VietJet has experienced tremendous growth since it was founded 10 years ago © AFP
With a coastline as long as the US east coast, Vietnam has always presented challenges to travellers: the distance between the capital Hanoi and commercial centre Ho Chi Minh City is 1,150km, a trip that can take 38 hours by train and even longer by bus.
But the rapid development of the economy and a burgeoning middle class have created an ideal environment for the growth of the aviation industry in ways few might expect from a developing country.
Until just a few years ago, Vietnamese air travellers, including foreign tourists, were relegated to using Vietnam Airlines, the flag carrier, which has historically dominated both the international and domestic markets.
With little competition, Vietnam Airlines was not affordable for most local travellers. In 2007, the company formed a joint venture with Qantas to operate Jetstar Pacific, a low-cost carrier that primarily flies domestic routes, but it has had limited success.
Enter VietJet*, which was the country’s first privately owned airline when it was founded in 2007 and has since experienced tremendous growth. The airline has gone from one jet and two domestic routes in 2011 to 40 jets (and 182 more on order) and a network of 36 routes in Vietnam and 17 internationally, including Thailand, Singapore and China. It is targeting 45 domestic routes by 2019 and 36 international ones by 2018.
Competing head-to-head with Vietnam Airlines and Jetstar, VietJet has already taken a 43 per cent share of the domestic air travel market. Its success is down to its modern fleet (averaging 3.3 years old), savvy marketing, low fares and low costs — its unit costs are among the lowest in the world.
Nearly overnight, domestic air travel became an affordable option for more Vietnamese. That 38-hour train trip between Hanoi and Ho Chi Minh City now takes two hours by plane, the fare is essentially the same and it is much safer option than the bus.
With increased competition, Vietnam Airlines has recently stepped up its game.
Meanwhile, Air Asia is also looking to enter the domestic market via a joint venture with a local partner.
In addition to a surge in local travellers, record numbers of foreign tourists are visiting Vietnam. International tourist arrivals surpassed 10m in 2016 — a 26 per cent increase from the previous year — and 2017 is on track to break that record, with 8.5m arrivals in the first eight months of the year, a near-130 per cent increase over the same period last year, according to the Vietnam National Administration of Tourism.
This surge is benefiting companies beyond airlines. Perhaps the biggest beneficiary is Airports Corporation of Vietnam*, which operates all the country’s 22 airports. It makes money from charging a range of fees (such as airport security, passenger, landing and take-off) and leasing retail space within airports.
ACV’s market capitalisation is approximately $6.7bn, which would rank it among the top five companies in Vietnam’s VN index when it moves to the Ho Chi Minh Stock Exchange later this year. VietJet’s market cap, in contrast, is about $2.2bn. While VietJet makes most of its money from domestic routes, ACV earns more from international flights, where airlines and passengers pay higher fees (although domestic fees are slated to gradually rise starting this month).
One of the biggest challenges for VietJet and ACV alike is system capacity. Vietnam’s main airports are congested and require expansion, and the air traffic control systems need modernising — all of which will require enormous investment.
Nevertheless, both companies have thus far seen large share price gains: VietJet has gained 44 per cent since its IPO in December 2016 and ACV has gained 99 per cent since being listed in November 2016. The key to their continued success will be to manage growth, generate profit and meet investor expectations.
Vietnam’s young aviation industry is a high-profile example of the many sectors benefiting from the country’s tremendous growth. The Vietnamese are eager to spend their rising disposable incomes to see more of their own country as well as the broader region, and to otherwise improve their lives.
As more low-cost carriers enter the market, the price of travel should continue to fall, enabling more Vietnamese to travel. But with its early entry into the market, brand equity, and an astute management team, VietJet is well positioned to maintain its lead.
Andy Ho is managing director and chief investment officer of VinaCapital, a Vietnam-based investment management and real estate development company
*Stock held by VinaCapital’s investment funds