation market. With more than 40 aircraft still on lease to Go First, leasing firms are literally waiting in the wings to repossess their aircraft.

Maillard believes that in the aftermath of the recent developments at Go First, the country’s regulations need to be in sync with international frameworks. “The industry hopes the Government of India will expedite the alignment of domestic laws with international conventions and treaties to ensure that the [aircraft] lessors’ confidence in the market does not dip.” Due to NCLT’s moratorium on Go First’s financial obligations and transfer of assets, lessors are unable to deregister and take back their aircraft. A plea by lessors challenging NCLT’s moratorium was dismissed by the National Company Law Appellate Tribunal (NCLAT). Now, leasing firms are expected to seek an urgent hearing by a vacation bench of the Supreme Court over fears of parts from their aircraft assets being cannibalised by the airline.

“The awfully long duration of the moratorium under the Insolvency and Bankruptcy Code is also in contrast with the provisions of the Aircraft Protocol of the Cape Town Convention. Questions are also being raised about India’s commitments to international obligations under the Convention, while it continues to be one of the riskiest jurisdictions in the world when it comes to aircraft leasing and financing,” says Ajay Kumar, Managing Partner at law firm KLA Legal. Even as this may result in Indian carriers paying a high-risk premium, it also puts a question mark on the country’s ambitions of making GIFT City near Ahmedabad a global aircraft leasing and financing hub.

On May 12, the not-for-profit Bermuda-based Aviation Working Group (AWG) comprising global aviation equipment manufacturers, leasing firms and financial institutions, issued a watch list notice on Go First.

Ticket Trajectory

Prior to Go First filing for voluntary insolvency, Jet Airways had gone belly up in 2019. At that time, the full-service carrier used to operate a fleet of 123 aircraft, and enjoyed coveted slots both at domestic and international airports. “Two airlines going belly up in such quick succession indicates that all is not well with India’s aviation sector, despite a robust recovery post the Covid-19 pandemic,” says KLA’s Kumar.

Last year, there was tremendous expectation of Jet Airways reviving under a new management. But, following the exit of its CEO and other core team members, the plan is in limbo again. “We are all aware of the massive orders being placed by Air India as well as IndiGo. This is in stark contrast with the Jet and Go First situation,” he adds.

Meanwhile, passengers are already having to cough up a fortune for air travel on sectors where Go First had flights. Unless the void created by the airline’s near demise is bridged quickly, ticket prices will continue to soar due to a virtual duopoly enjoyed by market leaders IndiGo and Air India. “Airfares have gone up two to three times, with the result that people have been cancelling bookings since they are unable to rebook at the prices that Go First was offering,” says Jyoti Mayal, President of Travel Agents Association of India (TAAI). “Beyond that, travel agents’ money is also locked, putting many of them at risk.”

Another section impacted is the Go First employees, as the carrier wants its personnel to serve notice periods ranging from six to 12 months before they are officially relieved. “The worst affected are pilots who are being treated as an asset by the airline. Other than them, they have no other assets as all the aircraft are on lease,” says aviation industry veteran Shakti Lumba. “However, the guys who will get the worst hit are the ground staff, for they will be left high and dry.”

Despite these hiccups, the Indian aviation growth story is expected to remain intact, with the forecast of a steady increase in air traffic over the next few years. Experts also say the current spike in ticket prices is a short term phenomenon, and it will start cooling down with the evolving demand-supply situation. “Over the medium term, we could see some additional risk pricing that may be charged by the lessors from Indian carriers. Also, the concerted effort to develop the overall aviation ecosystem, like MRO hubs and giving impetus to aircraft leasing origination in India could hit a pause button,” says Jagannarayan Padmanabhan, Senior Director at CRISIL Market Intelligence. The government and the regulator will need to take some serious lessons from the crisis. 

@manishpant22