On Tuesday, 2 May, low-cost carrier Go First filed for voluntary insolvency resolution proceedings before the National Company Law Tribunal (NCLT).
On the same day, the company's CEO Kaushik Khona announced that the airline will temporarily halt operations on 3, 4, and 5 May due to a serious cash crunch.
"Go First is facing financial crunch due to non-supply of engines by Pratt & Whitney (P&W), forcing the grounding of 28 planes."Go First CEO Kaushik Khona
The airline's plea for voluntary insolvency is scheduled to be heard by the tribunal on Thursday, 4 May.
As Go First faces the risk of shutting down, we explain how severe the cash crunch is for the airline – which was started by Wadia Group chairman Nusli Wadia's son, Jeh Wadia, in 2005 – and whether it would have an impact on other airlines. Read on.
How Severe Is the Cash Crunch?
In its filing with the NCLT, the airline said that its total debt to financial creditors, including banks, was Rs 6,521 crore, as of 28 April.
The company had not defaulted on any of those dues as of 30 April, but it had defaulted on payments to operational creditors, including Rs 1,200 crore to vendors and Rs 2,660 crore to aircraft lessors, it said in the filing.
All of Go First's A320neo aircraft are powered by P&W. The manufacturer has had issues in supplying replacement engines to both Go First and IndiGo, as it is experiencing supply chain issues.
"We're experiencing global supply chain challenges which are limiting the availability of structural castings and other parts... We expect supply chain pressures to ease later this year," a P&W spokesperson had told ANI in February.
Air India and Vistara are the other two A320neo family operators in India, and are powered by engine maker CFM. What IndiGo did was it opted for CFM as part of its follow-on order, according to a report by Moneycontrol.
However, Go First chose to stick to P&W for its second round of orders too.
Go First said that grounded aircraft "due to P&W's faulty engines" grew from seven percent of its fleet in December 2019 to 50 percent in December 2022, costing it Rs 10,800 crore in lost revenue and additional expenses.
"It is crucial to note that Go First was already on cash-and-carry mode (it pays oil marketing companies daily per flight) and has now filed for voluntary insolvency resolution," Jinesh Joshi, a research analyst at financial services company Prabhudas Lilladher, told The Quint.
"Over the last year and a half, promoters had invested $366 million in the company, but it was not enough to cover expenses and the airline was planning to raise money in recent weeks, which apparently seems to have failed," he added.
What Happens Next?
The airline's lawyer mentioned the plea before the NCLT on 3 May and has sought urgent listing of the matter. The tribunal has agreed to list the case accordingly.
However, it usually takes around two to six weeks for the NCLT to accept such applications, Economic Times reported citing unnamed experts. "But based on Thursday's hearing, the NCLT will decide if it is going to admit or reject the insolvency application," a company law expert told The Quint.
If the NCLT accepts the application, the airline's board, which comprises Nusli Neviile Wadia, Britannia managing director Varun Berry and others, will be dissolved.
After that, a resolution professional (RP) will be appointed who will begin the Corporate Insolvency Resolution Process (CIRP) (which takes six months), which will involve seeking the claims of various creditors among stakeholders. A committee of creditors (CoC) will also be formed to oversee the airline's functioning.
At this juncture, no lawsuit can be filed, no claims will be entertained, and no aircraft can be repossessed, the person told the newspaper, adding that the RP will basically operate the airline then in consultation with the CoC.
And if the NCLT rejects the insolvency application, then the CIRP won't commence, the company law expert added.
How Has P&W Reacted?
Go First has a "lengthy history of missing its financial obligations to Pratt & Whitney," news agency ANI reported citing sources.
In a statement, the engine maker said that it was "committed to the success of our airline customers, and we continue to prioritise delivery schedules for all customers. P&W is complying with the March 2023 arbitration ruling related to Go First. As this is now a matter of litigation, we will not comment further."
Go First had alleged that P&W had refused to abide by an award by an emergency arbitrator appointed as per 2016 Arbitrator Rules of the Singapore International Arbitration Centre (SIAC).
As per the order, P&W was asked to take all reasonable steps to release and dispatch at least 10 serviceable spare leased engines to Go First by 27 April 2023 and a further 10 spare leased engines per month until December 2023.
But the airline has accused the engine maker of refusing to honour the emergency arbitrator's order and not providing spare leased engines.
The airline said P&W has also not provided any certainty on the time frame for the provision of spare leased engines in the future. It has also failed to induct faulty engines for repair, the airline added.
Will It Mean Higher Airfares?
A report by Economic Times pointed out that airfares on routes where Go First had a significant presence are set to increase by at least 20 percent, with peak travel season kicking in.
Domestic air travel has been registering record highs since March this year – and all airlines are reporting over 90 percent occupancy.
With few seats available, the prices of the unoccupied seats on other airlines will go up by as much as 20 percent than the current prices, the report added.
Even Travel Agents Association of India said that the move will reduce capacity and could push airfares in certain routes, the report further said.
Ameya Joshi, an aviation analyst, pointed out that the airline's collapse comes at time when demand for pilots is picking up and pilot unions are demanding more salaries as well as a minimum flying hours guarantee.
"The airline's downfall can be looked at in a positive aspect as well. It means that there is likely to be a sudden availability of workforce at all levels. Pilots, crew, and engineering resources have been in short supply as airlines in India look to expand," she told The Quint.
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