Why Gofirst Bankruptcy is a GENIUS business strategy? | Business Case Study ​⁠

Summary

Go First Airlines filed for bankruptcy due to severe financial troubles, including mounting debt and operational disruptions from faulty engines supplied by Pratt & Whitney. However, bankruptcy isn't seen as the end but a strategic move, allowing the airline to restructure its debts, defer payments, and negotiate with creditors. The airline aims to leverage the 270-day grace period to secure new loans, continue operations, and potentially win a lawsuit against Pratt & Whitney for compensation. This approach, which focuses on debt restructuring and operational continuity, offers Go First a chance to recover and return to profitability.

Takeaways

• 😀 GoFirst airline has filed for bankruptcy due to severe financial issues, including debts exceeding $800 million and faulty engines from Pratt and Whitney.
• 😀 The airline's bankruptcy could be a strategic business move, not necessarily the end for the company, as it seeks to restructure and return to profitability.
• 😀 Bankruptcy in aviation can be used to delay payments, restructure debt, and negotiate with creditors for a better chance at survival and revival.
• 😀 GoFirst grounded 50% of its fleet by early 2023 due to ongoing issues with its Pratt and Whitney engines, which contributed to its financial collapse.
• 😀 Aviation companies face volatile costs, especially for fuel, which can fluctuate based on geopolitical events like the Russia-Ukraine war, severely affecting profitability.
• 😀 The airline industry operates on very thin profit margins, with the global aviation industry's net profit margin in 2023 forecasted to be just 0.6%.
• 😀 GoFirst, previously profitable in 2018-2019, saw a sharp decline in financial health due to the pandemic and rising fuel costs.
• 😀 Bankruptcy offers two potential paths for a company: liquidation, where assets are sold off, or resolution, which focuses on restructuring debt and saving the company.
• 😀 During bankruptcy resolution, a company can delay payments for up to 270 days, which helps it stabilize and protect critical assets like aircraft from repossession.
• 😀 Debt restructuring can lead to significant savings, as creditors may agree to cut the debt and extend the repayment term, making it more manageable for the airline.
• 😀 GoFirst's bankruptcy strategy could allow it to use new loans to cover essential expenses, retain staff, and potentially win compensation from Pratt and Whitney for engine failures.

Q & A

Why did Go First file for bankruptcy?

Go First filed for bankruptcy due to severe financial issues, primarily caused by a combination of faulty engines from Pratt & Whitney, mounting debt of over $800 million, and external factors like the pandemic and the Russia-Ukraine war that affected its operations.

How did Pratt & Whitney's engines contribute to Go First's financial crisis?

Pratt & Whitney supplied faulty engines that caused a significant portion of Go First's fleet to be grounded. As a result, the airline's ability to operate flights was severely impacted, leading to operational losses and contributing to its bankruptcy.

How does bankruptcy help Go First despite its financial troubles?

Bankruptcy allows Go First to temporarily defer payments, restructure its debt, secure fresh loans, and protect its assets from being seized. This process gives the airline time to stabilize, negotiate with creditors, and continue operations.

What are the two main approaches to bankruptcy that airlines can take?

The two main approaches are liquidation and resolution. In liquidation, the company's assets are sold off to pay creditors, and the company ceases to exist. In resolution, the company continues to operate while negotiating its debts and restructuring its finances.

What is the key advantage of opting for resolution over liquidation for Go First?

The key advantage of resolution is that Go First can continue operating, restructure its debt, and protect its assets, such as its aircraft, from being repossessed. This gives the airline a chance to recover rather than being dissolved in liquidation.

How long can Go First defer payments after filing for bankruptcy?

Go First can defer payments for up to six months, with the possibility of extending this period to 270 days. During this time, the airline is protected from legal actions and creditors cannot seize its assets.

What is debt restructuring, and how could it benefit Go First?

Debt restructuring allows Go First to renegotiate the terms of its debt with creditors, such as reducing the total debt amount, lowering interest rates, or extending repayment periods. This can significantly reduce the airline's financial burden and make its debt more manageable.

What role does the Indian bankruptcy code play in Go First's recovery?

The Indian bankruptcy code allows Go First to access protections such as deferring loan payments and renegotiating debt, while continuing its operations. It also enables the airline to secure fresh loans and manage its finances while it works on recovery.

What could Go First achieve if it wins its legal case against Pratt & Whitney?

If Go First wins its legal case against Pratt & Whitney, it could receive up to $1.1 billion in compensation, which would help pay off its debts, recover losses, and provide financial relief, aiding the airline's recovery.

How does Go First's bankruptcy help it avoid liquidation and asset sales?

By opting for bankruptcy resolution, Go First can avoid liquidation and the forced sale of its assets. The airline can negotiate with creditors to restructure its debt and secure new loans, all while continuing to operate and protect its fleet.