Buoyed by the positive impacts of landmark free trade agreements and new amendments to the rules, the Vietnamese aviation industry will offer expanded opportunities for foreign investors. Tom Treutler and John Frangos from Tilleke & Gibbins – Southeast Asia’s leading full-service regional law firm – provide a deep analysis into how regulatory improvements can change the investment picture in the sector.

After the initial foreign investment surge that started in the 1990s, the Vietnamese aviation industry has seen incredible expansion. In 2000, only about five million passengers travelled on domestic and international flights in Vietnam. In 2018, the number of passengers travelling through Vietnamese airports reached over 105 million – with Vietnamese airlines alone carrying 50 million passengers. Aviation experts have highlighted Vietnam as one of the top 10 countries for aviation expansion in the coming decade, and the fastest-growing in Southeast Asia. Indeed, the growth has been exceptional – in 1993, only 20 international airlines were flying to Vietnam, and there were only about 20 international destinations one could fly to and from the country. Fast forward to 2019, there are about 60 airlines flying to Vietnam, and you can fly to about 100 destinations.

In advance of the upcoming Donald Trump-Kim Jong Un summit in Hanoi, Vietnam has received more good news that should be a bellwether of even further expansion for its aviation sector. The United States Federal Aviation Administration (FAA) last week announced that Vietnam has been granted Category 1 (CAT 1) certification, signifying that the country satisfies safety and other conditions for direct flights to the US. These direct flights are expected to increase business and tourism travel to Vietnam and bode well for the economy.

Vietnam’s challenges include ensuring that its airports can meet the increasing demand. The recent doubling of the apron space at Tan Son Nhat International Airport in Ho Chi Minh City will allow the southern commercial hub to land and park more planes, but more terminal space is needed. The new airport outside of Ho Chi Minh City may not be ready until 2025. However, recent developments in regional airports, such as the opening of Van Don International Airport in the north-eastern province of Quang Ninh and upgrades in Cam Ranh Airport in Central Vietnam should help the situation.

Poised for more investment

Decree No.92/2016/ND-CP on the aviation industry was issued in 2016 to help loosen some restrictions on the sector and has spurred development, but further liberalisation of the investment regime is needed. For example, there are still 120 types of permits and over 25 types of approvals provided for in the various regulations related to the aviation industry.

Recognising that further liberalisation of the regulatory regime can boost investment and increase development in the sector, the government is considering revising Decree 92 a few years after it was issued. With more industry expansion, the regulatory framework must also be updated.

In particular, Vietjet’s prominence in the sector and quick growth changed the face of the industry. In 2012, Vietnam Airlines held 70 per cent of the domestic market share. Now its market share is only about 50-55 per cent, according to reports. New entrants such as Bamboo Airlines have also started to take flight. Other established airlines may also undertake initial public offerings in the future to raise capital.

The international route market shares of major carriers from East Asia have been affected by new entrants from the Middle East. The success of new entrants in both the domestic and international routes signals that Vietnam presents great opportunities to new players.

In response to these factors, the Vietnamese government has recently published draft amendments to Decree 92. If developed into a law, the new amendments will open up expanded opportunities for foreign investors in the aviation industry. However, in one aspect the law will make it more difficult for new domestic entrants: increased capitalisation requirements. The government is expected to continue reviewing and possibly refining the draft for issuance soon.

According to the draft amendments, the investment ceiling for foreign investment in an air carriage business enterprise will be raised to 49 per cent from the previous 30 per cent of the share capital. The largest shareholder will be required to be a Vietnamese company or individual. If the Vietnamese company or entity has foreign investment capital, the foreign capital may not exceed 49 per cent.

The new Vietnamese-to-foreign shareholder ownership ratio contemplated in the draft is generally in accordance with Southeast Asian standards. For example, foreign ownership in Thai airlines is limited to 49 per cent. In Indonesia and Malaysia, local investors must own more than 50 per cent. In the Philippines, foreign investors are limited to less than 40 per cent ownership.

The draft also proposes that there will no longer be a distinction between international and domestic-only carriers in minimum capital requirements.

