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VietJet pursues more domestic expansion and plans Seoul as second international destination

4-Sep-2013

VietJet is pursuing further network expansion over the next few months as the carrier looks to cement its position as the leading low-cost carrier in the Vietnamese market. VietJet is adding three more domestic routes for a total of 14 and is also preparing to launch services to Seoul, which would be its second international destination after Bangkok.

VietJet overtook Jetstar Pacific as Vietnam’s largest LCC less than one year after its 25-Dec-2011 launch. By its second-year anniversary at the end of 2013 the carrier will account for over 25% of capacity in the domestic market and have a fleet of 10 A320s – on both counts double the size of Jetstar Pacific.

But Jetstar Pacific is finally preparing a response as the Jetstar Group affiliate plans to launch international services by the end of 2013 and pursue domestic expansion. Jetstar Pacific and its majority owner Vietnam Airlines have done little so far to try to combat VietJet’s rapid ascent. If VietJet continues to expand quickly a response is inevitable although VietJet could try to avoid a potential conflict by focusing more on expanding planned joint ventures in other Asian markets.

VietJet’s domestic market share exceeds 20%

VietJet currently operates 11 domestic and two international routes with a fleet of eight A320s. The carrier operated 30 domestic daily flights in its Jul/Aug-2013 summer schedule and is planning to operate 37 domestic daily flights at the start of the winter season in Nov and Dec-2013.

As of the end of Aug-2013, VietJet accounted for just over 20% of domestic seat capacity in Vietnam. Vietnam Airlines accounted for a leading 67% share while Jetstar Pacific accounted for about 13%. (For Sep-2013 the figures fluctuate as VietJet and other carriers temporarily adjust capacity for the low season. VietJet in the first half of Sep-2013 is operating 27 daily domestic flights before gradually ramping up in late Sep-2013 and Oct-2013 prior to reaching 37 flights on 1-Nov-2013.)

Vietnam domestic capacity share (% of seats) by carrier: 26-Aug to 1-Sep-2013

VietJet is the only private carrier remaining in the Vietnamese market following the Feb-2013 collapse of Air Mekong, a regional carrier which was partially owned by US-based regional airline group SkyWest Airlines. VietJet initially overtook Jetstar Pacific as Vietnam’s second largest carrier in Nov-2012 as it expanded its fleet to five A320s.

See related report: VietJet overtakes Jetstar Pacific as largest Vietnamese low-cost carrier

Three more A320s have been delivered so far in 2012, including two in Jun-2013. The two aircraft were mainly used to add capacity on several domestic routes as VietJet’s domestic capacity expanded from about 53,000 weekly seats to 75,600, according to CAPA and Innovata data.

Vietnam domestic capacity by carrier (total seats per week): 19-Sep-2011 to 23-Feb-2014

VietJet to launch three new domestic routes in 4Q2013

VietJet will use its final two aircraft deliveries for 2013 to again primarily expand in the domestic market. On 26-Aug-2013 the carrier announced the launch of services from Hanoi to Buon Ma Thuot from 15-Oct-2013. Hanoi-Buon Ma Thuot will be the carrier’s 12th domestic route, including five from Hanoi and seven from its main base at Ho Chi Minh. VietJet launched a daily flight to Buon Ma Thuot from Ho Chi Minh on 20-May-2013.

Buon Ma Thuot, located in Vietnam’s central highlands and knows as the country’s coffee capital, has been VietJet’s only new domestic destination so far in 2013. The carrier also launched this year service from Hanoi to Nha Trang, a beach destination which was already served from Hanoi.

See related report: VietJet to pursue more rapid expansion in 2013; Jetstar Pacific needs to respond fast

Data from VietJet’s booking engine reveal the carrier plans to add another new domestic destination on 1-Nov-2013 with the launch of service to Qui Nhon. Qui Nhon, a coastal city in central Vietnam, will initially be served from Ho Chi Minh with one daily flight.

VietJet will also launch service from Hanoi to Hue on 15-Oct-2013 with one daily flight, according to the carrier’s booking engine. VietJet previously only served Hue, located in north-central Vietnam, from Ho Chi Minh. All services at Hue have been suspended since 20-Mar-2013, when the airport closed for runway repairs. The airport is now slated to re-open on 20-Sep-2013 with VietJet initially resuming the Ho Chi Minh-Hue route with two daily flights, representing a doubling of its previous Ho Chi-Minh-Hue schedule.

