Why Nusli Wadia’s SOS couldn’t save Go First

FILE PHOTO: The number of Go Airlines’ aircraft grounded due to engine issues averaged 30.5% in 2020; 25.6% in 2021, and 33.9% in 2022, the company stated. Between 2016 and February 2023, it carried out 289 engine changes and 221 engine swaps. Reuters  (REUTERS)
FILE PHOTO: The number of Go Airlines’ aircraft grounded due to engine issues averaged 30.5% in 2020; 25.6% in 2021, and 33.9% in 2022, the company stated. Between 2016 and February 2023, it carried out 289 engine changes and 221 engine swaps. Reuters (REUTERS)

Summary

  • What went wrong with the low-cost airline? Here’s the inside story

On 25 March, the fight to save Go Airlines (India) Ltd finally landed before Michael Lee, an emergency arbitrator in Singapore.

Talks between the Indian company, which ran the airline Go First, and American engine manufacturer Pratt & Whitney, had ended in a deadlock. The engine maker did not replace or provide spare engines for the faulty ones, crippling the low-cost carrier’s operations, Go Airlines held. By March, half of the airline’s fleet of 54 Airbus 320 (neos) were grounded.

Nusli Wadia, the 79-year-old chairman of the Wadia Group, which owned Go Airlines, logged in for the virtual hearing, along with Varun Berry, the former chairman of Go Airlines. Pratt & Whitney was represented by Hendrick ‘Rick’ Deurloo, president of the company’s Commercial Engines division.

“The organization will fall apart," Wadia told the arbitrator.

Besides quick delivery of the engines, he wanted Pratt & Whitney to award $416 million to the carrier, on account of the losses it had incurred. The engine maker, apparently, had compensated InterGlobe Aviation, India’s largest airline company, for similar engine failures. InterGlobe Aviation runs IndiGo.

The engines in dispute are called Gear Turbo Fan (GTF) engines—they have a gear box between the fan and a low-pressure shaft. This design results in lower fuel consumption and is also less noisy compared to other engines. IndiGo is the only other Indian airline that operates Airbus 320 (neos) with GTF engines.

“We understand that financial relief is being provided to our competitor because they said so on their investor call," Wadia told Lee. “I would look for some relief, financial relief, to help us along the way for the next six months".

Lee saw merit in Wadia’s plea but only partially. He directed Pratt &Whitney to supply 10 serviceable engines within a month and provide 10 engines, every month, until December 2023. But the arbitrator did not ask the engine maker to compensate Go Airlines for the losses it incurred.

Pratt &Whitney, part of the Raytheon group, the world’s largest aerospace and defense manufacturer, maintained that the airline wanted to ‘jump the queue’ (ignore the company’s other customers) in terms of engine delivery.

Whatever the reason, the engines never arrived and Wadia’s fears came true. 37 days later, on 2 May, Go Airlines filed for voluntary insolvency with the National Company Law Tribunal (NCLT) in New Delhi.

Go First revenues
View Full Image
Go First revenues

The engine trouble was the last straw that broke the proverbial camel’s back. The company had already hit an air pocket and was shaky because of internal problems. Jehangir (Jeh) Wadia, Nusli Wadia’s son, who had been the managing director (since December 2017), stepped down in March 2021 over differences with his father, leaving the carrier without an astute boss.

Then, Go Airlines was unable to raise money through a public issue of shares. The Securities and Exchange Board of India (Sebi) had initially held back from giving its nod—the market regulator was unhappy with accounting practices at a group company. When Sebi finally green-lighted the IPO, the markets, globally, had started diving, and the company did not go public. Finally, the covid-19 pandemic made things worse.

Meanwhile,the Indian skies have been getting busier. Another low-cost airline, Akasa Air, started flying in August 2022. Air India, under the Tata Group, has placed a record 470 aircraft order. Go Airlines, even without the engine troubles, ran the risk of sliding into insignificance.

Wadia’s reasoning made before the mediator and the company’s filings in a Delaware court in the US succinctly tells the tale of the carrier’s fall over the last one year. This story stitches these submissions; some of this haven’t been reported until now.

The backstory

How did the dispute between Go Airlines and Pratt &Whitney start? Let us step back.

The airline started operations in November 2005, about nine months ahead of IndiGo. Back then, the brand was known as GoAir.

While Lufthansa was the first airline to operate Airbus 320 (neos) with GTF engines, IndiGo and Go Airlines were the second and third carriers to use these engines, globally.

For the first six years, Go Airlines was conservative, only operating a fleet of 10 Airbus 320 aircraft. However, beginning June 2011, the company turned aggressive—it placed an order for 144 Airbus 320 family aircraft.

Pratt &Whitney’s GTF engines were picked over CFM International’s engines. CFM is a 50:50 joint venture between GE Aviation and Safran Aircraft Engines. Larger rivals, Air India and Vistara, power their Airbus 320 (neos) with CFM engines.

Go First crisis
View Full Image
Go First crisis

Go Airlines went with GTF engines because they are more fuel efficient and promised lower operational costs. Significantly, Pratt &Whitney agreed to finance the pre-delivery payments to be made to Airbus for the aircraft, according to court filings reviewed by Mint.

In the sale and leaseback (SLB) model of financing aircraft purchase, an airline has to make about 30% of the cost of the plane (varies depending on the order size and negotiations) as pre-delivery payment. Normally, airlines take bridge loans to fund these payments.

While the financial deal looked favourable for Go Airlines, engine troubles soon surfaced.

