Introduction
Once again, the Indian, sky goes into turbulence. In Indian Skies, another airline is again trapped for cash. “Go First” Airways has decided to file for bankruptcy. The airline has stopped all flights. Reports say there is a severe shortage of funds. Reports also say that Go First owns more than 800 million dollars to its Credit. Now Go First has blamed Pratt and Whitney not only for faulty engines but also for its insolvency.
Go First has been granted bankruptcy and has a huge potential to revive and operate again very soon. On 2nd of May 2023 Go First filed for bankruptcy, which instantly created chaos in the market, they grounded their aircraft and canceled hundreds of flights, and the banks that had exposure to Go First are now at the brink of a very heavy loss.
Now while most people might think of this to be yet another case in the graveyard of Airlines like Kingfisher, there is something very fascinating that has been found out and my personal sense is that Go First going bankrupt is not a bad, thing at all. Instead, Go First is using it’s bankruptcy as a very calculative business strategy to come back into the business.
My Analysis Based on My Understanding you may differ on my take on the Bancruptcy applied by Go First Airlines whihc I call it as Bankruptcy Model
Table of Contents
Understanding The Strategy
Bankruptcy by itself is a brilliant business strategy in the aviation market. So, the question is how the hell can bankruptcy be a good thing for a company? How could Go First be using it’s bankruptcy to bounce back into the business? Most importantly what are the study materials to help you understand the bankruptcy strategy better? In this article let us understand the strategy.
As usual let’s start from the basics this is the breakup of the cause that an airline company incurs during its operation. 30% of it is fuel cost, 16% is a lease cost, which is majorly leasing of aircraft, 5.2% is interests. Interest payments to the banks and salaries are 11.8 percent.
Now this breakup is not a big deal at all because that’s what costings look like. But with the aviation business what makes this extremely scary is the fact that the share of the most critical expense of all keeps on changing and that is fuel cost.
For example, in Mumbai in June 2021 the aviation turbine fuel rate was 70 rupees per liter but since the start of the Russia-Ukraine war the price of ATF had almost doubled to 141 rupees per liter in July 2022 and even now it is at 89 rupees per liter. So, the effect of war is still there. But all of this is not just because of war.
The cost of Aviation turbine fuel keeps on fluctuating with economics geopolitics and even demand seasons. So, today you could be making a 10 percent profit because the cost of oil has dropped. But in the geopolitical situation, say for the next quarter itself the American President Mr. Joe Biden makes a statement that upsets Saudi Arabia which may lead to an oil production cut.
This would lead to higher oil costs and suddenly because of this unrelated matter, your profits will sink to minus 20 percent. Imagine a warning that Saudi Arabia will face consequences after OPEC last week announced a major cut in oil production. I’m not going to get into what I’d consider and what I have in mind but there will be the Consequences.
Opec the organization of petroleum exporting countries has announced it will cut back production by 2 million barrels a day. With International oil prices surging to a multi-year high jet fuel prices also saw a steep hike in prices. Following, Russia’s invasion of Ukraine oil prices skyrocketed in March22 alone they surged by about 35%, and as we know ATF prices form over 40% of the operational costs for Aviation companies.
Most Aviation companies have been reporting losses in the last quarter because of the drain on profitability on account of higher ATF prices so there is no fixed profit margin in the Aviation Space at all. In fact, the International Air Transport Association put out a forecast stating that the net profit margin in the global aviation industry in 2023 was just 0.6 percent, and even in 2019 that before the pandemic the industry was operating at a net profit margin of just 3.1 percent.
Understansding Go First Case
This is the reason why airline companies are always struggling and the slightest of changes in the economy can directly lead to a thousand crore company going bankrupt. If this is very clear let’s understand the case of Go First people. Go First was a very successful Airline if you look at their balance sheet, they were making a healthy profit of 150 and 120 crores in 2018 and 2019 and they were so aggressively expanding their business.
In 2018 they placed an order for 144 Airbus A320 new aircraft. This was one of the largest aircraft orders in the history of Indian Aviation. But to their misfortune just like every other airline in India Go First was affected by two forces.
- The pandemic in 2020 and the
- Russia-Ukraine war in 2022 and because of these two events the company went from 152.08 crores in profits to 1807.91 crores in losses.
