VietJet Air plans ambitious expansion including Vietnam’s first long-haul low-cost operation


VietJet Air plans to pursue significant expansion of its international network over the next few years as the carrier rapidly expands its A320 fleet and looks to launch a widebody operation.

Singapore will in May-2014 become VietJet’s second scheduled international destination after Bangkok. Several more international destinations in Southeast and North Asia are expected to be added by the end of 2014. The airline also aims to begin serving Australia, Europe and the Americas within three years using a new fleet of widebody aircraft.

In addition VietJet is pursuing ambitious growth outside its home market: its first overseas joint venture, Thai VietJet, is preparing to launch services in Sep-2014. Thai VietJet will initially operate three A320s while in the Vietnamese market VietJet will add seven A320s in 2014 for a total of 17 aircraft. Both airlines will use the additional capacity to launch a relatively even mix of new domestic and international routes.

VietJet adds its 12th A320 and 15th domestic route

VietJet began operations in Dec-2011 and has quickly grown to become Vietnam’s largest LCC and the country’s second largest carrier after Vietnam Airlines. VietJet on 20-Mar-2014 added its 12th A320 and on 23-Mar-2014 launched its 15th domestic route, Ho Chi Minh to Dalat.

Dalat and Ho Chi Minh were already among VietJet’s 11 domestic destinations. The carrier currently has a about a 26% share of seat capacity in Vietnam’s domestic market, compared to about 60% for Vietnam Airlines and 14% for Jetstar Pacific, according to CAPA and OAG data. Jetstar Pacific, which is 70% owned by Vietnam Airlines and 30% by Australia’s Jetstar Airways, was Vietnam’s first, but now smaller, LCC.

VietJet sees an opportunity to continue expanding domestically, mainly by adding frequencies on existing routes and by connecting the dots between existing destinations. For example VietJet already served two destinations from Dalat and nine domestic destinations from Ho Chi Minh before starting one daily frequency on Dalat-Ho Chi Minh, a route which was previously only served by Vietnam Airlines. Vietnam Airlines’ domestic network currently consists of 21 destinations (according to OAG data) but several of the 10 destinations it exclusively serves are small regional markets served with turboprop aircraft.

As CAPA reported in Dec-2013, VietJet’s business plan envisions further rapid domestic expansion in line with a goal to capture a 45% to 50% share of the market by the end of 2015.

Managing Director Luu Duc Khanh told CAPA’s 2014 Airline Fleet & Finance Summit in Singapore on 26-Mar-2014 that VietJet aims to capture a 33% to 35% share of Vietnam's domestic market in 2014. He said the carrier now hopes to achieve its ultimate goal of securing a 45% to 50% share in 2015 or 2016.

See related report: VietJet Air will pursue more rapid expansion in 2014, targets 50% share of Vietnam’s domestic market

Vietnam has relatively low domestic and international LCC penetration rates

Mr Luu pointed out Vietnam’s domestic market is still relatively under-penetrated by LCCs compared to other Southeast Asian markets. This gives VietJet confidence it can continue to pursue rapid domestic growth while leveraging its position as the country’s largest LCC.

LCCs currently only account for about 40% of domestic capacity in Vietnam. Among Southeast Asia’s five main domestic markets – Indonesia, Thailand, Malaysia, the Philippines and Vietnam (in descending order) – this is by far the lowest figure. The domestic LCC penetration rates in all the other markets are well in excess of 50%.    

While there are opportunities for VietJet to grow more domestically, there are even bigger opportunities in Vietnam’s international market. Currently LCCs account for only 13% of international capacity in the Vietnamese international market, according to CAPA and OAG data.

This is by far the lowest penetration rate among Southeast Asia’s six main international markets – Singapore, Thailand, Malaysia, Indonesia, the Philippines and Vietnam (in descending order of size). The international LCC penetration rate in the five other main Southeast Asian countries range from about 22% (Thailand) to about 50% (Malaysia).

VietJet lists a network of four international destinations, consisting of Bangkok in Thailand, Kunming in China, Seoul in South Korea and Siem Reap in Cambodia. But it currently only serves one of these destinations, Bangkok, with scheduled services. Bangkok Suvarnabhumi is currently served from both Ho Chi Minh and Hanoi with one daily flight on each route.

VietJet is finally ready to begin Ho Chi Minh-Singapore route

VietJet on 26-Mar-2014 announced plans to launch scheduled service betwteen Ho Chi Minh and Singapore on 23-May-2014 . The carrier will initially serve Singapore with one daily flight and is offering promotional fares on the route starting at USD2 (excluding taxes).

Ho Chi Minh-Singapore is a highly competitive route already served by three LCCs – Jetstar Asia, Tigerair Singapore and Lion Air – along with flag carriers Singapore Airlines and Vietnam Airlines. One daily flight will give VietJet only about a 7% share of capacity on the Ho Chi Minh-Singapore route. Following VietJet’s entry Lion will have an 8% share while the four main players – Jetstar Asia, Tigerair, Singapore Airlines and Vietnam Airlines – will all have roughly equal shares of 21% to 22%.

