Vietnam Air Charters' Prospects Rise

The bad old days when state-run Vietnam Airlines was just a shabby little domestic carrier operating shabby Russian aircraft, with service to match, are a fading memory. Powered by aggressive fleet expansion and a new air services agreement with the US initialed in October, ambitious VN has signaled its intention to become a significant player in Asia's hotly competitive aviation market. That, officials concede, may take some time, but the groundwork is being put into place.

A key driver is national pride and stubborn determination to emulate its far more advanced Asian rivals. But the airline also is starting to profit from Vietnam's steady economic growth and a bounce-back in travel following early containment of SARS after an initial steep decline in traffic.

Vietnam Airlines carried 1.8 million passengers in the first six months of 2003, of which 707,000 were international. In terms of traffic, figures are reversed, with VN generating 1.8 billion RPKs on international services, versus 835 million in domestic services. It operates an average of 56 domestic flights and 49 international flights each day. According to figures supplied by the airline, VN posted pre-tax earnings of $49.8 million last year up from $29.3 million in 2001. Revenues totaled $523.9 million and operating profit was $39 million.

By 2005, President and CEO Nguyen Xuan Hien tells ATW, the carrier plans to increase the number of passengers it carries by up to 16% and annual revenues by 14% to $1 billion. His optimism comes on the wings of an updated economic assessment by the Asian Development Bank in Manila that says average regional growth next year will accelerate to 6% with the diminishing impact of SARS and the war in Iraq and delayed recovery in industrial countries.

Also in the airline's favor is the fact that the nation's communist leaders appear to be moving toward a more liberal economy and are focusing efforts on promoting foreign tourism. The overseas ethnic travel market includes an estimated 1 million-plus Vietnamese in the US alone, plus large numbers in Europe. Executive VP-Commercial Affairs Pham Ngoc Minh indicates that passenger traffic to and from the US, now at about 280,000 a year, has been growing 5%-7% annually and officials expect the rate to double once direct flights start under the new bilateral (see box, opposite page). The US market already is the airline's third largest market behind Japan and Taiwan and accounts for about 10% of Vietnam's total airline business.

VN admits its target to evolve into a quality-driven, full-service international airline is a challenge. It benchmarks itself against incomparably stronger carriers such as Singapore Airlines, Cathay Pacific and Japan Airlines, with which it codeshares.

The level of IT sophistication in its operations, for example, is still at an early stage and "under development," Hien admits. Although its flights are listed in the Amadeus GDS and others, Web sales and e-ticketing remain a long-range vision, hardly surprising for a country in which only 2% of the population subscribes to Internet services. How much VN actually is investing in IT and communications remains a question.

The airline's MRO department, which also performs line maintenance at all Vietnamese airports, is just now in the process of obtaining the Vietnamese civil aviation authority equivalent to JAR 145 certification. This summer VN signed an accord under which it will provide Lao Airlines with crew and all maintenance services for its single A320 for one year--its first stab at third-party work.

The country's limited home market is another issue. Around 40% of the 81.1 million, heavily agrarian populace lives in poverty with less than $10 monthly income--despite rapid economic headway in recent years spurred by a bilateral trade agreement with the US. Officials declined comment when asked to what extent domestic ticket prices may be subsidized as a national infrastructure obligation.

Factored into VN's rapid development is the residue of its 1956 roots as the national carrier of a Communist Party-run country with five small Russian-made aircraft and one international route: Beijing. The chairman of Vietnam Airlines Corp., Nguyen Si Hung, is also secretary of the Corporation Party Committee, which organized its Second Congress recently to lay out strategic guidelines for VN's development in line with government directives.

The carrier was incorporated in 1989 as a state enterprise and recast in 1996 as Vietnam Airlines Corp., bringing together a host of subsidiaries from ground handling to hotels, real estate and catering with the airline as its core. A six-member management board appointed by the prime minister runs the corporation, which the government intends to convert into a holding company. In an example of the kind of red tape that would stifle most other airlines, the Saigon Times reported that the Vietnamese Central Bank only in September gave VN approval to open additional offshore bank accounts in foreign currency, including the US dollar, to facilitate transactions with foreign business partners.

VN's domestic network, which links 16 cities throughout the country and claims an annual 15%-17% growth rate, is enhanced by local carrier Pacific Airlines, in which VN holds an 85% stake. That carrier, which according to its website has a fleet of two A321s, an A320, an A310, an MD-82 and a 737-800, also flies charters and provides scheduled services to Taipei, Kaohsiung and Singapore. Plans call for wholly owned charter subsidiary Vietnam Air Services to be restructured as a feeder carrier in 2005 to operate ATR 72s and F70s on some of VN's domestic and shorter Asia regional routes under the name Vietnam Airlines Express, according to Luong Hoai Nam, director-marketing planning.

VN flies to 23 international points including Tokyo, Sydney, Seoul Incheon, Taipei, Fukuoka and Osaka. It plans to inaugurate 777 services in December to Frankfurt--initially from Ho Chi Minh City via Hanoi and Moscow--its second European destination after flights were launched to Paris in June. Frequencies will be twice or three times weekly. Duong Chi Tanh, director-passenger marketing, says the FRA start could slip into early 2004 and that the airline also is conducting a feasibility study into flying to London.

