Go First plays smart but banks may lose
Dear Readers,
Who moves first matters the most in business since there is a first-mover advantage. The Wadia group’s Go First airline has filed a resolution for moratorium relief under the Insolvency and Bankruptcy Code (IBC).
The group has made known its strong intention to make the airline fly again, but there are high chances that banks will lose a lot. Let me explain.
The total debt of Go First is around Rs 5,600 crore and it is difficult to predict how much loss will banks make if the airline goes bankrupt. But if it goes for resolution, the IBC track record of recovery is not great. In the majority of the cases, banks recovered not more than 40% of their dues. In liquidation cases, I doubt whether banks even recovered their legal consultancy fees because they took more than 95% haircuts. Videocon is a great example. So, looking at the track record of National Company Law Tribunals, I don't think banks will get a decent recovery. So, perhaps bankers are praying that Go First would not go for liquidation. But chances are high that even if it doesn’t head for liquidation, the lenders stand to lose because they don’t know how long the case will continue and how long it will take for Go First to resolve their issues. While the airline has played it smart, the bankers have no choice but to wait and watch.
Go First’s strategy
Go First has filed for voluntary bankruptcy under section 10 of IBC. In my opinion, this is the smartest move any big company can make to use the IBC wisely.
Let’s understand what would have happened had Go First not filed for bankruptcy. Most likely it would have defaulted and banks would have declared it a defaulter and dragged it to NCLT. Allegations of fraud would have maligned the brand, and any revival would have been difficult. Just like Kingfisher or Jet Airways.
But the Wadias played smart. The group has been in the business for 150 years. Its chairman Nusli Wadia had his famous controversies with Dhirubhai Ambani in the past. The group's presence is quite commendable in the areas they operate.
What is the dispute between Go FIRST and Pratt & Whitney?
Go First has blamed the American aerospace manufacturer Pratt & Whitney (P&W) for being solely responsible for their issues, a move that has given them an opportunity to revive and operate the airline again. According to Kaushik Khona, CEO of Go First, the engine maker P&W defaulted on the contract and did not serve them on time because of which they faced a major business impact.
Go First is affected because of the non-availability of the aircraft engines, which were supposed to be provided by P&W. If the company would have served the engines which perform better, the airline would not have been grounded, the CEO explained to ETNOW.
P&W had promised service and lease 10 engines per month to Go First. Also, they should have picked up 40 failed engines of the Go First. But P&W has struck back and blamed Go First for not making payments on time.
Wadia and troubles
But there is another side. Analysts say the Wadia group is going through a major financial crisis. They already have a SEBI order against them. The market regulator has restricted them from borrowing from the capital market for two years. Rating agency Acuite downgraded the company in January 2023.
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On the other hand, there is heavy competition in the airline business, specifically with the Tatas achieving a gigantic scale. In the last 18 years of being in the airline business, the Wadias must have realised that the road would be difficult for them ahead. The other players like Vistara have flown past and IndiGo has already grabbed a decent market share. Scaling up and gaining market share will not be easy for them. And managing the engine performance is not going to be easy either as also raising funds.
Banks and rewards
The reason Wadias are confident is that they have an arbitral award in their favour against P&W. The NCLT may take note of it since the supply and performance issue seems genuine. The whole case seems to be in the favour of the Wadias. Banks will not have an alternative but to pray for the airline to fly.
I feel in India large groups never fail. Only their businesses and banks who lend to them fail. That's what led to the adage – rich promoters and sick firms. We have had many such businesses which went bankrupt. Essar, JK Cement, ADAG Group, etc filed for bankruptcy while their promoters were doing well but not their lenders. Soon, it will be clear which route Go First flies.
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Happy Reading,
Amol Dethe
Editor
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