Purple patch punctured? The good, bad and ugly of Go First Airlines bankruptcy

NEW DELHI: Just when the airline industry was going through a purple patch with rising demand and lowering fuel prices, budget carrier Go First surprised both investors and flyers by filing for bankruptcy.

For flyers, it could mean higher airfares as a result of the decrease in competition. But for investors in other airline stocks, it could turn out to be a blessing in disguise.

Go First, which had 6.9% market share in March 2023, has cancelled flights scheduled for May 3 to May 5 due to fund crunch but without clearing the confusion on future flight schedules.

As a result, shares of InterGlobe Aviation, which runs IndiGo airline, zoomed up to 8% to day's high of Rs 2,181.40. SpiceJet stock rallied 5.6% to Rs 33.25 and Global Vectra was up 5% at Rs 60.85.

Even shares of grounded airline Jet Airways, which had declared bankruptcy in 2019, were locked in the 5% upper circuit at Rs 60.59.

"While the revival path isn’t clear for Go First, the market disruption caused by the shutdown of operation is likely to reduce competitive intensity, and could benefit airfares especially amid the recent strong traffic trends seen in the Indian aviation sector," said Jefferies analyst Prateek Kumar.

Further, if the suspension is prolonged, other airlines that are adding capacity would look to avail the slots vacated by Go First (especially in the much constrained key metros) and grab onto the market share, he pointed out.

The global brokerage said as strong demand trends are supporting airfares and fuel prices are also mildly turning from a headwind to a tailwind, even the weakest players would sail and benefit from industry tailwinds.

Airlines stocks, which are typically not known as wealth creators in the long term, have been getting a lot of investor attention.

Value investor Vijay Kedia, who recently picked up a stake in an airline stock, had said he was impressed by the rising traffic and demand potential. "It is a contra bet against their past performance. I am betting against the perception that airlines can't make money," Kedia had told ETMarkets earlier in March.

Aviation analysts see the potential exit of Go First as margin positive for sector consolidation as it would mean one less player in the market.

"While the industry is certainly attractive, it has become very competitive. Some of the financial aspects of running an airline are quite tough to overcome, particularly the exchange rate and fuel cost. Unless you have a bit of consolidation once again happening, you will not see the industry players remaining healthy," said independent market expert Mahantesh Sabarad.

Amid the Go First crisis, SpiceJet said it will be mobilising Rs 400 crore credit taken from the government to take 25 grounded aircraft to the skies again.

On the other hand, investors fear Go First Airlines' bankruptcy could derail the rally in bank stocks due to exposure in IDBI Bank, Central Bank of India, Axis Bank and Bank of Baroda.

Central Bank shares were trading 4% lower, Bank of Baroda 2.5% while Axis Bank lost 1%.

Jefferies, however, estimates that bankruptcy is a low event impact for Indian banks as loans are estimated to be around just 2 basis points of sector loans.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)