Markets
What Go First filing for insolvency resolution means for aviation sector
Summary
- Investors were enthusiastic about market share gains for peers, and the development is also expected to support airfares in the near term
One man’s loss is another man’s gain. With Go First filing for voluntary insolvency resolution on Tuesday, there was enthusiasm among investors about the potential exit of the budget airline as it means market share gains for its peers. Since demand in the aviation sector is currently robust, this development is also expected to support airfares in the near term.
Shares of InterGlobe Aviation Ltd, India’s largest airline by market share, were up more than 5% in Wednesday’s morning trade, hitting a new 52-week high. Smaller peer SpiceJet’s shares also rose, jumping over 4%.
In March, Go First’s market share stood at 6.9% compared to the lion’s share of 56.8% that IndiGo commands. SpiceJet’s market share was 6.4%.
“IndiGo and Air India can see market share gains of 4-5% and 2-3% respectively if Go First remains suspended for long," said Sabri Hazarika, analyst at Emkay Global Financial Services Ltd.
But first, what led to Go First taking this step? Go First holds Pratt & Whitney’s International Aero Engines, LLC.’s (P&W) faulty engines responsible for this unexpected move. P&W is the engine supplier for Go First’s Airbus A320neo aircraft fleet. The percentage of grounded aircraft due to P&W’s faulty engines has grown from 7% in December 2019 to 31% in December 2020 to 50% in December 2022, said the airline.
It is worth noting here that the P&W engine issue has persisted for some time. As Prateek Kumar, an analyst from Jefferies India points out, “It is unclear as of now if this event means the end of operations for Go First, and why this has been announced suddenly." Kumar said in a report dated 3 May, “IndiGo is facing a similar problem with P&W engines for some of its fleet, but has been able to better maneuver the crisis owing to its much larger fleet size and better negotiations with the vendor."
Go First has cancelled flights from 3-5 May with no mention of scheduling for future periods. This development comes at a time when the aviation sector is facing supply constraints and robust demand trends. This could benefit airfares, which are already stronger indicating the airlines’ yield. For perspective, IndiGo’s yield stood at a multi-quarter high of Rs5.37 in the December quarter. Yield is a measure of pricing. While it would be slightly lower sequentially in the March quarter due to seasonality, the yield is expected to remain healthy.
In the near term, lower fuel costs could have translated into a cut in airfares, but Go First’s woes would now mean the same may not happen to the extent expected. Even so, the extent of support to yields could be capped this time around. According to Hazarika, “Remember, when Jet Airways closed operations, industry airfares had strengthened sharply as it was a much bigger airline and market share gains were higher for peers. Since Go is a relatively smaller player, the upward pressure on airfares may not be that much."
It remains to be seen how the market share of airlines shape up given that some are adding capacities and would avail the slots occupied by Go First earlier. “If Go First is eventually unable to restore its operations, then the event can accelerate consolidation in the sector and move towards duopoly," said Hazarika. To be sure, investors are likely to track intervention by the Directorate General of Civil Aviation, if any.
