Vietnam Airlines got approval for a plan to sell and then lease three Airbus A350 aircraft late last year, just before taking delivery of these wide-body jetliners in 2016-2017, to gradually slash loans guaranteed by the Government.

After equitization in 2014, Vietnam Airlines saw State ownership cut to 95%. Therefore, the national flag carrier submitted its 2016-2020 business plan to the Ministry of Transport in late 2015 before presenting it to shareholders for approval.

An important part of Vietnam Airlines’ plan is to gradually lower Government-guaranteed loans by converting part of these loans into domestic commercial loans besides the sale and lease of the three Airbus A350s.

Vietnam Airlines projected that with the aircraft selling and leasing plan, its Government-guaranteed loans would fall from 86% of total loans in the 2011-2015 period to 82% in the 2016-2020 period.

In 2015 alone, the airline took out US$138.5 million in commercial loans. If the three aircraft on firm order are sold, the need for Government-guaranteed loans would decline by around US$460 million until 2020.

With loans guaranteed by the Government, the carrier has an edge over other enterprises as it can easily get access to domestic and foreign loans at low debt service costs and payments in longer periods of time.

Besides, when submitting its equitization plan in June 2014, Vietnam Airlines asked the Government for continued guarantees of export credit and foreign commercial loans to invest in its aircraft fleet expansion, and the Government gave approval.

European and U.S. credit institutions only lend to Vietnam Airlines on condition that the Government provides guarantees.

Compared to the plan announced in 2008, the fleet of the airline would be reduced by 30 units, including some of the airplanes of Vasco transferred to a new airline set up in partnership with Techcombank.

In its original plan, Vietnam Airlines would use the new-generation Airbus A350s for its transcontinental services to North America, Europe and Australia. However, unfavorable economic developments in Europe in the past few years have greatly affected demand for air travel. The rise of Middle East airlines that offer competitive fares has also impacted market share of airlines operating long-haul flights like Vietnam Airlines.

Therefore, Vietnam Airlines has to adjust the expansion plan for its flight network and fleet to ensure efficiency.

In addition, the later-than-scheduled delivery of some Airbus A350s and Boeing B787s has affected the flight operation plan of Vietnam Airlines.

The carrier also has to pay higher guarantee fees for financial leasing contracts though aircraft are not put into use, with VND267 billion this year, VND334 billion next year and VND515 billion in 2020. Guarantee costs are projected to make up 33.7% of the airline’s after-tax profit this year and 22.08% in 2017.

As a result, it is necessary for Vietnam Airlines to lower financial obligations. It has plans sell aircraft scheduled for delivery in 2018-2019 to ensure its business efficiency if its financial plans like capital increase do not materialize as expected.