Premature degradation

Aircraft with the GTF engines were inducted into Go Airlines’ fleet in mid-2016. Within four months, in September 2016, an engine had to be removed because of faults. This problem was not limited to Go Airlines and recurred with carriers globally. Put simply, the engines degraded prematurely, causing shutdowns and failure.

Between 2016 and February 2023, Go Airlines carried out 289 engine changes (removal of a failed engine to replace it with a serviceable engine) and 221 engine swaps (removal of a serviceable engine from a grounded aircraft to install it on a second aircraft), the airline said in the court filing.

The number of Go Airlines’ aircraft grounded due to engine issues averaged 30.5% in 2020; 25.6% in 2021; 33.9% in 2022.

From 1 January 2020 to 28 February 2023, there were 17,244 ‘aircraft on ground’ days—the cumulative number of days during which an aircraft is grounded and cannot fly— across the airline’s fleet of ‘first batch aircraft’.

As of March, 28 of the airline’s ‘first batch’ aircraft (52% of its total fleet) were grounded because the airline does not have sufficient serviceable GTF engines. Of the 144 Airbus 320 (neo) family aircraft ordered, the first 72 were internally referred to as the first batch.

Unofficial estimates suggest that about 85 Airbus 320 (neos) and 48 Airbus 321 (neos), fitted with the GTF engines from Pratt &Whitney, are grounded across the globe, including India.

Analysts Mint spoke to said that the problem is not one of supply chain; it has to do with the quality of the engine.

“Pratt &Whitney-GTF issues, at the moment, plague Lufthansa, IndiGo, ANA, Hong Kong Express, Turkish Airlines, Air Senegal, United Airlines, Jet Blue, Swiss Air and Air Baltic as much as it does Go Air. It is high time Pratt & Whitney got mature enough to take a firm step and discontinue the GTF series engine for good," said Mark Martin, founder and CEO at Martin Consulting, an aviation consultancy firm.

The groundings impacted Go Airline’s marketshare. It had a 9.8% domestic share in October 2021, with 2,290 departures per week for the 2021 winter schedule. The market share fell to 7% in October 2022. When it filed for insolvency, the airline had a share of 6.8%. Market share drops also underline a hit to its finances and the capability to service payments. According to estimates, Go Airlines owes various creditors about 11,000 crore.

‘A very big gap’

Wadia, before the arbitrator, explained the company’s losses.

“Right now, we are losing $25 million a month," he said when asked on the number of engines the airline needed to keep itself afloat for six months.

“It’s a very big gap. Our turnover, our revenue would be in the order of $150 million. Currently, it’s in the order of $64 million. That gap is of $86 million. You (airline/prompters) are bearing 100% of all costs," he added.

Wadia further brought up a human resources issue, which is linked to the airline flying again.

“I have got 57% of my pilots sitting on the ground and they are very expensive people," he said. “So, I have another threat. If people—my employees, my pilots and others—don’t see relief coming, they will leave the airline. If the relief comes too late, I won’t have the pilots, I won’t have the organization. So, the number of engines and the speed of that is critical for our existence for the next six months," he argued.

Go Airlines stated that the financial impact on Pratt & Whitney will be minimum – “a rounding error"—even when it compensates for the non-delivery of engines.

A person close to the airline’s earlier management said that the company was forced to opt for the Singapore arbitration after Pratt & Whitney’s decision to suspend maintenance repair and overhaul (MRO) operations from May 2022, and after a recent proposal in February 2023 to induct no more than two to three engines per month.

In a clarification to Mint, Pratt & Whitney said that the allegation that it is responsible for Go Airlines’ financial condition is without merit and the company will vigorously defend itself and pursue its own legal recourse. “It is important to note that the current worldwide supply chain issues, durability enhancements, the earlier upgrades made to the GTF, and a business dispute with Go First are separate, and cannot be clubbed together as ‘engine issues’," the company stated. This is a commercial and contractual dispute, now under litigation, the company added.

 

Go First data
View Full Image
Go First data

Analysts, meanwhile, say that the airline’s problems are due to its dependence on one engine and that the engine maker is more at fault than the airline. “Unlike IndiGo, which hit critical mass with its fleet around 2013, with the stable CFM-installed Airbus A320, GoAir’s over-dependence on a single type of engine (PW-GTF) led to this disaster," said Martin.

Survival chances

The airline’s appeal for insolvency has been admitted by the NCLT court in Delhi and an Interim Resolution Professional (IRP)—Abhilash Lal—has been appointed to run the airline.

Government officials told Mint they are hopeful that the airline will return to the skies, based on their interaction with the new management under the IRP.

“It is imperative for the aviation industry in India that the airline restarts. The IRP-led management (RP Lal and operational staff) has given us hope of a resumption," said the official, who did not want to be identified.

The airline company under the new management, for now, has not given a firm date to restart operations to the Directorate General of Civil Aviation (DGCA), India’s aviation regulator. Some say that the airline could restart in June but no firm proposal has been submitted to the regulator yet.

Nonetheless, the DGCA has sought a comprehensive flights resumption plan within 30 days. The airline has been asked to furnish the availability status of operational aircraft fleet, maintenance arrangements, required technical staff, pilots and other personnel.

But like Wadia feared, retaining people would be the next challenge. The company’s employees are already looking for jobs elsewhere, one employee Mint spoke to, said. The experience of the defunct Jet Airways, which failed to take off even after finding a buyer, doesn’t give them much confidence. Aviation jobs, however, are booming, with both Air India and IndiGo planning international and domestic expansion. The 6,000-odd employees of Go Airlines, therefore, remain hopeful.

Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
more

topics

MINT SPECIALS