Go Air Files for Insolvency, India’s Disconcerting Trend of Failed Airlines

This month, Go First Airlines filed for insolvency with the National Company Law Tribunal (NCLT). According to estimates, the banks are now facing a loss of more than ₹5,600 crore. According to a statement issued by the Wadia group airline, the rising number of defective engines provided by US-based Pratt & Whitney's (P&W) International Aero Engines resulted in the grounding of 25 aeroplanes or half of its fleet, resulting in serious financial consequences. The no-frills airline accused P&W of not complying with contractual commitments and failing to comply with an arbitration ruling in the issue, claiming that with more engines set to breakdown over the following three to four months, the company's operations would have been unsustainable.

Meanwhile, Go Air has cancelled its flights from May 3 to May 5 owing to a severe financial shortage caused by the widespread suspension of its planes, according to PTI, citing Go First's Chief Executive Officer Kashik Khona.

Outstanding Loans Result in Hesitant Banks

According to the airline's Initial Public Offering (IPO) prospectus, the airline's overall monetary obligations were Rs 14,172 crore by the end of December 2020. Bank of Baroda, Central Bank of India and IDBI Bank are among the top lenders to the airline. Under a consortium loan, the Central Bank of India and Bank of Baroda have a ₹1,300 crore exposure, IDBI Bank has a relatively smaller Rs 50 crore exposure, based to the insolvency filing, while a Central Bank of India employee told Reuters that the exposure was close to ₹2,000 crore. This has increased exponentially in the previous two years. The business that sought an IPO three years back had to postpone it at least three times owing to a variety of factors, including the global epidemic. 

Banks are hesitant about extending their stake in the aviation industry since the failures of Kingfisher Airlines and Jet Airways resulted in significant losses for the banking sector. The overall outstanding bank loans of the airline industry in India according to the RBI stands at ₹28,330 crore till March 2023.

Issues with the Indian Aviation Industry

Although passenger traffic in India, in terms of volume began to gradually recuperate in FY23 following a long-lasting pandemic that had a substantial effect on the aviation sector worldwide, Indian aviation contestants remain confronted with serious obstacles arising from high ATF (aviation turbine fuel) rates and a diminished capacity to deflect on the higher cost of operations to consumers. The cost of jet fuel accounted for about 45% to 50% of overall operating costs. Go Air, for example, posted a loss of 1,804 crore in FY22, compared to 870 crore in FY21.

Another major infrastructure obstacle confronting India's aviation sector is the lack of appropriate facilities for airports. A number of airports in the country have become outdated and require remodelling, while others are in remote areas, causing congestion, interruptions, and safety concerns. Another issue is the requirement for greater runway capacity. As the number of aircraft and passengers increases, new runways are required to meet the increased traffic.

Furthermore, the nation's air traffic control system is less sophisticated than that of several other nations, which can cause delays and congestion. To increase efficiency and safety, the present air traffic control infrastructure must be improved and upgraded.

More policy clarity and consistency is one of the most difficult tasks in the regulatory environment. Regulations are frequently subject to interpretation, which can result in a variety of results depending on the agency involved. This can increase compliance costs and cause uncertainty for airlines and other industry stakeholders. There are multiple agencies involved in regulating the aviation industry, which often leads to added complexities and delay in action. Furthermore, increased transparency and ownership in the legislative mechanism are required. Stakeholders in the sector have urged for increased interaction with policymakers and dialogue in the development of legislation and rules. 

Government Initiatives to Counter the Challenges 

In order to reduce operating expenses, the government reduced customs tax from 2.5% to 0% on supplies or components, including engines, used in the manufacture of aircraft by public sector entities of the Ministry of Defence in the Union Budget 2021-22.

Aside from that, the federal government aims to invest ₹420-₹450 billion in India's airport infrastructure between FY18 and FY23 to address the issue of inadequate infrastructure.

Furthermore, because the aviation business is lucrative but also demands major capital investment and risk tolerance, the government is encouraging expanded engagement of the private sector through Public-Private Partnership (PPP). Moreover, the Airport Authority of India (AAI) and other Airport Authorities have set a capital expenditure in the aviation market of around ₹98,000 crores over the coming five years.

The aviation industry is crucial to driving the economic growth of a country. It makes accessibility to the remote parts of the country significantly more easier and makes it convenient for the citizens to stay connected to their fellow countrymen. The recurring trend of failed airlines in India is a cause for concern. After Kingfisher and Jet Airways’ failure Go Air has become the thrid airline to file insolvency. 

Banks have faced significant losses due to the failure of these carriers, and they might become apprehensive to invest in the aviation industry, leading to stagnation in the growth of the airline sector. 

The government is taking initiatives to make air travel more accessible to the people, however, failing airline companies may slow the progress of the government’s ambitions. They need to ensure that the current landscape of the Indian aviation sector shifts towards a more positive future, whether it is done through policy reforms or additional capital support.