Go First crisis has lessors tightening future contracts

India has seen over 15 airline bankruptcies in the past two decades, including Kingfisher, Jet Airways and Air Sahar

Deccan Herald | 21st May 2023

In less than two weeks, the Directorate General of Civil Aviation (DGCA) has received at least 50 requests for repossessing as many leased planes from two Indian airlines, triggered by one of them filing for voluntary insolvency. The panic has been triggered by earlier experiences of Indian airlines turning bankrupt and lessors left fighting to get back their aircraft. The admission of Go First’s insolvency case by the National Company Law Tribunal (NCLT) and the Indian government’s warning to the lessors insisting on taking back their machines has only stiffened the approach of the latter to the Indian market that they were so enthusiastic about this far.

Going forward Indian airlines that have recently placed big orders for fleet expansion, will have to brace for more stringent terms in their financial leasing contracts, higher risk premiums and pay higher lease rentals thereof. In all likelihood, this higher cost of doing business will be passed on to the passengers as higher ticket prices.

The airlines will also have to negotiate being profiled as high-risk prospects, as the Aviation Working Group (AWG), a UK-based entity that monitors leasing and financing laws, has placed India on a watchlist with a negative outlook citing that it had failed to comply with international aircraft repossession norms after airline Go First was granted bankruptcy protection. They’ve already downgraded India’s rating down two notches, with its current compliance score at 63.5.

The nervousness is born of history. India has seen over 15 airline bankruptcies in the past two decades, including Kingfisher, Jet Airways and Air Sahara which have preceded Go First. Most of these airlines operated with leased aircraft.

Protracted insolvency cases

What has made the lessors more antsy is their past experience of seeing insolvency cases dragging on, while their assets stay grounded. Once insolvency is filed the airlines get a moratorium of six months, which can be extended to nine months and the wait gets further stretched based on whether the airline finally goes for liquidation. Of course, if the airline has the funds, it can resume operations while the case proceeds. Otherwise, while their aircraft gather dust, lessors lose the opportunity to lease them to other airlines, underscored Alok Anand, CEO, Acumen Aviation, an Irish asset leasing company and a player in the Gujarat International Finance Tech-City (GIFT).

Besides the fear of depreciation of the aircraft value while grounded, lessors also fear having to take a deeper cut on their dues if other creditors like oil companies or airport operators seize the aircraft to recover their dues from the airline. And in worst-case scenarios, like the liquidation of assets, they may not get any money at all, experts explained. “India has been a rough market for lessors, this anguish towards India happened 11 years ago due to the downfall of Kingfisher airline,” said Mark Martin, CEO, Martin Consulting.

Cape Town Convention Treaty

Though a signatory to the Cape Town Convention Treaty in 2001, which called for the protection of the rights of lessors in repossessing their aircraft, India is yet to have this compliance ratified by the Parliament and put in place laws to ensure that.

“The Lessors are concerned about the entangling of the aircraft in litigation if the airlines go bankrupt,” said Ajay Monga, Partner, SNG & Partners. “No lessor would want to keep approaching the court to take back possession,” he added.

A market too big to ignore

The counterargument to these lessor inhibitions is that as the fastest-growing aviation market in the world, India is not a destination lessors can turn their back on.

The impact will be more on smaller airlines like Spicejet, argued Akshat Agarwal, Consultant, CAPA India. The interest of lessors continues to remain strong owing to the three stable airlines – Indigo, Air India and Akasa.

One should take the AWG remarks with a pinch of salt, experts suggested. CTC has not been ratified in a law in India and lessors know this when they lease airplanes here. Lessors continue to invest because India being high-risk, is also a high-reward market, argued Martin.