What does the Aviation Working Group's downgrade of India mean?

A second downgrade has meant that airlines in India face the risk of paying higher charges for leasing aircraft, especially at a time when airlines in the country are staring at losses of nearly Rs7,000 crore this year. Image: Punit Paranjpe/AFP

As if the troubles weren’t enough already, India’s aviation sector has flown into more turbulence.
 
On September 25, the Aviation Working Group (AWG), a UK-based not-for-profit organisation comprising aviation manufacturers, leasing companies and financial institutions, that monitors international leasing and finance laws, downgraded India’s compliance ratings for the second time in four months.
 
The decision by the AWG follows an ongoing dispute involving the lessors of Go First after the National Company Law Appellate Tribunal (NCLAT) upheld insolvency proceedings against the airline. The initiation of insolvency proceedings has meant that the airline's assets have been placed under a moratorium, thereby refraining lessors from taking possession of over 50 aircraft of Go First.
 
“Based on action and inaction in the Go First insolvency proceedings resulting in delays on creditor rights materially beyond those committed to under the Cape Town Convention, India’s projected compliance category rating has been downgraded to ‘low’,” AWG said in a statement on September 25. India's rating has been lowered from 3.5 out of 5 to 2.
 
India’s bankruptcy law currently takes precedence over a treaty known as the Cape Town Convention treaty, which guarantees the rights of lessors to repossess leased high-value equipment such as aircraft, engines and helicopters in case of payment defaults. A Cape Town Convention Bill is currently in the works by the Indian government to avoid any conflict with domestic laws, particularly the Insolvency and Bankruptcy Code (IBC), 2016.

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“AWG notes therein that a further positive change to this rating and scoring requires the adoption and implementation of express primacy legislation, which clearly overrides conflicting provisions in the Indian Bankruptcy and Insolvency Code,” AWG said in the statement.
 
A second downgrade has meant that airlines in India face the risk of paying higher charges for leasing aircraft, especially at a time when airlines in the country are staring at losses of nearly Rs7,000 crore this year. “This is a matter of grave concern,” Vinamra Longani, a Delhi-based aviation expert tells Forbes India. “Given no implementing legislation has been passed in India regarding the Cape Town convention, India’s insolvency laws take precedence. Each time there is a downgrade, it draws attention from lessors and financiers of aircraft who are key to the success of the Indian aviation story.”
 
While that could affect those such as Akasa and SpiceJet, relatively smaller airlines in one of the world’s fastest-growing aviation markets, the likes of Air India and IndiGo may not be hit very hard. “There will, however, not be a dearth of lessors wanting to place aircraft to well-run and well-capitalised airlines,” adds Longani. “It’s the smaller airlines that are looking to grow, and in need of financing for aircraft, that may be affected. The cost of credit could go up for them.”

Also read: Can anything stop IndiGo?
 
India’s aviation sector is currently moving into something of a duopoly with IndiGo having a market share of 63.3 percent and Air India Group having another 25.7 percent. Both airlines have placed orders for nearly 1,000 aircraft this year, from both Boeing and Airbus.
 
Mumbai-based Go First had filed for bankruptcy after being forced to ground its aircraft over faulty engines made by American engine manufacturer Pratt & Whitney. The GTF engines developed by Pratt & Whitney were found to have problems with fan blades, an oil seal and the combustion chamber lining, leaving the airline with only 50 percent of its fleet to fly with, costing it $1.3 billion in lost revenues.