Go First's Insolvency: Turbulence Ahead Due to Engine Troubles and Financial Woes

What Has Happened ?

In August 2020, Go Airlines (India) Ltd, which operates under the brand name Go First, had announced a suspension of its international operations and a reduction in its domestic flight operations due to the COVID-19 pandemic. The airline had stated that it was facing financial difficulties and was unable to pay its employees and vendors.

In March 2021, the airline's promoter Wadia Group had announced that it was looking for a buyer for a stake in the company. However, it was unable to secure a deal and the airline's financial situation continued to deteriorate.

On 4th May 2021, Go First announced that it was filing for voluntary insolvency proceedings with the National Company Law Tribunal (NCLT), citing the financial impact of the COVID-19 pandemic and its inability to pay its debts. The airline also blamed engine manufacturer Pratt & Whitney (P&W) for its financial situation, stating that the company had supplied faulty engines for its Airbus A320neo aircraft, which had resulted in a loss of revenue.

According to reports, Go First has a debt of around Rs 1,800 crore and owes money to various creditors, including the Airport Authority of India, oil marketing companies, and aircraft lessors. The airline's move to file for insolvency proceedings is aimed at protecting its assets and finding a resolution to its financial troubles.

It is worth noting that Go First is not the only Indian airline to face financial difficulties in recent years. In 2019, Jet Airways, once India's second-largest airline, was forced to halt its operations due to mounting debts and financial difficulties. The COVID-19 pandemic has further worsened the financial situation of the Indian aviation industry, which has seen a significant drop in passenger traffic and revenue.

What Has Go First Said ?

The airline said it was “forced to apply to the NCLT” after “the ever- increasing number of failing airlines supplied by Pratt & Whitney’s International Aero Engines” led to grounding of 25 aircraft, or half its fleet of Airbus A320neo planes, and major financial stress.

Go First said P&W which is the exclusive supplier of engines for A320neos had failed to meet contractual obligations and refused to comply with an arbitration award for the Singapore International Arbitration Centre (SIAC)

It added that more likely engine failures over the next three-four months, would have made its operations “unviable”.

Major Hit

Go First has been hit by engine snags since January 2020. It has claimed that the percentage of its grounded aircraft due to P&W's "faulty engines" had grown from 7% in December 2019 to 31% in December 2020, and to 50% in December 2022.

This, while incurring 100% of operational costs, has set it back by Rs 10,800 crore in lost revenues and additional expenses, Go First has said.

It has also claimed that following P&W's actions, some lessors repossessed aircraft, drew down letters of credit, and notified further withdrawals of planes.

"... These actions will result in a severe depletion in the number of aircraft..., thereby making it further unfeasible for Go First to continue its operation and meet its financial obligations," the airline said.

How has Pratt & Whitney Responded ?

Sources in the engine manufacturer denied Go First's allegations, and said the airline has a "lengthy history of missing its financial obligations" to P&W. But P&W did not mention this in its brief official statement. It denied Go First's allegation that it was not complying with

SIAC's directions. Go First has also filed an emergency petition in a US court seeking enforcement of the SIAC award

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, Reuters has reported. While the carrier had not defaulted on its dues until April 30, 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.

What does this mean for Go First's Competitors?

The insolvency of Go First and its impact on the Indian aviation industry can have both positive and negative implications for its competitors.

On one hand, the temporary suspension or reduction of operations by Go First can reduce competition in the market, which can benefit its competitors by allowing them to gain market share and increase their pricing power. This can be particularly beneficial for other low-cost airlines that are competing with Go First, such as IndiGo and SpiceJet.

On the other hand, the insolvency of Go First can also have negative implications for its competitors. The reduction in capacity due to the suspension or reduction of Go First's operations can lead to higher demand for flights offered by other airlines, which can result in higher fares for customers. Additionally, the potential exit of Go First from the market can reduce the overall competitiveness of the Indian aviation industry, which can be detrimental to all players in the market.

Overall, the impact of Go First's insolvency on its competitors will depend on various factors, including the duration of its suspension or reduction of operations, the response of other airlines to the reduced competition, and the overall state of the Indian aviation industry.

What Next ?

"Once the NCLT processes the airline's application, it may put in place an interim resolution professional to take over and operate Go First.

The resolution of Jet Airways (grounded in 2019) under IBC has been a non-starter so far.

Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Material. Charted Secretary etc.