Loss-making budget airline Go First’s move on May 2 to file for bankruptcy took the lessors of its aircraft off guard, and they are now caught between a rock and a hard place. If the National Company Law Tribunal (NCLT) accepts the airlines’ insolvency plea and request for a moratorium on its financial obligations, they will not be able to take back their aircraft from the airline even if they don’t get paid.
The Insolvency and Bankruptcy Code (IBC) prohibits the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. This means that if Go First goes into insolvency, lessors of the airline cannot take back the flights.
Since Go First went public with its insolvency plans, these lessors have made a dash to get the aircraft back by applying to the aviation regulator, the Directorate General of Civil Aviation (DGCA), to deregister some of its planes. This is a long-drawn process but even if they get access to the planes, the next challenge would be to get these planes to fly. Most of them are grounded because of faulty engines supplied by US-based Pratt & Whitney (P&W); the issue which is at the core of this crisis faced by Go First.
ALSO READ: NCLT to hear two insolvency petitions filed against Go First on May 8
“The lessors would rather get possession of the aircraft and then find a way to fly them than have them lie in some hangar in the possession of the airline. If the moratorium starts, the lessors can’t get the planes back, and breaching the moratorium has criminal penalties,” a lawyer advising one of the stakeholders told Moneycontrol.
Thus far, aircraft leasing companies have sought to repossess and deregister 20 aircraft leased to Go First under the provisions of Irrevocable Deregistration and Export Request Authorization (IDERA).
SMBC Aviation Capital, GY Aviation Lease, Banas Aviation Leasing Limited, Yamuna Aviation Leasing Limited, Narmada Aviation Leasing Limited, EOS Aviation, and Pembroke Aircraft Leasing, have approached the regulator to deregister 20 Airbus A320 Neo aircraft of the airline. Of the 20 aircraft, 15 were operating till May 2, after which the airline shut operations. Queries sent to lessors and Go First remained unanswered.
ALSO READ: Wadias’ Go First manoeuvre should set the tone for IBC use
Masterstroke by Promoters?
The IBC states that for a company under insolvency, a moratorium will be placed on the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
Legal experts said the move by the promoters, the Wadia Group, is a well-planned move aimed at securing the airline’s future as well as regaining control of it under India’s bankruptcy law.
“The lessors were taking control of the fleets. In order to save it, this is the only opportunity left with the promoters. If they don’t initiate insolvency at this stage, the lessor may take away the aircraft because they have already applied for de-registering the aircraft,” said Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors.
Go First has a fleet of 54 Airbus 320 neos fitted with Raytheon-owned P&W engines, which the airline operates on a sale-and-leaseback model by working with around 11 international lessors. Out of its total fleet of 54 A320 neos, the airline was forced to ground around 26 planes due to engine issues.
Go First had in November 2022 reached out to its lessors to discuss a moratorium on the lease rental payment for some of its grounded aircraft, citing non-payment of compensation from Pratt & Whitney for its grounded engines. While the airline sought compensation from Pratt & Whitney for faulty engines, with fewer operating aircraft its market share shrunk, leading to loss of revenue and delayed payments to vendors.
Deja Vu
The overhang of the Jet Airways experience is driving stakeholders to protect their interest. Majority of Jet Airways’ lessors moved swiftly and took re-possession of the planes ahead of its insolvency, which led to reduction in the troubled airlines’ asset value. While the Wadia group is keen to ensure its fleet is protected, the lessors seem to be desperately seeking to re-possess the planes.
Unlike Jet Airways, the cash-strapped Go First’s troubles stem from mounting debt owed to lenders and lessors even as half of its fleet lay grounded due to faulty engines. Kaushik Khona, Chief Executive Officer, exclusively told Moneycontrol that Go First was burning around Rs 200 crore every month since November which it could no longer afford, and had to resort to filing for insolvency.
Tight Spot
Lessors have few options. "Deregistering Go First aircraft is the first priority for lessors whose planes are ready to fly. If lessors are not able to de-register their airworthy planes they will lose out on revenue until the insolvency case resolves, which they will then look to recover from Go First," said Lokesh Sharma, a defence and aviation expert.
He added that lessors may also file a claim with the insolvency court for any unpaid rent or damages incurred due to the insolvency of Go First.
"However, the amount of the claim may be limited and there is no guarantee that the lessor will be able to recover their losses," Sharma said.
A lawyer close to the development said that there is no recourse available to the lessors once the insolvency process starts.
“There are only two things lessors can claim. First, they need a proof of claim that states the amount owed, and second is the lease rental which will get aggregated as insolvency resolution process cost. This means that while they will be denied their property, they will be paid its rental for the next 9-12 months or so till the process ends. They will be paid before anybody else, even before lenders make any recovery,” the lawyer said.
But the long drawn insolvency process of Jet Airways is haunting the lessors.
Failure on Take-off
Industry players point out that even if the lessors get the planes, the lack of engines to fly them may remain a challenge.
"It is in the interest of the lessors to let Go First go through insolvency and resolve the issues so that the aircraft can fly again. Getting a flight deregulated and taking it back is a long-drawn process. And how would they even fly the planes back without engines? P&W is not replacing the engines and if the lessors decide to change engines, they will have to spend a huge sum to make appropriate changes like replacing the pylon on the wings,” said Mark D Martin, Chief Executive Officer of aviation consulting and aerosafety firm Martin Consulting.
The Go First CEO has said that the airline needs at least 20 aircraft to be back in service and break-even on daily operations. The company’s management believes that the airline would be able to return to full-scale operations by September 2023 if Pratt & Whitney provides the airline with the engines as per the arbitral award issued by the Singapore International Arbitration Centre (SIAC) in favour of the airline.
An aviation expert from JPMorgan said that given the supply chain issues P&W is currently facing, they are not expected to dedicate resources to supply new engines or repair faulty engines of Go First.
"Go First's grounded fleet is unlikely to take to the skies anytime soon, even if they are deregistered by the DGCA on the request of lessors," he added.
Experts pointed out that lessors whose planes are grounded will have it tough as they will have to spend significant amounts to repair faulty engines from a third-party source.
"The history of the aircraft will reflect that the lessor used a third-party to repair the faulty engine, which might affect its resale value," Sharma said.
Martin said, “No airline had to shut because of faulty engines before. This is not a Go First vs lessors issue, and they (lessors) need to move carefully in this precarious situation. Globally, incidents have been reported in over 25 airlines and 700 engines due to faulty engines from P&W. Whatever transpires in NCLT will have global ramifications."
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