The Collapse of Go Air: Analyzing the Factors and Economic Consequences”
Cash-strapped Indian airline Go First filed for bankruptcy on Tuesday 2nd May 2023, blaming “faulty” Pratt & Whitney engines for the grounding of about half its fleet.
The move marks
The first major airline collapse in India
since Jet Airways filed for bankruptcy in 2019,
Go First owes financial creditors 65.21 billion Indian rupees ($798 million), its bankruptcy filing showed as per NCLT. Defaulted on payments to operational creditors, including 12.02 billion rupees to vendors and 26.60 billion rupees to aircraft lessors, it said in the filing.
The total bank loan outstanding of the aviation sector amounts to Rs 28,330 crore as of March 2023, according to RBI data. Banks are staring at a loss of over Rs 5,600 crore in Go First Airlines which has filed for insolvency at the National Company Law Tribunal (NCLT)
Go First said its filing followed a refusal by Pratt & Whitney, the exclusive engine supplier for the airline’s Airbus A320neo aircraft fleet, to comply with an arbitration order to release spare leased engines that would have allowed the airline to return to full operations.
Unpaid dues piled up and the airline didn’t pay it. Now demand has picked up leading to shortage in maintenance capability and of course the engine makers are giving first preference to the airlines which paid on time,” as per an executive.
“Go First accounts for
- 6 of the about 30 (by airlines together) non-stops daily on Delhi-Srinagar and Mumbai-Goa routes
- 6 of the 52 daily on Delhi-Mumbai,
3. 5 of 13 on Delhi-Leh,
4. 3 of 10 on Delhi-Bagdogra.
This is the peak summer travel season and, except Goa, all the other destinations are in demand. With few seats available, they will go at the highest levels that could be up to 20% higher than current fares
“It is bad for the (airlines) industry… It is such a fragile industry… we lost crores of rupees in Kingfisher Airlines, in Jet Airways and we have another one going into insolvency (proceedings),” Travel Agents Association of India (TAAI) President Jyoti Mayal told PTI.
Now underscores the fierce competition in a sector dominated by IndiGo and the recent merger of Air India and Vistara under the Tata conglomerate.
“Unfortunately, this comes in the middle of the peak demand season and when school vacations are about to begin. If the past is precedent, refunds will likely be hard to come by. In the medium term, this decision by Go First will likely impact market risk premiums for all airlines and perception of the entire Indian aviation ecosystem.
Indian airlines are expected to record a consolidated loss of $1.6 to 1.8 billion in the financial year 2023–24 ending March 31, 2024, according to aviation consultancy CAPA India. The full-service carriers are predicted to incur a loss of $1.1-$1.2 billion.21-Mar-2023
Few of the Indian Airlines which closed down in the last 20 years are:
1.Kingfisher Airlines (Operated from 2005 to 2012)- 17 Years
2.Jet Airways (Operated from 1993 to 2019) — 26 Years
3. East West Airlines(Operated from 1992 to 1996)- 4 Years
4. Damania (Operated from 1993 to 1997)- 4 Years
5.Air Pegasus (Operated from 2015 to 2016)-1 Year
6.Air Costa (Operated from 2013 to 2019)- 6 Years
7.Paramount Airways (Operated from 2005 to 2010)- 5 Years
8.MDLR Airlines (Operated from 2007 to 2009)- 2 Years
9.Deccan Airways (formerly Air Deccan, Operated from 2003 to 2008)-5 Years
10.Jagson Airlines (Operated from 1992 to 2013)- 21 Years
11. Alliance Air (formerly Air India Regional, temporarily suspended operations in 2020)
12. Go Air (Operated from 2005 to 2023)- 18 Years
So, the above data clearly speaks about an Airline getting shut in every 1.5–2 years in India which is a super scary picture.
Hence its important to dwell on 2 important aspects which everyone should know about the Aviation In India.
1. Factors which lead to fail of an Airline
2. Impact to the economy of the Country
Factors which lead to Fail of an Airline
Airlines in India have had to face several challenges, besides general mismanagement, which impact profitability. Below are a few of them.
