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Change of course

Released at: 08:00, 19/06/2014

Change of course

Despite its dominant market position Vietnam Airlines is under significant pressure to reform and carry out an IPO.

by Nam Tien

Two new Airbus A321s were delivered to Vietnam Airlines (VNA) on the night of March 10 as part of an order placed with the European manufacturer in 2009. Demand for aircraft has increased significantly in rapidly emerging Asia. Within the next 20 years the region is expected to have procured more than 13,000 new aircraft, with a total value of more than $1,900 billion. Newly-established carriers such as Lion Air, AirAsia, and Vietnam’s VietJetAir have confidently signed major contracts with manufacturers after recognising the potential the region’s vibrant aviation market brings.

In Vietnam the construction of a second terminal at Hanoi’s Noi Bai International Airport and the Long Thanh International Airport in Dong Nai province to serve the overloaded Tan Son Nhat International Airport in Ho Chi Minh City illustrates the strong growth seen over recent years and potential into the future. As the national flag carrier, VNA benefits a great deal from this growth but comes with countless challenges and difficulties. In order to seize the opportunities the airline requires a long-term plan and effective reform.

Threat to the throne

Vietnam’s Aviation Market Share, 2013

The first chapter of the national flag carrier’s history was written back in January 1956, when its predecessor, Vietnam Civil Aviation, was born with a fleet of just five prop-driven aircraft. The development route of VNA was stormy for the first couple of decades due to ever-changing political and economic environments, but all were overcome. It now owns a fleet of more than 80 modern aircraft, including Airbus A330s and Boeing 777s. Passenger numbers increased from 21,000 in 1976 to more than 9.3 million in 2009 and approximately 15 million in 2013. VNA is now a member of the second largest air alliance, SkyTeam, and operates flights to 52 destinations (21 domestic, 28 international, and three charter/seasonal), connecting 26 countries and territories.

Its leading position in Vietnam is quite firm, with a market share of nearly 57.2 per cent in 2013, followed by VietJetAir with 26.1 per cent, Jetstar Pacific 15.2 per cent, and VASCO 1.8 per cent. VNA now holds 70 per cent and 100 per cent of Jetstar Pacific and VASCO, respectively, and it can be said that nearly 74 per cent of Vietnam’s aviation market is under its control. The airline is planning to double its fleet from 80 to nearly 160 by 2020. Its existing fleet dwarfs VietJetAir’s, with a humble ten. With powerful resources, it is logical that VNA is the market leader, with pre-tax profit of VND533 billion (more than $20 million) in 2013, double the result in 2012.

In early March Vietnam Airlines and its advisors - Citigroup, Morgan Stanley, BIDV Securities, and Vietnam Valuation and Finance Consultancy Joint Stock Company - completed a corporate valuation for submission to the Ministry of Transport and report to the Prime Minister.

It plans to propose its final published value be in accordance with its own accounting ledger or the re-valuation conducted by the State Audit Office of Vietnam. The original book value, according to its financial report dated March 31, 2013, is VND57,156 billion ($2.744 billion), which is higher than the re-valuation of VND57,047 billion ($2.739 billion).

It is reported that Vietnam Airlines was planning to raise $200 million by selling 383 million shares in the IPO, but its chairman noted the figures were only estimates. The government may consider reducing the government’s stake even further if the IPO takes place smoothly.

The recent appearance of budget carriers, especially VietJetAir, which is owned by Sovico Holdings, has sparked competitiveness in Vietnam’s aviation market. VietJetAir’s average airfares are usually lower than VNA’s by 25 to 30 per cent. “Never before has the competition in the local aviation market been so fierce,” Mr Pham Viet Thanh, Chairman of VNA, told a meeting between Prime Minister Nguyen Tan Dung and executives of Vietnam’s State-owned enterprises (SOEs) last year. VietJetAir operates mostly domestic routes and posted an after-tax profit of VND120 billion (nearly $5.7 million) in 2013, which was triple its result in 2012, while VNA’s after-tax profit was a modest VND140 billion (a touch over $6.5 million), after recording losses on domestic flights.

VietJetAir is winning in the domestic market with its budget airline strategy and its ambitious plans to compete with the national flag carrier include developing its fleet from 10 to 17 or even 20 aircraft over the next three years. A contract worth some $10 billion signed with Airbus not long ago confirms its determination. Its network has doubled to 16 domestic routes and two international. Competition can be found not only in the sky but also in the hangar, with reports surfacing that VietJetAir has been attempting to headhunt aviation engineers from VNA by tripling their salary.

Adding fuel to the flames, the international market is shrinking as foreign airlines increasingly offer new routes in the region. Previously it was mostly a battle between VNA and German as well as French carriers, but now there is strong competition from the Middle East: Emirates, wholly owned by the government of Dubai’s Investment Corporation of Dubai. “The modern-day obstacle for Vietnam Airlines is not competition with Jetstar Pacific and VietJetAir,” Mr Thanh emphasised. “It is between carriers from Vietnam and those from other countries, as we must ‘open our skies’ in 2015.”

