Powered by

Home Business

Go First Crisis: Why Airlines Have Failed In India In The Past

By Surbhi Sharma
New Update
Go First Crisis: Why Airlines Have Failed In India In The Past

Cash-strapped airline Go First, which had filed for insolvency over ‘faulty’ engines supplied by Pratt and Whitney on May 2, was granted bankruptcy protection by the National Company Law Tribunal (NCLT). 

This came amid over a week of trouble for the airline which has had to down shutters on flight operations because of a lack of funds.

Go First CEO Kaushik Khona welcomed NCLT's decision and showed hopes of making the airline viable again. “This is a historic ruling as an application of insolvency has been admitted so fast. The order prevents a viable airline from becoming an unviable one. The purpose of IBC has always been revival," Khona said on Wednesday.

While the order comes as a much-needed respite, it is pertinent to note how different factors make it difficult for aviation companies to keep afloat in India. From Damania Airways in the 1990s, Kingfisher in 2012 to Jet Airways in 2019, airline failures have always made headlines in India. 

Since 1994, when private airlines took off in the country, at least 27 scheduled carriers have either been shuttered or have been acquired or merged with other airlines, according to official data cited by PTI.

Given India's history of many airline companies going kaput, The Core spoke to aviation experts to find out why this happens and if there are lessons to be learned from the past.

Go Air, now rebranded as Go First, has been one of India’s largest private airlines, with a somewhat consistent market share until 2022. From the least flight cancellations for fiscal 2021 and as of January 31, 2021, to suspending its operations temporarily in May 2023, aviation expert Capt. Amit Singh says that this is a systemic failure at every step, and not just on the part of Go First.

'Early signs of airline distress ignored'

According to Singh, airline operators have failed to learn from the past, especially from the Kingfisher collapse, an airline that had the most impact. “The Kingfisher models started out as a low-cost airline with all economy seats, then suddenly they change their profile to a full-service carrier with both business and economy class and the service was also very good. However, it wasn’t viable as if one is paying Rs 2500 for a ticket and getting all the good facilities, how is the airline earning money because there's hardly any margin of profit? Obviously, somebody has to do some financial checks which wasn’t done.” 

Singh added that some of the important indicators of an airline in distress are when they start defaulting on payments to the airport operators, for fuel and salaries. This is because their expenditure is much more than what they're earning but nothing was done at that time. 

“After the Kingfisher collapse, the DGCA (Directorate General of Civil Aviation) issued a regulation which said that if an airline is found to be in financial stress, then a special audit is to be conducted where the airline will be closely monitored to ensure safety and passenger convenience. All these first signs were present in the case of Go First, there was a regulation in place, and even from a safety point of view, the DGCA knew that the airline was not doing well. So they should have intervened well in advance,” Singh said.

Why did Go First suspend flights?

Highlighting the technical reasons behind Go First’s grounded aircraft, Ajay Awtaney, Founder and Editor of Live From A Lounge said that Go First's downfall was not related to what we've seen in the past. “The problem statement that Go First gives is that their engines, which were supplied by Pratt and Whitney, were failing. Pratt and Whitney engines are based on a new technology and it works in a different fashion than some of the other airline engines. Hence it was unproven. Go First kept all their eggs in one basket and signed on for the same engine over and over again for all its aircraft.” 

publive-image Market share of selected private airlines in India over the years.

 

Previously, IndiGo, one of India's largest passenger airlines, with a market share of 55.2 per cent as of 2022 has also been forced to ground some flights due to engine issues linked to Pratt and Whitney. However, owing to its fleet size and business model, it has managed to keep running. Across Go First and IndiGo, nearly 60 Airbus A320s have been grounded in India so far, “but in the case of IndiGo, it's 10% of its fleet. So with the other 270 or 280 aircraft, IndiGo is able to run its operations and still be the market leader in India. But for Go First, the grounded flights were half their fleet so they are unable to run their operations anymore,” Awtaney added.

