When Vietnam’s Bamboo Airways first took to the skies in January of 2019, everything was looking up for Vietnam’s airline industry–not only was international tourism flourishing but rising incomes among middle-class Vietnamese were fueling a boom in domestic tourism as well. In fact, the route between Hanoi and Ho Chi Minh City was on track to become one of the busiest air corridors in the world.
This was followed in May by the listing of Vietnam Airlines, the Southeast Asian country’s national carrier, on the Ho Chi Minh City Stock Exchange. It was the second major airline to complete an initial public offering, following in the footsteps of Vietnam’s biggest budget carrier Vietjet which had been the first privately owned airline in the country when it started flying back in 2011.
On top of that, November also saw regulations changed to allow foreign ownership in Vietnamese airlines to increase from 30 to 34 percent. Not a substantial jump but a small sign that the sector was open for investment–both domestic and foreign.
Indeed, the airline industry in Vietnam was flying high with clear skies as far as the eye could see, however, this was to be short-lived. As 2019 drew to a close, dark clouds were gathering over Vietnam’s airline industry with pandemic border closures hovering just over the horizon.
COVID hits, the sector nose dives
Bamboo Airways had barely been flying for a year when COVID-19 was declared a pandemic and Vietnam’s borders were closed. On March 8, 2019, the last of the regular flights that would leave the country for quite some time were boarded in a mad scramble and a day later Vietnam’s airports went dormant.
For the better part of two years, passenger flights in and out of Vietnam would be heavily restricted. Whereas Vietnam had welcomed around 19 million visitors in 2019 in 2021 it was barely 160,000. Needless to say, the revenue of Vietnam’s three major airlines plummeted.
But this was, of course, only temporary, and as vaccines became available, COVID restrictions began to ease, and flights gradually began to resume. This would, however, not take away from the fact that the industry had been dealt a sizable blow and, whereas the COVID-caused challenges would dissipate, the losses banked during the pandemic would take years to clear. This was to be a reality further compounded by the outbreak of war in Ukraine.
Recovery stalls on outbreak of war
When Russia first entered Ukraine in February of 2022, oil prices jumped. This had a two-fold impact on the aviation industry.
Firstly, rising oil prices were creating inflation in the world’s biggest economies which took to increasing interest rates to try to bring it back into line. This saw the world’s key reserve currency, the US dollar, rapidly appreciate in value against the Vietnamese dong.
Secondly, the price of jet fuel skyrocketed–not only did fuel cost more but with US dollar contracts it was taking a lot more Vietnamese dong to fill airline tanks. Notably, this was a similar situation for airlines all over the world. However, whereas airlines elsewhere in the world could simply pass on this increased cost to consumers, Vietnam’s domestic airfares were (and still are) regulated.
Ticket price cap crosswinds
With ticket prices in Vietnam capped, Vietnam’s airlines found themselves in a situation whereby their input costs were increasing but their ticket prices could not. This was putting the squeeze on domestic airlines.
Vietnam Airlines, in particular, was vocal about how this was impacting the firm’s bottom line and in July 2022 was urging the Ministry of Industry and Trade to increase the price ceiling as profit margins grew ever tighter. There was, however, no immediate action and airlines were left to set ticket prices within the pricing framework detailed in Circular 17/2019/TT-BGTVT that had been developed based on input prices in 2019.
This was made all the more challenging by the aforementioned steady devaluation of the local currency.
Currency fluctuations
In essence, Vietnam’s airlines were being paid for airfares in Vietnamese dong, which they were then using to buy jet fuel, denominated in US dollars that were becoming more and more expensive, at prices that were sky high–Vietnam airline profit margins were under assault on multiple fronts.
This was, however, somewhat mitigated by the State Bank of Vietnam–the SBV–which was burning through foreign currency reserves trying to keep the dong from devaluing further. But this couldn’t last forever and in September of 2022, the SBV changed tact and increased interest rates by 1 percent and then in October for a second time by another 1 percent. But whereas this eased exchange rate pressures, it increased capital costs–Vietnam’s airlines were now facing higher interest payments on the huge debts they had developed during the pandemic.
