The VietJet training centre has a vibrant, youthful air, more reminiscent of a university recreation room than an airline office. Flight attendant trainees bustle about the place, which features several classrooms and a large, cafeteria-like space that overlooks Ho Chi Minh City’s Tan Son Nhat International airport.
It is splashed liberally with the carrier’s red and yellow colours. The most prominent feature is a chest-high cut-out of the number “9,000”, referring to VietJet taking delivery of Airbus’s 9,000th aircraft in March 2015, the carrier’s first A321. It is backed by several pictures showing the carrier’s president and chief executive, Nguyen Thi Phuong Thao, posing with company staff, political leaders and prominent Airbus executives.
Madame Thao – her preferred title – has much to be proud of. In just five years since starting operations, the privately held carrier has built a fleet of 37 Airbus A320-family aircraft. It has orders for 200 additional aircraft, including 100 more Airbus narrowbodies and a deal for 100 Boeing 737s signed in May 2016.
The carrier serves 27 domestic and international destinations, and has established itself as a vibrant arch-rival to the conservative, state-owned Vietnam Airlines. FlightGlobal schedules data indicates that it will generate 13.3 billion ASKs in 2016, 62% higher than in 2015. Since 2012, VietJet’s ASKs have on average doubled annually.
Seated on a blue and white couch, Thao speaks quickly through an interpreter. She smiles throughout the interview, but it is immediately apparent that a talent with numbers accompanies her warm demeanour. Without hesitation or consulting notes, she cites statistics and traffic figures. Industry sources say she is a formidable negotiator.
She also has a knack for public relations. On new flights to beach destinations, the carrier has been known to have flight attendants in bikinis walk the aircraft aisles. Early in the carrier’s history this earned it a fine of a few thousand dollars, but a priceless amount of publicity. In 2014, it held a photo shoot in which models, clad in red and yellow lingerie with VietJet hats, posed provocatively with an A320 as a backdrop. The shoot went viral on social media – although the authorities were reportedly less than delighted.
GROWTH POTENTIAL
“We have achieved a very high growth rate because VietJet generates market share from a great number of people who have never flown before,” says Thao. “Vietnam has nearly 100 million people, the majority of whom are very young. The penetration of the aviation market is still very low, so we have much room for development.”
VietJet has received an indirect boost from the country’s existing infrastructure. A long, thin country, Vietnam lacks modern highways from north to south. The country’s train system is rundown and slow. The fastest express train between the two biggest cities, Ho Chi Minh City and Hanoi, takes up to 30 hours. An A320 can do it in less than two hours and with far greater comfort. A colleague of Thao talks proudly about how the airline has brought air travel to the masses, and that “farmers and ordinary people” can now fly.
The question this raises, of course, is yields. Domestic air tickets in Vietnam are subject to competition among the two dominant carriers – VietJet and Vietnam Airlines – and low-cost carrier Jetstar Pacific, of which Vietnam Airlines holds 70% (the other 30% is owned by Qantas).
Mark Farwell/Studio 4 Productions
Further complicating the competitive picture is the apparent dearth of routes. FlightGlobal schedules data shows that 42% of all domestic seat capacity is between Ho Chi Minh City and Hanoi. After this, 39% of seat capacity serves the country’s third-biggest city, Da Nang, from either Ho Chi Minh City or Hanoi. While new routes to other cities will gain more traffic, this “golden triangle” is a permanent feature of the country’s air travel market.
Ruthless competition on just a handful of routes generally spells bad news for yields, but VietJet appears to be prospering. The carrier says that in 2015 revenue tripled from a year earlier, to D10.9 trillion ($490 million), and that its load factor was 88%. Thao says the company was profitable in its second year of operations, although the company has never disclosed profit figures. Still, she gives a clear sense of what it takes to succeed in this sort of environment.
“We are strongly convinced about our cost management capabilities,” she says, noting that VietJet’s CASK ex-fuel is just 2.42 cents.
By comparison, AirAsia’s CASK ex-fuel for the three months ended 31 March 2016 was 1.96 cents. Thai AirAsia’s CASK ex-fuel for the second quarter of 2015 was 2.7 cents.
She attributes the low CASK to a young fleet, with an average age of just three years, which helps with maintenance costs. The low cost of labour in Vietnam also plays a part – although the carrier employs a significant number of foreign crew on the flight deck. Thao says the carrier generates a respectable utilisation rate of 13.4h per aircraft per day.
AIRPORT CAPACITY
Given its immense orderbook, the big question facing VietJet lies in clear view of the company’s training centre: Tan Son Nhat airport itself. The two-runway facility, made famous during the Vietnam War, is surrounded by urban sprawl. The Civil Aviation Authority of Vietnam said it handled 22 million passengers in 2014, against a design capacity of 20 million. A significant expansion is under way, but even a casual visitor can see the airport is bursting at the seams, especially its domestic terminal.
“We have seen publicity that all airports in Vietnam are congested, but we think this is a PR psychology,” says Thao. “The government of Vietnam is committed to investing a lot in airport infrastructure. From now until 2020 the government will invest up to $10 billion.”
