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VietJet Air continues domestic expansion in Vietnam as its IPO approaches

VietJet Air is pursuing further domestic expansion as demand for travel within Vietnam continues to grow rapidly. VietJet secured a 40% share of Vietnam’s domestic market in Jul-2015 and should soon be able to capture a 50% share.

VietJet is launching services on 1-Oct-2015 to Pleiku, which will become its sixteenth domestic destination, and is now looking at using regional jets to open up new secondary domestic destinations which cannot be accessed by its fast-growing fleet of A320 family aircraft. VietJet is keen to test out a new regional strategy by wet-leasing an Embraer E195, which would be used to launch services by the end of 2015 to the Vietnamese resort island of Con Dao.

International expansion has been relatively modest and is much more risky than domestic expansion. VietJet is launching services in Oct-2015 to Yangon, its fifth scheduled international destination, but is wisely focusing most international expansion on charters, particularly to China. VietJet also has been very slow at expanding its affiliate in Thailand, where competition is more intense and market conditions are less favourable.

VietJet's domestic market share reaches 40%

VietJet Air currently provides scheduled services to 15 domestic and four international destinations using a fleet of 25 A320 family aircraft. This includes two wet-leased A320s along with 21 A320s and two A321s which are operated under the VietJet air operators’ certificate. The group also has one A320 at Thai VietJet Air, which has been operating charters since early 2015.

The two wet-leased A320s were sourced as VietJet has not been able to take aircraft fast enough to meet rapidly growing demand in the domestic market. VietJet recently stated that Vietnam’s domestic market grew by 26% in 1H2015 with VietJet flying a majority of the additional passengers.

VietJet board member Chu Viet Cuong told CAPA TV on the sidelines of the 4-Aug-2015 CAPA Australia Pacific Aviation Summit that the airline was able to secure a 40% share of the domestic market in Jul-2015. He said demand in the domestic market is robust and is expected to continue to grow rapidly.

VietJet board member Chu Viet Cuong discusses VietJet’s position in the domestic growth and plans for further domestic as well as international expansion

The Vietnamese domestic market has more than doubled since VietJet’s launch

Vietnam has a growing middle class and VietJet has been able to stimulate rapid domestic growth since it launched services in late 2011, driving a higher portion of the country’s 90 million people to trade in long bus and train journeys for flights.

Weekly domestic capacity in Vietnam has more than doubled over the last four years from about 235,000 weekly seats in Sep-2011 (two months prior to VietJet’s launch) to about 490,000 weekly seats in Sep-2015. VietJet has accounted for about 75% of the seats that have been added.

Vietnam domestic weekly seat capacity: Sep-2011 to Oct-2015

In Oct-2015 VietJet will account for about 38% of domestic seat capacity compared to about 48% for market leader Vietnam Airlines, according to CAPA and OAG data. The remaining 14% of seat capacity is provided by Vietnam Airlines budget subsidiary Jetstar Pacific.

VietJet accounts for an even higher portion of domestic passenger traffic as its load factor has consistently been 90% or higher.

VietJet again expects to grow passenger traffic by more than 70% in 2015

VietJet currently allocates over 90% of its scheduled seat capacity to the domestic market. While it has added several international flights since launching international services in 2013 domestic expansion has continued to account for an overwhelming majority of its growth.

Total passenger numbers increased by 74% in 2014 to 5.6 million and is on pace to grow by nearly 80% in 2015 to 10 million in 2015. Domestic expansion is again driving most of the growth.

Mr Chu said VietJet aims to carry 15 to 16 million passengers in 2016, which would give VietJet yet another year of growth exceeding 50%.

VietJet plans to continue adding domestic capacity at a rapid clip as its takes additional aircraft. According to the CAPA Fleet Database, the group currently has commitments for 62 additional A320 family aircraft, including nine A320ceos, 11 A321ceos and 42 A320neos.

VietJet Group fleet summary: as of 26-Aug-2015

Aircraft In Service In Storage On Order*
Total: 24 0 62
Airbus A320-200 22 0 9
Airbus A320-200neo 0 0 42
Airbus A321-200 2 0 11

VietJet ordered six additional A321s at the Jun-2015 Paris Air Show, providing more early delivery slots ahead of the new generation A320neo. Mr Chu said the group plans to take on average one additional aircraft per month over the next several years.