Fuel
A major chunk of operating cost in aviation is air turbine fuel (ATF). It usually comprises half the cost but can go steeply up depending on several factors. There has been a phenomenal rise in ATF price, nearly 60% to 70% in the past few years. International oil prices are sensitive to a host of global factors and can often play spoilsport for an airline which is otherwise doing well. Fluctuating ATF means a perennial instability built into the business. Wild swings in ATF prices can wreck an a ..
In India, ATF is heavily taxed. States impose a value-added tax (VAT) on ATF which could be as high as 30%. Aviation Minister Jyotiraditya Scindia last year wrote personally to 22 chief ministers to bring down VAT, arguing that a lower rate favours states as well since it means greater number of flights coming into the states and higher amount of refuelling. A large number of states have reduced VAT. There are also calls to bring ATF under the GST so that there is uniformity and more stability i ..
Since India is nearly 85% dependent on imports to meet its oil needs, the only way to cut ATF prices and bring stability to airline business is to reduce taxes.
Dollar
An appreciating dollar also raises the costs for an airline. Jet fuel, lease payments, maintenance and overhaul costs, along with aircraft purchases, are typically priced in dollars. When rupee depreciates against dollar, it increases day-to-day cost of operations, squeezing profit and cash balance. It makes overseas tickets more expensive, and can dent demand and shrink margins.
Fluctuating demand
Demand elasticity is a major challenge in the aviation business all over the world. Demand for air travel is highly sensitive to business cycles. It is one of the first sectors to feel the impact of a downturn because a low in business activity means immediate reduction in air travel. Air travel demand is also sensitive to global disruptions such as pandemics and conflicts. Fluctuating demand plays havoc with airline business since every seat going vacant translates into loss.
High fixed costs also become major concerns due to demand elasticity. When demand is low, airlines have to still pay salaries to all the staff. Airline staff, especially pilots, are highly paid. Most of the airline staff can’t be hired and fired at will because many, like pilots, are technical staff which is not easily available when needed. Airlines staff is also often highly unionised which means a company can’t lay off or cut salaries at will.
Planes make for a high fixed cost. They must be ordered years in advance since it takes a lot of time to build them. While placing orders for planes an airline must have a good idea of future demand. When the planes are delivered years later, the airline must pay up even if there is low demand and it won’t be able to use all its planes. Planes, even when grounded, cost a lot since they require regular maintenance and often they are sent abroad for it. If an airline does not have enough planes wh ..
If an airline does not have enough planes when the demand goes up, it has to lease them at a high cost.
Airport costs too are high, especially for low-cost airlines, since India does not have too many separate cheaper airports for domestic airlines. Often, domestic and international flights operate from the same airport.
The Government Factor
Aviation is a sector highly regulated by the government and adhering to regulation means an addition to already high operating costs. Since the government itself used to operate an international as well as a domestic carrier, Air India and Indian Airlines, its policies were often seen as more favourable for its own airlines, making it difficult for private airlines to compete. The government has often been accused of protectionism by private players. The pampered and profligate government airlines. The pampered and profligate government airlines, which had no pressure to adhere to market forces, had skewed the whole aviation business for private airlines.
In India, the government has regulated air fares, often capping them at a fixed price. Fare caps render a good chunk of operations unprofitable. It was the government airfare cap that had led to the rise of low-cost airlines in India, but intense competition means airlines can’t hike fares as much as they want.
Low profitability
Airlines is not an easily profitable business. As per credit rating agency ICRA, despite the high airfares, the airline industry is estimated to post a net loss of Rs 110–130 billion in the April 2022-March 2023 period.
Aviation may look glamorous but the aviation business is hard and rough. Cost can often mount to unmanageable levels; intense competition keeps fares in check; customers always seek low fares; raising fares can bring down sales; and it’s not easy to persuade customers to pay extra for better services and amenities. Aviation being a capital-intensive sector, it requires deep pockets and lots of patience for the business to do well. Success is based on building huge scale which requires loads of c ..
