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VietJet Air 2015 outlook: more rapid domestic growth as it defers long-haul plans. IPO late 2015

VietJet Air is planning to focus on domestic expansion and growing its North Asian network in 2015 as Vietnam’s leading LCC again aims to double in size. VietJet is seeking to grow further its share of the Vietnamese domestic market, which has already surpassed 30%, while launching services to China, Hong Kong and Japan.

VietJet Air roughly doubled its fleet and traffic in 2014, ending the year with six million passengers and almost 20 aircraft. The airline aims to again double passenger numbers in 2015 as the fleet is expanded by about another 10 aircraft.

But VietJet has made a major and sensible strategic adjustment in deciding to focus primarily on the domestic market. Plans for acquiring widebody aircraft and entering the long-haul sector have been delayed for at least three years. Instead VietJet is considering regional aircraft, which would be used to further bolster its domestic position.

VietJet is already one of the 10 largest LCCs in Southeast Asia

VietJet launched services at the end of 2012 and has quickly become one of the largest LCCs in Southeast Asia. VietJet is now the eighth largest LCC in Southeast Asia based on current seat capacity.

VietJet already has surpassed both of Singapore’s LCCs –  Jetstar Asia and Tigerair – and will likely overtake Indonesia AirAsia and potentially Thailand’s Nok Air by the end of 2015. Nok, Indonesia AirAsia, Jetstar Asia and Tigerair were all established in 2004 – eight years before VietJet began operations.

Southeast Asia’s top 10 LCCs ranked by seat capacity: 19-Jan-2015 to 25-Jan-2015

Rank Airline Total Seats
1 JT Lion Air 1,083,194
2 AK AirAsia 550,260
3 5J Cebu Pacific Air 366,997
4 FD Thai AirAsia 338,040
5 QG Citilink 230,760
6 DD Nok Air 218,204
7 QZ Indonesia AirAsia 198,360
8 VJ VietJet Air 156,060
9 D7 AirAsia X 122,148
10 TR Tigerair 120,240

VietJet Air currently serves 13 domestic and five international destinations with a fleet of 19 A320s in single-class 180-seat configuration. VietJet’s Vietnam operation added nine aircraft in 2014 while its new joint venture in Thailand took its first aircraft. CAPA will look at Thai VietJet Air, which is currently operating charter flights and plans to launch scheduled flights in Mar-2015, in a separate analysis report to be published later this week.

The 19 aircraft currently at the Vietnamese operations includes the first two aircraft from its 63-aircraft order with Airbus, which was completed in Feb-2014, and one wet-leased aircraft. The wet-leased A320, which is sourced from Bulgaria-based BH Air, is not included in the table below as it has not been registered in Vietnam.

VietJet Air fleet: as of 20-Jan-2015

Aircraft In Service In Storage On Order
Total: 18 0 61
Airbus A320-200 18 0 12
Airbus A320-200neo 0 0 42
Airbus A321-200 0 0 7

VietJet will add another 13 aircraft in 2015

VietJet managing director Luu Duc Khanh said at a 16-Jan-2015 media briefing in Singapore that the group is slated to take in 2015 nine additional aircraft from its order with Airbus. This includes its first A321, which will be delivered in Mar-2015.

Mr Luu said VietJet is also looking at leasing four additional A320 family aircraft, which would give the group a fleet of 33 aircraft by the end of 2015. The group has tentatively allocated three of the 13 aircraft expected to be added in 2015 to Thai VietJet Air and 10 aircraft to its original operation in Vietnam.

As is the case with all of Southeast Asia’s LCC groups, there is some degree of flexibility when it comes to both allocations between affiliates and total fleet size. But VietJet will certainly have another year of rapid growth in 2015 with most of the additional capacity being injected into the Vietnamese domestic market.

VietJet tones down its international ambitions

VietJet is now taking a relatively conservative approach to the international market. It has dropped plans to launch a long-haul operation, which Mr Luu expects will be relooked at in three to five years. It is also not planning to expand its network in Southeast Asia but will pursue some expansion in the Vietnam-North Asia market, where competition is less intense.

