Go First crisis: What is Cape Town Convention? Why India's aviation sector needs it | Explainer

Amid the Go First crisis, the global aviation leasing watchdog has put India on a watchlist with a negative outlook following the NCLT order restricting the Wadia Group's bankrupt airline's lessors from repossessing planes as the insolvency process is underway.

What is the Go First crisis?

Go First is the latest airline in the Indian aviation sector that has hit turbulence. The budgeted carrier has filed for bankruptcy-the second Indian airline to declare bankruptcy in four years. In 2019, Jet Airways filed for bankruptcy. Go First's total debt to financial creditors was ₹65.21 billion as of 28 April. The airline owes over ₹2,600 crore (approximately) to various aircraft lessors. Go First's lessors include SMBC Aviation, CDB Aviation's GY Aviation Leasing, Jackson Square Aviation, and BOC Aviation.

Go First is blaming its engine suppliers Pratt and Whitney for the current crisis. Go First said that P&W supplied faulty engines which halted their flights, resulting in direct losses to the carrier.

Go First also cited data to justify its claim. Grounded aircraft "due to Pratt and Whitney's faulty engines" surged from 7% (in December 2019) to 50% in (2022 December), costing ₹108 billion in lost revenues ad additional expenses.

At present, the Wadia Group-backed airline has suspended flights till 23 May.

What did Pratt & Whitney say on Go First's accusations?

P&W has called it 'a matter of litigation'. The aerospace company added, "Praat & Whitney is committed to the success of our airline customers, and we continue to prioritize delivery schedules for all customers".

What government says about the Go First crisis?

Union Aviation Minister Jyotiraditya Scindia said "Critical supply chain issues with regard to their engines have affected Go First's finances. The Centre is assisting the airline by speaking to various stakeholders.

Indian Airlines vs aircraft lessors--An Old Dispute

Indian airlines are heavily dependent on foreign lessors to finance plane purchases due to the booming demand for air travel. According to a report by Primus Partners, India has about 800 commercial aircraft of which 80% are on lease.

Since the Indian court's proceeding has legally barred lessors from repossessing the planes of Go First, the dispute between lessors and Indian airlines is likely to escalate.

According to the experts, the lessors may charge higher risk premiums from other Indian airlines to safeguard themselves from future turbulency in any other Indian airline.

If the premium by lessors goes up, the business cost of airlines will automatically increase. This will also result in higher airfares.

The aircraft lessors have already filed for the deregistration of SpiceJet planes which defaulted on lease rentals.

Solution-Cape Town Convention

Aviation experts see the solution in Cape Town Convention (CTC) Bill. It is a 2001 treaty designed to smooth the growth of aviation by protecting the repossession rights of aircraft. The CTC treaty eases the financing and leasing of aircraft, engines, and spare parts by reducing lessors' risk and expanding legal predictability in these transactions, including the case of insolvency.

India acceded to the CTC in 2018 but has not been ratified by the Parliament yet. As a result Indian law prohibits any such recoveries once bankruptcy proceedings are initiated for a company, lawyers, and industry.

A lawyer said that India has made it easier for lessors to take back planes if airlines default on payments after joining an international treaty known as the Cape Town Convention. But lack of proper legislation to enforce the treaty means India's bankruptcy law will supersede lessors' repossession requests.

As many as 11 lessors, backed by global banks, that leased aircraft to the airline will now move the appellate tribunal, opposing the bankruptcy order and allowing them to repossess their aircraft.

If Go First collapses, it would follow other Indian carriers Jet Airways, which went under in 2019, and Kingfisher, which failed in 2012. These airlines' lessors have also suffered in the past.

Why India needs legalisation of the Cape Town Convention Bill?

At present India is a signatory to the CTC but needs legal protection due to the clash between existing laws and CTC's norms.

In the interest of the aviation market's growth, India must legalise the Convention provisions.

Inevitably, higher premiums by lessors will make airline businesses costly and ultimately passengers will bear the brunt in the form of high ticket prices.