Airlines in Vietnam struggling to stay aloft

“Last year, the aviation market saw solid growth with the number of passengers surging 22.5% over the figures for 2014 to roughly 67 million,” said Lai XuanThanh, head of the Civil Aviation Authority of Vietnam.

In terms of growth, the Vietnam airline industry was the third fastest growing in the Asia-Pacific region, said Mr Thanh, citing statistics from the International Civil Aviation Organization.

This growth has resulted in a lot of airlines acquiring (or placing orders for) new aircraft and rapidly growing fleet sizes, placing an undue strain on cash flows to repay the massive amounts of debt piling up.

"We're seeing an awful lot of capacity as a result of new aircraft acquisitions," said Mr Thanh.

 "It's highly competitive and that has seen profits in the industry slide, both in absolute terms and as a proportion of Asian-pacific totals over the last three years."

“The problems aren’t for a lack of passengers in the domestic market,” said Nguyen Thi Phuong Thao, CEO of Vietjet Air, as we’ve maintained a domestic market share right at 40% over the past couple of years.

Mr Thao said the problem rather lies with the lack of passengers booking tickets on international routes, particularly those in the Asia-Pacific region.

Passenger traffic in the Asia-Pacific region is forecast to rise at a 5.7% compound annual growth rate (CAGR) through 2017, he said, according to data released last December by the International Air Transport Association (IATA).

The IATA expects that passenger traffic within the Asia-Pacific region will account for nearly 32% of worldwide air-travel by 2017, outpacing both that of Europe and North America, which is ballparked at around 23-24%.

Vietjet Air’s strategy is to forge a larger portion of the Asia-Pacific market, said Mr Thao while simultaneously increasing its current 28 domestic routes to take command of yet a larger percentage of the domestic market.

To that end we’ve recently placed on order an additional 86 Airbus aircraft to be delivered over the next six to seven years. To repay the debt we plan to raise capital by holding several IPOs (initial public offerings) with the first in the second quarter of 2016.

But Mr Thao noted that the competition with other budget carriers in Asia and Europe would be stiff and the company could face a protracted battle with overcapacity and low shareholder returns.

“Balancing growth and profitability,” is a fundamental challenge of the industry said Mr Thao.

He said the return on equity, is really the measurement of how to build long-term stockholder value, and that is very low for many of the airlines in Vietnam because we’re focused on growing.

With the focus on getting a larger market share in the Asia-Pacific region— the only question is how to do so in a manner that's financially sustainable while delivering the returns to investors as we go down that road.