Just a few days ago, aviation stakeholders read the positive news that the number of flyers stood at 456,000 as on the last day of April. This was 7 percent more than the pre-covid levels. There was much elation, explanation and commentary. But just 24 hours later, the euphoria turned to shock as news poured in about an airline insolvency.
GoFirst, an 18 year old airline, with 55 aircraft flying to 35 destinations and 7 percent of the market stopped taking bookings for two days, soon after they filed for voluntary insolvency. The airline issued a press release blaming their engine supplier and failure to comply with an arbitration order. As the news spread, new information came to light. It would seem that a multitude of factors led to this situation. As of this writing, the airline has suspended all flights. There seem to be more questions than answers.
Gradually then suddenly — a number of factors combined
With 5000 employees, a turnover in excess of US$400 million and 200 odd flights per day, the airline had been facing challenges. Financially, the losses were mounting. In the last three years, losses exceeded US$100 million each year and the balance sheet saw significant erosion. Dues kept mounting and for aircraft rentals alone the dues were in excess of US$250 million. This also reflected in operational performance where the last three months saw the airline only deliver about 50 percent on-time performance across the four metro airports and operate a fairly truncated schedule.
Then there was the issue of market dynamics. GoFirst had a history of cautious growth. To put it in perspective during the first few years when GoFirst (then known as GoAir) launched, they had 4 aircraft and were seen to be the more promising airline. In the initial years, it held more slots than Indigo at several airports. Costs were in control and it embraced the mantra of low-costs. The airline had a turbulent ride but towards the end of 2016 showed promise. Via profits, via planning and via potential. 2020 and the pandemic was to change all of that.
The pandemic saw panic and varying strategies employed at the airline. It made it through but if the pandemic wasn’t challenging enough, the post pandemic landscape became harder to navigate. And then with the buyout of Air India and the launch of Akasa (ironically by a former CEO at GoFirst) the competition became even more aggressive. Part of this included the war for talent. Aggressive hiring and compensation impacted both the availability of talent and the cost of talent adding to the financial and operational woes. The list goes on…
Putting it all together meant reduced cash-flow and the daily cash-flow rate was not enough to cover operational liquidity, let alone invest in restoring the balance sheet or paying down debt. With IPO plans that didn’t quite takeoff, and no other strategic investors in sight the writing was on the wall. By the airline’s own admission, there was no other avenue.
The impact of the insolvency will ripple to the entire ecosystem
Unfortunately, the insolvency is not a stand-alone event. In that the impacts will flow through to other airlines. Be it via higher risk premiums, additional guarantees or even eroded trust. Aviation continues to be a fairly tight knit network and unfortunately the decision by GoFirst to file for insolvency does not quite bode well. If the case is accepted, stakeholders from oil-marketing-companies to airports to transport providers will all need to make their way to the NCLT and will receive a fraction of their dues at best. In the backdrop, the market is still reeling with the shutdown of Jet Airways from 2019 and the timing of this insolvency again puts up several questions.
There is also the question of flyers. GoFirst was flying approximately 25,000 passengers per day and on some routes they had sizeable presence. These flyers stand to lose their money and alternate bookings will be hard to come by. Especially on routes like Leh, Goa, Srinagar which are summer favourites and are witnessing peak demand given school holidays. Refunds may or may not happen and if the past is any precedent, the route to refunds will be testing and trying.
Finally, there is the issue of narrative. The insolvency puts in question the oft repeated claim of Indian aviation soaring and will warrant closer examination. Of players in the ecosystem, of policies and of planning related towards maintaining a transportation system and towards upholding the integrity and trust of the flying public.
Revival, buyout or shutdown: what’s next?
While hopes are pinned on the airline taking to the skies once again, what this requires is a significant infusion of capital. Capital to the tune of US$150 million at the very least. Followed by renegotiations, restructuring and a revisit of the entire strategy. Ironically, with that capital base it may be easier to start a new airline given the contingent liabilities that seem to crop up time and again in such cases.
Revival (under the NCLT) would also mean the hiring of a new management team under the resolution professional and unfortunately the closest example one can find is that of Jet Airways which entered into insolvency proceedings in mid-2019 and is yet to emerge and revive. This in spite of a bidder, a management team (now dissipated) and a court approved plan.
Strategically a buyout makes sense for the slots and traffic rights the airline holds. But this has to be weighed against the extremely fragile balance sheet, the liabilities estimated at US$940 million, and potential legal challenges. And of course the integration challenges. It also begs the question that if a strategic buyout made sense would a buyer not have approached the airline in the past?
Finally, there is the grim and dire reality of a shutdown. Where yet another airline makes its way to the airline graveyard, while passengers and employees alike are left by the wayside. Where several suppliers, both small and large, are forced to write-off receivables. Where banks take yet another haircut and develop further aversion to the aviation sector. And where the legacy and pride of working for an airline, gives way to grief and despair. For no fault of their own.
— The author, Satyendra Pandey, is Managing Partner for the aviation services firm AT-TV. The views expressed are personal.
Read his previous articles here (Edited by : C H Unnikrishnan)
First Published: May 4, 2023 10:18 AM IST
