Carry On Airline Limited (COAL)¹ is a leading low-cost airline in India, with a market share of nearly 45% in domestic air travel. The company is…

Carry On Airline Limited (COAL)¹ is a leading low-cost airline in India, with a market share of nearly 45% in domestic air travel. The company is among the top 500 listed companies on both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The industry is highly competitive, with airlines frequently engaging in price wars. Consequently, despite its dominant market position, COAL operates as a price taker, with limited ability to influence ticket prices. The company operates nearly 1,800 flights daily, connecting over 310 destinations across India through a fleet of 400 aircraft. COAL follows a hub-and-spoke operating model, wherein flights from multiple destinations converge at designated hub airports before passengers transfer to connecting flights for their final destinations. This model enables extensive network connectivity and efficient aircraft utilisation. However, it also creates significant operational interdependence, as delays or cancellations on one route can cascade across multiple connecting flights, disrupting the entire network. The company's tagline, "Punctuality, Prioritized, Price Downsized," reflects its strategic focus on providing low-cost yet punctual air travel. To support this strategy, COAL sought to maximise aircraft utilisation by minimising turnaround time between flights and maintaining a lean workforce. Crew members and pilots were rostered to maximise productive flying hours, enabling aircraft to cover greater distances and generate higher revenue while keeping operating costs low. Decision-making at COAL was highly centralised. In addition to strategic decisions, most operational and tactical decisions were taken at the company's headquarters in Mumbai. Regional managers were primarily responsible for implementing directives issued by headquarters, with limited autonomy to respond to local operational issues. Although operational feedback was collected from regional offices, it had little influence on managerial decision-making. The airline industry is subject to extensive regulatory oversight by the Directorate General of Civil Aviation (DGCA). For the preceding two years, the DGCA had recommended that airlines provide crew members and pilots with a minimum rest period of eight hours between flights to reduce fatigue and improve operational safety. The regulator also advised airlines to recruit additional crew and pilots to facilitate compliance. Although these recommendations were not initially mandatory, the government repeatedly indicated its intention to make them legally enforceable. Despite these developments, COAL continued to roster its crew with only five hours of rest between flight duties. Management believed that compliance with the proposed norms would either require reducing flight operations or increasing staffing levels, both of which would adversely affect profitability. Consequently, the company prioritised competitive ticket pricing, punctual operations, and shareholder returns over workforce expansion and operational resilience. This cost-focused approach extended beyond rostering practices. COAL maintained tight operational budgets by limiting employee incentives, restricting training expenditure, freezing recruitment, and not compensating overtime. Training and employee development received minimal attention, with management believing that employees could adequately learn through on-the-job experience. These practices resulted in high employee turnover, as skilled crew members and pilots increasingly migrated to competing airlines offering better compensation, career development, and working conditions. Following several aviation safety incidents across the industry, the government made the DGCA's recommended crew-rest guidelines mandatory with immediate effect in April 2026. While most competing airlines had already taken steps to comply, COAL had failed to build the necessary workforce capacity. As a result, the company faced an acute shortage of crew members and pilots and was forced to cancel a large number of scheduled flights at short notice. Given the highly interconnected nature of COAL's hub-and-spoke network, these cancellations rapidly triggered a domino effect across the airline's operations, resulting in the cancellation of nearly 85% of its flights. The disruption extended beyond COAL, severely affecting domestic aviation across the country for more than a week. Thousands of passengers were stranded, leading to missed business engagements, personal commitments, and widespread public dissatisfaction. The Government eventually intervened to restore normalcy. Apart from significant reputational damage, COAL was required to refund approximately ₹500 crore in ticket sales and was further penalised ₹100 crore by the DGCA for failing to implement the prescribed crew-rest guidelines and for deficiencies in operational control and delegation. In response to the crisis, COAL appointed Thomson and Thomson Consultants (TTC), a Singapore-based management consulting firm, to redesign its organisational and operational framework. The engagement was led by Mr. Sung Wong, who proposed evaluating the organisation using the McKinsey 7S Framework to identify misalignment among strategy, structure, systems, skills, staff, style, and shared values that had collectively contributed to the operational failure. The prolonged disruption also created significant financial stress and liquidity constraints. Acting on TTC's recommendations, COAL entered into a sale-and-leaseback arrangement in May 2026 with Zeelong Aircraft Leasing Limited (ZEAL) to strengthen its cash position. Under the arrangement, COAL sold 10 aircraft to ZEAL for ₹ 100 crore each. Immediately prior to the transaction, each aircraft had a carrying amount of ₹ 60 crore, while its fair value was ₹75 crore. Simultaneously, COAL entered into a lease agreement granting it the right to use each aircraft for 9 years, with annual lease rentals of ₹ 12 crore, payable at the end of each year. The transfer of the aircraft satisfied the requirements for recognising a sale under Ind AS 115, Revenue from Contracts with Customers. Initial direct costs, if any, may be ignored. The implicit rate in the lease is 10% per annum, which is readily determinable by COAL. ZEAL