Investment opportunities

The elimination of the differentiation in capital requirements between foreign and local airlines puts Vietnamese law in a similar position to Thailand, which also makes no distinction. However, Thai minimum capital requirements are far lower, as scheduled operators are required to have a fully paid-up registered capital of at least THB200 million ($6 million). Charter operators must have paid-up registered capital of at least THB25 million ($753,000).

Other proposed amendments will also help liberalise investment. For example, the requirement that new airlines must be consistent with government master plans for the airline industry may be abolished. This change should reduce the steps in the application process and is one fewer regulatory hurdle.

It is hoped that the new amendments can reduce the number of steps involved in the approval process, for example by eliminating initial pre-approval by the prime minister on an investment project. Other improvements in the draft decree may simplify processes for share transfers (only registration with authorities will be required).

The proposed amendments to Decree 92 are also geared towards encouraging private investment in airports. Vietnam currently has about 25 commercial airports, including the recently opened Van Don International Airport serving the large northern tourism hub of Quang Ninh province, which is home to Halong Bay.

More than 10 of these airports are international-ready, though only six or so are currently handling direct international flights. As mentioned above, the government is proceeding with the expansion of Tan Son Nhat International Airport, as well as the major investment in a world-class international airport in Long Thanh, outside Ho Chi Minh City.

Hanoi and Danang’s airports have recently been significantly upgraded. Many regional airports servicing international flights, such as Cam Ranh near the south-central city of Nha Trang, are already attracting private investment. Recent private investment plans in airports in the central province of Quang Binh, and Dong Hoi city of neighbouring province of Quang Tri have also been announced. Thus, it is clear that there are opportunities in airport construction and services in Vietnam. Under the proposed amendments to Decree 92, an airport enterprise, whether establishing and maintaining a domestic or international airport, is only required to have minimum capital of VND200 billion ($8.7 million).

Boost from FTAs

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement will likely have a positive effect on the Vietnamese aviation sector.

In the last several months, various European countries such as Spain and the Czech Republic have announced expanding co-operation with Vietnam to increase air travel. The various member countries acceding to the CPTPP have reached heftier commitments to each other on air transport-related services than with previous free trade agreement. This can include activities such as flight training, design and operation of airports, and ground-handling services in various countries.

New rules on registration

On January 23, 2019, the government of Vietnam issued Decree No.07/2019/ND-CP to amend and supplement Decree No.68/2015/ND-CP on registration of nationality and rights towards aircraft. Decree 07 will take effect on March 11, 2019 and is expected to help the development of the aviation industry.

Currently, any aircraft owned by a Vietnamese entity must be registered in Vietnam. Under Decree 07, the registration requirement only applies to aircraft that are owned and operated by Vietnamese entities.

One other change is related to the irrevocable deregistration and export request authorisation (IDERA) mechanisms. At present, Decree 68 is silent on procedures or applications for completion of IDERA documents. Decree 07 adds the terms and resolution of complaints/petitions and completion of IDERA documents.

Other provisions relate to deregistration of damaged aircraft and registration of temporary Vietnamese nationality for aircraft. In this regard, under Decree 07, seriously damaged aircraft which can no longer be repaired or recovered can be deregistered from Vietnamese nationality.

Also, under Decree 07 an aircraft registering for temporary Vietnamese nationality (for the purpose of, for example, being trialled in Vietnam) is no longer subject to the requirement of “not taking any other nationality or having foreign nationality deregistered.”

With the new changes in Decree 07, Vietnam moves further into compliance with its obligations under the Cape Town Convention on International Interests in Mobile Equipment (commonly known as the Cape Town Treaty). Specific guidance on the IDERA documents could provide more comfort to lessors with respect to recovering their assets in the event of default. Vietnam’s growing aviation industry will benefit from this, as airlines should have more access to leased aircraft. The draft amendments to Decree 92 and the issuance of Decree 07 are indicative of Vietnam’s overall revamping of its aviation regulatory framework, and show that the government is seeking to encourage more foreign investment to meet the country’s rapidly growing air transportation demand.

VIR