03-Nov-2014 9:24 AM

VietJet Air and Jetstar Pacific plan more international expansion in 2015

Analysis

VietJet Air and Jetstar Pacific are planning more international expansion in 2015 as both Vietnamese LCCs continue to rapidly expand their fleets. VietJet is looking at Indonesia, Malaysia, Japan and Russia while Jetstar Pacific will focus on North Asia.

VietJet has expanded rapidly since its Dec-2011 launch and is now about double the size of Jetstar Pacific. VietJet is poised to complete two major milestones in Nov-2014 as the carrier takes the first of at least 63 A320 family aircraft that were ordered in early 2014 and launches its first overseas joint venture, Thai VietJet Air.

Jetstar Pacific meanwhile is accelerating the pace of its expansion as it adds three A320s in 4Q2014 and at least two more aircraft in 2015. Jetstar Pacific also completed a milestone on 27-Oct-2014, when it launched its first scheduled international route - Ho Chi Minh to Singapore.

Summary

VietJet Air and Jetstar Pacific are planning more international expansion in 2015.
VietJet is looking at Indonesia, Malaysia, Japan, and Russia while Jetstar Pacific will focus on North Asia.
VietJet is poised to complete two major milestones in Nov-2014 as the carrier takes the first of at least 63 A320 family aircraft and launches its first overseas joint venture, Thai VietJet Air.
Jetstar Pacific is accelerating the pace of its expansion as it adds three A320s in 4Q2014 and at least two more aircraft in 2015.
Vietnam's LCCs have rapidly expanded their fleets in 2014, with VietJet beginning the year with 10 A320s and Jetstar Pacific with only five A320s.
VietJet and Jetstar Pacific have primarily added domestic capacity in 2014, pushing up Vietnam's domestic LCC penetration rate from about 24% in 2013 to about 37% in the first eight months of 2014.

Vietnam's LCCs to expand fleets further in last two months of 2014 and in 2015

VietJet Air currently serves 12 domestic and three international destinations while Jetstar Pacific operates scheduled services to 10 domestic and one international destination.

VietJet operates a fleet of 15 leased A320s while Jetstar Pacific's fleet currently consists of eight leased A320s, according to the CAPA Fleet Database.

2014 has been a year of rapid growth for Vietnam's emerging LCC sector. VietJet began the year with 10 A320s while Jetstar Pacific began the year with only five A320s.

Jetstar Pacific CEO Le Hong Ha told CAPA on the sidelines of the 13-Oct-2014 CAPA Asia Aviation Summit and LCC Congress that the carrier plans to add two A320s in the last two months of 2014 followed by another two A320s in 2015. Jetstar Pacific is still finalising discussions with leasing companies for its next four aircraft.

In late Oct-2014 Jetstar Pacific took delivery of an A320 from AWAS, its eighth aircraft overall and third addition for 2014. Mr Le said Jetstar Pacific also has been temporarily wet leasing an A321 from Vietnam Airlines to support its schedule ahead of its own fleet expansion. The A321 is in 184-seat two class configuration while Jetstar Pacific's A320s are in single-class 180-seat configuration. (Jetstar Pacific has been offering the business class seats on A321-operated flights as priority seats with the same additional charge that applies for the front section and exit rows on Jetstar's A320s.)

Jetstar Pacific fleet summary: as of 1-Nov-2014

Aircraft	In Service	In Storage	On Order
Total:	8	0	0
Airbus A320-200	8	0	0

VietJet meanwhile is planning to take delivery of two additional A320s in the last two months of 2014. These will be the first two aircraft that will be sourced directly from Airbus. In Feb-2014 VietJet completed an order for 63 firm aircraft - consisting of 14 A320ceo, seven A321ceo and 42 A320neo - as well as 30 purchase rights.

VietJet Air fleet summary: as 1-Nov-2014

Aircraft	In Service	On Order
Total:	15	63
Airbus A320-200	15	14
Airbus A320-200neo	0	42
Airbus A321-200	0	7

A delegation of VietJet executives and board members is planning to visit Toulouse in Nov-2014 to pick up the carrier's first aircraft from its landmark order. VietJet board member Chu Viet Cuong told CAPA TV in an interview after speaking at CAPA's 13-Oct-2014 Summit that one additional aircraft will subsequently be delivered every month until 2020.

