Making the right choices to save Vietnam Airlines

Tony Foster - Managing partner, Freshfields Bruckhaus Deringer LLP

Then it went on to post its largest quarterly loss ever at the start of this year at VND4.97 trillion ($216 million). This was nearly double the loss in Q1 of 2020, and higher than the loss in any quarter since the pandemic outbreak began.

The second quarter this year was worse. The nation’s borders did not reopen, and due to the spread of the Delta variant, domestic flights that had been largely unaffected in 2020 (except for short periods) and which had ensured some cash flow, are drying up. Various cities have seemingly banned flights from Ho Chi Minh City.

The government, through State Capital Investment Corporation (SCIC), owns more than 85 per cent of Vietnam Airlines. One would therefore have expected a strong degree of state interest in ensuring adequate financing for the airline during these difficult times. Yet progress has been slow.

The prime minister, the government, and the National Assembly all passed resolutions to support Vietnam Airlines, which was achieved by the end of 2020. In April this year, the State Bank of Vietnam (SBV) issued a circular on refinancing by credit institutions to Vietnam Airlines. This allowed existing lenders to refinance their loans at zero interest, up to VND4 trillion ($173 million). However, it appears that commercial banks were not keen to provide additional credit to the airline.

In June, the SBV said three banks would provide loans of the same amount, sourced from the SBV’s refinancing fund. On July 5, SeABank announced that it had agreed to provide a zero-interest loan of half of the amount to Vietnam Airlines. The two also signed a three-way strategic cooperation with local real estate developer BRG Group.

Vietnam Airlines has stated it expects part of the $87 million to be disbursed in July, but it is not known how much. The other half of the refinancing sum is due to be provided by Maritime Commercial Bank and Saigon-Hanoi Commercial Bank, but agreements do not appear to have been concluded yet.

The second part of the rescue plan that has been approved in principle is the purchase of about VND8 trillion ($348 million) of new equity by the SCIC. However, the latest expectation is that this will not be implemented until the last quarter.

If Vietnam Airlines is not supported in a timely manner by the government, the impact of defaults and cross-defaults in the airline sector will be severe. The impact will be felt beyond the airline sector. The message (which, admittedly, is not necessarily new) will be that state-owned companies are on their own. The cost of credit will go up, particularly from foreign lenders.

The government might find it hard just to support Vietnam Airlines. The other airlines here – Vietjet, Bamboo, and Vietstar - also need support to survive. The Vietnam Aviation Business Association has proposed VND25 trillion ($1.1 billion) of loans for air carriers with a preferential lending rate of 4 per cent for 3-5 years so they can recover from the pandemic; a reduction of 50 per cent in service fees at airports; and certain corporate income tax reductions.

Most governments give a high priority to maintaining air transport connectivity in order to protect economic activity and jobs. But there is always a trade-off between ensuring connectivity and having an efficient industry after the pandemic. The choices a government makes will affect the future development of the aviation industry. In other countries, governments have provided:

- State loans: This has been the most popular form of support for airlines around the world;

- State guarantees for commercial loans;

- Direct grants and fiscal transfers to the companies;

- Some forms of “in-kind” assistance such as relieving airlines of landing fees and certain kinds of taxation and employment furlough schemes;

- Hybrid debt instruments, including convertible bonds and warrants; and

- Equity injections and other direct recapitalisation. Airlines are highly leveraged companies, so equity investment may have a bigger impact on the balance sheet than a larger loan.

In return for providing the support, governments have imposed some conditions. Vietnam could – depending on the issues it faces - insist on some of these conditions in respect of Vietnam Airlines.

Firstly, governments have set timelines to exit from their ownership acquired through significant recapitalisation aid.

Secondly, a number of countries such as the United States, Israel, and New Zealand have imposed limitations on management pay, bonuses, dividend payments, and share buy-backs in the companies receiving public money.

Next, a lot of state support measures came with a requirement to restructure, since the state does not want ongoing bailout obligations.

Finally, some countries have required green commitments from those benefiting from support. Vietnam is one of the countries in the world to suffer the most from climate change, and early action to make its green position visible to the world will stand it in good stead in many ways.

Every country is different. But, oddly, given its ownership interest in Vietnam Airlines, the government has done comparatively little to support it. With the more serious COVID-19 variants now in the country, and greater losses looming for the airline, it would appear time for the government to take quicker and more drastic action.