Reiterating that the Go First situation developed over time, Singh said that Pratt and Whitney’ were supposed to supply 103 engines to Go First but as of the date when the cash-strapped airline closed down, they had around 50 engines only. "In 2020, 30 per cent of their fleet was grounded. It increased to 33 per cent in 2022 and now(in 2023) to 52. Even if you have 30% of your fleet grounded, that is a big indicator that how is the company running with 30 per cent fleet?" 

Matter of Choice

While the fall of Jet Airways' was due to a lack of enough finances, it was a technological challenge for Go First and a choice where they decided to go with just one engine manufacturer, according to Awtaney. Elaborating on the airline deals, Awtaney explained that when one buys an aircraft, they buy the aircraft separately and the engines are bought separately, which means that there are two contracts. For example, for the Airbus A320, there are two suppliers, Pratt and Whitney and CFM. While most Indian airlines operate their aircraft with CFM ones, Go First and to a small extent, IndiGo decided to go with Pratt & Whitney. However, when IndiGo saw that these Pratt & Whitney engines were, giving them trouble, they moved to CFM engines. But since GoFirst did not have a big enough fleet, they were stuck with Pratt and Whitney.

Mitigating Risks

Experts believe there is a lack of a watertight arrangement through which timely financial audits can be done whenever an airline is stuck in fragile circumstances.  "We don't have an SOP (standard operating procedure) that if an airline is going to shut down or if you see a drop in the airline of passenger rates or an increase in cancellations, number of cancellations, then at what stage an automatic SOP should trigger."

When the financial condition of an airline deteriorates, they need to be treated differently than the stronger players in the market to protect the interest of passengers, said Awtaney.  "At this point, the customers have not received the refunds from Go First, and other airlines are not bound to honour tickets that Go First issues. So, they are going to charge according to their commercial prices. The authorities should thus, create a watertight framework where customers are not at the receiving end," Awtaney added. 

The year 2020 saw a decline in passenger growth for domestic airlines by -7.16 per cent during Jan-Mar. The subsequent suspension of air operations caused by the COVID-19 outbreak resulted in a sharp decline in the passenger load factor. In light of the pandemic, the Emergency Credit Line Guarantee Scheme (ECLGS) was launched to mitigate the distress caused by the COVID-19 pandemic to business enterprises.

publive-image The number of passenger carried (in lakhs) by private airlines in India over the years.

Go First is eligible for funds up to Rs 1,500 crore, under ECLGS. "They had received some amount from the fund to buy engines but that wasn't enough. The Aviation ministry's job is to make policies that promote the business, which is aviation, but they don't have anything in control including fuel prices, taxes or passenger service fees," said Singh. 

According to Go First, they are still eligible for funds amounting to about Rs 208 crore, which it will use to pay the salaries of its 7,000 direct employees. 

Why resuming operations for failing airlines is an uphill battle?

Go First had filed for insolvency, and not bankruptcy, Singh explained. Insolvency is a six-stage process in the NCLT wherein a professional is appointed, followed by monitoring and analysis to see if the airline is revivable or not. According to Singh, the airline is a very high-risk industry where the profit margins are very thin.

"Why wouldn't anyone start a new airline rather than invest so much money in an existing airline which has so many debts to pay and court cases running unless there is a big potential? The easier job is to start a new airline, which one can start in one year's time.

publive-image The passenger count of private airlines for the year 2020 is during Jan-March.

The Road Ahead

Passengers carried by domestic airlines during Jan-April 2022 were 358 lakhs as against 291.08 lakhs during the previous year, registering an annual growth of 22.99%and monthly growth of 92.15%. As the passenger share is increasing over the years, India needs more operating airlines in the future.

Awtaney "I think at this point in time, the market is largely divided between two key players. IndiGo and all the TATA group airlines, which will eventually be one airline, called Air India. So I think there is room for two or three more airlines, which is where the return of Jet Airways is something to look forward to. Unfortunately, it has not happened so far. But we do need two or three more mainline airlines which are operating on a nationwide basis."

login-icon

The Core brings you exclusive reporting, insights & views on business, manufacturing and technology.

ALL OUR ARTICLES ARE FREE TO READ.