Context: Air Carrier Go First recently filed for voluntary insolvency at the National Company Law Tribunal. It has also suspended its flights.
India’s Aviation Sector
A major growth engine of India, civil aviation will drive India to become a $5 trillion economy by 2024.
- Large Market Size: India has become the third-largest domestic aviation market in the world and is expected to overtake the UK to become the third-largest air passenger market by 2024.
- Economic Contribution: Indian aviation also contributed 5% of the GDP, creating a total of 4 million jobs.
- Rapid Growth: Over past 6 years, India’s domestic passenger traffic has grown at a compound annual growth rate (CAGR) of around 14.5%, while international passenger traffic has increased by a CAGR of around 6.5%.
- India’s domestic passenger traffic is likely to rise to 16 crores in the 2023-24 fiscal year from an estimated 13.75 crore from the previous fiscal. By 2029-30, India’s domestic passenger traffic is likely to touch 35 crore.
- Infrastructure: The number of airports with civilian flights in India has grown from 74 in 2014 to 148 in 2023. Airports Authority of India (AAI) and other airport operators have targeted a capital outlay of around Rs 98,000 crore in the airport sector across India by 2025 for constructing greenfield airports and new terminals, expanding and modernizing existing terminals.
Challenges Faced by India’s Aviation Sector
- Safety Concerns: After Covid-19 pandemic, an increasing number of technical snags and malfunctions are being reported across leading private airlines raising serious concerns about flight safety.
- Profitability of the Sector: Most airline operators have poor financial health. The situation worsened during the COVID-19 pandemic due to lockdowns and flight restrictions. Consistent losses drive down number of operators impacting competition and efficiency.
- Supply Chain Issues: Delay in deliveries of aircraft, crunch in pilot availability and in cabin crew hinder the expected supply in new capacity to meet the demand growth.
- Low Per Capita Penetration: Despite the rapid growth witnessed in the passenger traffic, its per capita penetration is still significantly low versus global average/ peers.
- Poor Rural Connectivity: With mega airports controlling air and ground space, it is almost impossible to connect rural and small towns from the large metros.
- Policy Lacunae: There are many policy gaps that remain to be addressed e.g., the Aircraft Act, 1934 and Aircraft Rules, 1937 have not kept pace with modern technology in aerospace. This has increased costs to the industry and ultimately affected passenger growth.
- Lack of Oversight: Numerous operational violations and deficiencies by airlines, poorly trained pilots and unlicensed airports reflect the lack of effective regulatory oversight by Directorate General of Civil Aviation.
- Insufficient Maintenance and Repair Facilities: India’s lack of large-scale maintenance, repair, and overhaul (MRO) facilities contribute struggle of various airlines, as grounded aircraft cannot be quickly repaired and put back into service.
Why did Go First File for Voluntary Insolvency?
- Impact of COVID Pandemic: The Covid crisis has had a massive impact on the aviation industry and air traffic in India. Indian airlines and airports incurred an estimated loss of Rs 19,564 crore and Rs 5,116 crore, respectively, in 2020-21 due to severe disruption caused by the pandemic.
- Import Dependency: India is among the top importers of crude oil, depending on foreign fuels to meet 85% of its requirements. A higher price of crude oil in the international market will directly hike the ATF rates and consequently lead to high ticket prices.
- Depreciation of Indian Rupee: Indian rupee emerged as Asia’s worst performing currency in 2022 depreciating around 11.5% against the US Dollar. High fuel costs and a weak rupee make the cost of operations unsustainable for the airline industry. The airlines raise the fares to counter the same.
- Lack of Funds through IPO: The Go First wanted to raise Rs 3,600 crore since 2015 through an IPO to meet its debt repayment and working capital requirements. But weak market sentiment and the cold response of owners on infusing funds gave a blow to its prospects.
- Unavailability of Aircrafts: The Go First is facing financial crunch also due to non-supply of engines by US-based jet engines manufacturer Pratt and Whitney (P&W) that has forced grounding more than 50 planes.
- Dip in Market Share: Go First had 6.9% market share in March 2023, slipping from 8.9% in 2022.
Implications of Insolvency
- Bad Omen for Indian Aviation Sector: Go First’s bankruptcy filing would be the second in five years after Jet Airways failure in April 2019 in the aviation industry. This trend of insolvency is not a very good sign for the Indian Aviation market.
- Shares of Aviation Stocks Rise: Go First’s bankruptcy means lower competition for peers. The shares of InterGlobe Aviation hiked 8%, SpiceJet surged about 6% while defunct airlines Jet Airways’ shares also surged 5%.
- Fares to Soar: With Go First’s bankruptcy filing, it is expected that other airlines will benefit, leading to a 10-15% increase in air fares on domestic leisure routes.
- Opportunity for Slots: Go First’s grounding of Aircrafts also offers a chance to competitors to grab precious airport slots.
- Impact on Airlines Personnel: The Go First bankruptcy will have an impact on the airline stakeholders, cabin crew, pilots, passengers and many more.
Government Schemes for Aviation Sector
- Emergency Credit Line Guarantee Scheme (ECLGS): It is a part of Aatmanirbhar Bharat Abhiyaan to support eligible Micro, Small and Medium Enterprises (MSMEs) and business enterprises in meeting their operational liabilities and restarting their businesses in the context of the disruption caused by the COVID-19 pandemic.
- Digi Yatra: Digi Yatra policy is Union Government’s initiative for providing passengers seamless and hassle-free experience at airports without the need for verification of ticket and ID at multiple touch points.
- UDAN: Union Government’s flagship program Regional Connectivity Scheme UDAN (Ude Desh ka Aam Nagrik) has the objective to fulfill the aspirations of the common citizen with an enhanced aviation infrastructure and air connectivity in tier II and tier III cities. The government has also planned to develop 100 airports by 2024 under this scheme.
- Greenfield Airport Policy: Government of India had accorded ‘In-Principle’ approval for setting up of 21 Greenfield Airports.
- Better Policies: The Ministry of Civil Aviation in India has been encouraging States to reduce their VAT on ATF and vouched for ATF to be brought under GST.
- Maintenance, Repair and Overhaul (MRO) Policy: The Union Government had in 2021 introduced an MRO policy that aims to turn India into a global hub for aircraft maintenance and overhaul, which now largely happens abroad.
- NABH (Nextgen Airports For Bharat): This scheme was launched in 2018 to increase the number of Airports and their capacity to handle traffic in India. It aims to expand airport capacity more than five times to handle a billion trips a year through investments to be made in airport upgrade by both the private sector and the state-owned Airports Authority of India (AAI).
- There needs to be timely supply of aircraft, engines, and other key components to airlines in India.
- There also needs to be manufacturing facilities within India either through India’s own IP (intellectual property) or in collaboration with the global majors.
- Currently, there is limited aerospace product manufacturing in India, and the government and the domestic industry have been making a push to significantly grow the segment.