Competition Intensifies in Vietnam’s Aviation Sector

International New York Times | 31 March 2014

Carriers like Vietnam Airlines are considering initial public offerings as the private VietJet vies for their passengers. Credit Aaron Joel Santos for The New York Times

HO CHI MINH CITY, Vietnam — Chien Anh, a restaurant manager here, used to fly on either Vietnam Airlines, the state-owned flag carrier, or the budget airline it mostly owns, Jetstar Pacific. But after the private VietJet Air started flights in 2011, Mr. Anh’s loyalty began to shift.

As of late last year, the start-up accounted for about a quarter of the seats on domestic flights, compared with 63 percent for Vietnam Airlines and 12 percent for Jetstar Pacific, according to the CAPA-Center for Aviation, an aerospace consulting firm.

Compared with the flag carrier, VietJet is “a little cheaper and the service is the same,” Mr. Anh, 32, said recently at a baggage-claim carousel in Tan Son Nhat International Airport in Ho Chi Minh City after touching down in a packed VietJet flight from Hanoi.

Competition is heating up in Vietnam’s aviation sector just as Vietnam Airlines and other state-owned companies are considering plans for initial public offerings this year. Analysts see changes in the aviation sector as a potential bellwether of how the country’s economic reform agenda may take shape in the longer term.

Pham Ngoc Minh, chief executive of Vietnam Airlines, said the carrier was “on the right track” for an I.P.O. in the second quarter of 2014, pending approval from Prime Minister Nguyen Tan Dung.

“The development of more and more airlines has brought an overall expansion in traffic in the industry,” Mr. Minh wrote in an email when asked about VietJet’s rising domestic market share. “It is good for the customer because it gives them more choice.”

Mr. Minh said that the government would initially retain a 65 to 75 percent share in Vietnam Airlines and that Jetstar Pacific, which he said would have 10 airplanes this year, planned to compete in the low-cost market. Vietnam Airlines will stay focused on its full-service business and increase its fleet to 150 planes, from 82, by 2020, he added.

Stephen Moynihan, a spokesman in Australia for Jetstar Airways, a member of the Jetstar Group, declined to answer questions sent by email about Jetstar Pacific’s strategic plans in Vietnam. Jetstar Airways is wholly owned by Qantas, the Australian airline; Qantas owns 30 percent of Jetstar Pacific.

Vietnam Airlines is the only one of Southeast Asia’s six main flag carriers that is not publicly listed, according to Brendan Sobie, an analyst at the CAPA-Center for Aviation. He said the company had not publicized details of its restructuring plans or begun a response to VietJet’s domestic challenge.

Airlines controlled by governments typically struggle to remain competitive because of state interference, and Vietnam Airlines might have trouble attracting investors when it sells shares, said Shukor Yusof, an aviation analyst at the ratings agency Standard & Poor’s.

Although it remains privately held for now, VietJet plans to have an I.P.O. in Singapore or Hong Kong in 2015, Luu Duc Khanh, the airline’s managing director, said in an interview at the company’s Ho Chi Minh City headquarters. He offered no further details.

VietJet said in February that it had completed an agreement, worth $9.1 billion at list prices, to buy 63 aircraft, with an option to buy 30 more — a sharp expansion from the current fleet of 11.

Aviation analysts say VietJet may continue to grow rapidly in the domestic market, just as AirAsia once did in its home territory of Malaysia. But, they add, the airline will face intense competition as it begins competing regionally with AirAsia and other low-cost carriers.

Mr. Khanh brushed aside skepticism, saying that VietJet began making a profit after 19 months of operation and that it plans to fly within the next three to five years not only across Asia, but also to Europe and the United States. He added that the target market was Vietnam’s rising middle class and the large Vietnamese diaspora, and that VietJet’s first joint venture outside Vietnam would begin in Thailand in June with five routes.

“Our main competitor is ourself,” Mr. Khanh said, adding that the company has stopped referring to itself as “low cost” in favor of “new age.”

He declined to provide the full names of the company’s major investors.

An analysis of publicly available information suggests that VietJet’s investors and executives have deep ties across the government, the banking sector and state-owned companies.

Mr. Khanh is the former general director of An Binh Commercial Joint Stock Bank, whose strategic domestic partner is Vietnam Electricity, the state-owned power monopoly. He is also chief executive of VietJet’s main shareholder, Sovico Holdings, a Vietnamese firm with investments in an arm of PetroVietnam, the state oil and gas monopoly.

Both Mr. Khanh and VietJet’s chief executive and vice chairwoman, Nguyen Thi Phuong Thao, sit on the board at another VietJet shareholder, HDBank, whose chairwoman, Le Thi Bang Tam, is a former vice finance minister. Ms. Thao is HDBank’s general director as well as Sovico’s executive chairwoman.

Dinh Viet Phuong, one of Sovico’s deputy general directors, previously held senior positions at the bus and truck maker Vinamotor and other large companies owned by the government.

Mr. Khanh said VietJet Air worked well with the government but received no special treatment. “We bring aircraft in, we fly people, we support the economy, and the government supports us in terms of infrastructure,” he said.

An I.P.O. by Vietnam Airlines might be a trial balloon that leads to systemic economic changes by Vietnamese leaders, said Edmund J. Malesky, a Vietnam expert and a professor of political science at Duke University. But he cautioned that merely offering stock in the most successful corners of the vast state sector would not be lucrative because so many inefficient state companies are draining public coffers.

“It’s got to be everywhere, and they know that — these are smart guys,” Mr. Malesky said.

Mr. Dung, the prime minister, has pledged to accelerate economic overhauls, and early indications are that the one-party government is willing to reform a wasteful and outdated state sector that has long been a drag on the economy, according to analysts and businessmen who follow Vietnam’s political system. That is a topic of considerable interest to the United States and Europe, which are negotiating trade agreements with Vietnam.

But there has been no clear guidance from the government about the exact scale or depth of planned changes at state-owned companies, and it is also unclear which sectors will remain sheltered by the state, and whether those companies even want to go public as the economy struggles to grow. Dominic Scriven, chief executive at Dragon Capital, an investment company in Ho Chi Minh City, said that the overhaul of state-owned companies could eventually help the government reduce net borrowing but that a more immediate effect would be raising investor confidence.

Vietnam’s government, he added, may follow China’s approach of “boxing in” such companies and allowing the private sector to grow around them.