Robbing Peter to pay Paul

With debts to operating creditors piling up, plans by GoFirst, formerly GoAir, to go to the market for funds is viewed with skepticism. Anjuli Bhargava reports.

June 1st 2021

Print Friendly

When airlines in India found themselves in a tight spot after air travel fell away sharply from March, they adopted different strategies to stay afloat. Read More » Leading LCC, IndiGo, reduced salaries, especially for senior management, and slashed costs across the board.

But GoFirst, until recently GoAir, stopped paying vendors and laid off almost all of its staff.

GoFirst, owned by Mumbai’s Wadia group, introduced graded pay cuts for working management staff not on leave without pay, starting with 50% for the CEO and ranging to 5% for lower ranks of staff. From April to June 2020, approximately 3,800 employees were put on furlough.

Post India’s first lockdown in May, airlines re-started domestic flights, but almost all of them continued to bleed cash. But Wadia’s carrier took the industry by complete surprise when it informed India’s regulator it was going to the market to raise Rs 3600 crore (US$490 million). A senior ministry of civil aviation official said “this will go down in history as making GoAir/GoFirst the only airline globally to attempt to raise money from the market when aviation is going through the worst phase in its history”.

In the meantime, analysts more closely examined the draft “red herring” prospectus the Mumbai-based ultra LCC had filed with the stock exchange and a fundamental question arose.

Is the airline looking to raise funds to settle past due debt or is it intending to fund growth as companies that approach the market typically do?

According to the documents filed with the Securities and Exchange Board of India (SEBI), a portion of the net proceeds from the issue are to finance the “prepayment or scheduled repayment of all or a portion of outstandings as availed by the company” to the tune of Rs 2,015 crore.

In addition, the airline seeks Rs 279 crore towards replacing Letters of Credit issued to certain aircraft lessors to assist in securing lease rental payments and maintenance of aircraft with cash credits.

Another Rs 254 crore is planned for the carrier’s debt with the Indian Oil Corporation, in part or full, for fuel supplied to the company. In other words, Rs 2,548 crore of a total Rs 3,600 crore planned to be raised in the market is intended to pay the company’s accrued debt.

“Who, in their right mind, wants to invest in a company to help it settle past bills and dues?”asked a former CEO of the airline. He said the stated objective was to settle debt.

Additionally, the draft documents submitted to the SEBI do not clearly reveal how much is owed to operating creditors. It is a well-known GoAir and fellow LCC, SpiceJet, have been keeping afloat since the pandemic hit by deferring all possible payments to creditors and vendors.

Wadia’s airline listed several risk factors in its submission, including dues to creditors, its precarious financial position post-pandemic and its losses for the nine months to December 31, 2020 of Rs 470 crore. The airline’s negative net worth is Rs 1,916 crore and current liabilities exceed current assets by Rs 4,362 crore. Auditors are asking if the carrier is a going concern. Its aggregate indebtedness on a consolidated basis at April this year was Rs 8,160 crore, as per the documents. The sum could increase in coming months.

Lessors have issued notices of demand for 24 aircraft and are seeking US$ 35.75 million (around Rs 260 crore) for unpaid leasing contracts. The company has said it may not be able to pay by the deadlines stipulated in the notices.

According to sources, a rift also has arisen between the Wadia Group patriarch, Nusli Neville Wadia, and his son, Jeh Wadia, over the control of GoAir , the airline’s brand ownership and other matters that were not helped by Wadia senior’s dismissal of Nasli Lawyer, head of administration for the company and a childhood friend of Jeh Wadia.

Jeh Wadia was removed from the airline’s board last December 31, 2020, but his brother, Ness Nusli Wadia, was reappointed from November 28, 2020.

The SEBI submitted document also reveals the airline has changed its auditors almost as frequently as it has changed its top management. In fiscal 2018, the airline’s auditor was Kalyaniwala and Mistry. For 2019 it was Bansi. S Mehta and Co., for fiscal 2020 it was Walker Chandiok and Co and for the nine months ended December 31, 2020, the auditor was MSKA and associates. In other words, four years have seen four different auditors.

Moreover, the recent rebranding of GoAir to ultra low-cost carrier, GoFirst, has raised eyebrows with many in the industry unable to understand how it performed this magic trick overnight.

Other figures in its SEBI submission also are being questioned. The Wadia document claimed its Cost per Available Seat Kilometer (CASK) for the financial year 2020 was Rs 4.66. CASK for SpiceJet and IndiGo were Rs 4.51 and Rs 3.89, respectively.

“As I see it, either IndiGo and SpiceJet also are ultra LCCs or the recent rebranding [of GoAir to GoFirst] is more of an eyewash than anything else”, said a former CEO of the airline.

The document quotes several new terms: cash CASK, maintenance CASK, employee benefits CASK; none of which are typically used in the industry. Statements that GoAir has lower numbers for all three parameters than rivals IndiGo and SpiceJet are being met with skepticism.

“It does not explain how GoAir’s total CASK is higher if on all these parameters of Go’s numbers are lower. Either way, you can’t become an ultra low-cost carrier simply by declaring yourself one”, said a former CFO of the airline.

“The ultra low-cost airline concept is based on functionality. Getting people safely from one place to another at the lowest price,” explained a top management source at IndiGo. He said this flies in the face of GoAir’s latest campaign that claims You Come First. “In the ultra low-cost model, passengers do not come first or expect anything other than a safe and unpampered passage,” he said.

In the U.S. for instance airlines like Spirit charge for everything, including water or carrying a cabin bag. “DGCA rules in India do not permit many of the practices that American ultra low-cost airlines resort to,” said the CEO of a rival company. Rebranding without changing the cost structure fundamentally is “meaningless”, he added, and said the ability of any LCC in India to remodel itself into an ultra low-cost airline is limited by DGCA and MOCA existing rules.