Go First Bankruptcy Due to Faulty Aircraft Engines Explained for Investors
Introduction
In a recent development, the Indian budget passenger airline, Go First (formerly known as GoAir), owned by the Wadia Group, filed for bankruptcy in 2022. The chairman of the Wadia Group, Nusli Wadia, has attributed the airline’s financial woes leading to insolvency to Pratt & Whitney (P&W), the manufacturer of aircraft engines used in Go First’s Airbus A320neo fleet.
According to Wadia, these engines were defective from the outset, frequently experiencing failures and requiring extensive maintenance and repairs. Consequently, a significant portion of Go First’s aircraft remained grounded and unable to carry passengers. Wadia alleges that P&W failed to fulfill its contractual obligations regarding the replacement and repair of the faulty engines, as stipulated in the original supply contract. Despite Go First winning an emergency arbitration case, P&W allegedly continued to disregard the provision of replacement engines. This situation left Go First unable to meet its financial obligations, including lease payments and loans, ultimately leading to its insolvency.
Impact on Retail Investors
For retail investors, Go First’s bankruptcy and the allegations against Pratt & Whitney have implications for related publicly traded companies. The share prices of InterGlobe Aviation (IndiGo) and SpiceJet, competitors of Go First in the domestic airline market, may experience short-term benefits as they absorb Go First’s market share. However, both IndiGo and SpiceJet also operate a substantial number of P&W-powered A320neo aircraft. Allegations of engine troubles that have led to the bankruptcy of Go First could negatively impact investor sentiment. Investors should closely monitor P&W’s response to these allegations and any safety audits that may follow.
In the long term, if P&W engines are deemed unsafe by India’s aviation safety regulator, it could have adverse effects on the entire A320neo fleets of airlines like IndiGo, Go First, and SpiceJet. This could significantly impact their financials and share prices. However, Tata Group’s Vistara and Air India use non-P&W engines, potentially positioning them as beneficiaries if other airlines face engine-related challenges. The entry of conglomerates like Tata into the airline sector could now be seen as a strategically sound move.
Impact on Industries
The allegations against Pratt & Whitney regarding their A320neo engines have cast uncertainty over the commercial aviation and aircraft manufacturing industries globally. Indian airlines and leasing companies that rely on P&W engines for Airbus A320-family narrowbody aircraft may reconsider their future purchasing decisions pending further developments. A loss of trust in engine safety and reliability could damage P&W’s reputation. Additionally, Airbus faces challenges in maintaining the credibility of its fastest-selling aircraft variant if these issues remain unresolved.
Any decline in orders for A320neo jets due to concerns about P&W engines could have negative repercussions for Airbus, affecting its backlog of orders. In the worst-case scenario, widespread divestment of existing A320neo fleets by airlines in developing markets due to safety concerns could oversupply the market, leading to lower lease rentals and resale values. This, in turn, could benefit rivals like Boeing.
India’s aviation regulator, the Directorate General of Civil Aviation (DGCA), is likely to intensify scrutiny of all P&W-powered aircraft operated by domestic airlines. In conclusion, the allegations stemming from the Go First case could prompt key industry players to reconsider their engine selection preferences and airline operational dependencies in the future.
Long-Term Benefits & Negatives
Over the long term, the revelations from Go First’s bankruptcy could compel airlines and regulators to address deeper issues. Pratt & Whitney will likely be under pressure to improve engine designs, enhance manufacturing quality controls, and refine maintenance procedures. These improvements will not only enhance passenger safety but also restore trust in the aviation industry.
Furthermore, the business models of airlines that rely solely on unsustainably low fares and high aircraft utilization rates to compete with rivals may undergo reform. Stricter oversight by the DGCA, particularly regarding operational metrics like on-time performance, could lead to improved service quality for passengers. Lenders may also exercise greater diligence by restricting capital allocation to airlines without a solid long-term outlook.
Consolidation among weaker airlines and the reduction of surplus capacity could contribute to the financial health of the sector. Airlines such as IndiGo and Vistara, with scale and diversified backing from profitable non-aviation parent companies, could benefit. For Jet Airways, awaiting relaunch, the credibility of its aircraft fleet and maintenance practices could become competitive advantages in attracting passengers. Ultimately, this turbulence should pave the way for stronger and more sustainable growth in the Indian aviation sector.
Short-Term Benefits & Negatives
In the short term, the collapse of Go First is likely to negatively impact customer confidence in the airline and the broader Indian aviation sector. This could temporarily dampen the growth in air travel demand. Hundreds of Go First employees face job uncertainty and potential payment delays as the insolvency process unfolds.
Until carriers like IndiGo and SpiceJet provide assurances that their P&W engines do not pose the same underlying risks, nervous travelers may avoid these airlines as well. This avoidance could hinder revenue recovery following the losses incurred during the pandemic, just as 2023 traffic growth estimates appeared optimistic.
On the flip side, competitors may benefit from the public’s distrust of bankrupt airlines by attracting some of the market through their reputations and fair, non-predatory pricing. For Pratt & Whitney, immediate commercial impacts appear limited, as large aircraft manufacturers and airlines currently lack alternative narrowbody jet engine providers. However, engagement with Indian regulators and operators will remain sensitive.
Overall, the market instability resulting from the fallout of Go First poses negative growth headwinds for Indian airline stocks in the coming quarters.
Citation:
Kala Vijayaraghavan, “‘P&W Caused Go First Irreparable Damage’”, Economic Times, December 28, 2023, The Economic Times.