Tough Challenges for Airlines Firms

 

Vietnam aviation sector has maintained a stable and high growth. The number of clients using Vietnamese aviation services had increased by an average of 13.3 percent per year in the 2002-2007 period. Mr Lai Xuan Thanh, Deputy Director of the Ministry of Transport’s Aviation Department acknowledged that Vietnam is gradually reducing the subsidy policies for Vietnamese aviation firms, encouraging foreign airlines companies to do business. So far, Vietnam has 44 foreign airlines companies providing travel services, which is much higher than 18 companies in 2002.

Due to escalating high petrol prices in 2008 and the world economic downturn, domestic airlines companies faced hardships. The hardest hit company was the Vietnam National Airlines Corp (Vietnam Airlines) with the volume of arrivals reducing 3.3 percent in the first quarter of 2009. The figure is estimated to rise only 4.9 percent for the whole 2009, rather lower than the growth of 15.8 percent in 2008. Jetstar Pacific Airlines (JPA) maintained a growth of 28.7 percent in the quarter, which was, however, much lower than the growth of 54.6 percent in 2008.

 

Just coming into operation for 6 months, Ha Dung musician’s airlines company, Indochina Airlines had to cut down 50 percent of flights from the Hanoi –Ho Chi Minh city route.

 

Additionally, Vietjet Air – the first private airlines company in Vietnam with the business license being granted in December 2007, has not taken its first flight. Meanwhile, the business license will expire if they do not come into operation before December 2009. At present, Vietjet Air is speeding up preparations to start its first flight in the fourth quarter of 2009 after 2 delays.

So far this year, no Vietnam airlines firms have made profits in the domestic market amid the dull foreign arrival market. Vietnam Airlines, VASCO, JPA and Indochina Airlines complain losses in domestic flights despite good cost management.

 

Mr Luong Hoai Nam, General Director of JPA stated that no domestic aviation market could grow when all airlines firms complained losses in domestic flights. Vietnam, with the population of 86 million people, had only 6 million domestic airline moves and about 1 million people could fly. Meanwhile, Australia, with the population of 20 million had 50 million airline domestic moves. The gap in airlines transportation popularization between Vietnam and Australia is 35 times!

 

Additionally, the market share for international short-distant flights lasting under three hours by Vietnam firms was significantly narrowed when foreign airlines firms arrived on the scene. In the 1990s, the Vietnamese market share on international routes under 3 hours reached about 40 percent. Now, it has decreased remarkably and remained at about 15-20 percent in some routes.

 

Foreign airlines companies increased the flight volume so fast that Vietnamese firms could not catch up with and could only uphold a maximum of one or two flights per day to make profit or have small losses only. The burden of losses in domestic flights has hindered Vietnam airline companies from competing with the foreign ones and made the former gradually lose their market share though the 50-50 airlines contracts with other countries.

The Circular No. 103 by the Ministries of Transport and Finance that substitutes the Circular No. 22 and allows abrogation of the ceiling prices in domestic airlines routes as well as aviation service is really advanced, said Minister of Transport Ho Nghia Dung. If at least two airline firms operate in an airline route, Vietnam will apply the market-oriented mechanism to facilitate price competition among firms, which has been proven that the air fares in Vietnam have remarkably decreased since the beginning of this year in order to stimulate domestic demand while applying fuel surcharge upon the rising petroleum prices.

 

Meanwhile, Mr Luong Hoai Nam said the price management mechanism still embraces a lot of inadequacies. Though the Circular No. 103 went into effect on December 16, 2008; it has not yet proved the efficiency in reality, which puts state management, operations by airlines firms and companies of other sectors in a bind.

 

In this case, Mr Nam said the hardest hit are consumers, particularly in the special events of the National Lunar New Year or Tet, National Liberation Day and International Labour Day [April 30-May 1], and National Independence Day [September 2], etc. Meanwhile, the number of return flights during the busiest times is even lower than that in normal days of the previous years, fulfilling between 60-70 percent of the average number of flights. Therefore, the increase in the number of flights during the busiest period is often attributed to social and politic purposes rather than for business, which means that more flights result in bigger losses. Small-sized, private and foreign invested airlines companies have found it hard to increase their flight volumes.

 

Vietnam Airlines will arrange for more flights when the airplane fleet and air crew are willing to fly regardless of hiring airplanes in order to best serve the increasing demand during the busiest times.

 

Regarding clients, when supply out weighs demand, they are compelled to spend more on air fares for ticket sellers, agents and brokers. For example, some people had to pay VND3.5 million for tickets for Ho Chi Minh City-Hanoi flights but the disparity of VND1.7 million compared to the maximal prices did not flow into airlines companies’ wallets.

 

“We need to consider interests of consumers in a broader view. Air tickets should be a type of good that is easily to acquire at competitive and transparent prices. Moreover, upon surpassing the ceiling prices, additional flights will no longer be a burden of business but be business opportunities of airlines firms. In addition, it is very difficult to deal with arising disputes among airlines firms, between airlines firms and distributors and between airlines firms and clients”, Mr Nam said.

 

However, Deputy Head of the Aviation Department Lai Xuan Thanh recently said that under the view of state management agencies with the purpose of protecting consumers’ interests, it is necessary to apply the ceiling prices and the proposals by airlines firms to abrogate the ceiling prices are for the sake of business profit, not for social targets.

“Focusing on developing the current five airlines firms” has been a proposal made during the recent seminar entitled “Solutions to Vietnam aviation sector to overcome crisis”. In addition, Mr Lai Xuan Thanh said the Ministry of Transport has proposed the government of Vietnam to stop licensing new airlines firms from now onto 2015.

 

The infrastructure of Vietnamese airports does not allow many airlines firms to join the market. Almost Vietnamese airlines firms land their airplanes overnight at two major airports of Tan Son Nhat and Noi Bai. Meanwhile, the overnight parking capacity by these airports will serve only 92 parking places by 2015 when Vietnam will have an airline fleet of 149 airplanes regardless of inadequate airplane maintenance and repair services.

 

On the view of a state management agency, Mr Thanh said in the near term Vietnam will apply a mechanism of allotting market shares for particular airlines firms on the basis of the market demand, airlines firms’ competence and flight network balance and will allow a maximum of two airlines firms to operate on the same international air route.

 

In addition, the country will build a training centre in Cam Ranh area or Nha Trang city and a large airplane maintenance case at Chu Lai airport while taking the advantage of locally-made jet fuel by the Dung Quat oil refinery. Another important solution is to regulate the aviation service market with a focus on developing synchronized services at airports.