And for flag carrier Vietnam Airlines which, in less than a decade, has transformed itself from a chronically-ill socialist standard bearer into a competent and market-oriented airline, that held the promise of offshore equity to underpin its rapid development.
No longer. According to the carrier's deputy director general Pham Ngoc Minh, privatisation, even partially, has been taken off the agenda, despite the fact that accessing foreign capital in some form has long been part of the airline's strategic planning. Now, it seems, any foreign holding is politically too difficult to contemplate in a society struggling with future directions.
Doi moi has slowed dramatically in recent months as Hanoi nervously considers how to balance increasing commercial demands for a capitalist structure with socialist dogma. The 8th Communist Party Congress is also scheduled for the first quarter of 1996, closely followed by a general election.
For Vietnam Airlines, the outcome to this conundrum could prove critical. The flag carrier needs capital for investment in systems modernisation and new aircraft, including the acquisition of long-haul aircraft during 1996, if it is to continue its expansion in the face of continuing traffic growth.
Deputy director general Minh approaches the problem stoically, stressing that the most important factor is the government's hands-off approach which gives management the responsibility without damaging bureaucratic interference. Hanoi is 'supporting Vietnam Airlines in all ways possible to establish its network and fleet' with the only priority that it should meet its 'social obligation', he adds.
That includes the development of an airline which can compete with western standards of service and efficiency while making profits and providing Vietnam with essential air links. But achieving that might not be easy in the absence of a substantial capital injection as the carrier confronts watershed decisions on its future.
Leased Airbus A320s and Boeing B767s meet current requirements for modest regional and intercontinental services but the carrier is now close to reaching a decision on a larger aircraft type needed to open up new routes to North America and Europe. A number of medium-sized aircraft will also have to be added for regional expansion. Eleven ageing Tupolev TU-134s and a single Yak-40, which still provide about 5 per cent of capacity, will be phased out by 1997, with the fleet growing to between 35 and 40 western-built aircraft by 2000, says Minh.
The fleet renewal will have to be achieved during a four-year period in which the airline will face a volatile Vietnamese economy, intense competition and the threat of overcapacity. Vietnam's airports are served by nearly all the European and Asian majors, which will soon be joined by the US mega-carriers.
According to Vietnam's State Planning Committee, the economy grew by 9.5 per cent in 1995, up from 8.8 per cent in the previous year. Foreign investment reached US$4.5 billion for the first nine months of 1995, against US$3.7 billion for the whole of 1994. Much of this has been in hotel and tourism infrastructure, which is a boost for the airline. But inflation has returned with a vengeance, hitting 14 per cent in 1994 and 20 per cent in 1995. The local currency, the Dong, has also been kept artificially high against the US Dollar, hurting Vietnam's exports.
All of this adds up to an uncertain climate for Vietnam Airlines, which has been experiencing 40 per cent average annual growth since 1986 when Hanoi decided to take a more open approach.
Vietnam Airlines was established as part of a reorganisation of scheduled international services to the west in 1993 and began operations on July 4 with Airbus A300 and A310 flights from Ho Chi Minh City to Seoul, Korea. Today, regional flights also link Hanoi and Ho Chi Minh City with Osaka, Taipei, Kaohsiung, Hong Kong, Manila, Guangzhou, Vientianne, Bangkok, Phnom Penh, Kuala Lumpur, Singapore, Sydney and Melbourne. The airline also flies to Dubai, Moscow, Berlin, Amsterdam and Paris.
By 1992, Vietnam Airlines' market share of passenger traffic had risen from 12 per cent in 1990 to 27 per cent. In 1995 passenger numbers reached 2.1 million, up from 1.67 million the previous year while the number of non-Vietnamese passengers rose by 48 per cent to 436,000.
Minh is guarded about revenue and income statistics for 1995 - the airline reported a profit of US$21 million (271.4 billion Dong) in calendar 1994 on revenue of US$227.2 million - but Vietnam Airlines officials say privately it remains in profit and has done at least as well as the previous year.
Growth was deliberately kept down in 1995 from a projected 50 per cent to around 35 per cent to avoid the dangers of rampant expansion. Minh says 1996 traffic growth is expected to be between 25 and 28 per cent, which he believes is manageable. 'We are being very careful about not growing too fast and want to limit it to a maximum of around 30 per cent annually,' says one senior official. However, this will be difficult given the plan to purchase - or lease - several larger wide-body jets which will increase capacity.
