A flight attendant presents gifts to passengers on board an Air Mekong airplane in a file photo taken in 2010. Budget carrier Air Mekong halted its flights late last month to restructure its fleet.
High overheads have made it difficult for private carriers in Vietnam to make profit and the future looks bleak given that just one of five that have been licensed is still in the market.
Two have ceased operations after prolonged losses and the other two have never taken off.
However, rising incomes of its citizens and its political stability make Vietnam an aviation market with potential for carriers with a realistic, reasonable business strategy and deep pockets to absorb losses for a few years, experts say.
Five private airlines have been licensed in Vietnam since 2007, but just one of them, VietJet Air, is still in business, struggling to make ends meet.
Budget carrier Air Mekong halted its flights late last month to restructure its fleet. In fact, the airline is straddled with huge losses. It is pressurized by fuel supplier Vietnam Air Petrol Company to repay debts. The airline’s fuel costs ran up to VND1.3 billion ($624,000) per day.
Indochina Airlines lost its license in December 2011, as did private freight carrier Trai Thien Air Cargo, after remaining inactive for an extended period.
Indochina acquired its license in May 2008, but halted all its activities by the end of October, 2009, due to financial difficulties. It faced a lawsuit in which Asia Commercial Bank demanded repayment of debts totaling $1.3 million, according to the Transport Ministry.
Trai Thien Air Cargo never launched a flight after being licensed in June 2008, and nothing has been heard of Blue Sky’s original plans for operating a charter jet service.
Experts said the airlines’ failures are rooted in poor financial capacity, high fuel costs and economic slowdown. Any new airline that was not well prepared in terms of finance, human resources and business strategy would incur stiff losses in such a situation they said.
The carriers operating in domestic skies served 13.5 million passengers in 2012, down 0.2 percent over the previous year. The sector has seen a growth of 11 percent in 2011 and 31.5 percent in 2010, according to the General Statistics Office.
Lai Xuan Thanh, head of the Civil Aviation Administration of Vietnam (CAAV), said it was usual that airline investors incurred losses in the first two to three years of operation, not just in Vietnam, but other countries in the world as well.
Private airlines know this, but the carriers in Vietnam underestimated the difficulties, he said, adding that wrong strategies were also a reason for their failure.
For instance, while customers were still finding low-priced flights attractive, Air Mekong used four Bombardier CRJ900 aircraft, each with 90 seats, to offer luxurious services.
One industry insider who did not want to be named said private airlines cannot earn profit merely with their flights. State-owned Vietnam Airlines is able to offer ground services and trade in aviation fuel, other carriers do not have these options.
Another problem was that the tight market conditions were forcing carriers to keep their prices low. To attract customers, private airlines have offered many discounts, making airfares on some routes equal to railway tickets’ price, he said.
Private carriers were also struggling to compete with state-owned Vietnam Airlines in expanding their share of the domestic aviation market. The national carrier holds 68 percent of the market share, and it also has a 70 percent stake in budget carrier Jetstar Pacific, which holds 13 percent of the market share.
Four carriers operate in the domestic aviation market at present - Vietnam Airlines, Jetstar Pacific, Vietnam Air Service Company, or VASCO, a fully-owned subsidiary of Vietnam Airlines, and VietJet Air.
Desmond Lin, business manager of VietJet Air, a carrier like Air Mekong suspending operations is normal in a market economy. The market still presents opportunities for investors as the government is strengthening relations with other countries, facilitating development of the aviation sector, he said.
Vietnam is also a rapidly developing country that enjoys the advantages of political stability and safe tourism destinations. Add to this the increasing incomes of local people, the aviation market still has big potential to grow, Lin said.
VietJet Air plans to expand its domestic routes, and start to tap some international routes in Asia, he said.
Duong Tri Thanh, chairman of Jetstar Pacific, said the aviation business requires large, long term investments. “Investors should not give up after a year or two of suffering losses,” he said.
His airline has not seen any profit since it began operations five years ago, but it hopes to cut losses this year and make gains in effectively tapping international routes that it plans to launch this year, he said.
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By Ngan Anh, Thanh Nien News (The story can be found in the March 1st issue of our print edition, Vietweek)