VietJet needs a regional aircraft to access the smaller domestic markets

VietJet will continue adding capacity on trunk routes such as Ho Chi Minh-Hanoi, which it now serves with an average of 17 daily flights. VietJet also sees opportunities to expand on secondary routes. For example it recently upgraded Ho Chi Minh-Chu Lai from four weekly flights to daily, giving it more capacity than Vietnam Airlines in the Chu Lai market.

VietJet is also keen to continue expanding its domestic network but is running out of opportunities for new destinations using its existing fleet. There are 24 domestic airports in Vietnam, nearly all of which are served by Vietnam Airlines or its turboprop subsidiary, Vietnam Air Services (VASCO).

That leaves only nine airports without VietJet service or eight after Pleiku is added to the VietJet network. VietJet plans to launch services to Pleiku on 1-Oct-2015 and will initially operate one daily flight from both Hanoi and Ho Chi Minh.

Of the remaining eight airports in Vietnam that will still not have any VietJet services most cannot accommodate A320s. VietJet will therefore need a second smaller aircraft type if it is to continue growing its domestic network. CAPA wrote in a Jan-2015 analysis of the VietJet outlook for 2015 that VietJet was looking at regional jets and turboprops with a decision expected by the end of 2015.

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

VietJet has since ruled out turboprops, concluding that Vietnamese prefer jets. But the group continues to evaluate regional jets and is now looking at initially wet-leasing an E195, which would enable it to begin accessing domestic airports with shorter runways by the end of 2015.

The E195 would enable VietJet to launch Con Dao service

Con Dao would be the primary destination for the proposed new E195 operation. While other regional airports could be served at a later stage VietJet is most interested in the Con Dao market.

Con Dao is an island off the southeast coast Vietnam and is currently only served by ATR 72s operated by VASCO and its parent Vietnam Airlines. Vietnam Airlines, which markets all VASCO-operated flights, is currently offering seven daily flights from Con Dao, according to OAG data. The flights generally head to Ho Chi Minh, which is only about 200km from Con Dao, with a few flights stopping at the smaller southern Vietnamese city of Can Tho, which is only about 100km from Con Dao.

Con Dao could potentially support a large increase in capacity. LCC service would almost certainly stimulate demand and drive rapid growth in the tourism industry on Con Dao, which is known for its deserted beaches, coral reefs and thick forests.

VietJet’s launch of service in late 2012 to Phu Quoc, a resort island southwest of the mainland, similarly drove huge growth in the Phu Quoc tourism sector. The Phu Quoc market opened to VietJet after a new airport was completed, replacing an airport which was only accessible with regional aircraft including ATR 72s from Vietnam Airlines and CRJ900s operated by now defunct Vietnamese carrier Air Mekong.

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

VietJet now serves Phu Quoc with five to six daily flights, making Phu Quoc its fifth largest destination. Total domestic seat capacity at Phu Quoc has roughly tripled over the last three years with VietJet accounting for about half of the additional seats.

VietJet Air one-way seat capacity from Phu Quoc: Dec-2011 to Dec-2015

A longer runway would be difficult to construct at Con Dao due to the geography of the island. But VietJet believes the market is large enough to support a second carrier and make the investment in a second aircraft type potentially worthwhile.

With a regional jet VietJet would also be able to serve several destinations from Con Dao rather than only compete with Vietnam Airlines to Ho Chi Minh.

Wet-lease provides ideal opportunity for VietJet to test out thinner routes

Overall VietJet sees opportunities to open new point to point routes connecting cities smaller than Ho Chi Minh or Hanoi with popular domestic tourist destinations such as Can Dao, Phu Quoc and the popular mountain resort town of Dalat. Most of these airports can accommodate A320s but new point to point routes which are not currently served non-stop are better suited for smaller regional jets.

