Private airline determined for expansion with $9.1-billion fleet infusion

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PHOTO: vietjetair.com

Vietnam's only remaining private carrier VietJethas shocked the domestic aviation market by signing a deal to buy nearly 100 new planes for a total of US$9.1 billion.

The budget carrier signed the agreement with French planemaker Airbus SAS on September 25. The sale includes 92 A320 aircrafts, as well as the leasing of eight more.

The planes will be delivered beginning next year. The last payments and deliveries will be in 2022.

Managing director Luu Duc Khanh said that although many people did not take the news seriously, VietJet had in fact been preparing for the purchase since the company was founded five years ago.

Responding to doubts that VietJet could not afford the huge payment, he said the carrier was "well-prepared" to pay in installments over the next nine years.

Apart from bank loans that will cover up to a fifth of the total payment, VietJet has reached firm commitment agreements with its foreign partners on export credit support, he said.

The carrier is also considering raising money through bond issuances. An initial public offering may be set for about 18 to 42 months, said Khanh.

"˜Confusing'

Economist Nguyen Tri Hieu told Thanh Nien that he found the capital arrangement plan "confusing" as VietJet's massive loans will not be guaranteed by the Vietnamese government, according to Jean Noel Poirier, French Ambassador to Vietnam.

Foreign lenders often require loans to be guaranteed by a third party, and it is hard to believe that local sources would be able to lend an amount equaling 8-9 percent of the country's gross domestic product during an economic slump, he said.

He also cast doubt on the financing of export credits, saying in the US and European countries such support comes with the requirement that products to be shipped to foreign buyers are made up of at least 50 percent local materials and services, something he said was unlikely in airplane manufacturing.

Economist Le Tham Duong also questioned the feasibility of borrowing without guarantors, saying that it would be hard to get lenders on board for an expansion project in low-cost aviation, which is still new in Vietnam.

Outlook

The carrier, which launched its first flight at the end of 2011, had announced late last August a possible IPO after unexpectedly becoming profitable earlier this year.

Bloomberg then quoted Khanh as saying that VietJet's performance in the first seven months had been "far beyond" expectations with pretax profit of VND120 billion ($5.69 million). The carrier had projected losses in the first three years of operation.

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Several analysts were hopeful that VietJet's expansion would break up the near-monopoly held by Vietnam Airlines in the domestic aviation market. 

VietJet had increased its market share to 20 percent as of late August from 14 percent a month earlier. It now operates eight leased aircrafts and serves 14 destinations in Vietnam and Thailand.

Air transport has one of the lowest ratios of profit over initial investment among commercial industries and air carriers have reported total global losses of $50 billion over the past ten years, according to International Air Transport Association.

In Vietnam the aviation slump has forced four shutdowns of private airlines since 2008, leaving VietJet as the sole private carrier to compete against its state-owned rivals, which include Vietnam Airlines, Jetstar Pacific, and VASCO.

Vietnam Airlines, while holding nearly 68 percent the market share, has a 70 percent stake in low-cost carrier Jetstar, which accounts for another 12 percent. Vietnam Airlines fully owns VASCO.

Khanh said the local market still had room for development given his estimate that Vietnam has less than one plane for every one million residents.

The ratio is 1.4 in the Philippines, 2.5 in Thailand, 7 in Malaysia, and 15 in Australia, he said.

He hoped an additional 5-10 planes from Airbus ASA annually through 2020 would help VietJet meet the rising demand, which he predicted would hit 150 million passengers annually by that time.

A representative from Vietnam Airline said the air transport market in Asia Pacific region is growing fast with a 15-20 percent increase annually, forecasting fiercer competition between carriers operating in Vietnam.

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