classifies the lease as an operating lease. Meanwhile, the Securities and Exchange Board of India (SEBI) initiated an investigation into the governance practices of COAL (refer Annexure 1). The investigation revealed that the Board had been aware for nearly two years that the company's aggressive rostering policy and lean staffing model exposed it to significant operational risks. However, these material risks were neither disclosed to the stock exchanges nor reported to SEBI through the company's periodic regulatory filings. During F.Y. 2025–26, the Risk Management Committee met only twice, with an interval of 180 days between the two meetings. However, it failed to discuss these significant operational risks in either meeting. Nor did it seek any information from employees or obtain any legal or professional advice on the matter. The Committee comprised six members, five of whom were members of the Board of Directors. Notably, none of the Board members serving on the Committee were independent directors. In a separate development, Dev Patel, Assistant Manager in the Accounts Department, questioned the availability of Input Tax Credit (ITC) on aircraft used in COAL's airline operations. Referring to the provisions contained in Annexure 2, he expressed the view that ITC was not available on such aircraft. In response, his reporting manager, Sunita Jain, took the contrary position that COAL was eligible to claim ITC not only on the aircraft used for providing taxable passenger transportation services but also on related services such as insurance, repair and maintenance, as well as on the lease rentals payable under the sale-and-leaseback arrangement. Meanwhile, the audit of COAL's financial statements for the year ended 31 March 2026 was substantially completed in June 2026. During the audit, CA. Shirish Patra noted that the DGCA had made the crew-rest requirements mandatory in April 2026, following which COAL cancelled a substantial number of flights and incurred significant passenger refund obligations and a regulatory penalty. Management initially considered these events to be events arising entirely after the reporting date. However, the auditor noted that, before 31 March 2026, COAL had already been aware of the DGCA's proposed requirements for nearly two years, had continued to roster crew below the recommended rest period, and had not taken steps to strengthen its workforce. The auditor therefore considered whether the events occurring after 31 March 2026 provided evidence of conditions that existed at the reporting date and whether any adjustment to the financial statements was required. Annexure 1 Business News COAL Faces SEBI Scrutiny After Flight Operations Crisis Triggers Investor Losses Mumbai, 25th April 2026 – The unimaginable inconvenience caused to passengers, the widespread anxiety, and the inability of thousands to meet their personal and professional commitments remain fresh in public memory following the unprecedented disruption of flight operations by Carry On Airline Limited (COAL). The crisis stemmed from poor flight scheduling and inadequate crew rostering. Despite being aware for the past few years of the Directorate General of Civil Aviation's (DGCA) recommended crew-rest guidelines, COAL's management failed to take adequate steps to strengthen its workforce and ensure compliance. When the guidelines became mandatory in April 2026, the airline struggled to operate with an understaffed workforce, resulting in the cancellation of more than 85% of its scheduled flights. The operational disruption severely impacted the company's financial performance. Revenue losses, passenger refunds, and regulatory penalties significantly eroded investor confidence. COAL's share price plunged by nearly 50% at the height of the crisis, closing at ₹94 per share, compared with its recent high of ₹185 per share in March 2026. Meanwhile, the Securities and Exchange Board of India (SEBI) has initiated an inquiry to examine whether COAL complied with the disclosure requirements prescribed under the SEBI (Listing Obligations and Disclosure Requirements) Regulations (LODR). As part of the investigation, SEBI is reviewing the minutes of the Board and its committees to determine whether the management was aware of the impending operational risks well before the guidelines became mandatory. The regulator is also examining whether the company had identified the staffing shortage and operational vulnerabilities as material risks and whether such risks were appropriately disclosed to the stock exchanges or reported through the Business Responsibility and Sustainability Report (BRSR). If any lapses are established, SEBI may seek formal explanations from the company and consider appropriate regulatory action. The coming weeks are expected to be crucial as COAL's Board faces increasing scrutiny over its governance practices, risk management, and disclosure standards. The airline's reputation has already suffered significant damage, with public confidence and investor sentiment remaining severely affected in the aftermath of the crisis. Annexure 2 Dev Patel/ Assistant Manager/ Accounts From: "Dev Patel" Sent: 15th June 2026 10:00 To: "Sunita Jain" Cc: Subject: ITC eligibility for COAL under the GST Act Attachments: Dear Sunita, I am in the process of preparing the Company's GST returns and require your guidance on the eligibility of Input Tax Credit (ITC). As per the GST Act, ITC is blocked in respect of motor vehicles and other conveyances, as well as on related services such as repair and maintenance, insurance, and servicing, subject to specified exceptions. Further, we have recently entered into a sale-and-leaseback arrangement with ZEAL, under which COAL will pay an annual lease rental of ₹ 12 crore per aircraft. In my view, ITC is not available on the aircraft used in COAL's airline business. Consequently, I believe that ITC would also not be available on related services such as repair and maintenance, insurance, and servicing. Further, I am of the opinion that COAL would not be eligible to claim ITC on the lease rentals payable for the 10 aircraft covered under the sale-and-leaseback arrangement. Could you please confirm whether my understanding of the GST provisions is correct? Based on your guidance, I shall proceed with the preparation and filing of the GST returns. Regards, Dev Dev Patel Assistant Manager - Accounts