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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’