VietJet is also part of a broader industry effort to increase the number of slots at the airport. Thao notes that the airport now has 32 slots per hour, but work is under way to increase this to 42. In the “near future” this will grow to 50 slots per hour. By comparison, UK air navigation provider NATS estimates that London Heathrow’s two-runway system can generate 90 slots per hour. Thao feels that slot growth, and other expansion efforts, will boost capacity to 40 million by 2017 or early 2018.
“There has been a lot of investment in the country’s commercial airports,” she says. “There are 22 commercial airports in operation in Vietnam, and Tan Son Nhat is the only one we regard as full.”
Thao hints that VietJet may not, in fact, put all the aircraft on its orderbook into the VietJet flagship, but potentially farm them out to franchisees. Thus far, the only franchise carrier outside Vietnam is Thai VietJet Air, based at Bangkok’s Suvarnabhumi International airport. VietJet owns 49%, with two unnamed investors holding separate stakes of 41% and 10% each.
Having operated its first flight in late 2014, Thai VietJet has three A320s. It has taken some time for this carrier to get up to speed. For now it only operates on the Bangkok-Phuket, Phuket-Chiang Rai and Bangkok-Chiang Mai routes, although it has also operated charters. While Thao says the unit is profitable, industry observers note that it is a minnow in Thailand’s ruthlessly competitive airline market.
Thao adds VietJet is willing to operate franchises overseas, but is wary of “investing a lot” in the franchise model. Rather, VietJet would prefer local partners to put up the bulk of investment. VietJet would contribute operational, branding and distribution expertise.
Should VietJet set up oversees franchises, it would be following the cue of the two regional low-cost juggernauts, Indonesia’s Lion Air and Malaysia’s AirAsia. The challenge, of course, is that low-cost competition throughout Southeast Asia is particularly cut-throat with creaking infrastructure and slot limitations set to make life challenging for newcomers. This probably explains Thao’s relatively cautious approach to franchises compared with her two counterparts, Lion’s Rusdi Kirana and AirAsia’s Tony Fernandes.
BUSINESS MODELS
In her rare public interviews, Thao has stated that she carefully studied the business models of low-cost airlines such as Southwest, Ryanair and AirAsia before deciding to start VietJet. Indeed, VietJet was originally intended as a joint venture with AirAsia, but political issues forced VietJet to go it alone. One hallmark of the classic low-cost model is committing to a single aircraft type. This conveys benefits in a range of areas, from crew training to spare parts.
Sources familiar with the 737 deal say that Boeing offered very attractive pricing, even though Airbus fought a desperate battle to keep VietJet as an all-Airbus operation. It also probably helped that the deal was endorsed by outgoing US president Barack Obama. During his state visit to Vietnam in May 2016, he personally witnessed Thao sign the agreement with Boeing president Ray Conner.
Nonetheless, the shift to Boeing breaks the classic single-type model. FlightGlobal asked Thao about this pivotal decision.
“I appreciate the single-type business model,” she says. “And we considered that we will only get the second type in our fleet in 2019. By then we will have about 90 airplanes and will have been in the airline business for nine years. When we officially launch the second type it will be appropriate. More importantly, commercially speaking, we will get efficient, comprehensive support from Boeing. We can be assured of the capability to operate the second type.”
Apart from the 100 jets, the deal also includes infrastructure, operational management, training, tooling and equipment. With a nod to Obama, Thao adds that the deal comes with “political support”.
Thao, however, still has warm words for Airbus.
“We highly appreciate what Airbus has done for us. They have been with VietJet since the very beginning. For the time being, we’ll have two strategic partners: Boeing and Airbus. And they will work with us for our development. Both see great potential in the Vietnam market.”
Indeed, just four months after the Boeing deal, Thao was in Hanoi to sign an order for 20 A321s, personally witnessed by French president Francois Hollande. As with the Boeing deal, it was signed before a huge bust of Vietnam’s founding father, Ho Chi Minh.
The next battleground for the two big airframers is whether VietJet takes the plunge into long-haul. Over the years, VietJet has publicly flirted with the idea of obtaining widebody jets. These could help it serve the large Vietnamese diaspora in the USA. For the time being, though, Thao has a preference for standing pat. While the carrier continues to study long-haul low-cost, she feels that it would be difficult for such a venture to generate a profit.
“This does not mean we will not eventually operate long-haul operations, but for the immediate term our focus is on narrowbodies.”
To address the long-haul market, VietJet prefers to co-operate with overseas partners. She says it has a “technical co-operation” arrangement with Qatar Airways. It is also in discussions for interlining with a Japanese and a US carrier. The former is probably Japan Airlines, which saw its codesharing deal with Vietnam Airlines end when All Nippon Airways purchased a stake in Vietnam’s flag carriers.
“In order to form interline arrangements, we need to reach certain standards with our service and operations,” she says. VietJet received an IATA Operational Safety Audit (IOSA) in 2015 and will register as an official member of IATA.
Without question, Thao has done more to stimulate Vietnamese air travel than any other airline executive, past or present. Considering the vast number of aircraft she has on order, and her tenacity as a businesswoman, VietJet’s prominence in both Vietnam and beyond is set to grow.
Source: Cirium Dashboard
