IPO Alert: Will GoAir Soar or Crash-land?
In the game of airlines, you either fly, or you die. ✈
It takes a lion's heart to be in the aviation industry.
Richard Branson, the founder of Virgin Atlantic Airways, once said, “If you want to be a millionaire, start with a billion dollars and launch a new airline.” After that, he tragically lost 200 million pounds to save the airline from the covid crisis.
Recently, even Warren Buffett exited the airlines sector at a loss. According to him, the pandemic may have fundamentally changed the business (maybe Zoom had to do something with it?).
Closer home, in the past 22 years, the fate of 13 airlines have crash landed.
Only 6 carriers command the skies for now.
Well, even their condition is not good. And, the pandemic just came as the final blow. Even before the pandemic, all but Indigo Airlines were in huge losses. Even the Indian government has not been able to make profits out of Air India and is looking to sell 100% stakes in it (how and to whom, if at all, is a story for another day).
And now, GoAir is at the brink of going bust. In one final attempt, it is coming out with an IPO to start its journey afresh.
It’s planning to raise Rs. 36,000 million (or Rs. 3,600 crores) and use ~70% of the proceeds for:
Well...In simple words, to repay its dues and debts!
The airline is pushed to the wall. In the last one month alone, its promoter group has infused fresh capital of Rs. 5,460 million (Rs. 546 crores). And, the bankers have refused to extend more loans.
Look at how it fared against its competitors:
Note: EPS stands for Earnings Per Share, i.e the amount of profits made by the owner of one share. It's negative (losses) for all airlines. But for GoAir in particular, the losses are super high.
Yeah. Pretty Bad. Even the auditors expressed material (kaafi heavy) uncertainty of whether the company can operate beyond a year (in accounting lingo this is called ‘Going Concern’ - whether the company will live on and on or not).
In order to stay in the game, and show some hope to its existing investors, the company has done the following:
Rebranding: The company has rebranded itself as GoFirst, the first ‘ultra low cost carrier’ of India. Their target customers, now, are young Indians and MSME businesses.
Move from family owned to a corporate structure: Jeh Wadia, the promoter of the company has stepped down from his MD position. He has been closely monitoring every decision of the company since its inception. But, the company has had 6 CEOs in the last 15 years. Feels like no one wants to stick with GoAir, no?
And so, his stepping down from the position seems like the right move. But, that’s not all. They have bagged a big name to lead the company. Someone who has already achieved what GoAir has set its eyes on.
Ben Baldanza, the former CEO of Spirit Airlines, who has created the first ever ‘Ulta low cost carrier’ of the United States, made it profitable and took it to a successful IPO.
Give hopes of a brighter future: GoAir’s domestic traffic growth rate in the last two years is best among the lot.
What’s even more promising is the growth of India’s aviation sector. At a CAGR of 12.1% in the last 4 years, India is the fastest growing aviation market in the world. It had also become the third largest market in 2019 behind the USA and China.
And the fact that the company is backed by the Wadia’s. The same promoters that bring you Britannia.
Well, they are also hopeful that the market is in a “bull” phase and retail investors are putting their money in whatever comes its way. GoAir, coming from the same label as Britannia, could be an exception and take advantage of the tide.
That’s about GoAir. But, why is the industry cursed to losses and bankruptcy?
Because of ultra high fixed costs (something that they have to pay whether they earn money or not).You don’t get airlines for cheap. You don’t get fuel for cheap. You don’t get pilots for cheap. But, the people they sell tickets to look for affordability, more than anything. Add to that, the crippling regulations of DGCA (ask Mallya about it).
Even after all this trouble, we have some stalwarts who dream of putting the common man on the plane. If people were to stop investing in the industry because of fear of losing it all, we wouldn't see any low cost aircrafts flying! Do we want that? Imagine dreaming of going to Mars, when we cannot make flying on our own planet a profitable affair.
Something needs to happen to revolutionize the aviation sector. And, that something needs to happen now!
Disclaimers and Gyaan:
The information shared in this document is only for the purpose of educating investors and should not be considered as investment advice.
Investing is a risky game, especially if you don’t know what you are doing.
Don’t take anyone’s word when it comes to investing, unless they are SEBI registered / authorised financial advisors.
Do your own research (and please go beyond the first page of Google Search).
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