Ho Chi Minh to Singapore capacity by carrier (one-way seats per week): 19-Sep-2011 to 14-Sep-2014

The Ho Chi Minh-Singapore market could prove to be challenging for VietJet given that LCCs already account for over 50% of capacity on the route. But it is a critical addition to VietJet’s network as Singapore is the largest international destination from Ho Chi Minh based on current seat capacity.

Singapore has been in the business plan for VietJet for over a year and was originally expected to be launched in Jun-2013. Seoul and Taipei were also initially planned for 2013.

See related reports:

While VietJet has been slow in pursuing international exposure since launching Bangkok in Feb-2013 (as it instead focused on further domestic expansion), it is keen to now turn its attention more to developing internationally. With seven A320s slated to come into VietJet’s fleet in 2014 (excludes the three aircraft for Thai VietJet), the carrier has the capacity to expand both domestically and internationally.

VietJet plans North Asia expansion in 2014

Mr Luu told the CAPA Summit that VietJet is aiming to launch routes in 2014 to mainland China and Hong Kong as well as Singapore. He says within two to three years VietJet aims to serve most major destinations in Asia using its A320 fleet. Southeast Asia destinations including Kuala Lumpur, Jakarta and Yangon will be served primarily from Ho Chi Minh while North Asian destinations will be served mainly from Hanoi.

The North Asia markets could prove to be more lucrative for VietJet as, unlike Bangkok and Singapore, there are no LCCs currently linking Vietnam with any North Asian market. Bangkok and Singapore currently account for over two-thirds of all international LCC seat capacity from Vietnam, according to CAPA and OAG data.

There are now only four international markets from Vietnam with LCC service – Bangkok, Singapore, Kuala Lumpur and Manila.

This suggests there is a remarkable potential for LCC growth in the Vietnamese international market, particularly to North Asia as virtually all of North Asia is within narrowbody range of Vietnam.

Vietnam international LCC routes ranked by seat capacity: 24-Mar-2014 to 30-Mar-2014

Rank Origin Destination Total Seats
1 SIN Singapore Changi Airport SGN Ho Chi Minh City Tan Son Nhat Airport 18,462
2 SGN Ho Chi Minh City Tan Son Nhat Airport KUL Kuala Lumpur International Airport 10,800
3 SGN Ho Chi Minh City Tan Son Nhat Airport DMK Bangkok Don Mueang Int'l Airport 7,560
4 KUL Kuala Lumpur International Airport HAN Hanoi Noi Bai Airport 2,520
5 HAN Hanoi Noi Bai Airport DMK Bangkok Don Mueang Int'l Airport 2,520
6 BKK Bangkok Suvarnabhumi International Airport SGN Ho Chi Minh City Tan Son Nhat Airport 2,520
7 BKK Bangkok Suvarnabhumi International Airport HAN Hanoi Noi Bai Airport 2,520
8 MNL Manila Ninoy Aquino International Airport SGN Ho Chi Minh City Tan Son Nhat Airport 2,506
9 SIN Singapore Changi Airport HAN Hanoi Noi Bai Airport 1,800
10 MNL Manila Ninoy Aquino International Airport HAN Hanoi Noi Bai Airport 900

VietJet and its smaller rival Jetstar Pacific are both keen to become the first LCC linking Vietnam with North Asia.

VietJet is also keen to become the first LCC linking Vietnam with markets beyond Asia, including Australia, Europe and North America.

VietJet plans long-haul low-cost operation

Mr Luu told the CAPA Summit that VietJet is currently considering widebody aircraft, which would be used to launch a long-haul operation. He said destinations in Australia, Russia, Western Europe and North America are in the business plan and should be added within the next three years.

Airbus and Boeing have both made widebody proposals to VietJet along with leasing companies. VietJet would most likely start with leased widebody aircraft, with deliveries beginning as early as 2015. The carrier plans to make an initial widebody commitment or acquisition by the end of 2014.

If it implements its plan to expand into long-haul services VietJet will become the eighth long-haul low-cost carrier in Asia-Pacific, joining Australia-based Jetstar Airways, Malaysia’s AirAsia X, Singapore’s Scoot, the PhilippinesCebu Pacific, Thai AirAsia X, Indonesia Air Asia X and Thailand’s NokScoot. The latter three carriers are planning to launch in 2014, giving Thailand and Indonesia their first local long-haul LCCs.

The addition of VietJet would mean all six of the largest markets in Southeast Asia would have locally established long-haul LCCs.

VietJet is right to see a potential opportunity in Vietnam’s long-haul market. Vietnam’s long-haul market is now relatively under-served and would be ripe for LCC penetration given that a large and fast growing portion of the market consists of price conscious leisure passengers.