At present the fleet is entirely leased and consists of eight A320s and four B767s. There are also four ATR72s for domestic services, with another two due to be added over the next few months. At presstime, negotiations were underway with Airbus about a possible lease/purchase arrangement to replace seven Air France A320s whose leases expire in March. The remaining A320 is leased from Singapore's Region Air and another option under review is to lease nine more from Region Air instead.
More important for the future will be the choice of new long-haul aircraft and the carrier will evaluate all the available options including the B747-400 and B777, A340/330 and MD-11. Minh says he would prefer to buy new long-haul aircraft, although this would require government funds or overseas financing. Hanoi has recently given approval for the purchase of two new Fokker 70s due for delivery in May for regional and domestic routes. 'We are trying to maintain steady expansion. The government will carefully study our report when we need approval from them,' he says.
The normalisation of relations between Vietnam and the US has given Vietnam Airlines valuable rights to the US west coast which it is keen to use. There are some 200,000 Vietnamese expatriates living in Los Angeles alone and Vancouver and Seattle also have large Vietnamese populations. In Europe, the carrier wants to add London and Frankfurt 'as soon as we possibly can', says Minh, acknowledging the slot restrictions at both airports. Air service agreements have also recently been signed with Bahrain and Slovakia. Regionally, the airline is also looking for steady growth through increased frequencies.
A key plank in Vietnam Airlines' growth is the development of more alliances and partnerships. Already, the flag carrier regards its close relationship with Hong Kong's Cathay Pacific as critical. The two operators' codeshare partnership began in 1991 on a small number of services between Hong Kong and Vietnam's two major cities. There are currently 11 codeshare flights a week to Hanoi and 12 to Ho Chi Minh City.
That experience has given Vietnam Airlines the confidence to seek new alliances, including a US partner. Discussions are underway with all the US majors, though the carrier has signed a letter of intent with Delta, which remains the favourite. 'We would like to find a US partner to support us in developing our network and traffic and particularly to meet direct competition,' says Minh. The carrier already has codeshare arrangements with Canadian Airlines International, China Airlines, and Korean Air as well as joint services with Lufthansa, Malaysia Airlines and Singapore Airlines.
'We are in the process of very fast development so we must find all the ways possible to meet these demands. We are looking to develop routes through codeshares, joint services or seat exchange - all kinds of co-operation,' adds Minh.
A critical factor which will influence Vietnam Airlines' ability to emerge as a credible player remains the restructuring and modernisation of the country's airport infrastructure. Hanoi has a US$4 billion airport masterplan which includes upgrading Ho Chi Minh City's Tan Son Nhut airport and Hanoi's tiny Noi Bai airport. However, due to an accident of history and geography, Vietnam's commercial capital Ho Chi Minh City and political capital, Hanoi, are at opposite ends of the nation. The carrier plans to solve that anomaly by opening up Da Nang, at the very centre of the country, as a primary regional and international hub.
A former US airbase, Da Nang is earmarked under the airport masterplan to get a new US$100 million terminal and already has everything else required to enable it to fill the role, including a runway which will take fully loaded long-haul aircraft. Customs and immigration facilities and an instrument landing system are already in place. 'We have a plan to open Da Nang for use on major international routes and we expect to be doing it by 1996,' says Minh.
Meanwhile, Vietnam Airlines has made substantial improvements in other areas, including distribution, through membership of SITA's Gabriel II and connection to the Abacus CRS. An agreement with Air France has helped the training of local pilots, cabin crew and mechanics. However, the carrier also needs to make large investments in its maintenance and cargo operations and develop its internal computer management systems.
The airline has come a long way since its shaky start in the aftermath of the war but has no intention of keeping a low profile. Vietnam became a full member of the powerful Asean regional grouping in July and the government has indicated the country will play a positive role in the region. The flag carrier plans to follow suit by becoming a full member of the Orient Airlines Association, subject to government approval.
The carrier also appears to see potential in a more informal regional grouping, the Greater Mekong Sub-region, or GMS, which covers a population of 225 million. The members all have borders on the Mekong River and include Burma, Cambodia, Laos, Thailand and Vietnam, along with the Chinese province of Yunnan. They recently drew up an agreement, coordinated by the Asian Development Bank, to embark on a regional development strategy, with particular emphasis on transport and a budget of some US$40 billion.
Of more immediate importance to Vietnam Airlines will be the strength of Hanoi's political winds of change. Without a clear mandate to raise money offshore or a guarantee of substantial government funding, the flag carrier's development could be severely curtailed as it strives to become a significant player.
Source: Airline Business
