Was Go First’s plea for voluntary insolvency a masterstroke or a mega disaster?

The voluntary insolvency action can be described by some as a masterstroke because the airline gained moratorium on all payments. (File image)

In the airline industry, a flight getting diverted due to unfavourable landing conditions, and reaching its destination a while later when the weather has cleared up, is not unusual. Go First’s saga thus far has, however, been of an airline — not a flight — wilfully getting diverted without the eventual destination or time of arrival being known.

Go First filed a plea for voluntary insolvency resolution in the National Company Law Tribunal (NCLT) in May. This was accompanied by an announcement regarding the suspension of flights for two days — May 3 and 4 — to perhaps give an impression, either as part of a planned strategy or inadvertently, that suspension of flights was to be for only a brief spell.

The past few weeks' events have, however, shown that suspension of flights has turned out to be for a prolonged period. The initial announcement has been followed by over a dozen communications extending flight cancellations further and further, the latest flight cancellations being up to June 25, 2023. More such announcements extending cancellations till a further date cannot be ruled out.

As more than seven weeks have elapsed since the announcement was first made, and one fails to understand how cancellation of flights for two days can extend to over 50 days, one is tempted to ask what the policymakers at Go First had in mind or expected when the NCLT was approached.

Introspection

If viewed from the limited perspective of Go First’s inability to meet its financial commitments — whether it was entirely due to problems of faulty engines supplied by Pratt & Whitney or otherwise — the voluntary insolvency action can be described by some as a masterstroke because the airline gained moratorium on all payments. Simply put, the airline management bought relief for itself by not having the need to bother about marshalling resources for effecting payment to vendors and lenders, even while continuing to exercise control on all the assets, including aircraft.

However, if judged from the perspective of airline business, it can be described as a disastrous decision since the airline remains grounded, with no solution on the horizon. Quite like Kingfisher and Jet Airways, which collapsed in 2012 and 2019, respectively, Go First too has been displaying misplaced bravado making it appear that resumption of flights is on the anvil.

Has any airline after a prolonged suspension of operations taken to the skies again? One is left wondering where is Go First’s optimism emanating from? It would be infinitely better for Go First promoters to share reasons for their optimism, if any. The reality check on its credibility can only then follow.

Amongst those taking a pessimistic view of the airline’s operational future, perhaps based on past experience, are aircraft lessors. While the lease of a few aircraft was terminated soon after the initial announcement of Go First and before NCLT admitted the application, lessors are contesting the NCLT moratorium order because it prohibits them from repossessing the aircraft leased to Go First. There are unconfirmed reports that the government hasn’t taken kindly to this and may amend the law soon to facilitate possession of aircraft once an airline has defaulted on payment of lease rental.

Financial Back Up Needed

Appearing on behalf of the Interim Resolution Professional appointed for the airline, legal luminary Harish Salve, said: “If the aircraft are returned, that's the end of this airline, it's dead.” Salve is spot on! Where Salve has erred is in understanding that even if an airline has aircraft in its possession, it will remain in comatose condition unless there is finance available to run the airline. Has Go First given any indication about financial back up as yet? There isn’t any evidence in the public domain.

While at aviation regulator DGCA’s behest, the crisis-hit Go First has seemingly submitted a revival plan, one is unsure of how many aircraft use does the plan entail. As the number of aircraft needed will be far less than the operational aircraft (half the fleet of 50+ aircraft was operational at the time of initial announcement) it had at the time of suspending flights, one is tempted to ask: who decided on total suspension of flights, and why? Was the action only to seek reprieve from contracted payment obligations? It is for the legal minds to decide whether the course adopted by Go First can be categorised as use or abuse of the legal protection provided under NCLT.

Go First should therefore share its optimism with all stakeholders on its revival plan. Sharing of details can’t be restricted to just losses and problems relating to Pratt & Whitney engines if it desires to retain whatever goodwill still exists.

When the airline resumes operations, if at all, it will be a challenging task. Longer the break, the greater the uncertainty of resumption and the more challenging the revival process. First, the airline will lack credibility with the travelling public — passengers, including those whose travel plans suffered due to sudden cancellations, are unlikely to book tickets on it. Second, luring them with highly discounted fares will only make the cash-starved airline bleed further. Anyone in the Go First management who therefore assumes that once revival actually materialises, customers will flock to patronise it, is grossly misreading the market trends.

Regaining Market Share A Challenge

This is particularly true because the domestic market is largely driven by how attractive are the fares on offer, and not loyalty to an airline. Even if Go First commanded a market share of 6.4 percent in April 2023 by flying almost 4,800 flights in the month, down from  8.4 percent by flying 6,242 flights in January 2023, the climb will be onerous and time-consuming. While a gradual reduction in market share was entirely due to actions of Go First management, the effort to gain market share will see intense competition as Indigo, Air India and Vistara have all launched additional flights on Go First’s routes and these airlines can’t be expected to surrender the gains they made.

Since it should be apparent to all that Go First cannot have use of all aircraft currently in its fleet, both due operational and financial reasons, why isn’t it voluntarily giving up control on some aircraft sought by lessors. The NCLT’s moratorium has already caused enough harm to country’s ease of doing business campaign. The cost of rigidity and prolonged legal process to get justice is bound to be paid by other airlines, as lessors will invariably try to plug loopholes in our legal framework by seeking additional guarantees when leasing aircraft in future.

It is also amusing to see banks, which have collectively loaned Rs 6,521 crore to Go First, ordering a forensic audit for possible diversion of funds only after the airline has suspended operations. This has happened in the case of Kingfisher and Jet Airways too. Why can’t the banks learn their lessons and have a system of close monitoring in place so that the possibility of diversion just doesn’t exist.

Go First has made itself a subject for a management case study and let’s hope it leads to streamlining of our systems even as the question of whether Go First will revive or perish has become secondary.

Jitender Bhargava is former executive director of Air India and author of the book, The Descent of Air India. Views are personal, and do not represent the stand of this publication.