For background on how Vietnam’s aviation industry came out of the COVID pandemic, see: Vietnam’s Airline Industry Turbulence: Unpacked 2024
At the start of the year, news circulated that Vietnam Airlines was on the road to recovery after reporting a ‘record pre-tax profit’ of VND7.32 trillion or US$287.7 million ending a four-year streak of losses.
This was, however, a little misleading with said record profit, in large part, the result of one of the airline’s creditors writing off US$220 million worth of debt in exchange for the return of several planes leased by its subsidiary, Pacific Airways.
Moreover, at the end of last year, Vietnam Airlines still had negative equity (what’s left after subtracting its total assets from its liabilities), to the tune of VND 10 trillion or US$398.72 million, notably down from VND 16.95 trillion or $694 million in 2023, but still significant.
That is to say that Vietnam Airlines is still very much financially on Struggle Street three-odd years after COVID-19 border closures came to an end. That said, it’s not just the airlines’ accumulated debts that are weighing on Vietnam’s aviation industry. Vietnam Airlines’ biggest peers, VietJet and Bamboo Airways are also facing their own financial challenges.
Bamboo Airways, for example, has been trading insolvent (defined in Vietnam as when monies owed to creditors pass more than 90 days past due) for at least a year, maybe even longer.
Some of those waylaid payments at the end of last year, included debts with the Airports Corporation of Vietnam worth VND 2.1 trillion or US$82.3 million; overdue engine lease fees with Willis Lease Finance Corporation of US$3.8 million; and a AU$15,000 refund owing to an Australian travel agent.
Whereas this is clearly not good for the reputation of Bamboo Airways, this can reflect poorly on Vietnam’s other airlines too.
That said, Bamboo Airways is not alone in struggling to fulfill its international obligations.
Vietjet could be on the hook for US$275 million after it failed to return four aircraft when their leases were cancelled back in 2021. As part of its obfuscation efforts, it also took action in the Hanoi Courts which ultimately led to an anti-injunction order earlier this year. This has already done real, tangible damage to Vietnam’s reputation in the global aviation industry.
Specifically, the Aviation Working Group (AWG), which administers the Cape Town Convention (CTC), a set of rules governing aircraft leases, currently has Vietnam out of compliance with the agreement and on a watchlist over the incident. Notably, airlines from countries not in compliance generally pay higher rates on their leases.
That is to say, Vietnam’s airlines are not currently in great financial shape going into what will likely be a huge expansion period for the industry–Not only is the new Long Thanh Airport set to significantly increase the number of flights that can enter and exit the country, but tourist arrivals approached record highs at the end of last year and, though only early days, numbers from the first two months of the year suggest last year’s numbers could very well be beaten, and by a lot, this year.
Moreover, Vietnam’s economy is still on a high-growth trajectory making flying more affordable for a lot more Vietnamese people every year. That’s not to mention that a stronger US dollar could see more Vietnamese holidaying at home.
With all of this in mind, demand looks set to continue to grow into 2025 and beyond.
That said, some pause for thought needs to be given to how the industry might rise to meet this surging demand in its current condition.
That is to say, that reform may be needed.
For one, there is a general tendency in Vietnam to allow a business to basically run itself into the ground rather than forcing a bankruptcy. Obviously, this is not great news for creditors, but it’s also bad for the marketplace in general. In the case of Bamboo Airways, the airline is taking slots at airports, passengers, and subsequently revenue that could be going to the bottom line of one of Vietnam’s other airlines that might have a better chance of survival.
Moreover, currently limited to owning just 34 percent of an airline in Vietnam, allowing foreign firms to take bigger stakes in Vietnamese airlines could bring in some much needed capital but also expertise.
Vietnam Airlines, for example, as a mostly state-owned enterprise, is generally expected to have a member of the Communist Party of Vietnam at its command (by convention though not by law). With only roughly five percent of the population members of the Party, this significantly limits the talent pool from which it has to draw.
Moreover, foreign partners may be able to use existing relationships and their own reputations in the global airline industry to mitigate the impacts of any adverse outcomes from Vietnam’s out-of-compliance status with respect to the CTC.
That’s not to mention that opening up domestic air routes to foreign airlines could also create competition and drive innovation and efficiency in the sector.
This would of course mean relinquishing some control over the industry, for which there does not seem to be a very big appetite. In June last year, Bamboo Airways suggested that an increase to 49 percent of foreign ownership limits could help save the embattled airline. It argued that 34 percent was too risky for foreign investors because it would not afford them significant voting or veto rights. This was, however, knocked back at the time by the Ministry of Planning and Investment (its reasons were not exactly made clear other than to say that Vietnam was already meeting its World Trade Organisation obligations).
There are, however, not a lot of other good options for keeping the industry aloft. Notably, the government has stepped in to prop-up Vietnam Airlines but not everyone was happy about this. Moreover, the government has been toeing the line that Vietnam’s private sector needs to be developed to ensure long-term prosperity. Stepping in to save a mostly-state owned enterprise, it could be argued, runs counter to this objective.
All of that is to say, that the state of Vietnam’s aviation industry doesn’t look to be quite as rosy as it might at first seem. Moreover, to ensure the sector’s sustainability moving forward, a rethinking of how the industry is currently structured may be needed.