A wet lease of an E195 is an ideal scenario as it allows VietJet to test the market before committing to acquiring a second aircraft type. It also allows VietJet to begin serving Con Dao and potentially other secondary domestic destinations a lot sooner than if it was to order or dry lease an E195.

Embraer is now working with VietJet to help the carrier try to source a wet-leased E195. The Brazilian manufacturer is obviously keen to support VietJet as a successful trial with a wet-leased aircraft could lead to VietJet acquiring its own E195 fleet.

VietJet would become only the third customer in Southeast Asia for the E-jet family after Myanmar National Airlines and Indonesia's Kalstar Aviation. A wet-lease is unlikely to become a long-term solution is as it more costly than operating an aircraft locally with Vietnamese crew.

Embraer has determined the E195 is able to operate from Con Dao with only slight payload limitations for the routes VietJet is seeking to operate. Con Dao’s runway is slightly less than 2000m and there are also potential airport pavement grade issues which preclude an E195 from taking off with a full load of fuel and passengers.

VietJet will need government approval before proceeding with its Con Dao E195 plan

The biggest potential obstacle to VietJet’s Con Dao E195 proposal is likely not technical but the Vietnamese government.

VietJet is uncertain if it will secure approval to launch services to Con Dao. So far the Vietnamese government, which owns nearly a 100% stake in Vietnam Airlines, has been receptive to VietJet’s expansion. But Con Dao could be seen as a special market and VietJet’s entry would impact VASCO.

VASCO relies heavily on Con Dao, which accounts for about half of the carrier’s flights. Ho Chi Minh-based VASCO also serves Phu Quoc, Can Tho, Rach Gia and Ca Mau (but with fewer frequencies than Con Dao) and currently operates a fleet of only two ATR 72s, according to the CAPA Fleet Database. Vietnam Airlines also operates turboprop flights with a fleet 12 ATR 72s and sells all the VASCO-operated flights. (Con Dao is primarily served with VASCO-operated flights but Vietnam Airlines also operates some flights to Con Dao.)

Ultimately the government will need to take into account the overall economic benefit of more services for Con Dao and potentially other regional airports that cannot accommodate A320s. VASCO has essentially a social role providing services which private airlines have never operated. But if markets such as Con Dao can now support competition from the private sector the government should relook at whether VASCO is still needed.

VASCO is currently one of only four domestic carriers in Vietnam along with Vietnam Airlines, Jetstar Pacific and VietJet. But as three of these carriers are part of the Vietnam Airlines Group the only opportunity to bring competition in Con Dao and other small airports is to approve a regional aircraft operation from VietJet.

VietJet selects Yangon as its next international destination

VietJet already has experience with wet-leasing although until now has only wet-leased A320s, a type it also operates. VietJet currently wet-leases one A320 from Bulgaria’s BH Air and one A320 from Golden Myanmar Airlines.

The relationship with BH began about two years ago while the Golden Myanmar wet-lease began a few months ago after Golden Myanmar stopped operating its only A320 on scheduled services, leaving it with its ATR 72-600 fleet for scheduled operations. But VietJet has had a relationship with Golden Myanmar for at least two years as the two carriers previously discussed a potential joint venture for the Myanmar market.

VietJet eventually decided against investing in a potential affiliate in Myanmar and instead pursued a joint venture in neighbouring Thailand. But VietJet is planning to launch services to Yangon on 2-Oct-2015.

Yangon will initially be served with five weekly flights from Ho Chi Minh. VietJet also has stated it plans to add a daily Hanoi-Yangon service from 1-Nov-2015 but has not yet begun selling this flight.

Vietnam Airlines is the only carrier currently serving the Vietnam-Myanmar market. The flag carrier currently operates five weekly A321 flights on Hanoi-Yangon and three weekly A321 flights on Ho Chi Minh-Yangon.

VietJet's international expansion has been relatively slow

Yangon will become VietJet’s fifth scheduled international destination, joining Bangkok, Singapore, Seoul and Taipei.

VietJet currently operates four daily flights to Bangkok including three from Ho Chi Minh and one from Hanoi. Bangkok was VietJet’s first international destination, with one daily flight from Ho Chi Minh beginning in early 2013. A second frequency from Ho Chi Minh was added in 2014 followed by a third frequency in 2Q2015, giving it as much capacity in the Ho Chi Minh-Bangkok market as Thai AirAsia and three times as much capacity as Jetstar Pacific.

