Young, higher-earning and with a love for travel, a new generation is creating an opportunity for the robust growth of low-cost airlines in Vietnam in the near future.
“I prefer going with a low-cost carrier not only because they offer many tickets with reasonable prices, but their services are also good,” said Chu Quynh May, a 26-year-old who works in the office of a foreign company in Hanoi.
Ms May is like thousands of young Vietnamese people now, who hunt for deals on the websites of domestic airlines, as well as foreign budget carriers such as AirAsia, Tiger Airways or Cebu, to plan their trips.
They admit that the budget carriers’ inflight comforts are few, but ease of booking (80% is done online) and pre- and inflight services are good enough for short flights around Southeast Asia.
Vietnam’s population is expected to surpass 90 million this year, and only 10% of those people have ever travelled on an airplane. Millions now want to fly but few can afford full-service carriers, which makes the country a low-cost carrier (LCC) company’s dream.
Last year, 23.6 million passengers passed through Vietnamese airports and 16.6 million of these flew with Vietnamese airlines. The country’s aviation industry grew nearly 14%, a high figure given the prevailing weak economy.
The International Air Transport Association also forecasts that Vietnam will likely become the third fastest growing aviation market in the world by 2014 (after China and India) in terms of international passengers and cargo transported.
Vietnam’s airlines are expected to transport 34-36 million passengers and between 850,000 and 930,000 tonnes of cargo a year by 2015.
The Law on Civil Aviation of Vietnam, passed in 2007, allows individuals or private companies to establish a private airline but the reality is that operating the business is not easy.
Many private airlines have been launched since 2007, including Indochina Airlines, VietJet Air, Air Mekong and Trai Thien Air Cargo. But financial and debt troubles forced Indochina Airlines and Trai Thien Air Cargo to shut down, while VietJet Air and Air Mekong had to wait until late last year to start their first flights.
Currently, only five airlines are operating in the domestic market, including the national flagship Vietnam Airlines, Jetstar Pacific Airlines, VietJet Air, Air Mekong, and Vietnam Air Service (Vasco). Out of these, only Jetstar Pacific and VietJet Air target budget passengers.
However, Jetstar Pacific, the first low-cost carrier in Vietnam, was merged into Vietnam Airlines early this year due to persistent losses, which observers say will make the domestic market less competitive.
Jetstar’s losses since its establishment, estimated at $10 million, came despite a 27% capital contribution from Australia’s Qantas.
The Vietnamese government in February decided to transfer its 70% stake in Jetstar back to the management of Vietnam Airlines.
Now Vietnam Airlines and its budget subsidiary together hold a combined market share of up to 97%, ranging from cheap to high-end segments, putting heavier competition pressure on other airlines.
To gain a foothold in the industry, investors need strong financial capacity and human resources to ensure quality operations, as well as deep experience in the aviation business.
“Aviation is a very specialised field that requires professional preparation and long-term investment. In the early years, VietJet Air did not set a profit target but said its aim was primarily to try to balance revenues and costs to ensure sustainable development,” said Pritam Singh, deputy general director of VietJet Air.
VietJet Air’s fleet consists of three Airbus A320, but is projected to increase to 20 aircraft by 2015. Its flights connect the country’s four biggest cities — Hanoi, Ho Chi Minh City, Danang and Nha Trang — and it plans to expand to other cities soon. This year, it aims to make 5,000 flights, transporting 700,000 to 800,000 passengers.
It will also be the first private Vietnamese budget carrier to open international routes by flying into Bangkok, starting in December. Singapore, Taipei and other Northeast Asian destinations are also on its agenda.
However, foreign low-cost carriers are already offering 10-12 flights daily from Vietnam to other Southeast Asian countries, so the competition is fierce.
“Low-cost carriers can take advantage of developing routes from Vietnam to China, South Korea, Hong Kong and Japan because visitors from these markets to Vietnam have increased in recent years,” said Do Xuan Quang, CEO of Vector Aviation Co Ltd in Vietnam.
According to the National General Statistics Office, Vietnam in the first nine months of this year welcomed 4.85 million international visitors, a year-on-year increase of 13%, mostly from South Korea, Japan, Taiwan and China.
The potential from increased travel to the country has prompted industry leaders to try to make inroads into Vietnam. In 2010 VietJet Air considered selling a 30% stake to AirAsia but the plan never materialised as Vietnam Airlines protested.
Late last year, Vietnam Airlines also declared its intention to enter the low-cost aviation sector to boost demand. Like other airlines facing rising fuel costs and declining domestic travel demand, the group’s revenues have declined substantially, to 21 trillion dong ($1 billion) in the first five months of this year, just 38.7% of its full-year target. The carrier has scaled back its 2012 net profit forecast to 80% of its earlier projection.
Currently, Vietnam Airlines owns 74 aircraft, flying 30 routes to 20 domestic destinations. Jetstar Pacific Airlines has six Airbus A320s and Boeing B737, flying eight routes to six destinations in both domestic and overseas markets.
Five carriers operating in a market of 90 million people are not too many, but local airlines will be exposed to fiercer competition after Vietnam opens its skies to Asean from 2015.
About the author
Writer: Le Mai Houng