Despite sitting comfortably on the throne with powerful resources, Vietnam’s aviation king remains vulnerable to any negative economic impacts and competitive pressure from its rivals. These are serious risks to it holding on to its leading position in Vietnam.

Change or wane

Vietnam Airlines’ passenger numbers, by year

As the national flag carrier VNA has long been trusted for its reliability and flight safety. Over the last 17 years its flights have been conducted without any accidents. There have, though, been issues. Complaints regarding poor service quality and frequent delays or cancellations can be common. Such issues may seem insignificant but they do affect the carrier’s image and a complete reform from head to toe is required for sustainable development. VNA needs to constantly look over its operations to improve product and service quality.

The emerging competitive pressures and its narrowing market share will drive change, which is necessary if it is to survive and thrive. Mr Nguyen Van Binh, State Bank of Vietnam Governor, once said that VNA sought a halt to exchange rate changes until December 31, 2013, otherwise “profits will turn to losses.” Its market share has been falling annually, by an average of 5 to 6 per cent. In its plan for this year it anticipates a market share of just 55 per cent.

VNA should not try to follow every move made by its smaller competitors such as VietJetAir or ignore the penetration of giant Middle Eastern airlines, but it must have a comprehensive strategy in order to not only streamline its system, cut costs and promote transparency, but also to be able to access pools of funding to finance its development and competitiveness. This is also true of all other SOEs. One of the solutions being implemented is the SOE equitisation process, and VNA has definitely not been left out. 

The national flag carrier is one of the major focuses of the government and the Ministry of Transport in the SOE equitisation process. “We are implementing the equitisation process aggressively, from awareness to action,” said Minister of Transport Dinh La Thang. “We are implementing the process because we see the value in equitisation, not because we are being forced to do so. Equitisation is essential for the innovation of Vietnam Airlines and all other SOEs.” The plan is to conduct an initial public offering (IPO) this year, offering 25 to 35 per cent of the carrier’s shares. In a year full of IPOs VNA is very much in the spotlight, receiving the most attention and interest from investors.

Along with positive market signals such as an expected increase of 15 per cent in domestic passenger numbers and growing international visitors, according to reports from the International Air Transport Association (IATA), the IPO is believed by many experts to be happening at just the right time and will therefore bring many benefits to the national flag carrier. For its own survival and development, VNA no doubt understands the need to change more than anyone else.

“The airline is now carrying out its IPO plans and choosing a strategic partner to complete equitisation this year and officially begin operations as a joint stock company from January 1, 2015.”

Mr Pham Viet Thanh - Chairman, Vietnam Airlines

“The timing of the IPO seems fine as the bear market appears to be over. Of course, the valuation will be crucial. But if the government allows the IPO to go ahead at a reasonable valuation and perhaps even throw in a nice dividend yield, there would certainly be demand for the company’s shares.”

Mr Johan Kruimer - Managing Director, HSC

“This deal is more likely to attract private equity investors, provided it can be structured adequately to provide downside protection, as well as interest from strategic investors. The foreign investors we are working with also want to know the results of the corporate valuation before deciding to become a strategic shareholder.”

Mr Michel Tosto - Head of Institutional Sales, Viet Capital Securities

“There are a few critical factors for a successful IPO of Vietnam Airlines. The first would be the involvement of a global Big Four auditor such as KPMG, PwC, Deloitte or Ernst & Young. Secondly, it needs several value added independent directors joining Vietnam Airlines’ Board of Directors, such as the former CEOs of successful global airlines. Thirdly, the government ownership should be reduced to below 35 per cent so that the government can’t block shareholder resolutions, and this will help to ensure that the company is run in the best interests of shareholders and customers rather than political objectives. Fourthly, there must be sufficient liquidity in the shares after the listing. Last but not least, it is necessary to have risk management systems and internal controls to ensure that there are no kickbacks on Vietnam Airlines’ purchases and no related party transactions, etc.”

Mr Chris Freund - Managing Partner, Mekong Capital



Vietnam Civil Aviation, Vietnam Airlines’ predecessor, is established, with just five prop-driven aircraft.


With development hampered by the trade embargo imposed by the US, its efforts to modernise its fleet by signing contracts with Dutch lessor TransAvia and Swiss charter flight provider TEA Basle to bring Boeing 737s to Vietnam are obstructed.
Welcomes its 500,000th passenger.


Leases its first Airbus A320 and signs its first partnership with Air France for support and training services. Welcomes its 1 millionth passenger.


Receives six Boeing 777s, significantly improving its transport capacity. Welcomes its 5 millionth passenger.


Becomes a member of SkyTeam, making it the first Southeast Asian airline to join the alliance. It continues to modernise its fleet with advanced, environmentally friendly aircraft such as Airbus A350XWBs and Boeing 787-9s. Welcomes its 10 millionth passenger.


Operates a fleet of 87 modern aircraft, including Boeing 777s and Airbus A330s. Welcomes its 15 millionth passenger.


Plans to go public, offering 25 to 35 per cent of ownership to investors.


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