Vietnam Airlines still has nearly twice as many destinations and more frequencies

The addition of Qui Nhon and the resumption of Hue will give VietJet 11 domestic destinations. In comparison, Jetstar Pacific currently has seven domestic destinations while Vietnam Airlines has 20, according to Innovata data. With the resumption at Hue, Vietnam Airlines will have 21 domestic destinations. (Jetstar Pacific is not currently selling any services to Hue, which it last served in 2011.)

Vietnam Airlines serves all three of the new domestic routes being added by VietJet within the next two months. Vietnam Airlines currently operates two daily flights on Ho Chi Minh-Qui Nhon using mainly A321s. Hanoi-Buon Ma Thuot is currently served with one daily A321 flight while Hanoi-Hue will be served with three daily A321 flights from 20-Sep-2013, increasing to up to five daily flights during the peak northern hemisphere winter season. Jetstar Pacific currently does not serve any of these routes.

On most of VietJet’s routes Vietnam Airlines has more frequencies and capacity. A321s in two-class 184-seat configuration is used by Vietnam Airlines on most main domestic routes. Jetstar Pacific, which like VietJet operates A320s in single-class 180-seat configuration, generally has the same number or fewer frequencies than VietJet.

VietJet domestic routes: peak summer and peak winter 2013 daily frequencies

Route

VietJet

Jul/Aug-2013

VietJet

Nov/Dec-2013 frequency 

Jetstar

current frequency

Vietnam Airlines

current frequency

Ho Chi Minh-Hanoi

9

10

7

14

Ho Chi Minh-Danang  

6

6

3

11

Ho Chi Minh-Nha Trang

2

2

N/A

3

Hanoi-Danang

3

2

1

9

Ho Chi Minh-Haiphong

2

3

2

4

Ho Chi Minh-Vinh

2

3

2

3

Ho Chi Minh-Hue

0*

2

N/A

0*

Hanoi-Dalat

1

1

N/A

2

Ho Chi Minh-Phu Quoc              

2

3

N/A

5

Ho Chi Min-Buon Ma Thuot

1

1

3

Hanoi-Nha Trang 

1

1

3

Hanoi-Hue 

Launching 15-Oct-2013  

N/A 

Hanoi Buon Ma Thuot 

Launching 15-Oct-2013 

N/A 

Ho Chi Minh-Qui Nhon

Launching 1-Nov-2013

N/A 

VietJet domestic network map nears completion

With the 11 destinations and 14 routes planned for Nov-2013, VietJet will serve Vietnam’s 11 largest airports and the country’s 13 largest domestic routes. Most of the remaining top airports and routes are served by Vietnam Airlines and its subsidiary VASCO with regional aircraft. (VASCO-operated flights are counted under Vietnam Airlines capacity as all the flights are operated under the VN code).

For example, Con Dao is currently only served with ATR 72 turboprops while Pleiku is currently only served with ATR 72s and Fokker 70s. Can Tho in southern Vietnam, however, is served with A321s and could be a potential VietJet destination.

Top 20 domestic routes in Vietnam ranked by capacity (seats) and year-over-year capacity change: 2-Sep-2013 to 8-Sep-2013

Can Tho is currently the 12th largest domestic airport in Vietnam based on seat capacity while Con Dao is the 13th largest and Pleiku is the 10th largest. Qui Nhon is currently the 11th largest but will move ahead of Pleiku after VietJet launches services to Qui Nhon on 1-Nov-2013. At that point VietJet will be serving all 11 of the country’s largest airports including Hue, which will regain the seventh position after it re-opens.

Top 15 domestic airports in Vietnam ranked by capacity: 2-Sep-2013 to 8-Sep-2013

VietJet to turn attention to international market

Additional domestic expansion is a possibility for VietJet in 2014, when the carrier plans to take up to 10 additional A320s. While it already serves nearly every potential domestic destination, the carrier still has opportunities to thicken most of its routes given that Vietnam Airlines is still much larger in almost every market.

