Vietnam Airlines seeks regional role
HANOI - Vietnam Airlines , the country's national carrier, hopes to transform itself into a regional carrier and Vietnam into a regional hub by 2020.
"We want to be a regional company," said company chairman Nguyen Sy Hung, speaking on the sidelines of an investment forum in Hanoi last week.
Hung said the airline plans to spend $3 billion to boost its fleet to 100 aircraft by 2020, which is roughly the size of most major Asian airlines.
As Vietnam Airlines will gradually lose some of its home advantages once the market liberalizes under membership in the World Trade Organization - expected probably this year or next - spreading its wings to the rest of the region should help it sustain a healthy growth rate in the years ahead.
The company saw passenger growth of around 14% a year on average over the past decade and has steadily improved the quality of its services during that time.
Strong tourism growth, both domestic and foreign, will help it fill seats on planes even as Hanoi opens its skies to greater competition, while international demand for high-quality Vietnamese debt and equity will enable it to fund growth through international markets if domestic sources are limited.
But hurdles lie in the years ahead.
Constraints on the availability of leasable aircraft are hampering route development, while growing costs - particularly fuel and leasing contracts - could bite into profits.
The growing presence of low-cost carriers in the Vietnamese market may also force it to cut fares on routes that have until recently been relatively protected, and until the carrier joins an alliance and increases its fleet size, it will be hard pressed to compete with more established regional players.
Plans to expand fleet
From its current 39 aircraft, Vietnam Airlines hopes to operate a fleet of 56 by 2010 and 100 by 2020, Hung said.
That puts it ahead of Philippine Airlines Inc. (PAI.YY), which now operates 32 aircraft, and not too far behind Indonesia's Garuda with 57. But it's well short of the 90 aircraft operated by regional leader Singapore Airlines Ltd. (S.55.SG), Thai Airways International PCL's (THAI.TH) 91 and Malaysian Airline System Bhd.'s (3786.KU) 111.
Hung said funding for the expansion will come from various sources, including profits, domestic capital markets, export-credit organizations and international markets.
With international appetite for Vietnamese debt high, and borrowing rates established by a recent benchmark sovereign offering relatively low, the airline should have little trouble topping up domestic financing with foreign borrowing.
"If we can't access enough through existing sources, we might consider...an international bond," Hung said.
International equities markets, too, would likely welcome the company's debut, analysts say, although Hung declined to comment on the likelihood of a foreign listing.
According to Dominic Scriven, director of Ho Chi Minh City-based fund management firm Dragon Capital, the airline's young fleet and the industry's growth potential - both within Vietnam and throughout Asia - would draw investors to the company.
A domestic listing, should Vietnam Airlines choose to offer one, would "certainly" attract buyers, he added.
According to company figures, Vietnam Airlines last year saw revenues increase 10.4% from 2004, while pretax profits gained 11.7% on year. The airline conducted 50,000 safe flights, reported an 18% rise in passenger numbers to over 6 million and saw cargo transportation grow 6% from 2004 to 97,000 tons.
Hung anticipates annual industry growth of 13%-14% a year through the near to medium term; something the state-owned provider can take advantage of.
In line with growing profitability, Vietnam Airlines is improving its safety record and service provision.
The International Aviation Transport Association is expected soon to grant it an Operational Safety Audit Certificate that will help it meet the requirements of potential code share and network alliance partners.
During an address to participants of the Hanoi forum, Hung said Vietnam Airlines in now studying the possibility of joining an alliance and hopes also to negotiate new code sharing arrangements. He didn't elaborate.
Ensuring demand for its services, tourism arrivals into Vietnam rose over 18% on-year in 2005 to 3.5 million and are expected to reach between 3.6 million-3.8 million this year. Vietnam Airlines currently controls 43% of all international air travel in and out of the country.
Domestic air travel, too, is growing: the company last year saw a 12% on-year gain to 16 million travelers.
"To be an important regional player, an airline needs a big local travel market...and Vietnam has major potential," said Richard Pinkham, a Singapore-based consultant with the Centre for Asia Pacific Aviation.
Some turbulence ahead
As part of its plan to turn Vietnam into a regional hub, the government has told all transport sectors they must liberalize and allow greater competition.
Obligations already made under existing trade and investment deals, as well as those expected when Hanoi negotiates entry into the WTO, will take from Vietnam Airlines the de facto monopoly position it has enjoyed during much of its recent growth. Although Vietnam has opened slowly to foreign carriers over the past decade, Vietnam Airlines still controls many overseas routes and almost all domestic ones.
Constraints on the number of affordable lease aircraft it can contract in are making it hard to expand services while awaiting delivery of planes it has bought but not yet received.
Earlier this year, a company spokesman told reporters that "there are almost no aircraft to lease on the international market" and those available are being leased for "a very high price."
Growing oil prices also threaten the company's bottom line, Hung told forum participates.
The arrival of low cost carriers in the Vietnamese market may threaten the full-service carrier at it builds its market position, analysts have said.
Last year, Tiger Airways and Air Asia launched discount routes to Singapore and Bangkok respectively from Vietnam. A discount route to Kuala Lumpur will open in 2006. Jetstar Asia has a license to operate flights into Vietnam but has not yet announced plans to do so.
"Low cost carriers will pose a threat" to future growth, Hung told the forum.
By Catherine McKinley - Dow Jones - March 27, 2006.
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