After multiple false starts, the Wadia group-owned Mumbai headquartered GoAir has filed for an initial public offering (IPO). Its umpteen attempts in the past to list on the bourses were abandoned even before this stage and this attempt comes when the Indian industry is going through its biggest and most difficult challenge ever. This also comes a day after the airline put a half-hearted effort in rebranding itself as GO First.
Like all airlines in the country, GoAir has been impacted by the pandemic. While IndiGo, India’s largest airline, has time and again said that it has not defaulted on lease payments, GoAir has listed out that they continue to be in payment default under several of their aircraft lease agreements. This could lead to legal action against the company.
There are other risks too.
Utilisation of funds
The airline intends to raise Rs 3,600 crore via a fresh issue of shares. A subsequent chunk of this at Rs 2,015 crore, or 56 percent of the proceeds, are planned for prepayment or scheduled repayment of all or a portion of outstanding borrowings. Up to Rs 279 crore is earmarked for the replacement of letters of credit issues to certain aircraft lessors and Rs 254 crore is earmarked for repayment of dues to the Indian Oil Corporation. This would leave the airline with a little over Rs 1,000 crore for its future expansion and other corporate needs.
The repayment and prepayment would substantially reduce the total borrowings of the company that stand at Rs 2,955 crore and will help reduce its financial burden in future years.
This would considerably take away the largest chunk of finance costs from the balance sheet—which stood at Rs 855 crore last year and have been growing in the last few years.
While agencies like CAPA and SAP, which were commissioned to conduct an independent study of the airline have portrayed a bright picture of the future of Indian aviation, much of this optimism lies on the parameters that led to GR Gopinath starting Air Deccan. The pattern is the same—looking at the sheer number of people in India and tie it up with increasing incomes to postulate that there is a growing demand for aviation in India.
But what are the facts? Only a fraction of the population takes a flight each year, airlines like other industries grapple with price-conscious customers and aviation faces competition from other forms of transport.
India’s airline fleet betrays these realities. The combined commercial fleet in India stood at 716 aircraft at the end of 2020. Southwest Airlines in the US alone had more aircraft than this.
Likewise, India aviation had 144.2 million passengers in 2019. European low-cost carrier Ryanair alone carried more passengers.
That said, there is no denying the fact that there lies opportunity but Indian aviation is brutal and the opportunity comes at a cost, which has seen quite a few entities collapse in the past decade.
Comparison against peers
With the suspension of Jet Airways, there are only two listed airline companies in India—IndiGo and SpiceJet. A comparison with GoAir shows the airline’s total income for FY20 was just 19 percent of that of IndiGo but in line with the fleet it has.
GoAir is lagging both Spicejet and IndiGo in ancillary revenue - at per ASK (available seat per kilometre) level, a measure of seat carrying capacity, as well as per passenger level. However, it has a favourable operating cost per ASK against its rivals and a maintenance cost that matches IndiGo.
GoAir market share has stagnated for years and hasn't moved beyond 10 percent in an aggressive manner.
The DRHP is one of the many steps leading to a successful IPO but what would also matter over finances is how the airline performs operationally and its market presence in areas that are growth drivers of the company.
For an airline, the entire business is dependent on the movement of people and being in the right market at the right time could be the differentiator. GoAir, in the past, has lived up to these momentary upticks to make the most of it and it was under the same CEO!
How much will the airline save by moving from an LCC to an ‘ultra’ LCC will also decide the profit margins in future.