VietJet's Chu Viet Cuong discusses fleet and network expansion as well as the LCC's initial success at penetrating the Vietnamese market

Under the current delivery schedule, a second A320 from the 63-aircraft order will be delivered in Dec-2014 followed by 12 additional aircraft in 2015. Mr Cuong expects the 12 aircraft that will be delivered in 2015 to include four or five A321s, which will be used to increase capacity on domestic trunk routes.

Thai VietJet Air plans Nov-2014 launch

Some of the 12 aircraft slated to be delivered to VietJet in 2015 are expected to be allocated to new joint venture LCC Thai VietJet Air, which in mid Oct-2014 took its first A320 (a leased eight year old aircraft sourced by its Vietnamese shareholder).

Thai VietJet, which is 49% owned by VietJet and 51% owned by small Thailand-based regional carrier Kam Air, is now in the final stages of securing its air operator's certificate from Thai authorities.

Mr Chu said Thai VietJet aims to launch commercial services in Nov-2014 with domestic flights from Bangkok's Suvarnabhumi Airport. Chiang Mai and Phuket, which are the two largest domestic routes in Thailand, are the anticipated initial destinations. (Thai VietJet however could run into a roadblock in Phuket as the airport is slot constrained.)

Mr Chu said Thai VietJet Air will initially target Vietnamese tourists travelling around Thailand. This is logical as VietJet already serves Bangkok Suvarnabhumi with two daily flights from Ho Chi Minh. VietJet also resumed on 1-Nov-2014 one daily flight on the Bangkok-Hanoi route, which was launched in Jun-2013 and had been suspended for about four months due to the civil unrest in Thailand.

Vietnam is a growing source market for Thailand's tourism sector but there are currently no scheduled non-stop flights from Vietnam to Phuket, Chiang Mai or any other secondary destination in Thailand.

Ultimately Thai VietJet will need to attract a diverse base of passengers to be sustainable as the Vietnamese only accounts for about a 3% share of total visitors to Thailand. As CAPA has previously suggested, Thai VietJet will have to overcome intense competition from Thailand's three more established and fast growing short-haul LCCs - Thai Airways affiliate Nok Air, Thai AirAsia and Thai Lion Air.

See related reports:

Vietnam's domestic LCC penetration rate approaches 50%

VietJet also continues to explore opportunities for joint ventures in other Asian countries and recently signed a partnership agreement with India's Air Costa. But a majority of its 12 deliveries slated for 2015 are expected to be allocated to the Vietnamese market, where the group sees ample space for further domestic and international expansion.

VietJet and Jetstar Pacific have both primarily added domestic capacity in 2014, pushing up Vietnam's domestic LCC penetration rate from about 24% in 2013 to about 37% in the first eight months of 2014.

Vietnam domestic and international LCC capacity share (% of total seats): 2001 to 8M2014

The current domestic LCC penetration rate in Vietnam is about 45%, including about a 31% share from VietJet and 14% share from Jetstar Pacific. Vietnam Airlines, which also owns a 70% stake in Jetstar Pacific, accounts for the remaining 55% of current domestic capacity, according to CAPA and OAG data.

There is still room for further domestic expansion as the overall market is growing rapidly, including by over 20% in 2013. Vietnam's 45% domestic penetration rate also still lags the other four main domestic markets in Southeast Asia - Indonesia, Malaysia, Philippines and Thailand.

VietJet to continue adding capacity on domestic trunk routes

VietJet particularly sees opportunities to add capacity in 2015 on domestic trunk routes, where Vietnam Airlines remains the market leader. For example Vietnam Airlines currently has about a 53% share of capacity on the Ho Chi Minh-Hanoi route compared to 31% for VietJet and 16% for Jetstar Pacific, according to CAPA and OAG data.

Ho Chi Minh-Hanoi is one of the largest routes in Southeast Asia and accounts for 15% of total domestic seat capacity in Vietnam. Total capacity on the route, which increases significantly during peak holiday periods in Vietnam, is up by almost 50% compared to Nov-2011 levels, which was just before VietJet launched services.

Ho Chi Minh to Hanoi total capacity (one-way seats per week): Sep-2011 to Nov-2014

As slots at Ho Chi Minh are now at a premium the introduction of A321s will particularly help VietJet close the gap with Vietnam Airlines, which operates A321s as well as some widebody aircraft on domestic trunk routes.

