Go First Moratorium: Airline lessors worry that grounded planes and depreciation could affect recoveries

"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. This means higher lease rentals for domestic carries and increase in the cost of doing business implying 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," said Nilaya Varma, Co-Founder & CEO, Public Policy Realisation, Primus Partners.

India is hugely dependent on lessors, one because delivery of new planes takes, time and two, airlines mostly follow a sale and lease-back model. Hence IndiGo, Go First, SpiceJet and Vistara are all mostly flying leased planes.

Lessors aren't keen on staying with Go First's insolvency process because it mostly takes several months to conclude. This could mean aircraft will remain on ground unused instead of being leased to any other airline which is more stronger. Then there is constant depreciation in the value of the aircraft if it stays on ground for a long period.

Another major worry is other creditors of the airline like oil companies or airport operators seizing the aircraft to recover their dues from the airline. Lessors are also against staying with the IBC process as they often have to take a deeper haircut on their dues. And in worst case scenarios, like liquidation of assets, they may not get any money at all.

These concerns are not new—lessors have faced huge losses during the grounding of Kingfisher Airlines as well as Jet Airways.

In Jet Airways' insolvency matter—lessors had claimed over Rs 14,400 crore of which Rs 2,290 crore were admitted- and that too is not paid yet by the Jalan-Kalrock Consortium.

It is estimated that Go First owes over Rs 2,600 crore to various aircraft lessors—SpiceJet too is seeing aircraft de-registration requests but there is no clarity yet on how much it owes to lessors.

So all this put together explains why lessors are likely to attach a high risk premium increasing lease rentals for airlines. And as Primus Partners predicts, this could increase air ticket prices for the flyers.