VietJet also plans to start small and expand slowly in Thailand. The group has dropped consideration of a third affiliate in Southeast Asia, where it had been looking at Myanmar. Instead, VietJet is looking at potential joint venture opportunities in North Asia, where it sees more opportunities as the market is not as saturated with LCCs. VietJet could establish a carrier in North Asia by the end of 2015 although the new potential JV has not yet been allocated any aircraft.

The new more conservative approach to international expansion is sensible, given the steep competition. VietJet’s plans for expanding outside Vietnam were initially overambitious.

International expansion can be challenging and risky at this stage. While VietJet has quickly developed a widely recognised brand that Mr Luu says is known by 99% of the Vietnamese population, it is not yet well known in other Asian markets.

VietJet is right to focus on its strength and pursue opportunities within Vietnam, which has emerged as one of the world’s fastest growing markets. Now is the time to cement its position in the domestic market and secure additional slots at Ho Chi Minh, which are starting to become scarce.

Vietnam has plenty of domestic opportunities

VietJet plans to add capacity on trunk routes through a combination of more frequencies and up-gauging flights from the A320 to A321. But VietJet also sees an opportunity to add three to five new domestic destinations using its current A320 fleet.

It also sees opportunities to launch new point to point routes which are not currently served by any carrier. The rise of Vietnam’s middle class in secondary cities is opening up opportunities for new routes such as from Haiphong, one of Vietnam’s four largest cities, to the popular island destination of Phu Quoc or the mountain holiday destination of Da Lat.

Several of Vietnam’s relatively under-served provinces are eager to attract more LCC services to boost local economies and domestic tourism. Vietnam is also constructing new airports. For example there was a groundbreaking ceremony on 18-Jan-2015 for an airport in the south-central resort town of Phan Thiet which is expected to become operational in 2018.

Meanwhile Vietnam is investing in upgrading several existing airports. Phu Quoc has seen rapid growth since a new airport opened in late 2012, replacing an airport which could not accommodate A320s.

See related report: Phu Quoc sees surge of new flights, led by VietJet and Vietnam Airlines, as new airport opens

VietJet considers acquiring regional aircraft

There are still several airports which are only served by Vietnam Airlines or its regional subsidiary VASCO. Most of these airports can only accommodate regional aircraft and some cannot be upgraded because of geographic limitations.

VietJet is now studying the potential acquisition of regional aircraft, which Mr Luu said would be used to serve smaller airports as well as open or take over thin routes which are more suitable for smaller aircraft. VietJet is in talks with ATR, Bombardier and Embraer and plans to make a decision on regional aircraft by the end of 2015. “If we do it we’ll do it this year,” Mr Luu said.

Adding smaller aircraft at this phase is lower risk than the original plan for expanding in the other direction by acquiring widebody aircraft. Smaller aircraft would enable VietJet to penetrate new domestic markets, supporting its efforts to continue increasing its share of the domestic market.

VietJet has opportunities for further domestic market share gains as well as opportunities to grow with the overall market. While Vietnam’s domestic LCC penetration rate has more than doubled since the launch of VietJet, reaching about 41% in 2014, it is still lower than the other four main domestic markets in Southeast Asia (Indonesia, Thailand, Malaysia and the Philippines).

Vietnam LCC capacity share (% of seats): 2003 to Jan-2015

Given its position as Vietnam’s leading LCC and the relatively small number of airlines in Vietnam, VietJet could potentially capture over 50% of the domestic market. The leading LCC in the Philippine market, Cebu Pacific, already has about a 60% share of the domestic market in the Philippines while AirAsia has a nearly 50% share of the Malaysian domestic market. Malaysia and the Philippines are similarly sized domestic markets and are only slightly larger than Vietnam.

VietJet currently accounts for about 32% of domestic seat capacity in Vietnam, according to CAPA and OAG data. Vietnam Airlines accounts for a leading 54% of domestic capacity, giving it by far the largest domestic market share among the main flag carriers in Southeast Asia. Jetstar Pacific, which is 70% owned by Vietnam Airlines and 30% by Australia’s Jetstar Group, accounts for the remaining 14% of domestic capacity in Vietnam.

