Airline gains bankruptcy protection

Go Airlines (India) was granted bankruptcy protection on Wednesday, bolstering the country’s fourth-largest carrier chances of getting back on its feet, but lessors are expected to mount legal challenges to repossess planes.

The low-cost carrier, recently rebranded as Go First, was plunged into financial crisis this year, sparked by what it called “faulty” Pratt & Whitney engines that grounded about half its 54 Airbus A320neos. The U.S. engine maker, part of Raytheon Technologies, in a statement said Go First’s allegations were “without merit”.

In granting bankruptcy protection, the National Company Law Tribunal in New Delhi ordered a moratorium on Go First’s assets and leases. It also appointed Abhilash Lal of Alvarez & Marsal as the interim resolution professional to take over management with immediate effect.

The resolution professional “shall ensure that retrenchment of employees is not resorted to as a matter of course,” the tribunal’s 41-page order said. Go First has staff of around 7,000.

The bankruptcy move adds to headaches for lessors, which have filed requests with India’s aviation regulator for the return of about 40 Go First planes after rental payments were missed.

India made it easier for lessors to take back planes if airlines default on payments after joining in 2008 an international treaty known as the Cape Town Convention. But bankruptcy protection supersede lessors’ repossession requests.

“The next step for lessors is to approach the appellate tribunal … It will be a prolonged legal battle” said Ajay Kumar, managing partner at India’s KLA Legal which represents Go First lessors including Jackson Square Aviation and Bank of China Aviation.

He added that Go First’s woes will lead to higher lease premiums for Indian airlines.

That could prove to be a pain point for the sector at a time when Indian Prime Minister Narendra Modi is touting the country’s emergence as an aviation powerhouse, with bigger rivals IndiGo (INGL.NS) and Tata Group’s Air India expanding aggressively.

Go First’s lessors also include SMBC Aviation Capital and CDB Aviation’s GY Aviation Leasing. They did not immediately respond to a request for comment.

Its voluntary seeking of bankruptcy protection to renegotiate contracts and debt marks a first for an Indian airline, and Chief Executive Officer Kaushik Khona, who was present as the order was read, hailed the tribunal’s decision as “historic”.

Go First, which had a 7% share of the world’s third-largest aviation market in March, has currently suspended all flights due to “operational reasons” and is not taking new bookings.

Reviving the airline – one of the hardest hit worldwide by problems with Pratt & Whitney engines – will not be easy, said Abhirup Dasgupta, a partner at HSA Advocates who specialises in insolvency law but is not involved in Go First’s proceedings.

It will require fresh funds and lenders could be wary of investing, he said.

Go First bankruptcy filing lists Central Bank of India, Bank of Baroda, IDBI Bank, and Deutsche Bank among its financial creditors which are owed 65.21 billion rupees ($798 million).

The airline’s total liabilities to all creditors stands at 114.63 billion Indian rupees, including dues to banks, financial institutions, vendors and aircraft lessors.

It’s also not clear when the dispute with Pratt & Whitney will be resolved. Go First won an arbitration case in Singapore that ordered the U.S. firm to dispatch spare engines to the airline and has since approached a Delaware Court to request that it be enforced.

Pratt & Whitney plans to oppose the move, a Delaware court filing showed on Wednesday.

The Indian tribunal said the new resolution professional will take “all necessary steps including the execution of the arbitral award”.

In its statement, Pratt & Whitney said it will vigorously defend itself against Go’s claims and was pursuing its own legal recourse.