State run-Indian Oil Corporation Ltd (IOCL) has invoked a Rs 500-crore bank guarantee by GoFirst after the loss-making budget carrier filed for insolvency before the National Company Law Tribunal (NCLT) on May 2, two sources close to the development told Moneycontrol.
IOCL, the exclusive fuel supplier to GoFirst, now has an outstanding due of around Rs 50 crore, the sources said.
On May 2, the cash-strapped company Wadia Group-owned airline first announced that it would temporarily suspend flight operations on May 3 and 4 due to a severe fund crunch. A bit later in the day, the company said that it has filed an application for voluntary insolvency resolution proceedings before the NCLT, Delhi due to a "severe fund crunch".
“IOCL requested for the bank guarantee to be invoked yesterday (May 2) and it was accepted by the bank. Now only a small sum of around Rs 50 crore is outstanding,” an official from the OMC told Moneycontrol.
Another IOCL official said, “Unlike some other airlines which suffered due to corporate governance and mismanagement issues, this seems to be a case of faulty engines. Once that is fixed, the problems can be resolved.”
Sources told Moneycontrol that IOCL will take a call on future supplies after the airline resumes operations, but typically, in such cases, the company opts for a ‘cash-and-carry’ model. This model requires the buyer, Go First in this case, to buy aviation fuel with upfront payment so that dues are cleared every day to reduce the risk exposure of the OMC.
Sources said that IOCL invoked the bank guarantee issued by Bank of Baroda that would take care of the majority of Go First’s outstanding dues as of now. An email query sent to IOCL and Go First did not elicit a response till the time this piece was published.
An IOCL official said, “We have a 15-year-long relationship with Go First. We are hopeful that the airline will recover and restart operations and we will get our money since the main problem it seems is the faulty engines.”
Kaushik Khona, Chief Executive Officer of Go First, exclusively told Moneycontrol on May 3 that the airline was burning cash of around Rs 200 crore every month since November and could no longer afford it and had to resort to filing for insolvency. The NCLT in Delhi has agreed to hear the airline’s voluntary insolvency on May 4. The airline hopes to resume operations as soon as NCLT admits the application.
Story So Far
While most airlines faced challenges due to travel disruption due to the pandemic and subsequent rise in fuel prices, Go First also had the added burden of dealing with faulty engines.
Go First was forced to ground half of its fleet citing faulty engines supplied by Pratt & Whitney. While the airline sought compensation from Pratt & Whitney for faulty engines, with fewer operating aircraft, its market share shrunk, leading to a loss of revenue and delayed payments to vendors.
The airline has blamed Pratt & Whitney for its position, as the American aerospace manufacturer has refused to comply with the arbitral award issued by the Singapore International Arbitration Centre (SIAC) in favour of the airline.
The SIAC, in an order issued on March 30, had asked P&W to provide GoFirst with 10 serviceable engines by April 27, 2023, and 10 engines each month till December this year. However, P&W has refused to comply with the order.
On April 28, Go First moved a petition before the Delaware court seeking enforcement of the Singapore arbitration panel's award.
Khona said that Go First needs at least 20 aircraft to return to service and break even on daily operations.
Meanwhile, Pratt & Whitney said in a statement on May 3 that it is committed to the success of its airline customers. “We continue to prioritize delivery schedules for all customers. P&W is complying with the March 2023 arbitration ruling related to Go First. As this is now a matter of litigation, we will not comment further.”
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