VietJet sees an opportunity to tap into growing inbound tourism demand as well as the visiting friends and relatives (VFR) sector. With the latter, VietJet would target the large Vietnamese population living overseas, particularly in Australia, the US and Europe, following the strategy used by Cebu Pacific’s new long-haul operation in targeting the expatriate Filipino population. Mr Luu says with long-haul services catering to the Vietnamese expatriate population VietJet aims to “maximise our brand value and passenger loyalty”.

Russia is also a target market for the new long-haul operation but would be pursued more in response to surging inbound demand. China and Russia are the two big growth markets for Vietnam’s tourism sector. With China VietJet can use its existing A320 fleet.

VietJet has the order book to expand rapidly

VietJet in Feb-2014 finalised an order for 62 A320s, including 20 existing generation aircraft A320 family aircraft and 42 A320neos. The order converted a high profile MOU that was initially signed at Paris in Sep-2013 in front of the presidents of France and Vietnam.

See related report: VietJet Air places major A320 order. Is there room for another pan-Asia low-cost airline group?

Mr Luu says the first of the current generation A320s that have been ordered directly from Airbus will be delivered in 4Q2014 while the first A320neo will be delivered in 2018 or 2019. VietJet is expanding its fleet in the first three quarters of 2014 by continuing to add leased aircraft. It began 2014 with a fleet of 10 leased A320s and plans to have 17 leased A320s by the time the first A320 from the order with Airbus is delivered in 4Q2014.

Overall the VietJet fleet is expected to double in 2014 from 10 to 20 aircraft, including three A320s for Thai VietJet. VietJet now expects its Thai joint venture to launch in Sep-2014 and operate three aircraft by year-end on five routes, two or three domestic routes along with two or three international routes.

Mr Luu says the group envisions expanding its A320 fleet in subsequent years by 12 aircraft per annum with seven aircraft allocated to its original operation in Vietnam and five aircraft for overseas joint ventures. VietJet has been exploring joint venture opportunities in other Asian markets to follow its Thailand project, including Myanmar and South Korea.

The current VietJet group fleet plan envisions 13 additional aircraft in 2014 for a total of 33 and 14 additional aircraft in 2015 for a total of 47. A few of these 47 aircraft will likely be widebodies.

VietJet Air group fleet plan: number of aircraft from end-2012 to end-2018

VietJet reports profit and plans IPO

The rapid fleet and network expansion could be partially financed through proceeds raised from an initial public offering (IPO). Mr Luu says VietJet is aiming to pursue an initial IPO in 2015. He pointed out the carrier is already profitable with an operating profit or EBITA of VND268 billion (USD 13 million) in 2013.

So far this year VietJet’s profit has been even more impressive with an EBITA of VDN223 billion (USD11 million) in the first two months of 2014.

Revenues in 2013 were up 184% to VND4.337 trillion (USD207 million). Revenues in the first two months of 2014 were up 131% year over year to VND998 billion (USD48 million).

VietJet financial highlights: 2013 vs 2012 and 2M2014 vs 2M2013

VietJet has a bright future in a market quickly becoming crowded; hybridising is one response

VietJet is also hybridising, adopting what it calls a “new age carrier” model. The carrier plans to soon launch a business product, SkyBoss, and an in-flight entertainment option which will be sold as an ancillary.

The hybrid model should particularly help VietJet as it expands into long-haul operations. Vietnam is keen to exploit its geographic position, which is strategically well positioned between Southeast and Northeast Asia, and become a transit hub. As it grows its network VietJet could potentially develop a transit product, offering connections between Northeast and Southeast Asia as well as to Australia, Europe and North America.  

But the implementation of VietJet’s ambitious expansion plan will have its challenges.  Vietnam Airlines is also planning to start pursuing long-haul expansion in 2015 and 2016 as it takes delivery of new generation widebody aircraft. The Gulf carriers have started expanding in Vietnam and will likely add significant capacity to the market in the coming years as Vietnam is still relatively under-served by them compared to other Asian markets.

In addition, VietJet faces intensifying competition with Southeast Asia’s other LCC groups, which are much larger, providing more efficient economies of scale. Vietnam Airlines inevitably will also respond by pursuing expansion at its budget brand, Jetstar Pacific.

Vietnam, with its population of 90 million, has tremendous opportunities as it continues its emergence as one of the world’s fastest growing markets. VietJet is confident it can build on its leading position in Vietnam’s still relatively undeveloped LCC sector. But competition will be fierce as VietJet will not be the only player pursuing rapid expansion in Vietnam and the broader Southeast Asian market.

This is the first in a series of analysis reports on the Vietnamese market. The next instalment will review Vietnam Airlines' outlook, including the flag carrier’s plans for an IPO and long-haul expansion following the delivery of 787s and A350s.  

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