Vietnam domestic capacity share (% of seats) by carrier: 19-Jan-2015 to 25-Jan-2015

VietJet should pursue domestic expansion before competitors can respond

Jetstar Pacific accelerated expansion in 2014 after several years of limited to no growth. But Jetstar Pacific is still expanding at a much slower clip than VietJet and has said it plans to focus primarily on the international market.

See related report: VietJet Air and Jetstar Pacific plan more international expansion in 2015

A strategic adjustment at the Vietnam Airlines Group to rely more on its budget brand in the increasingly competitive domestic market seems inevitable. But at least for now VietJet seems to have a window to continue growing and take market share away from its government-owned competitor.

VietJet is unlikely at this point to encounter significant government resistance as its low fares have successfully stimulated growth and boosted local economies, appealing particularly to the provincial governments. But it makes sense to focus on domestic growth before competition intensifies – either with another new entrant or a response by Vietnam Airlines.

Suspending plans for long-haul operation is sensible

Long-haul operations could be a distraction, particularly at such an early phase in VietJet’s development. For example Asia’s oldest LCC, Cebu Pacific, only launched its long-haul unit in 2013. Cebu Pacific had added turboprop aircraft five years earlier, in 2008.

VietJet has been studying the long-haul low-cost model over the last year. It was initially looking to acquire widebody aircraft as early as 2015 with the aim of bringing the VietJet brand to overseas markets that have large Vietnamese populations, particularly Australia, Russia and the US.

But Mr Luu pointed out that the demand in the short-haul market is very strong, making it hard to justify investing in a long-haul operation at this time. “It’s better for me to focus on what we are doing best,” Mr Luu said, adding that VietJet will still eventually expand into the long-haul market. “My expectation is three to five years down the line.”

VietJet drops plans for Vladivostok

VietJet also has dropped plans for serving Far East Russia, which is within A320 range of Hanoi. VietJet signed a Memorandum of Understanding with Vladivostok Airport in Sep-2014 with the aim of launching service on the Hanoi-Vladivostok route sometime in 2015.

See related report: VietJet Air international expansion enters new phase with Cambodia and Russia

Mr Luu said the depreciation of the Russian rouble makes Hanoi-Vladivostok a challenging route. There is still sufficient demand to bring tourists from Russia’s Far East to Vietnam but it is a price sensitive inbound leisure market. The decision to postpone Vladivostok is wise as VietJet would struggle to get fares that in USD terms were sufficient to cover the cost of the operation, which would be relatively high as it is a long route approaching the range limits of the A320.

VietJet also has toned down ambitions for growing its regional network within Southeast Asia, another sensible adjustment given the intense competition in the Southeast Asian market. VietJet currently serves three destinations in Southeast Asia – Bangkok, Siem Reap and Singapore. It currently operates three daily flights to Bangkok – including two from Ho Chi Minh and one from Hanoi – one daily flight from Hanoi to Siem Reap and one daily flight from Ho Chi Minh to Singapore.

VietJet recently dropped a second daily frequency on the Ho Chi Minh-Singapore route only a few months after the flight had been added. Ho Chi Minh-Singapore is an extremely competitive market with three other LCCs offering almost 18,000 weekly return seats. VietJet now has only a 13% share of LCC capacity and a 7% share of total seat capacity on the Ho Chi Minh-Singapore route, making it the smallest competitor.

See related report: Jetstar Pacific battle with VietJet Air intensifies as Bangkok and Singapore routes are launched

Thailand-Vietnam is another highly competitive market but is strategically important for the group following the establishment of Thai VietJet. Siem Reap is a less competitive market not currently served by any other LCCs. Other potential Southeast Asian markets such as Kuala Lumpur and Manila however are served by foreign LCCs. VietJet has wisely decided to stay away from such markets for now and instead focus on domestic opportunities and international markets where competition is less fierce.

VietJet will focus its regional international expansion on North Asia

VietJet became the first LCC to serve the Vietnam-Taiwan market in Dec-2014, when it launched services from Ho Chi Minh to Taipei. It competes against Jeju Air on the Hanoi-Seoul route but each carrier has only one daily flight.

VietJet has been successful so far in the Korean and Taiwanese markets and is now looking at adding in 2015 a second destination in each country – Busan in Korea and Kaohsiung in Taiwan. VietJet already operates charters to Busan.