But in 2014 and beyond VietJet will likely focus more on expanding in Vietnam’s international market and in other Asian markets with new joint venture partners. More domestic expansion could provoke a response from government-owned Vietnam Airlines.

So far VietJet’s expansion seems to have come under the radar of the flag carrier as its low fares have primarily stimulated new demand rather than taken passengers away from the incumbents. But if VietJet’s share of the domestic market exceeds 30%, a response from Vietnam Airlines and its Jetstar Pacific subsidiary becomes more likely. VietJet’s 37 daily domestic return flights in its Nov/Dec-2013 schedule will give the carrier 93,240 weekly seats, which should give the carrier a share of the domestic market exceeding 25%. (VietJet would have a 26% to 27% share assuming no additional flights are scheduled by Vietnam Airlines and Jetstar Pacific, which is still possible given the typical relatively last second fluctuations in the Vietnamese market.)

While VietJet could be tempted to pursue even a higher share of the domestic market in 2014, most of the A320s it adds in 2014 are expected to be used to expand in Vietnam’s international market and at new overseas affiliates. In Jun-2013 VietJet announced plans to launch a new carrier in Thailand with the parent of small Thai regional carrier Kan Air. Thai VietJet is currently in the process of securing an operators’ certificate from Thai authorities and aims to launch services in 2014 with an initial fleet of two or three A320s.

See related report: VietJet boldly starts to build pan-Asia low-cost portfolio, starting with new JV in Thailand

In a recent interview with Bloomberg that has been re-published by VietJet on its website, VietJet managing director Luu Duc Khanh said the carrier is now looking to form similar joint ventures in other Asian markets. He added VietJet is moving forward with plans for a second joint venture agreement that would be signed in 2014 and involve one of four North Asian markets – China, Japan, South Korea and Taiwan.

VietJet to launch service to Seoul

Mr Khanh also said in the interview that VietJet plans to launch flights from Hanoi to Seoul in 4Q2013. VietJet’s original network plan for 2013 included four international routes – Ho Chi Minh to Bangkok, Singapore and Taipei, and Hanoi to Bangkok. But Singapore, which originally was expected to be launched in Jun-2013, and Taipei have been put on hold while Seoul Incheon has been brought forward.

Hanoi-Seoul represents a potentially less risky market than Ho Chi Minh-Singapore as it is growing rapidly and is not currently served by a LCC. Ho Chi Ming-Singapore is already served by three LCCs along with two flag carriers while Hanoi-Seoul is currently only served by Vietnam Airlines, Korean Air and Asiana.

Korean and Asiana each operate one daily A330 frequency on the route while Vietnam Airlines operates 12 weekly frequencies with a mix of A330s and A321s. With 13,000 weekly return seats Seoul is currently Hanoi’s second largest international market after Bangkok, according to CAPA and Innovata data. VietJet already serves the Hanoi-Bangkok route.

Hanoi to Seoul capacity by carrier (one-way seats per week): 19-Sep-2011 to 23-Feb-2014

VietJet has plenty of opportunities in Vietnam’s international market

Taiwan and Singapore are now in VietJet’s network plan for 2014 along with China, Indonesia and Hong Kong. Of these five markets only Singapore is currently served non-stop from Vietnam by a low-cost carrier.

While VietJet will serve nearly every sizeable domestic market in Vietnam following the upcoming expansion, it has just started to scratch the surface in Vietnam’s international market. There are huge opportunities in Vietnam’s international market given the current 11% LCC penetration rate and growth in Vietnam as a tourist destination. Outbound demand will also grow as Vietnam’s middle class expands and has sufficient discretionary income to travel abroad.

See related report: VietJet starts to exploit huge potential of Vietnam’s international low-cost airline market

Ho Chi Minh-Bangkok was launched as VietJet’s first international route in Feb-2013 while Hanoi-Bangkok was added in Jun-2013. Both routes are currently served with only one daily flight, giving VietJet only about 5,000 international weekly seats and a 1% share of total international capacity in Vietnam compared to about 40% for Vietnam Airlines.

Even in Vietnam’s small international LCC market, VietJet currently has only a 10% share of capacity. The AirAsia Group is the leading LCC international brand in Vietnam with a 39% share of total international LCC capacity.