On top of that the airline has been struggling with debt of 11463 crores and to make matters worse as you must have seen already in most of the Instagram reels Go First encountered a terrible problem with their engines. So far it says Pratt and Whitney supplied faulty engines so they could not operate the planes and this has led to direct losses. Pratt and Whitney engine of that Boeing triple seven aircraft actually exploded mid-air. The company has been facing issues with its current Pratt and Whitening engines.
A total of 15 Pratt and Whitney gtf powered aircraft, the engines that they are talking about are grounded because of faulty engines. Go First grounded just seven percent of its Fleet three years later this number surged to 50. Total 50 of the planes were not operational unfortunately Pratt and Whitney the engine manufacturer has completely deceived them. Cutting the long story short an American company called Pratt and Whitney supplied the engines to Go First and their engines have a record of breaking down very frequently. So, it’s not just Go First, even Indigo and Lufthansa faces the same issue with Pratt and Whitney. As it turned out that both Lufthansa and Indigo quickly reacted to the situation and fixed the issue.
With Go First, the problem of engines literally snowballed the company into trouble. Ever since they started facing this issue they had to ground their aircraft. In 2018 around 10 percent of its Fleet had to be grounded then 26 percent got grounded in 2021. 34 got grounded in 2022, 40 of their fleets got grounded in the first three months of 2023 and finally, 50 of their Fleet got grounded by April 2023.
Now as we all know even with all the planes operational we were looking at a profit margin of just 3.1 percent. It was so obvious that with 50 of their Fleet grounded Go First started bleeding. India’s Aviation sector is back in the news another airline has hit turbulence Go First. Go First has decided to fight for bankruptcy is now filed for bankruptcy. Go First Airlines, has filed for bankruptcy citing a financial crunch.
The airline says it has been forced to ground more than 50 planes. The cash-trapped Indian airline has suspended its flights for Wednesday and Thursday and has filed for insolvency. This is when the fight got ugly and finally Go First is now suing Pratt and Whitney on multiple charges demanding a compensation of 1.1 billion dollars.
The Strategy
Now the question we hear is why did we say that bankruptcy is a good thing for Go First and how can Go First recover from 1800 closing losses? With 11000 crores in debt in fact in the last two decades more than 15 Airlines have folded and none of them have ever flown again.
So the question is what makes us think that Go First can bounce back again? Well well here’s where the bankruptcy strategy of Airlines comes in. To understand this, we have to understand the two approaches to bankruptcy and they are liquidation and resolution. In simple words in liquidation, the entire company is sold off bit by bit to recover money from its assets and then this money is distributed to the creditors to compensate for their debts in case of an airline.
The first superpower that bankruptcy gives to an airline company
A company called Queen Fisher has 8000 crores in debt to be paid to the creditors but does not have any money to pay them back they opt for liquidation. So a liquidator will be appointed to carry out this process. This Liquidator would identify all of Queen Fisher’s assets say for example100 aircrafts, real estate like 25 buildings, 100 acres of land equipment, and intellectual property like software and algorithm. Then these assets will be sold off and the money that is raised would be used to pay the airline’s creditors in an order specified.
By bankruptcy law when liquidation happens it is usually a big loss to the creditors because if they want to recover 8000 crores they might hardly end up recovering 800 crores or less that is 10 times less money but once the liquidation process is complete Queen Fisher will cease to exist The airline’s employees would lose their jobs and any remaining value for the shareholders would be completely wiped off. So, clearly, this is a terrible option, right? Well, this is the reason why more often than not Airlines opt-in for the second option and that is the resolution.
In this method instead of selling off everything they have the airline company will use your bankruptcy to negotiate with their creators and this method can give an airline company three incredible superpowers. So, let’s start with the technical meaning, and then we’ll understand it in simple words.
The first superpower that it gives to the airline company is to defer payments for six months so when a company files for bankruptcy and its request is approved by the national company law tribunal i.e. the NCLT. They get a 180 day period which can be extended further to 270 days. In this period the company is protected from both legal actions and Recovery proceedings from its creditors.
In simple words, all their loans are on a pause for the next six to nine months and all the cases against the company will not proceed for these nine months. This works for all payments including salaries to employees rent to Airline lessens debt to Banks and all the other creditors.
In this time period, an interim resolution professional or IRP is appointed in order to manage the Affairs of the company during the bankruptcy process. So, a resolution plan will be prepared to revive the company and repay its debts the best part is that Within these six months the company cannot be taken to court and the assets of the company cannot be seized.
