Go First Bankruptcy and Its Implications
Source: Original reporting by ET Bureau, published on January 15, 2024.
Analysis for Layman
Go First airline, which entered bankruptcy in May 2022 with a debt of over Rs 6200 crore to creditors like Central Bank of India, Bank of Baroda, has faced challenges in attracting buyers. An initial bidding process in November 2022 had failed to garner interest. However, in December 2022, three international aviation investors – Sky One of Sharjah, Africa fund Safrik Investments, and Indian budget carrier SpiceJet expressed interest. Later, two more potential bidders – US firm NS Aviation and a consortium called Plan IT – joined.
With unanimous approval from creditors, the Resolution Professional (RP) will invite binding bids from these five entities until February 4, 2023. The timeline could be extended by 60 days according to insolvency regulations. However, creditors remain skeptical about serious bids materializing, given Go First’s ongoing legal disputes with aircraft leasing firms and engine maker Pratt & Whitney.
Impact on Retail Investors
The prolonged Go First bidding process, now extending over 8 months, highlights the risks associated with the aviation sector. For retail investors, it serves as a reminder of the challenges in the aviation industry, which is prone to regular crises and external shocks like the COVID-19 pandemic and oil price spikes.
While SpiceJet’s interest as a strategic bidder could be seen as positive for competition and industry consolidation, their own financial struggles may limit their bidding capacity. Historical instances, such as the collapse of Jet Airways, demonstrate the massive erosion of equity value for airline shareholders during distressed scenarios.
For retail investors, entering the aviation sector requires resilience and careful consideration of liquidity needs. Investing in the aviation industry, known for its high risk, is recommended only in the case of airlines with robust balance sheets, such as IndiGo. Any consideration of high-risk options, like SpiceJet, should be based on sustained industry profitability signals.
Impact on Industries
The turbulent Go First bidding process has implications for various industries:
- Aviation: More airline bankruptcies are likely if oil prices spike again, leading to a survival of the fittest scenario.
- Banking/Finance: Lenders may experience higher airliner defaults unless structural changes are implemented, necessitating policy reforms.
- Tourism/Hospitality: Airline troubles could cascade down the value chain, impacting hotels, agents, etc., and affecting regional connectivity.
- Transportation/Logistics: Cargo yields may rise in the medium term as passenger belly space tightens due to reduced flights.
Addressing structural issues such as high taxation and inflexible bilateral rights is crucial for the Indian aviation industry’s sustainability. Without these reforms, further consolidation and job losses appear inevitable, making the next year a testing period.
Long Term Benefits & Negatives
Positives:
- Low Penetration: With a low penetration of 0.09 trips per capita, the industry has a multi-decade growth runway as incomes rise.
- Government Focus: The government’s focus on expanding air connectivity through schemes like UDAN and new airports continues.
Negatives:
- Cyclical Threats: Cyclical threats like oil price spikes and recessions can derail even well-run airlines.
- Lack of Stable Policy Framework: The lack of a stable policy framework makes long-term planning almost impossible for airlines.
For the long-term potential of Indian aviation to be realized, structural changes are vital, including reforms in taxation, bilaterals, and fleet financing norms. The government can enable growth by allowing pricing freedom, stepping back from micro-management, and creating fiscal buffers for downturns. Despite global uncertainties, India’s domestic air traffic is expected to sustain a growth uptrend over the coming decade.
Short Term Benefits & Negatives
Positives:
- Potential Policy Steps: The situation may spark policy steps providing interim relief on taxation, leasing norms, etc.
Negatives:
- Creditor Haircuts: Creditor haircuts are likely if the resolution fails, eroding PSB profits yet again.
- Legal Battles: Protracted legal battles over plane repossessions could further erode value.
- Chilled Sentiment: Financially constrained airlines may face tougher access to working capital, chilling sentiment.
- Cascade Effect: A cascade effect across the travel ecosystem may lead to temporary demand destruction and job losses.
For investors, the focus is on the competitive scenario if a new airline emerges from Go First’s assets. However, a failed bidding scenario reducing industry capacity could also aid yield upticks. Some counterintuitive stock moves may be witnessed across names like SpiceJet and InterGlobe Aviation. Despite potential benefits, risks remain elevated for airline exposures until clarity emerges.
Companies Impacted by Potential Revival of Go First Airlines
Indian Companies:
Gaining:
- SpiceJet (NSE: SPICEJET): If SpiceJet acquires Go First, it could gain significant market share and aircraft, potentially strengthening its position as a budget carrier. It might also benefit from cost synergies and route optimization. However, integrating two airlines can be complex and disruptive, with potential risks to profitability in the short term. Market sentiment on SpiceJet could be positive upon confirmation of a bid, though concerns about integration might temper the gains.
- Travel Agencies and Online Booking Platforms: Increased competition and potentially lower airfares resulting from a revived Go First could benefit travel agencies and online booking platforms like MakeMyTrip (NSE: MMYT) and EaseMyTrip (NSE: EMIT).
- Airport Operators: Increased passenger traffic due to a revived Go First could benefit airport operators like Delhi International Airport Ltd. (NSE: DIAL) and GMR Airports Infrastructure Ltd. (NSE: GMRINFRA).
- Aircraft Maintenance and Servicing Companies: If Go First resumes operations, companies like Air India Engineering Services Ltd. (NSE: AIESL) and SpiceJet Ltd. (NSE: SPICEJET) could see increased demand for their aircraft maintenance and servicing services.
Losing:
- Existing Budget Airlines: Other budget airlines like IndiGo (NSE: INDIGO) might face increased competition for passengers and routes from a revived Go First. This could put pressure on their airfares and profitability.
- Go First Creditors: The possibility of recovering their full debt remains uncertain, even with renewed interest in the airline. The final resolution plan and the airline’s future performance will determine their actual recovery amount.
Global Companies:
Gaining:
- Aircraft Manufacturers: Airbus (EPA: AIR) and Boeing (NYSE: BA) could benefit from potential new aircraft orders if Go First is revived and expands its fleet.
- Aircraft Leasing Companies: Leasing companies like Avolon Holdings (NYSE: AVOL) and Air Lease Corporation (NYSE: ALC) could see renewed business opportunities if Go First resumes operations and seeks aircraft leases.
Losing:
- Engine Manufacturers: Pratt & Whitney (NYSE: PWH) might face continued legal challenges from creditors and potentially negative publicity if the engine issues linked to Go First’s bankruptcy are not resolved.
Market Sentiment:
Overall, the news of renewed interest in Go First is likely to be positive for the Indian aviation sector in the long term, boosting prospects for increased competition, lower fares, and potential airline growth. However, uncertainties regarding the final resolution plan, potential legal hurdles, and financial viability might create volatility in the short term. Investors should closely monitor developments and assess individual companies’ specific exposure and potential benefits or risks before making investment decisions.
Please note that this analysis is based on the information provided and should not be considered financial advice.