Recent changes to Indian laws that exclude leased aircraft from assets subject to freezing during an airline’s bankruptcy proceedings could have retrospective implications, according to India’s aviation regulator, as stated in a court filing on Wednesday.
The clarification surrounding the recent amendment to India’s insolvency law potentially opens the door for lessors of the bankrupt budget carrier Go First to reclaim their aircraft. Go First filed for bankruptcy in May, and its lessors faced obstacles in repossessing planes due to a moratorium imposed by Indian courts. This situation had garnered the attention of the world’s second-largest lessor, SMBC Aviation Capital, which expressed concerns that it could undermine industry confidence, especially when India is in the process of acquiring a significant number of new aircraft.
In a highly anticipated move, India amended its insolvency law in October, with the primary objective of harmonizing global and local regulations to support the growth of its rapidly expanding airline sector and address discrepancies that had caused issues, such as the Go First bankruptcy dispute.
The rule change was designed to align India’s laws with the Cape Town Convention, a treaty that safeguards the rights of foreign lessors, particularly relevant following the Go First bankruptcy dispute.
In limbo
However, the situation remains in limbo until the Delhi High Court delivers a verdict favouring Go First, which has resulted in the Directorate General of Civil Aviation (DGCA) prohibiting the airline from resuming its operations. This legal deadlock further complicates Go First’s chances of revival.
Go First has been grappling with a series of financial challenges since its grounding. With a significant workforce of 3,000 employees and a fleet of 56 aircraft, 28 of which are operational, the airline requires a substantial monthly infusion of approximately Rs 50 crore to Rs 70 crore to maintain operations. While state-owned lenders have recently released Rs 104 crore for specific expenses, including employee salaries and aircraft maintenance, the airline’s monthly financial requirements remain substantial.
The airline’s total liabilities to all creditors, including banks, financial institutions, vendors, and aircraft lessors, amount to over Rs 11,400 crore.
Further hit
If Go First’s situation resembles that of Jet Airways and its bankruptcy proceedings extend for a prolonged period, it could potentially cost banks around Rs 3,000 crore. This estimate does not account for aircraft lease payments, which would only further burden the financial situation of the banks.
Go First has extended the deadline for potential investors to express their interest in purchasing the airline until September 28. However, investors are awaiting the resolution of the legal issues before committing. The airline is promoting its available slots, operational aircraft, and valid aircraft orders as attractive propositions for potential investors. It has also filed an arbitration case against Pratt & Whitney, seeking $1.2 billion in damages for alleged faulty engines. While the outcome of this arbitration will take time, it could impact the airline’s valuation.
Go First’s path to recovery is laden with complexity. The airline must overcome legal challenges, meet the demands of creditors, and attract investor interest to take off again. This situation highlights the intricate nature of bankruptcy proceedings in the aviation industry and the substantial financial toll they can exact on all stakeholders involved.