It wasn’t just the airline industry, however, that was struggling. The tourism sector, the success of which is inextricably linked with that of Vietnam’s airlines, also had its own currency woes.
Tourism industry recovery delayed
The Vietnamese dong had lost just 9 percent of its value against the greenback by the start of November 2022. In contrast, the Thai Baht had lost 15 percent, the Malaysian Ringgit 14 percent, and the Philippine Peso 16 percent. In some industries this was good news, for the tourism sector, however, this meant that other parts of Southeast Asia were becoming much cheaper to travel–Vietnam was losing its low-cost destination edge.
But this was only part of the industry’s problems.
Changes made to Vietnam’s tourist visa program during COVID-19 were also proving to be a challenge. Specifically, the length a tourist could stay in Vietnam had been cut from three to one month and visa-free travel, though extended to more countries, had been capped at two weeks–tourists were booking shorter stays in many instances or choosing one of the other countries in Southeast Asia, that were becoming cheaper and offered longer visa-free stays, altogether.
This resulted in a relatively low 44 percent tourism recovery rate for Vietnam by the start of September 2023. For comparison, at the same time, Thailand had reached 75 percent, Singapore had reached 73 percent, Malaysia had reached 69 percent, and Indonesia had reached 53 percent.
Said visa changes were eventually rolled back but this was after Vietnam Airlines had recorded a loss in 2022 of VND 12.97 trillion or US$551.5 million, Bamboo a loss of VND 17.6 trillion or US$748 million, and Vietjet a loss of VND 2.65 trillion or US$112.6 million.
Foreign investment wanted
With the airline industry still fledgling almost two years after COVID border restrictions had been removed, Vietnam has started looking for support abroad.
The Prime Minister of Vietnam, Pham Minh Chinh, for example, in Australia for the ASEAN – Australia Special Summit, took the opportunity to suggest that Australian investors consider investing in Vietnamese airlines.
Notably, with 86 percent of the shares in Vietnam Airlines, the Vietnamese government is heavily exposed and foreign investment could be one way to avoid dipping into the state coffers to prop up the airline and the industry more broadly.
That said, with foreign ownership capped at 34 percent, the position of foreign investors in key decision-making is significantly weaker than their domestic partners and this has been problematic in the past.
Notoriously, Australia’s Qantas Airways exited the joint venture it had with Vietnam Airlines in 2020, handing over its share for reportedly peanuts the result of a partnership that had failed to produce results. This was due to conflicting working styles, according to local press at the time. A problem that may prove challenging to resolve.
The point being, that it’s not clear that outside support will be easy to find. That said, it could also simply be that foreign investors may be able to negotiate better deals on the back of the increased risk.
What’s next?
In November of 2023, airfare caps were lifted by about 5 percent for the first time since 2019. Detailed in Circular 34/2023/TT-BGTVT these news limits came into force on March 1 this year. This should take some of the heat off local carriers though of note, the jet fuel price has come down considerably since its peak in July of 2022.
That said, the glory days of Vietnam’s airline industry in the pre-COVID years are long gone. In their place is an industry still recovering from huge losses, hampered by currency and fuel price fluctuations, and limited by regulated ticket prices.
At the start of 2024, Vietjet looks to have somewhat bounced back, booking a profit after tax of VND 231.4 billion or $9.3 million in 2023. It is, however, the anomaly of the three with Bamboo Airways having shed most of its aircraft and routes over the past year or so and yet to report on its performance, and Vietnam Airlines recording four years in a row of losses adding VND 5.81 trillion or US$237.8 million to its tally last year.
Whereas current foreign ownership limits may be problematic, the diminished financial standing of the industry could be an impetus for change. Furthermore, as these airlines look to restructure their operations there could be investment opportunities to buy into ancillary services at a discount.
It may, however, take some time for these opportunities to become clear. With this in mind, the best way to monitor developments in the airline industry in Vietnam is by subscribing to the-shiv.