Last month, GoAir- the budget airline controlled by the Wadia group, filed for an IPO with the intention to raise Rs 3,600 crore (~ US$ 492 million). Morgan Stanley, CitiBank, and ICICI Securities have been enlisted to handle the share sale process.
Founded as GoAir in 2005, the company recently changed its name to Go First in an effort to rebrand itself as an ultra-low-cost airline. But, with the entire airline industry in the doldrums due to the pandemic combined with the effect of rising oil prices, will the IPO of the country’s fourth-largest airline garner enough attention?
Indian Aviation Industry
The Indian aviation industry consists of six key players- state-owned operator – Air India and five private sector players- Indigo, GoAir, SpiceJet, Air Vistara, and AirAsia. It is interesting to note that the salt-to-software conglomerate- Tata group owns a majority stake in both Air Vistara and AirAsia. Being the country’s largest airline, IndiGo is the industry leader, followed by SpiceJet, which has more or less managed to maintain its market share over the years. Due to its strong balance sheet and low-cost structure, Indigo gained market share during the past year, at the expense of Go Air which had cut down its operations to conserve cash. Jet Airways, once India’s largest full-service carrier, had fallen from grace when it shut down its operations in April 2019 due to financial constraints. But there is a possibility that the airline might resume operations as restructuring under the new insolvency and bankruptcy court is underway.
Business and Financials
The no-frills carrier will use the proceeds from the IPO for debt repayment, repayment of dues to Indian Oil Corporation, paying lessors and future aircraft maintenance. The Wadia group currently holds a 100 per cent stake in the airline.
Currently, the airline has a fleet of 55 aircraft- 46 of them are A320Neo, and the rest are A320Ceo. GoAir is betting on the A320Neo with an order book of 98 A320Neo and expects to take delivery of 36 additional A320Neo by FY24.
From payments to aircraft leasing firms to fuel expenses, close to 70% of an airline’s expenses are dollar-denominated. So for domestic airlines, a depreciating rupee can cost them dearly. Fuel is a major part of an airline’s expense, and fuel expenses have accounted for nearly a third of GoAir’s expenses, while aircraft repairs & maintenance and airport-related expenses make up around 20%.
Though passenger revenue is their largest source of revenue, airlines have increasingly relied on ancillary revenue streams as they provide higher margins. Ancillary revenue stream includes revenue from seat selection, meals, cargo service, online merchandise, cancellation fees etc.
The company’s financials have been prepared by four separate auditors over FY18 to 9MFY21, meaning that it has changed its auditors every year. The company has a debt of Rs 2,956 crore (~ US$ 404 million).
GoAir’s losses have widened dramatically between FY18 and FY20, signifying that the expenses have grown at a faster rate than incomes, leading to a negative net worth of Rs 1,962 crore (~ US$ 268 million). It is also important to note that as of 9M FY21, the company’s cash balance is abysmally low at just Rs 11.6 crore (~ US$ 1.59 million).
Conclusion
GoAir’s IPO seems to be primarily motivated by the need to reduce debt. The airline is struggling on multiple fronts- maintaining market share, being profitable, disputes with promoters over brand rights, frequent auditor changes etc. The Indian aviation market has also been notoriously difficult to crack due to its competitiveness and cost structure depending on uncontrollable external factors. Quick recovery in air travel demand seems to be less likely as pent-up leisure demand and increased number of vaccinations haven’t played out as expected. As consolidation in the airline industry hasn’t happened so far, the airlines are all set for a fare war to grab market share once things are back to normal. Overall the outlook is weak for GoAir and the airline industry.
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