Aviation market reaches for the skies

Vietnam’s aviation market seems set to grow for the forseeable future with greater competition to the national flag carrier Vietnam Airlines likely to come from budget operators.

Vietnam Airlines officially opened a new air route between the northern central city of Vinh and the Laos capital of Vientiane on January 12 using ATR-72 jets on the four flights a week schedule.

The new route was the first of this year, making it the 93rd air route Vietnam Airlines is currently operating, including 29 international and 21 domestic destinations.

This year, Vietnam Airlines plans to open at least three more routes from Hanoi and Danang to Tokyo and from Hanoi to Hong Kong, the airline’s chairman Pham Viet Thanh said in a report sent to the Ministry of Transport late last year.

In addition, it will increase the frequency of flights from Ho Chi Minh City to Tokyo, Hanoi to Fukuoka and from Ho Chi Minh City to Beijing and Shanghai.

The national flag carrier will also add Danang - Can Tho service to its domestic network, cementing its position as the biggest player in Vietnam’s domestic aviation market.

The news underlined Vietnam Airlines’ confidence, despite the severe effect of the global economic recession, and points to the company’s ambition to become one of the largest airlines in Southeast Asia.

The flag carrier’s success marks huge progress from its founding back in 1956, when the government established the Vietnam Civil Aviation Department. The forerunner to Vietnam Airlines operated domestic flights with only five aircraft.

In April 1993, Vietnam Airlines was officially established as the country’s national flag carrier, opening a new chapter for the state-owned carrier.

Since the implementation of the doi moi economic reforms in 1986, Vietnam has become one of the fastest growing economies in the world, providing the context for increased business and leisure travel.

Last year, Vietnam Airlines carried 14.7 million passengers on domestic and international flights and accounted for 40 per cent of international traffic entering the country by air and 61.4 per cent of domestic air travel.

The airline’s revenue in 2013 reached VND54.1 trillion, or $2.57 billion, and although revenue was 1.9 per cent behind the annual target, profits increased 62.4 per cent, reaching VND140 billion or $6.6 million.

Vietnam Airlines chairman Thanh said the result reflected the diversification in business operations, improved efficiency and the gains made possible by a restructured workforce. Vietnam Airlines also sold 24 million Techcombank shares last year.

“We will continue to divest from non-core businesses in line with our approved restructuring plan,” said Thanh, referring to its additional divestments from the Bao Minh Insurance Corporation.

Fleet expansion

In line with the carrier’s plans to further expand its network, Vietnam Airlines has also increased its fleet.

From five planes in 1956, the airline now has 82 aircraft including modern Boeing 777s, and Airbus A321, A320s combined with smaller ATR-72s which mainly serve the domestic market.

Vietnam Airlines’ expansion plans became more ambitious when it signed a range of record breaking contracts with Boeing and Airbus from 2005 to 2008.

Vietnam Airlines purchased four Boeing 777s and put the aircraft into operation in 2009 and 2010.

The airline and the Vietnam Aircraft Leasing Company two years later signed a memorandum of understanding with Boeing for the order of 12 next generation 787-8 Dreamliners.

The first aircraft will be delivered next year, while just last October, Vietnam Airlines signed a contract to buy 40 engines from General Electric, which will be installed on its ordered Boeing 787 Dreamliners.

The airline has also ordered 10 new generation A350-900 aircraft and 20 Airbus A321 aircraft from Airbus. Thirteen of them have been delivered.

“The airline expects to operate 101 and 150 modern aircraft in 2015 and 2020, respectively, taking solid steps integrating into the global aviation industry as a leading regional carrier,” Vietnam Airlines states on its website.

Faces growing competition

Although Vietnam Airlines is currently the biggest player in Vietnam’s aviation market, it still faces competition. Several years ago, the state-owned airline accounted for over 80 per cent of domestic market. But now, the fledging low-cost carrier VietJetAir is emerging as a rival.

Vietnam Airlines revealed in a report to the Ministry of Transport that its domestic market share had reduced from 68.7 per cent in early 2013 to 61.4 per cent at the year end. In terms of the domestic and international market, its market share had declined 2.7 per cent.

“The competition in Vietnam’s aviation market is becoming fiercer. This is a challenge,” said Thanh.

The biggest challenge comes from the growth of low-cost carriers. In the domestic market, Vietnam Airline faces the challenge of VietJetAir which last year announced an ambitious plan to buy and lease 100 Airbus aircraft by 2022 to serve its network expansion. Across the Southeast Asian region as a whole, Vietnam Airlines statistics showed that low-cost carriers had grown 20 per cent within 2013 and accounted for 50 per cent of market share.

Meanwhile, the increasing expansion of foreign airlines to Vietnam is pressuring Vietnam Airlines in terms of the international market. “The network expansion of Middle Eastern airlines such as Emirates, Etihad and Qatar has put pressure on European and Asian airlines, including Vietnam Airlines,” said Thanh.

However, the outlook is not so grey for Vietnam Airlines. Thanh said huge opportunities awaited as the economy continued to grow and Vietnam was luring increasing numbers of foreign investors, while tourist numbers seemed to be growing.

In addition, an equitisation roadmap has been mapped out for this year as the airline plans to sell a 30 per cent stake to a foreign strategic partner and private investors. The equitisation is expected to make Vietnam Airlines more competitive. The initial public offering plan is now under the consultancy of Citigroup, Morgan Stanley and two other Vietnamese firms.

Thanh claimed the airline would take the initiative to adjust its business plan and improve service quality to four-star standard by 2015 to make it more competitive.