New Delhi: Go Airlines’ “surprise” decision to file for insolvency is likely to further drive up air fares due to capacity constraints amid a strong surge in demand for air travel, according to experts.
Although there’s no clarity yet on the revival path for Go First, the low-cost airline that Go Airlines operates, the move is expected to significantly benefit other players such as Indigo, SpiceJet and Air India — sending aviation stocks soaring in anticipation.
Stocks of Interglobe Aviation (Indigo), closed higher by 4.52 per cent at Rs 2,163.90/share on 3 May, and had touched a 52-week high of Rs 2,235.95/share during the day. Similarly, SpiceJet scrip ended the day higher by 1.40 per cent at Rs 31.93/share, while Jet Airways closed at nearly 5 per cent, at Rs 60.59/share. Furthermore, SpiceJet has already announced that it has mobilised plans to revive 25 grounded aircraft.
The development comes a day after the Wadia Group-owned Go Airlines Tuesday said it has been forced to file for insolvency with the National Company Law Tribunal (NCLT) Delhi to protect the interests of all stakeholders “due to the ever-increasing number of failing engines supplied by Pratt & Whitney’s International Aero Engines, LLC”.
Citing issues with the engines supplied by American company Pratt & Whitney (P&W), the airline said it had to ground 25 aircraft, or about 50 per cent of its Airbus A320neo aircraft fleet, as of 1 May 2023.
In a tweet, Go Airlines said it had canceled all flights on 3, 4 and 5 May due to operational reasons.
Due to operational reasons, GoFirst flights for 3rd, 4th and 5th May 2023 have been cancelled. We sincerely apologise to our loyal customers. Please visit https://t.co/qRNQ4oQROr for more information. We assure that we’ll be back with more information soon. #GoFirst pic.twitter.com/QAJlL017QS
— GO FIRST (@GoFirstairways) May 2, 2023
However, the company’s website isn’t showing any flights until 15 May.
Experts ThePrint spoke to believe the crisis will lead to demand for other airlines. Jinesh Joshi, research analyst at advisory firm Prabhudas Lilladher Pvt Ltd, said that “accrual of incremental passenger volumes to other carriers will lead to higher load factors (seating capacity filled) and also increase in air fares”.
“Though the exact quantum is difficult to predict, competing airlines will benefit to a large extent as Go First commanded a market share of 8.9 per cent in CY22 (calender year 2022),” he added.
Also Read: US engine-maker flags Go First’s ‘lengthy history’ of non-payment after being blamed for insolvency
‘One less player in the market’
According to market research firm Jefferies, Go First operated in 27 domestic destinations that cover all the metro cities as well as seven international destinations, and commanded a market share of 6.9 per cent in March 2023.
“In a surprise announcement, Go First… has filed for insolvency, saying it could no longer continue to meet financial obligations, blaming US company Pratt & Whitney’s (P&W) faulty engines for the grounding of 50 per cent of its fleet which impacted Ops. The surprise shutdown will likely drive supply constraints amid overall strong air traffic trends and stronger airfares,” Jefferies said in a note Wednesday.
It further stated that while the path for revival isn’t clear for Go First, “the market disruption caused by the shutdown of operation is likely to reduce competitive intensity, and could benefit airfares especially amid the recent strong traffic trends seen in the Indian aviation sector”.
If the suspension is prolonged, Jeffries said, other airlines that are adding capacity would look to avail the slots vacated by Go First (especially in the much constrained key metros) and grab on to the market share.
According to the firm, the Indian aviation sector is currently going through a purple patch, with strong demand trends supporting fares and even fuel prices that are mildly turning from a headwind to a tailwind. Such circumstances would stand to benefit even the weakest players, it said, adding: “If the exit of Go First does happen, this would be at the margin positive for sector consolidation as this would mean one less player in the market.”
Risk to employees, banks
Research analyst Jinesh Joshi, quoted earlier, noted that in this situation, while the company has officially cancelled flights for three days till 5 May, the cancellations are likely to continue. While it was known that the financial situation of Go First was not very healthy, especially given that it was already on cash & carry mode i.e. paying oil marketing companies on a daily basis for fuel, the move to file for insolvency is sudden, he said.
Asked about the impact on Go First employees, Joshi said: “Unless Go First revives, there could be a large-scale retrenchment. However, this can be a silver lining for both Air India and Indigo that have announced aggressive expansion and hiring plans as excess supply would curtail inflation in staff cost.”
In a separate note, Jefferies noted that the company’s loan from banks stood at Rs 20-25 billion, with majority of liabilities (Rs 110 billion) being lease liabilities. However, it added that the impact on Indian banks will be low.
“Among banks, the Central Bank of India may have Rs 7 bn (billion), ICICI Bank Rs 3.5-4 bn; Deutsche Bank, IDBI Bank & ECBs were other sources. We see low risk for lenders,” it said.
(Edited by Uttara Ramaswamy)
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