On trunk routes from Hanoi, including Hanoi-Da Nang, A320s can be used to add frequencies. Hanoi and Da Nang are Vietnam's second and third largest cities but neither have the slot limitations of Ho Chi Minh, where there will likely be constraints, particularly at peak hours, until a new airport opens next decade.

From a network expansion perspective there is relatively limited room for further growth. VietJet will add its 13th domestic destination on 25-Nov-2014, when it begins service to Thanh Hoa from Ho Chi Minh. This will give VietJet service to all 10 of Jetstar Pacific's domestic destinations. Vietnam Airlines has a domestic network of 21 destinations but the eight remaining destinations where the flag carrier still does not face any competition are small and in some cases can only accommodate turboprop aircraft.

There are still some opportunities for new point to point routes bypassing Hanoi and Ho Chi Minh. But as these would be small low frequency routes most of the domestic capacity VietJet adds in 2015 and beyond will be in existing markets.

Jetstar Pacific is not as bullish about opportunities for further domestic expansion and at least for now is not planning to add capacity on the trunk routes. While Jetstar Pacific now has about half the frequencies of VietJet on the main trunk routes Mr Le believes these are "reasonable enough to compete".

Jetstar Pacific obviously is in a different position from VietJet as it is majority owned by Vietnam Airlines. Vietnam Airlines needs to use its budget brand to respond to increasing competition from VietJet and this partly explains Jetstar Pacific's dramatic expansion this year after several years of almost none. But at the same time Vietnam Airlines wants to keep Jetstar Pacific's presence to domestic trunk routes to a size where it is able compete at the bottom end of the market without impacting the performance of the main brand.

Jetstar Pacific will focus on international expansion

Jetstar Pacific instead plans to focus expansion on the international market, where it sees bigger opportunities. Vietnam's international LCC penetration rate is still below 20%. As CAPA has previously analysed, foreign LCCs account for most of Vietnam's international LCC capacity as Jetstar Pacific and VietJet have only just started to serve Vietnam's fast growing international market.

See related reports:

Jetstar Pacific launched its first scheduled international service on 27-Oct-2014, a daily flight from Ho Chi Minh to Singapore. As CAPA has previously reported, Jetstar Pacific is planning to launch its second scheduled international route in 10-Dec-2014, a daily service from Ho Chi Minh to Bangkok Suvarnabhumi.

Mr Le told CAPA that Jetstar Pacific also plans to launch service from Hanoi to Bangkok Suvarnabhumi at the end of Jan-2015. But after adding Singapore and Bangkok the carrier will focus on Northeast Asia, particularly Hong Kong, Taiwan and southern China.

Mr Le is particularly interested in Northeast Asian markets that are already served by other Jetstar Group affiliates from Singapore and Japan. This is a sensible and well proven network strategy ("joining the dots") as it allows Jetstar Pacific, which is small and does not have much experience in the international market, to leverage the group's experience and support.

Jetstar Pacific is keen to operate a mix of new charters and scheduled services as it builds up its North Asia network. Jetstar Pacific has been operating regular charters to Macau since Mar-2014 and Mr Le said the carrier is now reviewing several charter requests for destinations in southern China and South Korea.

The Macau contract was recently extended, enabling Jetstar Pacific to continue operating flights on the Da Nang-Macau route beyond the original termination date of end Oct-2014. Jetstar's booking engine shows three daily flights on the Da Nang-Macau route for at least the next several months. The flights are displayed as scheduled but are essentially charters because Jetstar Pacific only sells three of the 180 seats based on the arrangement it has with the partner underwriting the flights.

Jetstar Pacific is essentially dedicating one A320 to the Macau charter schedule, which includes an overnight stop in Macau. Jetstar Pacific does not have a Da Nang crew base but the additional costs of having to overnight crew in Da Nang and Macau are justified given the revenues generated from the charter contract. Charter operations have allowed Jetstar Pacific to develop experience with international operations but ultimately the airline should look to mainly serve the North Asia market with scheduled services.

VietJet's international network will include five destinations by end of 2014

VietJet also has had success with charters, operating a regular charter service in recent months from Da Nang to Seoul Incheon. VietJet has a base in Da Nang, which has emerged as an increasingly popular tourist destination.

