Go First files for voluntary insolvency: What led to the crisis?

Source– The post is based on the article “Go First files for voluntary insolvency: What led to the crisis?” published in “The Indian Express” on 4th May 2023.

Syllabus: GS3- Economy

News– Go Airlines (India) Ltd (Go First), is filing for voluntary insolvency proceedings with the National Company Law Tribunal.

What has Go First said?

The airline said it was forced to apply to the NCLT after the increasing number of failing engines supplied by Pratt & Whitney’s International Aero Engines. It led to the grounding of 25 aircraft, and major financial stress.

Go First said P&W had failed to meet contractual obligations and refused to comply with an arbitration award from the Singapore International Arbitration Centre (SIAC).

According to the airline, SIAC had directed P&W to dispatch spare leased engines per month. But it did not comply.

How has Pratt & Whitney responded?

P&W denied Go First’s allegations. It said that the airline has a lengthy history of missing its financial obligations to P&W. It denied Go First’s allegation that it was not complying with SIAC’s directions.

Which creditors have exposure to Go First, and how much?

Go First has told NCLT that it owes Rs 6,521 crore to financial creditors. It has informed the NCLT that given its current financial position, defaults are imminent.

It has already defaulted on payments to operational creditors, including Rs 1,202 crore to vendors and Rs 2,660 crore to aircraft lessors.

According to the Reuters report, the NCLT filing lists public sector lenders Central Bank of India, Bank of Baroda, and IDBI Bank, and private sector players Axis Bank and Deutsche Bank among Go First’s financial creditors.

Go First had also borrowed Rs 1,292 crore under the government’s Emergency Credit Scheme. Its total liabilities to all creditors are Rs 11,463 crore.

How will this episode impact the creditors and lessors?

Operational creditors will likely be affected more by Go First’s bankruptcy than financial creditors. Financial creditors are accorded a higher priority than operational creditors under the IBC.

It would have extreme ramifications for lessors and financiers whose aircraft are currently in the possession of the Go First.

Upon admission of an application for the corporate insolvency resolution process, a complete moratorium comes into play. It prohibits recovery of any property by an owner or lessor where such property is  in the possession of the corporate debtor.

Any lease agreements on the date of admission of the application may also be impacted by the moratorium.

What does this mean for Go First’s competitors?

Go First absence from the skies could create an opportunity for other domestic carriers.

In March, Go First’s domestic market share by passengers carried for the Jan-Mar quarter was 7.8%. For Jan-Mar, Go First was the third largest domestic airline by market share. It carried almost 9 lakh fliers in March.

If Go First does not return to the skies soon, its passenger load and market share will be available for other players in the civil aviation market.

How will passengers be impacted?

Fares are already high due to resurgent air travel. Go First’s insolvency will likely raise them further, at least in the immediate-to-near term. Other carriers are unlikely to be able to immediately deploy additional capacity to completely fill the demand.

Some additional capacity deployment and network adjustments by other carriers is expected almost immediately. But, these are unlikely to fully offset the impact of Go First’s absence.