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The National Company Law Tribunals decision to admit the voluntary insolvency petition filed by Go First has raised concerns among lessors and creditors about risks associated with aircraft leasing in India and the fallout on air travellers
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India’s domestic aviation sector is caught between a strong headwind and a course-changing crosswind. Already reeling under high fares on key domestic routes as a result of Go First cancelling a major bulk of its flights, it has to now contend with the legal spat involving the ultra-low-cost airline and the National Company Law Tribunal (NCLT) on one hand, and the airline’s lesser and creditors on the other, which threatens to have a long-term fallout for the sector as a whole.
The Story So Far
The troubles of the Wadia Group promoted Go First came to light on May 2 when it filed for voluntary insolvency proceedings before the NCLT and starting cancelling flights beginning May 3. In its plea, Go First blamed Pratt & Whitney (P&W) for 'faulty' engines as the reason why nearly half its 54 Airbus A320neos had to grounded. P&W, a part of Raytheon Technologies, has dismissed the airline’s claims as baseless.
Admitting Go First’s plea on May 10, the NCLT in an interim order granted relief to the airline, imposing a moratorium on the airline’s financial obligations. This meant that the lessors of Go First would not be able to take possession of the aircraft which are on lease.
Expectedly, lessors have vehemently opposed the NCLT’s interim order as they seek to repossess their planes. In fact, at least three aircraft lessors have challenged the insolvency. They have sought to re-possess aircraft and export or re-lease the planes to other functional airline operators. The protection granted to Go First has also sparked international ire.
Within hours of the NCLT order, aircraft lessor SMBC Aviation Capital moved the National Company Law Appellate Tribunal (NCLAT) against the ruling. As per reports, other lessors, like Narmada Aviation Leasing, Yamuna Aviation Leasing, GAL MSN, and GY Aviation Lease, have also opposed Go First’s plea and submitted in the NCLT that they wish to file an application under Section 65 of IBC, which deals with fraudulent or malicious initiation of proceedings.
However, according to company law experts, while lessors may file objections in the NCLT or NCLAT, they will not be able to take repossession of the aircraft immediately.
The lessors, however, have also moved the Directorate General of Civil Aviation, the aviation sector regulator, demanding the deregistration of 45 planes with Go First. Overall, Go First has a fleet strength of 54. Of these, 28 aircraft have been grounded due to engine issues, and 26 are operational.
From the publicly reported data, the total liabilities of Go First are Rs 11,463 crore, of which bank dues are Rs 6,521 crore. Of this, Rs 1,300 has been drawn under the government’s emergency credit line guarantee scheme (ECLGS). It has defaulted on Rs 2,660 crore of payments to aircraft lessors and Rs 1,202 crore to its vendors.
Go First claims that more than 80 per cent of engine failures occurred before the engines completed 5,000 hours of use, with combustor distress being the primary cause. The airline also alleges that P&W has acknowledged the failure of its engines, which has put the engine-maker in a difficult operational and financial situation.
The grounding of planes due to engine failures had a significant impact on Go First. The airline reports that 96 per cent of its fleet was available for flying in FY2015, but that number dropped to just 54 per cent in FY2023. As of March 1, 2023, 50 per cent of P&W engines were unavailable for flying, according to the airline. The non-availability of planes and engine failures cost the company Rs 10,800 crore in losses in the form of revenue and additional expenses.
Go First claims that it started facing losses and operating with 50 per cent revenue while incurring 100 per cent cost. Due to the grounding of planes and the pandemic, Go First's losses increased from Rs 1,346 crore in FY 2020-21 to Rs 3,600 crore in FY 2022-23. The airline's expenses also increased from Rs 2,250 crore in FY 2014-15 to Rs 5,907 crore in FY 2022-23. Go First states that it had to bear fixed costs related to its grounded fleet, such as lease rentals, aircraft maintenance charges, parking charges, and employee costs, even though the grounded fleet did not generate any revenue.
Implications for the Sector
Industry watchers have raised concern over the developments. Says Nilaya Varma, Co-founder & CEO, Public Policy Realisation, Primus Partners: "The NCLT's decision to admit the voluntary insolvency petition filed by Go First has raised concerns among lessors and creditors about risks associated with aircraft leasing in India. The perception of India as a high-risk jurisdiction could translate into higher risk premiums to other local airlines."
"A higher lease rentals for domestic carries and increase in the cost of doing business may imply higher costs being passed onto passengers in the form of high-ticket prices, thereby making it more difficult for Indian airlines to compete with their international counterparts. The ongoing developments will make it more difficult for Government of India to develop GIFT IFSC into a leasing hub,” adds Varma.
Agrees Jagannarayan Padmanabhan, Senior Director - Consulting, CRISIL Market Intelligence and Analytics. "The short-term impact would be an increase in airfares, also the passengers who would have booked their tickets early on would face some issue in getting revised tickets at similar prices," says Padmanabhan.
In the medium term, however, the choices for passengers may get limited and that could sometimes lead to irrational pricing or the inability of airlines to cater to a sudden surge in demand. "Competition helps in product innovation and to think out of the box to attract and retain customers also from a service stand point of view could be a limiting factor," Padmanabhan adds.
Overall, experts say the Indian aviation sector growth will continue year after year. However, it does raise a few questions for the allied sectors like Maintenance, Repair and Overhaul (MRO); setting up a base for aircraft leasing companies may also receive a setback." All these initiatives could see a temporary setback as the investors would like to see stability in operations of the airlines before sinking in capital," says Padmanabhan.
Regional Connectivity May Suffer
Regional connectivity, experts say, could get impacted as the need to serve the demand from the more profitable metro sectors may lead to a temporary pause in expansion to regional routes. Also, the risk premiums for Indian air carriers can get repriced leading to a strain on the cost side, experts point out.
Suprio Banerjee, Vice President & Sector Head - Corporate Ratings, ICRA, however, has a different take. He says, the movement of fares primarily depends upon the movement in ATF prices as well as the ability of the airlines to pass on such a rise in costs.
"It also depends on the overall demand-supply situation in the industry. The passenger load factors and the pricing power an airline can command over its competition will eventually determine the trajectory of fares for a particular airline," says Banerjee.
He is optimistic about the continued growth of the aviation sector. "The growth in air travel going forward will be aided by improving affordability and rising aspiration levels to travel by air, besides growing demand for tourism. Likewise, on the supply-side, favourable government policies, which have resulted in improved connectivity levels between cities through development of new airports and modernisation of existing airports will also contribute to the growth in the sector," he says.
What can the aviation sector learn from Go First’s experience? Padmanabhan of CRISIL lists a few of the lessons that should be learnt by all in the aviation sector. "Having water tight contracts is of paramount importance. Also, the airline business needs deep pockets and hence the need to be supported by investors/sponsors who can weather business cycles," says Padmanabhan.
Aircraft leasing has the potential to offer big opportunity for the government, Currently, Indian airlines are compelled to finance their leases through other countries such as Ireland, Singapore, Hong Kong who provide an ecosystem which fulfills their needs such as strong financing, faster aircraft repossession and redeployment and provision of maintenance and operations activities.
Leasing internationally implies Indian funds are redirected abroad which is another factor that should drive the government to take the necessary steps to establish a thriving leasing ecosystem in India, says a report by Primus Partners.
Also, as per the report, there is a dire need to streamline processes and the regulatory environment, with Gujarat International Finance Tec-City International Financial Services Centre (GIFT IFSC) possessing sufficient potential to become the face of aircraft leasing in India. "Several tax and leasing reforms have ensured a strong foundation which is brimming with opportunity, says Varma. Will the government take note?