Vietjet expands amid oil price hike

The Vietnamese private budget carrier is looking to add more international routes to hedge against rising fuel costs

At the annual general shareholders’ meeting last week in Ho Chi Minh City, Vietjet revealed ambitious goals for 2018 and beyond, to boost its influence in Asia. After securing 41 per cent of the market share in Vietnam, the budget airline is now setting its sights on various overseas markets, aiming to compete against the likes of Air Asia, Scoot, and Jetstar Airways.

In particular, Vietjet plans to launch 16 new international routes this year, with a focus on East Asian destinations. It will debut in Japan in the third quarter and expand its routes into other markets such as China, Taiwan, and South Korea. At the same time, Vietnam’s first private carrier will also boost its code-sharing and interlining collaborations with other airlines in the region, especially those who fly to Europe and North America.

Other markets on the list for Vietjet include India, Indonesia, and Russia. Feasibility studies for Australia are already underway, said CEO Luu Duc Khanh.

If all goes to plan, according to Khanh, Vietjet will operate a total number of 100 routes by the end of 2018 - 39 domestic routes and 61 international routes. The fleet size will increase to 66 aeroplanes, so as to serve 24 million passengers.

Vietjet believes that Vietnam’s rising appeal as a tourism, investment, and trade destination will ramp up the demand for international travel, especially affordable flights. In 2018, Vietjet plans to earn VND50.9 trillion ($2.2 billion) in revenue, up by 20 per cent from last year, and VND5.8 trillion ($254 million) in pre-tax profits, up 9.5 per cent.

At the meeting, chairwoman Nguyen Thi Phuong Thao revealed that Vietjet has received multiple calls from overseas stock exchanges such as Singapore, Hong Kong, and London.

According to Thao, these bourses are willing to waive a portion of listing costs for Vietjet and offer advisory services, but the budget airline has yet to make any concrete plans to list overseas. The airline made its debut on the Ho Chi Minh City Stock Exchange last February.

Le Nhi Nang, a representative of the State Securities Commission in Ho Chi Minh City, said Vietjet is encouraged to list abroad and this will help improve Vietnam’s status on international markets. To date, no Vietnamese businesses have managed to list on stock exchanges outside of Vietnam.

However, a major roadblock for Vietjet’s global expansion is the rising price of fuel. Two months ago, the International Air Transport Association voiced its concerns that recovering oil prices will pose threats to airlines around the world this year, eating away at their record-high profits.

Last Thursday, Brent crude oil traded at new highs of $74.44 per barrel while WTI crude oil stood at $68.37 per barrel. This is not good news for Vietjet, whose business targets are set on the condition that oil prices remain at $70.

As jet fuel takes up half of the budget airline’s expenses, analysts believe that its management must either act quickly or see its company’s profits erode. In a recent research paper, Bao Viet Securities pointed out that Vietjet is more susceptible to swings in oil prices than full-service carriers like Vietnam Airlines.

Going abroad seems to be a prime option. Thao noted that the airline wants to go regional partly because profit margins for overseas flights are 20 per cent higher than domestic routes, and fuel costs overseas are 30 per cent cheaper than in Vietnam.

A second solution for Vietjet is signing hedging contracts with banks. The budget airline revealed last Thursday that it is in negotiations with at least three banks to lock in oil prices and minimise risks. New and more energy-efficient aeroplanes have also been ordered.

Lastly, Vietjet is planning to boost its partnerships with Vietnam’s top oil firms. In January, an affiliate company of Thao made a bid to be a strategic investor at PV Oil Corporation, which is Vietnam’s second-largest oil retailer.

Last week, HDBank, another business controlled by Thao, bought out the loss-making PGBank, which is an entity of Vietnam’s top oil producer and seller Petrolimex. For the past five years, as a strategic partner, Petrolimex Aviation has served half of the fuel needs for Vietjet.

“Higher fuel costs may dampen Vietjet’s business results this year, and the budget airline must step up its international expansion efforts to retain the same growth rate it has enjoyed in previous years. Foreign exchange is another potential risk to take care of as Vietjet goes further beyond Vietnam’s borders,” wrote analysts at KIS Vietnam in a recent note.