Success is based on building huge scale which requires loads of capital. Celebrity investor Warren had once said of the airline industry in one of his letters to shareholders: “The worst sort of business is one that grows rapidly, requires significant capital to engender growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.”
While all these factors are present in the aviation sector of every country, Indian companies are more vulnerable to these because the aviation sector hasn’t grown much in India yet and per capita flying in India is still very low. Most private airlines in India have closed within five years of operation.
Over time, India has landed itself into a situation where airlines are caught in a vicious cycle of profitless growth. Most do not make much or almost no money from their core business of flying passengers.
Airlines fly on various routes, tot up losses from core operations, and then order more aircraft to fund the losses through sale and leaseback of planes. Along the way, they occasionally earn some revenue through non-aeronautical activities. Even those who run their businesses quite well rarely turn in a profit.
IMPACT ON ECONOMY
The airline industry plays a significant role in the overall economy of a country. When airlines in India or any other country face financial difficulties and go bankrupt, it can have various impacts on the economy, including:
1. Job Losses:
When an airline goes bankrupt, it may have to reduce its workforce, leading to job losses for pilots, cabin crew, ground staff, and other employees. This could lead to a rise in unemployment rates and a decrease in consumer spending, which could have a ripple effect across the economy.
Kingfisher Airlines: The closure of Kingfisher Airlines in 2012 resulted in approximately 5,000 employees losing their jobs. This had a considerable impact on the aviation industry and the economy as a whole.
Jet Airways: The shutdown of Jet Airways in 2019 had a severe impact on the aviation sector and caused approximately 20,000 employees to lose their jobs. It disrupted the industry, affected ancillary businesses, and had implications for the overall economy.
Other airlines: The closure of smaller airlines such as Air Pegasus, Air Costa, Paramount Airways, and MDLR Airlines also resulted in job losses, albeit on a smaller scale.
The job losses in the aviation sector not only affected airline staff but also impacted related industries such as ground handling services, catering, travel agencies, and tourism.
Decrease in Tourism:
Airlines play a critical role in facilitating tourism, both domestically and internationally. When airlines go bankrupt, it can lead to a decrease in the number of flights and destinations, making it more difficult for tourists to travel. This, in turn, can lead to a reduction in tourism, which can impact the tourism industry and related businesses.
Decrease in Business Travel:
Airlines also facilitate business travel, which is essential for economic growth. When airlines go bankrupt, business travelers may have fewer options, which could lead to a reduction in business travel. This could impact various industries, including hospitality, transportation, and retail.
Financial Losses for Suppliers:
Airlines work with various suppliers, including aircraft manufacturers, maintenance providers, and fuel suppliers. When airlines go bankrupt, it could lead to financial losses for these suppliers, which could have a ripple effect on their employees and the economy as a whole.
Impact on National Infrastructure:
Airlines contribute to the infrastructure of a country, including airports and other transportation networks. When airlines go bankrupt, it could lead to a reduction in flights and passengers, which could impact the maintenance and development of national infrastructure.
Impact of Flight Tickets price:
Due to the demand and supply situation, the price hike would take place by the other airlines effecting the common man
Impact on Logistics Cost:
This would effect an increase of the logistics cost for Air movements thus effecting the logistics companies and the market which has any Air movements. At times it may not be clearly visible to all as it depends on the market share of the Airline closed down,
FII investments:
Instil a fear in the FII community. Forieng investments into India is an important part for any economy to rise and if this gets effected the impact is large as this is not small sums
Decline in ancillary services.
These ancillary services are closely tied to the airline industry and can include:
Ground handling services
Catering services:
Maintenance, Repair, and Overhaul (MRO) services:
Travel agencies and ticketing services
Tourism and hospitality industry:
In summary, the impact of airlines going bankrupt can be significant, leading to job losses, decreased tourism, reduced business travel, financial losses for suppliers, and an impact on national infrastructure. It is crucial for the government and other stakeholders to take steps to support the industry and prevent such bankruptcies from happening. It looks like with the Go air effect the market is consolidating and major share would go to Indigo and Tata Conglomerate.
Note: You can view an YT video too on the same