Now in the case of Go First its Fleet of Airlines cannot be repossessed by the aircraft lessors. So Go First can use bankruptcy to save its planes. If you see the news you will see that Go First is now asking for the application to be accepted quickly because apparently, the lessers are actually asking for the planes back.
The Second Superpower Of Bankruptcy
The second superpower that it gives is debt restructuring and this is the best benefit of all. So let’s try to understand this using an example you see Go First has a debt of around 11500 crores. After the company declares bankruptcy there is no chance that it can repay the banks in its current position so this way the banks will have to write off these loans as non-performing assets Now the poor creators will have two options
- The first option is to wait for 270 days of the bankruptcy process plus wait for another one year for the liquidation proceedings to happen.
- Then after almost two years the planes and real estate will be put on sale now if you understand the aviation business you will know that after two years the planes will be in terrible condition and will be sold for pennies on the dollar.
So, this is unviable for the creditors in short if the characters have given 2000 crores, they will get no interest or installment for 1.5 years plus after all this proceeding they might get hardly one-tenth of what they gave out in loans. So, they might recover 200 crores odd only. So, this option, is clearly a disaster, right? This is the reason why they often go for the second option which is debt restructuring and this is something that is often used by American airline companies to get out of trouble.
For example, if a company has a debt of say 8000 crores at eight percent interest and a 10-year Tenure. Since the first option is so terrible the airline company can leverage the bank’s position to restructure its debt such that it can even get the bank to give them a 50 haircut and a 50 extension of the tenure. This means instead of paying back 8000 crores at eight percent they could not ask to pay 4000 crores at say five percent interest and instead of a 10-year tenure they could ask for a 15-year tenure.
Now just to tell you how big this difference is 8000 crores at eight percent interest for 10 years gets you an EMI of 97 crores but 4 000 crores at five percent interest over a ten year of 15 years means you pay an EMI of only 31.63 crores. In fact, if you look at the history of American Airlines when Delta Airlines went bankrupt, they saved 9.3 billion dollars Northwest Airlines saved 4.2 billion dollars and American Airlines saved 8 billion dollars just because of debt restructuring.
The Third Superpower Of Bankruptcy
This brings us to the third superpower which is emergency relief for operations. This provision allows the company to continue normal business operations during bankruptcy such as paying wages and benefits to employees filing and paying taxes and meeting certain contractual obligations like rent insurance premiums or vendor invoices.
This can help the company bounce back into profitability in case of Go First emergency relief for operations can help them pay their staff their upper management and the rent for their most important assets because of which they can come back to business and you know what guys Go First can even ask their creators to pay a part of these bills with fresh loans.
This is important because had, Go First not filed for bankruptcy and then asked a bank like Bank of Baroda to give them a loan of 500 crores then the Bank operator will be in trouble because RBI will roast them for giving a loan to a bleeding company.
Conclusion
But now because of the Indian bankruptcy code, the bank can give loans with the justification that the bank is giving a 500 crore loan because they want to save the company so that Go First can get back in the market and pay them 1400 crores back which they’ve already lent. So, this 500 crores are being invested to save their 1400 crore loan asset. Go First can now use these fresh loans after bankruptcy to pay their pilots to pay their engineers and to pay their cabin crew.
This is how Go First can use bankruptcy to achieve five unreal benefits number one they can keep their planes without paying the Lesser. Two, they can get more loans without paying any EMI for the previous loans for 270 days and Three they can use these new loans to pay for the most important members of the company and now they can use this 270 day time period to sue Pratt and Whitney.
In this 270-day time period if they win the case against Pratt and Whitney Go First will get 1.1 billion dollars as in nine thousand crores which they can easily use to pay back debt and recover their losses and get back into the business.
This is how we believe Go First is using bankruptcy to come back into the business and just like things could go right in theory they could also go wrong so firstly their Banks might opt in for liquidation but in case Pratt and Whitney might win the case or the promoters might simply decide to quit. Regardless of what happens, you got a brilliant case really to understand the unexplored side of bankruptcy, right?
That is the takeaway of this article that’s all from my subject today guys now if you learn something valuable please make sure to comment your thoughts on this and for more such insightful business and political case studies please subscribe to my News Letter Channel from manishadda.com