What GoAir wants to achieve with name change, public offering

Go First is positioned to get ahead of its peer group by operating with the ULCC model, the airline said

What GoAir wants to achieve with name change, public offering
A GoAir Airbus A320 Neo at Toulouse. Image courtesy: Wikimedia Commons/Mike Burdett

Struggling budget carrier GoAir is going full throttle to effect an image makeover. After announcing plans to become an ultra-low-cost carrier (ULCC) and putting Ben Baldanza of Spirit Airlines fame in charge of the project, the airline is now pushing ahead to go public. And to top it all, it has rebranded itself as Go First. 

The carefully selected new name, unlike the older one, gives a clear-cut message: it is the airline that flyers would 'go first' to. The GoAir website echoes this sentiment. "The airline where you come first," the airline proclaims on its website. "India's ultra-low-cost airline that puts you first. We want to make sure high fares don't meddle with any of your travel plans. Hop on aboard and enjoy the Go First way of flying," it adds. 

Indeed, along with being portrayed as the flyers' first choice, the airline is being also painted as one for which customer satisfaction comes first. A deft marketing strategy to look different in the highly competitive Indian aviation market. It is also an out-of-the-box effort to wriggle out of the mess created by Covid-induced downturn in demand, and the allegations of inefficiency, insensitivity, the exit of top executives and safety issues that the airline has had to deal with.

Go First arrives. Source: GoAir website 

The airline, which had taken off in 2005, said that at the heart of this rebranding is the commitment towards the ULCC model, PTI reported. With the youngest average fleet among Indian low-cost carriers (LCCs), the majority of which are Airbus A320 Neos, high-density seating, single aircraft type across its fleet, Go First is positioned to get ahead of its peer group by operating with the ULCC model, the airline said in a release. It is this "competitive advantage" that allows the airline to offer its customers a combination of "ultra-competitive", it added. 

CEO Kaushik Khona pointed out that the airline had stayed resilient during really tough times over the past 15 months and added, "Even as the times continue to be extraordinary, Go First sees opportunities ahead." 

IPO: A lot expected 

One way of utilising those opportunities would be in the form of raising capital through an initial public offering (IPO), which has never fructified despite being promised many times. The company is planning to offer shares worth Rs 3,600 crore and is banking a lot on the success of the IPO considering that government bailout is nowhere in sight. 

Also read -- GoAir to become ultra low cost carrier: What it means for passengers

The airline had meagre revenue in the first 17 to 24 days of March 2020. It had asked the government and the banking system for financial support and had implemented strict cost-cutting measures including salary cuts and leave without pay.

India Ratings downgraded GoAir's debt, Business Standard reported in July last year. The airline's overall debt had increased six per cent sequentially to Rs 1,891 crore in the June quarter. Add to that GoAir's dues of Rs 33.13 crore to the Airports Authority of India (AAI) at the start of this year.

A GoAir Airbus A320 at Toulouse-Blagnac Airport (LFBO) in France. Image courtesy: Wikimedia Commons/Laurent Errera  

The airline was put on cash and carry mode by the AAI on August 11. Under the cash and carry mode, the airline had to make an instant payment on a per-flight basis to avail of parking and landing facilities at AAI-run airports. GoAir is believed to have raised Rs 30 crore working capital in June, according to Hindu Businessline.

Bleeding revenue, high fixed costs

The Covid-19 pandemic severely dented the Indian aviation industry since it broke out last year. Then, just when green shoots had started to become visible, the second and more debilitating Covid wave emerged. Repeated lockdowns, travel bans and varying grades of restrictions imposed by different states have added to the woes of the industry, so much so that the survival of many mid-sized airlines have come under threat. 

Lack of passengers, especially during the second Covid-19 wave, has wreaked havoc in the aviation industry. In two months, from March 19 to May 18 this year, footfall at airports has fallen from nearly five lakh to a meagre 76,125. Aircraft movement has plummeted from 4,663 to 1,251 during this period. 

The airline's cash reserves are running thin. It keeps on defaulting on aircraft lease payments and in the first nine months of the financial year 2020-21, the company has recorded a negative net worth of Rs 1,961.5 crore, with current liabilities exceeding current assets by Rs 4,362.58 crore. This has posed a serious threat to its going concern, the company said. 

GoAir's passenger departures in December 2020 were just 63% of those a year ago and Available Seat Miles stood at 73% of the pre-Covid levels for the quarter ended March 2020. Consequently, the company reported a net loss of Rs 470.6 crore in the nine months ended December 2020. 

GoAir has introduced graded pay cuts for management staff that are working and not on leave without pay and held back salary restructuring for its pilots to cut expenses. From April-June 2020, nearly 4,000 employees were put on furlough.  