VietJet is also looking to serve Hong Kong, China and Japan in 2015. These are again markets not served by any LCCs from any Vietnamese gateway. VietJet has already been operating charters to China and has been receiving requests from local Chinese governments and agents to offer scheduled services.

Mr Luu said VietJet is looking at using its soon to be newly delivered A321s to serve Tokyo Narita. Tokyo would be VietJet’s longest route at about five to six hours from Hanoi or Ho Chi Minh.

All the new potential North Asia destinations represent relatively low risk expansion as the flights would rely heavily on local agents which book a large and growing volume of tour packages to Vietnam. VietJet already relies heavily on agents for its existing services to Korea and Taiwan, a distribution model it is comfortable with as Vietnam is also a market where agents continue to play an important role.

But overall VietJet will remain domestic-focused with the international flights providing some diversification along with an opportunity to boost aircraft utilisation rates through longer routes and some overnight flights. “In 2014 we will expand in the international market conservatively, step by step,” Mr Luu said.

VietJet doubles passenger numbers in 2014 with a 90% load factor

VietJet is right to be bullish about its own domestic market. An overwhelming majority of the 10 million passengers it has carried since it launched services on 26-Dec-2012 have been in the domestic market. Its highly successful domestic operation has enabled the airline to have high load factors and be profitable from a very early phase.

Mr Luu said VietJet’s load factor was an average of 90% in 2014 as total passenger numbers doubled from approximately 3 million to 6 million. He expects passenger numbers could double again in 2015 to 12 million as demand in Vietnam remains buoyant.

VietJet’s international load factor so far has been lower than its overall average. But at 80% to 85% it is respectable, particularly as three of its five international destinations were launched during 2014.

VietJet's new more conservative approach should help IPO prospects

Mr Luu declined to provide financial figures although VietJet has previously stated it is profitable. The airline is now aiming to pursue an initial public offering (IPO) in late 2015 which Mr Luu hopes will raise USD500 million to USD800 million.

The new more conservative international expansion strategy and increased focus on Vietnam’s domestic market should make VietJet more attractive to potential investors. Launching a long-haul operation in particular would have been a drain on resources and represented a higher level risk that could have raised concerns with potential investors.

VietJet still has a relatively ambitious long-term business plan and raised some eyebrows when it ordered 63 aircraft. But the deliveries are spread over seven years and VietJet has some flexibility with its fleet plan because all of its current aircraft are leased.

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

There will be opportunities to return aircraft over the next few years as 12 of the 18 aircraft that VietJet Air currently leases were brought in as second-hand aircraft, including aircraft that have been subleased from Philippine Airlines. The other six aircraft were leased in as new aircraft, including its first two aircraft from its Airbus order, which have been sold and leased back. (The proceeds from the IPO should give VietJet an opportunity to start pursuing other alternatives for financing its future fleet.)

VietJet could potentially phase out most – or even all – of its A320ceos before the last of its A320neos are delivered. The A320neo accounts for 42 of its 61 outstanding orders with Airbus. The first A320neo is slated for delivery in 2018 with an engine selection planned for 2015.

Fleet growth should be feasible given the opportunities in Vietnam

A fleet of at least 60 A320 family aircraft by early next decade is reasonable as Vietnam’s rapidly growing domestic market alone should be able to support a doubling of the carrier’s fleet. Regional international opportunities will also grow as Vietnam continues to emerge as a popular international destination.

Placing aircraft at joint ventures outside Vietnam is a much bigger unknown and comes with bigger risks. But VietJet does not necessarily need joint ventures to support the current order. Ultimately the affiliates outside Vietnam could prove to be relatively small niche carriers, leaving VietJet to focus primarily (or even perhaps entirely) on its local market.

The biggest risk clouding the VietJet outlook has always been overambitious international expansion. Eventually VietJet will look at accelerating international expansion, including the emerging medium/long-haul low-cost model. But the new strategy of focusing mainly on the huge opportunities in the local market is a step in the right direction which should give VietJet a firmer footing in the dynamic Southeast Asian marketplace. A successful IPO later in 2015 could open up the door to more rapid expansion, but for now the balance looks sound.

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