VietJet is looking at several potential scheduled international routes from Da Nang and using Da Nang (DAD) as a transfer point as the congestion at Ho Chi Minh (HCM) makes it hard to potentially introduce a connection product. VietJet is also looking at promoting connections at its second largest base Hanoi (HAN), which has a newer and less congested terminal.

VietJet Air top 10 bases/stations ranked on seat capacity: 3-Nov-2014 to 9-Nov-2014

VietJet also now operates scheduled services to Seoul from Hanoi. Mr Chu said the Hanoi-Seoul route has been extremely successful since it was launched in Jul-2014, with load factors above 95%.

Travel agency sales are often key to success of the new routes

Korean agents have accounted for most of the Seoul bookings, enabling VietJet to build up experience with overseas sales. VietJet's other two international destinations, Bangkok and Singapore, rely primarily on VietJet's well established distribution network in Vietnam as they are much larger outbound markets.

VietJet also expects to rely heavily on overseas agents for Ho Chi Minh-Taipei, which will be launched on 12-Dec-2014.

The carrier's other new international route, Hanoi to Siem Reap in Cambodia, is launching on 3-Nov-2014. For this route VietJet is mainly targeting the large number of foreign tourist that combine Vietnam and Cambodia. Vietnam Airlines and its Cambodian joint venture carrier, Cambodia Angkor Air, now dominate the Vietnam-Cambodia market.

VietJet needs to build up relationships with agents outside Asia, which would help it sell Siem Reap as well other routes that are popular with foreign tourists. For now it is relying on its Vietnamese agent base and their relationships with agents overseas.

Travel agents and other offline channels, including payment at banks, are an important part of the VietJet model including in the domestic market as Vietnam's internet penetration rate is low and most of the population do not hold credit cards. Of the approximately eight million passengers VietJet has flown to date about 30% were first time flyers.

VietJet could also potentially build up its foreign customer base by working with foreign airlines that serve Vietnam, particularly carriers which are not part of SkyTeam or have relationships with Vietnam Airlines. VietJet is currently in codeshare discussions with several airlines, both low-cost and full service, according to Mr Chu.

VietJet plans more international expansion in 2015

Mr Chu said VietJet's network expansion plan for 2015 includes Jakarta, Kuala Lumpur, Japan and Russia.

For Japan VietJet would follow the same model as Korea and look to work closely with Japanese agents. VietJet is currently looking at several potential routes between Vietnam and Japan.

There are currently no LCCs operating non-stop flights from Vietnam to Japan, Indonesia or Russia. VietJet however would have to overcome stiff competition from AirAsia if it launches services to Kuala Lumpur from Ho Chi Minh and/or Hanoi.

As CAPA previously suggested, the first Russian route for VietJet would be Hanoi to Vladivostok in Russia's Far East as this is within range of the current A320 fleet. VietJet however has been looking at acquiring widebody aircraft which would be needed to serve other more populated regions of Russia.

Long-haul expansion would be another ambitious move for VietJet

Mr Chu said during a panel discussion at the Singapore CAPA Asia Summit that talks with Airbus and Boeing over a potential purchase of widebody aircraft are continuing. He said the main target of the potential long-haul operation would be Vietnamese living overseas, particularly in Russia, Eastern Europe and the US. "We have got many demands from these countries and these regions so are thinking about the long-haul business," Mr Chu explained.

Russia and Eastern Europe will likely be served with A330s. But longer-range widebody aircraft such as the 777 would be needed to launch services to the US. The most likely scenario is for VietJet to test the waters with long-haul services by leasing A330-300s before moving to acquire larger longer-range aircraft such as the 777-300ER.

The upcoming first delivery from VietJet's 100-aircraft A320 commitment (includes 63 firm aircraft, 30 purchase rights and seven additional leased aircraft) marks only the first phase of a very ambitious expansion plan. The Vietnamese market has huge potential for growth across nearly every segment - inbound and outbound as well as domestic, regional and long-haul.

VietJet will also need to overcome intensifying competition, including at home from Vietnam Airlines and its budget subsidiary Jetstar Pacific. VietJet will also be faced with a host of other challenges as it rapidly spreads its wings in the international market and starts to build up a portfolio of affiliates in other Asian markets. These are pregnant with potential, but competition is building as others also chase the opportunities.