Why so competitive? Newspaper smells a rat in Vietnam’s aviation sector

Lots of investors want to establish a domestic airline, even though they know Vietnam’s aviation market is relatively small. The newspaper Lao Dong thinks it knows why.

Four airlines are flying in Vietnam’s domestic market: the national air flag carrier Vietnam Airlines; Vasco, its air charter subsidiary; Jetstar Pacific Airlines, a joint venture with Australia’s Qantas; and newly launched private carrier Indochina Airlines.  Two other private ventures have licences but have yet to fly: Vietjet Air, which expects to launch first flight in May 2010 and Mekong Air.

Strange things in the aviation market

Jetstar Pacific, the former Pacific Airlines now reborn as a budget carrier, is the upstart.  With a lot of fanfare, JP launched advertisement campaigns, opened new routes (and just as quickly abandoned some), launched in-land services, and offered super-cheap airfares. The air carrier in late 2008 reported that it was losing two million dollars a month, and had accumulated losses of 50 million dollar by August 2008.  [Other sources report that a bad guess on aviation fuel futures prices caused most of the red ink – VNNB]

Indochina Airlines’ debts to service providers had reached 30 billion dong by the end of November 2009. This has forced the air carrier to give back its only chartered aircraft to the foreign lessor and halt flights.  [IC Air reports that it has obtained new financing and is resuming operations with two aircraft on December 15 – VNNB.]

The General Director of Vietnam Airlines, Pham Ngoc Minh, said at an airlines’ meeting in late 2008 that in current [competitive] conditions, the nation’s airlines will collectively lose several hundred billion dong more by the end of the year.

It is clear that it is not easy to do business in Vietnam’s aviation sector, concludes Lao Dong.  So, the paper wonders, why is Jetstar Pacific still offering super-cheap fares and promising to beat any competitors’ price?  Why do many investors still queue to establish new airlines?

Too many players on a smallish field

Vietnam’s internal aviation market will serve nine or ten million passengers this year.  In the first nine months of 2009, Vietnam Airlines had 70 percent of the total carriage; the rest were divided among Vasco, Jetstar Pacific and Indochina Airlines.  The pieces of the cake will be even smaller when Vietjet Air and Mekong Air join the market in 2010.

Vietnam Airlines is still ‘eldest brother’ in the aviation family. It has big financial capability and a multi-functional business, is a member of ICAO (International Civil Aviation Organisation) and IATA (International Air Transport Association) and it will join the ‘Skyteam’ alliance in mid-2010.  Vietnam Airlines gets support from the State when necessary.

However, it seems that Jetstar Pacific Airlines is also a ‘big guy’ in the aviation market. Though flying with just a handful of aircraft and serving about one million passengers annually, JP has exceeded the eldest brother Vietnam Airline in some respects.  First of all, shareholders of Jetstar Pacific are heavyweights: the State Capital Investment Corporation (SCIC), which is even a ‘bigger guy’ than Vietnam Airlines, owns 70 percent, and Qantas, an Australian carrier ten times Vietnam Airlines’ size, owns the rest.  Only Jetstar Pacific can afford to sell tickets at such surprisingly low prices.

It seems, comments Lao Dong, that Jetstar Pacific aims to popularize its brand throughout Asia and collect passengers from every corner of Vietnam for Qantas, not  to make a profit. That explains why the JP managers aren’t paid according to the budget airline’s  business performance of Qantas.

The ‘feeder airline’ strategy

Lao Dong then ponders the question why so many investors are still interested in establishing more airlines despite the limited scope of the Vietnamese market.

Vietnam’s requirements on the establishment of new airlines are easy.  Airlines will be granted operating licenses to provide domestic flights if they have 200 billion dong in capital and licenses to provide international flights as well if they have 500 billion dong and meet some other requirements on management capability.

It is clear that the small Vietnamese airlines aren’t thinking of reaching out to the world market at this moment.  Indeed, very few air carriers in the world have the right to serve domestic markets in other countries.

Lao Dong thinks there is only one answer to the question. Decree No 76 (05-2007) allows foreign investors to hold an up to 49 percent stake in Vietnamese airlines.  That’s really an attractive proposition for foreign airlines that need to expand markets. The air carriers are ready to make heavy investment in other air carriers that can help gather passengers from every corner for them.

That explains why Pacific Airlines, though 300 billion dong in debt in 2004, was still valuated at  $150 million dollars when it sold a minority stake to Qantas.

In other words, concludes Lao Dong, Vietnamese airlines know that although it is really difficult to exist in the current business environment, if they have difficulty turning a profit, they can still do well – by selling a stake to foreign airlines.

VietNamNet/LD

Tags: Vietnam aviation