India Ratings cuts GoAir rating to ‘Ind BBB+’ on rising debt, sliding operating performance

Rating agency India Ratings has downgraded GoAir to ‘IND BBB+’ from ‘IND A-’ over mounting debt levels and lower operating performance for FY20. The rating agency, in its note, has also warned that “GoAir would witness sharp deterioration in its operating performance in FY21.”

India Ratings & Research said that GoAir’s expenses are extremely high. This, along with the rupee depreciation, has impacted GoAir’s year-on-year (y-o-y) growth. For FY21, because of the ongoing pandemic, GoAir has also had to borrow large sums to keep the airline a going concern.

India Ratings believes credit metrics will likely witness substantial deterioration in FY21 on the back of a substantial decline in profitability and increase in overall debt levels.

“GoAir’s overall debt increased to ₹18,91.83 crore as on June 30, 2020, on account of an increase in the short-term borrowings to fund the overall business requirements. The overall debt includes short-term borrowings from group companies in the form of ICDs,” the rating agency said. This is 6 per cent higher than the previous year.

The downgrade reflects the decline in Go Air’s operating performance in FY20 and the likelihood of further deterioration in the same in FY21, along with a weakening of the liquidity profile following the Covid-19 outbreak and consequent lockdown.

The pandemic has had a significant impact on the aviation sector, with business operations having been completely suspended for about two months across both domestic and international routes from March 25, 2020. While the Government of India allowed resumption of operations across domestic routes from May 25, 2020, airline operations across the international routes are yet to be resumed.

The loss of passenger traffic due to suspension of operations and the likely calibrated increase in passenger traffic over the near term would impact GoAir’s revenue profile. Additionally, given the high fixed cost structure of the company, and with its major costs being denominated in dollar, rupee depreciation is likely to weigh on the overall costs of the company.

GoAir’s main fixed costs include aircraft lease rentals and employee costs, amongst others. While the company has initiated cost-rationalisation measures in the form of sending employees on leave without pay and cutting down on various other discretionary expenses, these initiatives are unlikely to offer any material support to the profitability level.

As a cost-cutting measure, Wadia Group-owned GoAir has asked several of its employees to go on a leave without pay. It has also resorted to salary cuts and lay-offs to try and keep its working capital in check.

However, since the airline industry is the most impacted because of the Covid-19 pandemic, GoAir too is facing headwinds.

GoAir’s cash and bank balances for the first quarter of FY21 was ₹72.55 crore which, as on March 31, 2020, was ₹1,40.97 crore. Clearly, in liquidity too, GoAir has been facing a crunch.

While the average working utilisation of sanctioned fund-based limits stood at 55 per cent during the 12 months ended June 2020, the same increased significantly to about 89 per cent during the March-June 2020, India Ratings explained.

Given the loss of revenue during April-May 2020 and the likely impact of lower passenger traffic in the near term amid the fixed cost-heavy structure, India Ratings said, it “believes the liquidity needs would remain significantly high. The above-mentioned cost-rationalisation measures, negotiation of lease rentals, etc are unlikely to materially support the liquidity profile.”

Among the Indian carriers operating across international destinations, the company held a market share of 4.2 per cent in FY20 (FY19: 0.5 per cent). The company operated at a passenger load factor (PLF) of 89.1 per cent during FY20 (FY19: 88.4 per cent) across the domestic operations, while it operated at a PLF of 75.4 per cent (62.6 per cent) across international operations.

Operational since 2005, GoAir is a no-frills airline with focus on domestic operations. The company commenced international operations in October 2018 and flies to eight destinations. It has a single aircraft fleet (A320 family) and has been aggressively adding A320NEO aircraft to it.

In India, tax on ATF is a major concern for airlines. At GoAir, 35 per cent of its revenues are set aside to meet fuel costs. This has resulted in the funds crunch.

Over FY13-FY20, the promoters (Wadia Group) have provided financial support to GoAir by way of inter-corporate deposits (ICDs) and rights issue as and when required, India Ratings said.

“As on March 31, 2020, the company had outstanding ICDs of ₹250 crore, received from group companies. The same increased to ₹290 crore as on June 30, 2020. Additionally, the promoters have provided about 95 acres of land as security with various banks to facilitate banking tie-ups for GoAir,” it said.

The promoters play an active role in the airline’s operations, with day-to-day interactions with GoAir’s management on matters related to financial and operational performance. “India Ratings has received confirmation that the airline business is one of the key growth areas for the group, and hence, is strategically important. Thus, India Ratings believes that GoAir will continue to receive need-based financial support from the group, and the agency has factored in the same for GoAir’s rating.”