In today’s Finshots, we explain what went wrong at low-cost carrier Go First (earlier GoAir).

The Story

One year ago, Go First was prepping for an IPO. This week, it declared bankruptcy.

Just like that, it has its foot in the graveyard of now-defunct carriers — Air Deccan, Air Sahara, Kingfisher Airlines, Air Pegasus, Jet Airways….it’s a list that only seems to be growing by the day.

In 2005, when the Wadia Group (the folks behind companies such as Britannia and Bombay Dyeing) decided to try their hand at the airline business, they must have known that the odds were stacked against them. After all, everyone knows the famous words from Richard Branson, the founder of the Virgin Group — “If you want to be a millionaire, start with a billion dollars and launch an airline.”

But the Wadias believed they could make it work. And for a while, the airline did alright.

Sure, if you asked someone what’s their favourite airline, you probably wouldn’t ever have got Go First as a response. But it did its job. It had a market share of 10%. It took people from Point A to B quite reliably. It expanded to service some international routes. Its income in FY20 was in line with IndiGo after adjusting for fleet size. It kept its operating and maintenance costs at reasonable levels too.

There weren’t flashing lights signalling imminent doom.

Until Monday when people noticed that Go First routes weren’t showing while booking tickets. And then the company shocked everyone by announcing that it was declaring bankruptcy.

So where did it all go wrong for Go First?

Well, the official statement blames engine troubles.

You see, the airline business is actually dependent on multiple external parties. If you want to set up an airline, you won’t build out your own fleet. You’ll buy or lease the aircraft from two entities — Airbus or Boeing. And then you need to get engines from other suppliers like Rolls Royce and Pratt & Whitney (P&W). You put these two ‘outsourced’ bits together and you’re ready. What you’re in charge of is simply running the show. Make sure you’re flying profitable routes, check costs, and get great pilots and staff who show up every day.

Unfortunately for Go First, their P&W engines began to fail. And Go First had to stop flying those aircraft fitted with these problematic engines. In December 2018, around 10% of Go First’s fleet had to be grounded. This rose to 30% by December 2021. And at last count, 50% of its 54 aircraft were unflyable.

Needless to say, business sputtered to a stop. The company’s loss doubled from ₹870 crores in FY21 to over ₹1,800 crores in FY22.

And while the industry has been going through a purple patch, Go First was preparing its own grave.

Now the sad bit of all this is that it wasn’t entirely Go First’s fault. It didn’t embark on unbridled expansion fueled by debt. It wasn’t as if it couldn’t keep a check on costs. It was primarily an external issue.

But, could Go First have missed a trick or two? Could the airline and its management have seen this coming earlier?

Well, look at its rival IndiGo which suffered from the P&W engine failures too. It had to ground its fleet in 2016. But IndiGo didn’t sit idle. When it realized the scale of the problem, it quickly switched its engine supplier. And in 2019, it signed a $20 billion deal with CFM International for the engines in IndiGo’s new aircraft. It didn’t want to take a chance.

Oh, and IndiGo also managed to get P&W to pony up. It wrangled compensation for all the losses it had suffered due to P&W’s faulty engines.

Now we don’t know what was in their respective contracts. But all we know is that Go First had to fight. It had to fight for compensation. It had to drag P&W to an emergency court. Just to try and get some spare engines as a replacement. And even though P&W was ordered to provide 10 such engines by April 2023, it apparently never came through.

Though P&W did issue a statement on Tuesday saying it was in the process of sending the spare engines.

So, what’s next for the beleaguered airline then?

Well, theoretically, the company has declared bankruptcy to buy itself some time. It knows it can’t pay off the debts because half its fleet isn’t flying anymore. It doesn’t have enough money to keep running. It needs help. And by help, we mean a massive infusion of cash.

If not, it’ll have to sell off whatever assets it owns. And pay back its creditors.

Creditors like banks that have an exposure of ₹6,500 crores. Now Indian banks aren’t going to collapse if that’s what you’re worried about. Central Bank of India has lent it ₹1,500 crores and Bank of Baroda is in the mix for around ₹1,400 crores. That’s about it. They can take a hit and move on.

Oh, and the government might have to take a bit of a hit too.

See, during the pandemic, the government introduced a scheme called the Emergency Credit Line Guarantee Scheme. The purpose was to get banks to lend money to companies without fear. And if the company in question defaulted on the loan, the government would take the hit. Not the bank. And apparently, Go First borrowed ₹1,300 crores under this scheme as well.

These borrowers will be hoping for some clarity within the stipulated 270 day period.

In the meanwhile, Go First will be hoping the lawsuit against P&W in Singapore will go its way. That ₹8,000 crores will find its way into the airline’s coffers. That it can repay its debt.

The other option that folks say is that the Wadia Group can turn to what it already has. Their group companies like Britannia have quite a bit of cash to spare. It has given Go First loans in the past too. Not to forget that the group also owns massive swathes of property in Mumbai. This can fetch a pretty penny.

But will they want to keep throwing good money after bad?

Quite unlikely. Especially considering that there were rumours just last month that the promoters were trying to exit the airline. Sell their stake and walk away.

If not, Go First will simply have to wait for someone to buy it out. Someone who (naively?) believes that India’s population along with rising disposable income and the record high daily flyers is a potent cocktail. Someone who thinks they can beat the odds and create a profitable airline.

But even that doesn’t guarantee that Go First will fly again. Just look at the mess that Jet Airways is still in despite a new buyer in the mix.

So yeah, whatever happens, it’s a pretty sad state of affairs. The collapse will affect its 5,000 odd staff. It disrupts the schedules of roughly 40,000 passengers who flew its domestic routes daily. And with less competition, it could force airfares higher.

Until then…

PS: While we did say that Go First’s demise was due to P&W’s faulty engines, there’s something we didn’t mention. There has been internal turbulence for a while now. The airline hasn’t really had stable management. Executives don’t stay for too long. And there’s some infighting within the Wadia family too. Jeh Wadia, the son who was in charge, stepped down. And that’s what precipitated the change in name too. Could this have played some part in its financial turmoil too?

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