Vietnam LCC international capacity share (% of seats) by carrier: 2-Sep-2013 to 8-Sep-2013

Jetstar Pacific plans expansion

Jetstar Pacific also sees the opportunities in Vietnam’s international market and has been preparing to expand into the international market. The carrier has not expanded in several years and is currently about the same size that it was in 2008, when it was rebranded from Pacific Airlines and adopted the LCC model. But the Jetstar Group has talked up expansion since a 70% stake in the carrier was transferred to Vietnam Airlines from another government company in early 2012. Jetstar Pacific currently operates five A320s, having completed the transition from 737s to A320s in Jan-2013.

Jetstar Group parent Qantas stated as part of its recent results announcement for the year ending 30-Jun-2013 (FY2013) that Jetstar Pacific will commence international services in 1HFY2014 subject to regulatory approval. Jetstar Pacific has not said which international route or routes it is preparing to launch but an announcement is likely imminent as 1HFY2014 ends on 31-Dec-2013.

Qantas in the results announcement also restated plans to expand Jetstar Pacific’s fleet to 15 aircraft by mid-2017. This plan was initially revealed in early 2012 but Jetstar Pacific has not yet started to expand its fleet and it is unclear when the carrier will start to add aircraft.

In the year ending 30-Jun-2013, Jetstar Pacific’s passenger traffic dropped by 1.3% to 1.9 million. RPKs were also down 3.2% year-over-year.

Jetstar Pacific operational highlights: FY2013 vs FY2012

Jetstar Pacific, however, has been able to maintain high load factors over the last two years of between 90% and 91%. This shows the market is embracing the LCC concept and should be able to support additional Jetstar Pacific capacity.

With such high load factors, Jetstar Pacific’s expansion has likely been held up not from a lack of demand but from some resistance within Vietnam Airlines. VietJet’s rapid expansion and early success could spur on faster approval of Jetstar Pacific’s long-delayed expansion from Vietnam Airlines and the Vietnamese Government.

VietJet is already profitable and is starting to think about an IPO

VietJet also has reported consistently high load factors since its launch, providing another indication the Vietnamese market is ripe for low fare stimulation. VietJet has said its average load factor exceeds 90%. The carrier has transported over 3 million passengers since its Dec-2011 launch and carried about 1.9 million passengers in the first eight months of 2013.

The total Vietnamese domestic market grew by 6% in the first eight months of 2013 to 11.3 million passengers, according to Vietnamese Government data. VietJet accounted for the entire increase in the market as Jetstar Pacific has shrunk and domestic traffic at Vietnam Airlines appears to also have declined. Vietnam Airlines domestic capacity is currently at the same level it was in early Sep-2012 and is only slightly above capacity levels from Sep-2011, according to CAPA and Innovata data.

VietJet also claims to have been profitable so far this year, providing yet another indication that the LCC model has been successful in Vietnam. (Qantas or Jetstar has not released any profit or loss figures for Jetstar Pacific in recent years although the carrier is believed to still be in the red.)

In the Bloomberg interview, VietJet stated it posted a pre-tax profit of about VND120 billion (USD6 million) in the first seven months of 2013. The carrier was unprofitable in its first year of operation, as would be expected, and originally projected it would not turn a profit until its fourth year. Mr Khanh told Bloomberg VietJet is now looking to have an initial public offering in 18 to 42 months with a listing in Hong Kong or Singapore. Vietnam Airlines has also been working towards an IPO, which could be pursued as early as 1H2014 with a listing in Vietnam.

Mr Khanh also said the carrier is looking to place by the end of 2013 an order for an unspecified number of new aircraft. It is currently in advanced negotiations with both Airbus and Boeing. The order would support further growth with deliveries beginning in 2015. VietJet has relied on leasing companies to source its initial fleet of 10 A320s and is now talking to leasing companies to acquire up to 10 additional A320s for delivery in 2014.

VietJet has quickly proven itself as a significant player in the Vietnamese market. It is confident it can continue to expand rapidly in Vietnam and elsewhere in Asia. But as it expands VietJet will start to confront stiffer competition. In Vietnam, a stronger and bigger Jetstar Pacific could emerge while in other markets VietJet will need to fend off larger and more established Southeast Asian LCC groups including AirAsia, Lion and Tiger.


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