VietNamNet Bridge – The domestic aviation market has turned out to be not lucrative as thought.

Vietnamese market too severe to airlines (part 1)
Vietnamese market too severe to airlines (part 2)

Doan Quoc Viet, Chair of Air Mekong, once said that he has a love of adventure. This might be the reason which prompted him to jump into the aviation market, an unfamiliar business field to his BIM Group, which is keen on tourism, hotel, urban infrastructure development, fisheries and salt.

However, this did not mean that Viet risked his life. Viet decided to join the market his way: Air Mekong would first attack niche markets in order to avoid the direct confrontation with the big guy Vietnam Airlines, and then it would think of developing backbone air routes.

This explained why Air Mekong first developed the air routes from Hanoi and HCM City to islands and sea tourist sites in the central region and Central Highlands, such as Phu Quoc, Con Dao islands, Buon Ma Thuot, Vinh, Pleiku, Quy Nhon and Da Lat.

However, a lot of problems have arisen during the operation, while the income is not big enough to cover expenses. The airline has four Bombardier CRJ-900s (90 seats for each), while it has to pay no less than VND4 billion a day to keep the airline’s normal operation.

Le Song Lai, former General Director of Jetstar Pacific, once compared the business in the aviation sector with a “money burning machine.” He said airlines had to pay for hundreds of input items, while they have only one source of income from selling air tickets. Meanwhile, there always exists a war in selling tickets among air carriers.

The domestic aviation market now has five air carriers, namely Vietnam Airlines, Jetstar Pacific, Vasco, Air Mekong and Vietjet Air which serve some 12 million passengers a year and obtain the annual growth rate of 15 percent.

One may think that Vietnam is a market with great potentials if noting that only 10 percent of Vietnamese people now can take flights, a very small percentage if noting that the figure is 90 percent in Australia.

However, the domestic aviation market has turned out to be not lucrative as thought.

The group of Vietnam Airlines, Vasco and Jetstar Pacific accounts for nearly 80 percent of the market share. Especially, Vietnam Airlines has recently received 70 percent of Jetstar Pacific’s from the State Capital Investment Corporation (SCIC).

As such, there are only two private airlines operational, including Air Mekong and Vietjet Air. The two private airlines themselves also have to compete fiercely to exist and develop.

In late 2011, Vietjet Air officially joined the market, providing the first commercial flight. Unlike Air Mekong, Vietjet Air did not penetrate the niche markets, but developed the north-south backbone routes immediately.

After one year of operation, Vietjet Air has developed its fleet, now having five A320s which can provide flights to nine destinations in Vietnam. It plans to provide international flights from HCM City to Bangkok from February 10, 2013, while planning budget air routes to China and South Korea in 2013.

Despite the initial achievements, Vietjet Air now has to spend big money to run its daily operation, including a big sum of money on the fleet of five A320s. Vietjet Air’s main shareholders Savico and HD Bank have been struggling hard to cover the losses in the first year of operation.

The Indian private airline Kingfisher Airlines is facing serious problems with the total debts of up to 7 billion rupees. It has joined forces with other companies to propose the government to apply the policies allowing foreign airlines to make foreign direct investment in the country.

And experts expect that a similar thing may happen in Vietnam. However, for the time being, the market door remains very narrow too investors.

DNSG