Rays of sunshine in aviation clouds

July 02, 2020 | 11:00
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Amid serious impacts of COVID-19, there are hopeful points for the aviation sector on the back of the EU-Vietnam Free Trade Agreement. Tony Foster, managing partner of the Vietnam office at Freshfields Bruckhaus Deringer LLP, delves into how the land-mark deal improves the investment and business picture in aviation services. 
1498p16 rays of sunshine in aviation clouds
Vietnam Airlines and competitors can only mostly focus on domestic services for now, Photo: Le Toan

The aviation market around the world is in a tailspin. Numerous airlines around the world are bankrupt or will be bailed out. The International Air Transport Association (IATA) estimates that 2020 losses for airlines alone will be $84 billion. To put this in perspective, that is about a third of the total annual GDP of Vietnam. Airline revenues, according to the IATA, will be down 50 per cent this year.

Few rays of sunshine pierce these gathered clouds, but some may have recently caught sight of a couple of shafts of light. One is that airlines flying domestically in Vietnam appear to have achieved a V-shaped rebound that would be the envy of the aviation world, and as a result the domestic terminals at the airports in the country no longer whistle emptily.

Another positive is the EU-Vietnam Free Trade Agreement (EVFTA), which was approved by the National Assembly recently and should come into force around August. The EVFTA will doubtless improve the investment and business environment through institutional reforms and upgrades to the laws and regulations in the country, which should become increasingly standardised and transparent. But one has to dig deep into the appendices to the EVFTA, and to brush away the principle of infinite obliquity that seems to permeate these trade agreements, in order to see why the aircraft service companies of Europe should be trying to locate the next available jet to Vietnam. Though whether they will appreciate the two weeks stay in the quarantine camp that will result from such a hop remains to be seen.

The EVFTA confirms several points relating to aircraft services. The first is that airlines are permitted to provide services through their ticketing offices or agents in Vietnam. The second is that there are no restrictions in computer reservation services, except that they must go through public telecommunication networks that are under the management of the Vietnamese telecommunications authority.

Also, in terms of maintenance and repair of aircraft, international companies can provide services through joint ventures with Vietnamese partners or 100 per cent foreign-invested enterprises. Until now, the only competition for VAECO, the Vietnam Airlines subsidiary that leads the maintenance, repair, and overhaul market in Vietnam, were two joint ventures involving Singaporean groups.

The picture is more nuanced with respect to airport services. The exciting news is that five years after Vietnam allows private suppliers access to an airport or terminal, they will be permitted to provide ground services to such airport or terminal.

Then the clouds descend again. There are various qualifications and limitations to this future right. First, aircraft servicing and cleaning, surface transport, airport management, and air service navigation are excluded from walking through this open door.

Secondly, five years begins to run when Vietnamese private companies have access to an airport or terminal. This means that the sector has to allow the participation of at least one Vietnamese 100 per cent privately-owned company or one joint venture in which private capital contribution accounts for at least 51 per cent.

This remains to be interpreted and numerous details remain vague, such as how far up the corporate chain one looks for state capital. It is also unclear whether the five years will begin to run as to all ground services at an airport when the first private Vietnamese company is permitted to perform any such services at such airport, or whether the five years only begins to run in respect of the services being performed by that company. Moreover, the foreign company will need to establish a joint venture with a Vietnamese partner. The foreign equity cannot exceed 49 per cent, though this can rise, three years later, to 51 per cent of the capital. Next, the number of service suppliers in each airport can be limited, if there are space constraints. This leads to the possibility that the five-year window for Vietnamese companies could fill up the available space.

Furthermore, applications for licences to establish joint ventures can be evaluated by the authorities based on the following considerations, including, among others: (i) the net socio-economic benefits that the European Union investors can generate, including but not limited to their long-term commitments, capacity building and technology transfer for Vietnam, and their prior contribution to Vietnam’s economy; (ii) their financial capability and relevant experience; and (iii) the possible impact on Vietnam’s national security and defence. This review process alone reduces an apparent right into a discretionary application.

Another issue is that even if an EU investor succeeds in establishing a joint venture, its value is more limited than may appear on the surface. Any transfer of its capital in the joint venture would be subject to prior approval of the relevant authorities, and the relevant Vietnamese partner in the joint venture will have a right of first refusal to buy the interest being transferred.

Vietnam also made one more important commitment in the EVFTA. Foreign companies are permitted to provide in-flight meal services through the establishment of joint ventures with Vietnamese partners, with foreign equity not exceeding 49 per cent. Now, one can hold out modest hope that this will bring improvement upon the seafood and rice, chicken and noodles, and beef with potatoes choice that this author has so much enjoyed over the years.

By Tony Foster

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