From the clouds: Viet Nam’s aviation boom

Viet Nam has one of the world’s fastest-growing markets for airline passengers and with billions spent recently on aircraft, coupled with more entrants to the aviation market, it’s only going to grow - just in time for the rise of the travel-happy middle class

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Ten years ago elderly people who came into Hanoi or Ho Chi Minh City from the surrounding countryside might visit a shopping mall and ride an escalator for the first time. Now, they’re flying around the country.  Even in the early 1990s few travelled outside of their home cities or provinces and motorbikes were not common; most people cycled.

The boom in the domestic aviation industry has been huge and there are now a wider variety of choices than the single flag-carrier Vietnam Airlines.

" Viet Nam’s once small and single-carrier dominated aviation industry is expanding fast, with three domestic carriers now and plans for more." Helen Clark is a freelance Asia correspondent.

This emerging aviation story is actually just one chapter in the continued emergence of the ASEAN nations as economic growth stories and the home to a rising middle class. ANZ’s report, ASEAN: The Next Horizon, makes clear the mid and long -erm deepening of economic activity in the region, particularly in services such as tourism.

Demand in Asian economies for services will expand with the burgeoning middle class in the region – from around 500 million today to 3.2 billion people by 2030. The  budget airline market across the region is already established but rapid growth in Viet Nam – one of the major ASEAN population centres – will add to the momentum.

In May 2016 Hanoi hosted the first US President in 10 years when Barack Obama visited near the end of his presidency. The trip was notable for the obvious improvement in US – Viet Nam ties and the lifting of the weapons embargo on the country in place since the 1960s.

The US also walked away with a $US11.3 billion deal when new low-cost carrier VietJet made a huge purchase with Boeing.

In September then-French President Francois Hollande came to Hanoi for the first French Presidential visit in 12 years and did deals worth $US6.5 billion for Airbus, Boeing’s main European rival, for new planes for Vietnam Airlines. 

In his first trip to Washington in June Prime Minister Nguyen Xuan Phuc spent over $US8 billion on aviation and agricultural equipment, and much of that will go to General Electric-built engines for the Boeings. That’s a lot of rapid spending.

Taking off

According to state-run media, the domestic aviation sector in Viet Nam grew by 30 per cent in 2016, with some 28 million passengers. Viet Nam’s population is 94 million. According to the report the total market “served 52.2 million passengers last year, up 29 per cent from 2015.”

Marie-Anne Palces who has been a travel consultant in Viet Nam for seven years told bluenotesthat the servicing “servicing of increased travel has not matched demand”.

“Low cost carriers seem to struggle with volume,” she says. “[There are] constant delays and sub-standard airplanes.” With billions in buy ups in the past year substandard planes may ideally become a thing of the past for the fast-growing aviation industry.

The planes will go to all three domestic carriers, two of which have government involvement (Jetstar Pacific is 70 percent owned by Vietnam Airlines and 30 by Qantas). VietJet is privately owned.  The main growth in aviation at state level is not the planes but where they take off from.

Rob Rankin, Chief Operating Officer with Trails of Indochina and long-time Southeast Asia travel specialist, says the government effort comes from infrastructure development.

“Developing the infrastructure is a long-term play and I believe the aviation sector will grow parallel to the infrastructure,” he says.  

State-owned Airports Corporation of Vietnam, “operates all 22 airports in the country. With the rising demand of both domestic aviation and international arrivals, ACV has become one of the largest corporations in the country and would be a major source of revenue and profits”.

What has also helped is actually old infrastructure. Frederick Burke, a senior partner at Baker McKenzie in Ho Chi Minh City, told bluenotes Viet Nam “already had the basic infrastructure for a comprehensive civil aviation network as a by-product of the war that ended back in 1975... [it] did help overcome one of the most significant infrastructure challenges that would have been present otherwise – availability of cleared land.”

Steady rise

Viet Nam’s growth has yoyo-ed for a decade but rarely been much under 6 percent per year. As GDP has grown and Viet Nam is now a lower-middle income country (one reason Australia cut some of its aid last year).

“With such a large population of 90 million, even a small percentage of the population flying means big numbers for the industry,” Rankin says.

“Vietnamese people are travelling more and more, both for business, family visits and holiday, as income levels rise steadily.”

In older times it was only the few very wealthy or government leaders who flew, on old Soviet Tupolevs used by North Korean officials into the 2000s (Prime Minister Kim Jong-il visited Hanoi in 2007 in one).

All airlines have comprehensive international routes, with low cost carrier VietJet looking to expand to long haul flights rather than just cheaper regional hops.

Burke says the demand for aircraft and the entry of new private players into the Vietnamese aviation market is “actually driven mainly by the growth in domestic travel.” 

VietJet, begun by property mogul Nguyen Thi Phong Thao in 2011, has attracted attention from the beginning, mostly for PR stunts like bikini-wearing flight attendants.  

Other foreign airlines have tried and repeatedly failed to break into the domestic market thanks to monopolies, regulations and the need for a local partner. Foreign companies may only hold a 30 per cent stake.

Rankin says Malaysia’s AirAsia has failed to enter Viet Nam’s domestic market three times but will likely be successful early next year after partnering with a Hanoi company.

“Government resistance to foreign invested airlines has historically made it difficult for overseas carriers to enter the market,” he told bluenotes.

Viet Nam is of course still a socialist country and government maintains an interest in the major means of production - including aviation.

“Moreover, Vietnam Airlines guarded its lucrative monopoly jealously until it reached accommodations with the later private entrants and, to its credit, it has provided reasonably competitive services at each stage of the market’s development,” Burke says.

Plans

This is just the beginning. Other, smaller airlines are also looking for a share in the growing market.

There are plans for another, smaller domestic airline in Viet Bamboo Airlines, which plans a focus on the country’s second-tier airports in provincial cities and will purchase 15 craft from Boeing.

Owned by conglomerate FLC, start-up capital is a small $US31 million but the plans for the boutique airline to bypass major hubs in HCMC and Hanoi are apparently down to congestion. Vietstar, operated by the military since 2010, has plans for the civil market as well.

Compared to similar markets in the region like Thailand, Burke says, Viet Nam still has “a long way to go to catch up.”

“There is plenty of room for more growth ahead,” he says.

Helen Clark is a freelance Asia correspondent 

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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