Singapore became VietJet’s second international destination in May-2014 and is now served with two daily flights from Ho Chi Minh. Taipei and Seoul were added later in 2014 and are now served with one daily flight from Ho Chi Minh and Hanoi respectively. VietJet recently unveiled plans to add one daily flight on the Ho Chi Minh-Seoul route from 7-Nov-2015.

VietJet has steadily expanded its international operation over the last two years but its current schedule of eight daily flights still represents less than 10% of its total scheduled capacity.

VietJet one-way international seat capacity: Feb-2013 to Oct-2015

Even with the upcoming launch of services from Ho Chi Minh to Yangon and Seoul the LCC will have fewer than 10 scheduled international daily flights compared to approximately 80 domestic flights.

VietJet’s international expansion has been much slower than initially planned. VietJet initially planned to operate services to Cambodia, Indonesia, Malaysia and Russia by the end of 2014. Of these four markets, only Cambodia was launched, with flights from Hanoi to Siem Reap beginning in late 2014, but the route was suspended only after a few months.

See related reports:

VietJet serves China with charters – for now

VietJet has realised there are bigger and less risky opportunities for expansion in the domestic market. But the LCC has developed a relatively large international charter programme, which enables it to test out new international markets without the risk of scheduled services.

Charters also improve aircraft utilisation rates as some flights can operate during overnight hours. VietJet currently only operates one scheduled overnight flight, from Ho Chi Minh to Tapei.

Mr Chu said VietJet is currently operating charters to 10 destinations in mainland China. The China charters originate in popular holiday destinations such as Da Nang, Nha Trang and Phu Quoc along with the two main hubs of Hanoi and Ho Chi Minh.

VietJet eventually aims to operate scheduled services to China if it is able to secure the traffic rights. It also is still keen on eventually serving Vladivostok in Russia, which it was initially planning to launch from Hanoi in 2014 but delayed due to the Russian economic crisis.

VietJet also continues to look at potential routes to Japan and is eager to launch services to Hong Kong once it can secure slots in Hong Kong, which have so far proven elusive. The new A321 fleet are expected to be deployed on new and existing flights to North Asia as well as on some domestic trunk routes.

VietJet’s Thai affiliate off to slow start

Thai VietJet also has been operating charters from Bangkok to secondary cities in Vietnam and to Gaya in India. The VietJet group plans to use Thai VietJet to offer its Vietnamese customers connections beyond Bangkok to leisure destinations such as Gaya.

Thai VietJet Air was initially planning to launch scheduled services in early 2014 but has not yet operated any scheduled flights. The VietJet group seems hesitant to enter domestic trunk routes in Thailand, which have become highly competitive following the launch and rapid expansion of Thai Lion. As CAPA previously described the position, Thai VietJet will likely become a small niche carrier with a small fleet of A320s.

See related report: Thai VietJet Air will start small with an international focus. Domestic expansion could be painful

The group has not yet allocated its Thai affiliate a second aircraft. It seems to have recognised that there are currently better opportunities to deploy additional capacity within Vietnam.

VietJet Group wisely focuses on Vietnamese market as it prepares for an IPO

VietJet still has ambitions to establish more overseas joint ventures, including in North Asia. But for now the group is not in a hurry to expand its portfolio.

Focussing expansion on Vietnam is sensible as Vietnam is one of the fastest growing and least competitive markets in Asia. VietJet has quickly built up a large share of the Vietnamese domestic market and should be able to leverage its position as the largest LCC in a fast-expanding emerging market.

The focus on Vietnam is particularly important as the group is now preparing for an initial public offering, which it aims to complete by the end of 2015.

VietJet’s position and relatively bright outlook in the Vietnamese domestic market is clearly the group’s biggest strength and attraction to potential investors.

Accelerating international expansion, including potential long-haul services, can wait until after VietJet has completed the IPO and further increases its share of the Vietnamese domestic market.

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