Out of the money that GoAir plans to raise from the primary market, Rs 254.93 crore is proposed to be used to clear outstanding dues of oil marketing companies against fuel supplies, according to GoAir's Draft Red Herring Prospectus (DRHP), The Economic Times reported. As of April 19, 2021, GoAir owed Rs 257.21 crore to Indian Oil Corporation. The airline buys almost all its Aviation Turbine Fuel (ATF) from Indian Oil. 

Also read -- GoAir's woes: After scary planes and refund issues, now flyers carried in cargo aircraft?

The cost of GoAir's ATF has fluctuated greatly in recent times, The Economic Times pointed out. It accounted for 33.3% of the airline's total expenses in FY18, 33.1% in FY19, 27.3% in FY20 and 14.8% in the first nine months of FY21. "While our costs relating to fuel, manpower and various airport operating expenses were reduced during this period (fiscal 2021), we continued to incur significant fixed costs. As a result, our reduced costs did not fully offset the contraction in our revenue due to the Covid-19 pandemic," the airline stated.        

GoAir, however, has been able to raise some funds from other sources too, according to a Moneycontrol report. During fiscal 2020, it raised Rs 97 crore as equity from its promoter, the Wadia group, apart from $50 million from Go Singapore. In fiscal 2021, it got a fund-based (including non-fund-based sub-limits) line of credit of Rs 500 crore from ICICI Bank and Rs 342 crore from Deutsche Bank. It also raised Rs 546 crore as equity from Baymanco Investments Limited, a member of its promoter group.  

According to a Live Mint article, the GoAir IPO would tell us how much a beleaguered airline is worth. The airline had raised Rs 546 crore from its promoters at a post-money equity valuation of merely Rs 2,600 crore. An IPO at similar valuations would dilute promoter stake to around 40%. According to an analyst quoted by the website, GoAir is likely to look at a dilution of around 35%, which means a post-money equity valuation of a little over Rs 10,000 crore. 

A GoAir Airbus A320. Image courtesy: Wikimedia Commons/Sinkrate

The GoAir IPO may not have a smooth flight, according to the article. Market leader IndiGo announcing its intention to raise Rs 3,000 crore through a Qualified Institutional Placement (QIP) at around the same time could reduce appetite for a large issuance from another airline, and frequent changes at the top may scare investors. 

ULCC as solution to financial mess

The ULCC model could help GoAir tide over its financial troubles. ULCC takes the LCC model further. Extremely cheap rates are certainly a big attraction. Apart from that, every single inch of space is to be used for advertising. Therefore, luggage bins, foldable seat back trays, paper cups, food packaging, and even the flight crew uniform carry advertisements. Every unbundled service comes with a charge. Similar to an LCC, a ULCC also offers a bare-bones in-flight service. But there is more to ULCCs.

According to aviation expert Michael Boyd's article in Forbes, ULCCs are the wildcatters of the airline industry. In petroleum business jargon, a wildcatter refers to an entity that goes to drill oil where mainline companies have no interest. The wildcatters take the plunge based on their own research. Sometimes they are hugely successful, at other times, their ventures end up in massive failures, but yet they are willing to take the risk. ULCCs, similarly, chase markets and consumers that the traditional carriers tend to ignore. But often, those neglected markets contain a wealth of opportunity. 

ULCCs are not air service providers per se, in terms of simply connecting places based on known and expected consumer demand. ULCCs look to unravel latent discretionary dollars that can be diverted to air travel instead of being deposited in the bank or spent on let's say a new kitchen. ULCCs encourage consumers to make impulse purchases drawn by super-low fares and high value-to-cost equation for the consumers.

GoAir's ULCC plans, however, would not be easy to realise considering the devastation created by the pandemic, and the resultant high fixed costs and low-profit margins of the airline. Also, people may not be willing to make impulse purchases in the aviation and travel sectors for quite a few years now.  

GoAir had a cumulative domestic market share of 7.8% in the first three months of 2021, according to Directorate General of Civil Aviation (DGCA) data. In April, its share rose to 9.6% on the back of carrying 5.47 lakh passengers. 

GoAir's ULCC captain Baldanza sounded optimistic about the airline's prospects. He said that India is a fast-developing aviation market and the consumers here are highly value-conscious and quite demanding as far the flying experience is concerned. 

"The combinations of attractive airfares, a squeaky-clean flying experience, well-sanitised flights and on-time performance is what Go First is designed to deliver. And, that is exactly at the core of our brand and service," Baldanza added.

"As young India changes the way it travels, seeking speed, convenience, and yet demanding value, Go First is determined to be part of the socio-economic momentum to chart its next phase of growth," GoAir stated.

(Cover image courtesy: Wikimedia Commons/Mike Burdett)