Hien says discussions are underway with Lufthansa about a commercial agreement to take effect with the summer 2004 flight schedule, when VN aims to start 777-200ER nonstop flights to Frankfurt, some originating in Hanoi and some in Ho Chi Minh City (formerly Saigon). LH currently serves only HCMC, via Bangkok. Approximately 63% of VN flights originate in HCMC, with 37% originating in Hanoi. The airline links the two with 8-9 flights per day.

Turning to the transpacific, VN tentatively aims to launch its own services to San Francisco once the Vietnam-US bilateral is ratified but has not identified a timeframe. It sees Vancouver as its second future North American destination following an ASA with Canada ratified earlier this year.

The VN winter timetable includes several startups topped by thrice-weekly flights between Hanoi and Kuala Lumpur and four-times-weekly services between Hanoi and Singapore. Busan and Siem Reap are among recently inaugurated destinations, and SARS-suspended services have been reinstated to Beijing, Guangzhou and Kunming.

To support this growth, four 777-200ERs joined the fleet this year, two of them leased from ILFC. These two are powered by GE90-94Bs and operate on flights to Europe. The remaining two, plus two on order for delivery in 2004 and 2005, are or will be powered by PW4084s. These aircraft, which were ordered directly from Boeing, are mainly for shorter intra-Asian routes.

The addition of the new aircraft has resulted in the need to find additional pilots, and expatriate pilots of various nationalities have been hired to fill the gaps, training captain Richard Griffith, ex-British Airways, told ATW during a fight from Hanoi to Paris. More than 80% of VN pilots-in-command and 100% of second officers for its feet of 34 planes--slated to grow to 50-plus by 2007--are Vietnamese. Recurrent simulator training is taking place mainly at China Southern and Singapore Airlines facilities.

VN also operates seven 767-300ERs, three A321s, 10 A320s, eight ATR 72s and two F70s, some leased, some owned. Hien tells A TW that discussions are underway to finalize financing of an Airbus order for five more A321s to be deployed on domestic and intra-Asia routes. The 767s are to be phased out eventually. "Our goal is to meet potential growth with fleet expansion ... [and] develop a fleet that will give us the greatest benefits possible in terms of cost of operation, technology, production resources and management flexibility," be explains through a translator. He discounts as pure speculation reports that VN is considering an offer from Airbus for A340-300s, although Airbus Chief Commercial Officer John Leahy recently told this magazine that the two were talking.

The airline has identified the cargo business, which generated $47.4 million in revenues last year, as a key component of its development strategy in a region where it says the cargo industry is expanding at a rate of 9% a year. It may launch all-cargo operations in the next 3-5 years, Hien says.

In conjunction with delivery of the 777s, VN has begun rolling out a stunning new "golden lotus" livery against a deep blue background to replace its familiar but bland heron design. Hien says, "We realize that changing a logo does not automatically change anything else. So we are placing great efforts in harmonizing our product to the image that we are promoting with our upgraded inflight product and fleet renewal."

Vietnam has four airports capable of receiving aircraft as large as 747s: Hanoi, Ho Chi Minh City, Danang and Hue. Hien told the Saigon Economic Times that VN is interested in using the US-built airfield at Cam Ranh Bay, which is only 35 mi. from tourism magnet Nha Trang. He also wants the airstrip at Chu Lai near Danang upgraded for civilian use since it was idled by the Vietnamese military.

Despite technological challenges at the airline and the larger political and economic issues facing Vietnamese society, analysts are upbeat about Vietnam Airlines' prospects. "This is an airline with a future," declares Peter Harbison, MD of the Centre for Asia Pacific Aviation in Sydney. "Coupled with expansion underpinned by the country's robust economic growth, Vietnam--until now an underserved route--is establishing itself as a new, attractive travel destination."

Hien says, "We have set ourselves the target of serving 5.5 million passengers by 2005 and 8 million by 2010 over a strategically developed network of long-haul flights to complement our high-density domestic and regional operations." With recent performance as a guide, they just might make it.

US bilateral = opportunity and challenge.

The new air services agreement between the US and Vietnam provides for resumption of direct flights that have been suspended since the end in 1975 of the Vietnam War--which Vietnamese refer to as the American War. But the ASA also includes significant restrictions that could stall entry by US operators. The countries were to implement it on an interim basis pending completion of formalities.

Although authority for scheduled freighter flights will be unfettered, US passenger airlines will be prohibited from boarding passengers in France, Japan, South Korea, Taiwan or Hong Kong. Vietnam Airlines will be disallowed stops only in Japan. Also, US carriers will not be permitted until Oct. 15, 2005, to carry local traffic between Vietnam and Hong Kong.

Under terms of the five-year accord, two passenger carriers from each country may provide scheduled US-Vietnam service immediately. A third passenger carrier may begin service starting in the third year. Each may operate seven weekly roundtrips between the countries, according to the US Dept. of Transportation. The agreement permits an unlimited number of scheduled all-cargo carriers to operate with no limits on weekly frequencies. Additionally, it "features unlimited rights for cargo charters, and allows carriers of each side to operate up to 52 passenger charter flights per year," DOT said. The sides agreed to meet within four years to consider a further expansion of air service opportunities. DOT said it would pursue an open skies pact at that time.

In a sober assessment of the new ASA, Le Dang Doanh, an economist and adviser to Vietnam's minister of planning and investment, told the Associated Press: "While Vietnam Airlines has the opportunity now to fly to the US, a huge market, it also faces fierce competition."