What remains for investors in Vietnamese Aviation industry post Covid-19?

As a developing country, aviation development has been playing a critical role in promoting Vietnam's integration into the global, supporting its economic growth. The growth rate of Vietnam's aviation industry (AAGR) is the highest in the Asia - Pacific region with an average increase of 14% from 2018 to2023, compared to 5.5% of the whole region. However, the Covid-19 pandemic has had a profound impact on the airline industry, requiring directional strategies from the government and businesses. 

Market perspectives 

After the unprecedented COVID-19 shock, the aviation industry in Vietnam is in the stage of revival.  In particular, the industry grew by 441% in the first quarter of 2022, compared to the same period of 2021, while the number of domestic passengers decreased significantly (Civil Aviation Authority of Vietnam - CAAV, 2022). As of March 2022, the international aviation market has 23 foreign and domestic airlines (including Vietnam Airlines, Vietjet Air, and Bamboo Airways) operating to and from 20 countries and territories. Yet, in comparison to the pre-pandemic period, there are currently 8 countries that have not reopened regular flights to and from Vietnam, including Brunei, India, Indonesia, Myanmar, Macau, Finland, Italy, and Switzerland. 

In response to this situation, Dr. Bui Doan Ne - Vice President and General Secretary of the Vietnam Aviation Business Association (VABA) - stated the phenomenal recovery of the aviation sector as a result of the accelerated vaccination plans by the government and localities. Management strategies for Covid-19 and solutions to support economic rebound are critical factors in recuperating the Vietnamese aviation industry to its pre-epidemic growth rate. Dr. Ne also forecasted that with the growth of the airline industry in the upcoming time, Vietnam's economic growth in 2022 will potentially reach 15-20% compared with the one in 2021. What's more, if the pandemic situation is fully contained and the economy is re-opened, the aviation sector will recover sustainably in the year 2022. 

Supporting policies from the Vietnamese Government

Aware of the Covid 19 pandemic’s adverse effect on the global economy, the MOT has decided to reduce the price of take-off and landing services by 50 percent and remove charges for many aviation services, along with cutting down jet fuel fees and relaxing capital market conditions to support the airline industry. 

According to Circular 04/2021/TT-NHNN, the State Bank of Vietnam has refinanced credit institutions that offered loans to Vietnam Airlines and reschedule the debt payment period, keeping the same debt group, and setting up risk provisions for debts of the Airports Corporations of Vietnam (ACV). In addition, Resolution No. 135/2020/QH14 of Congress also allows the ACV to sell more stocks to increase charter capital. Environmental protection tax imposed on aviation fuel as well as other general taxes and fees is also lowered to support airline businesses. With the recovery in process, along with the government’s incentive and supporting policies, the aviation industry still has plenty of potential for development, especially in infrastructure and cargo transportation.   

Upcoming Opportunities

Aviation infrastructure 

To meet the demand of expected 275.9 million passengers and approximately 4.1 tons of cargo in 2030, the Ministry of Transport (MOT) has prioritized investing in several airports that are of great importance in the Hanoi Capital region and Ho Chi Minh City region like Noi Bai, Tan Son Nhat, and Long Thanh International Airport. The demand for aviation is estimated to spike with 275.9 million passengers and nearly 4.1 tons of cargo by 2030. Thus, the Ministry of Transport (MoF) has prioritized investing in several key airport infrastructures in Hanoi and Ho Chi Minh City namely Noi Bai, Tan Son Nhat, and Long Thanh. Simultaneously, 22 existing airports are being gradually upgraded and effectively operating, of which 6 new airports are under construction and investment. Additionally, authorities in some districts as well as “giant” corporations, notablyVietjet, Vingroup, FLC Group, and Sun Group, have also addressed their interests in investing in airports such as Chu Lai, Cat Bi, Tuy Hoa, Dien Bien, Dong Hoi, Quang Tri, and Van Don. 

On the other hand, according to Professor Dang Dinh Dao, while some large airports are operating efficiently, many local airports are only operating at one-third of their designed capacity. The total productivity of 22 airports in Vietnam lies at about 75 million passengers per year, comparable to that of a single Changi airport in Singapore. This reality indicates that the aviation sector in Vietnam still has room for improvement and presents potential opportunities. Thus, the ministries and departments are paying more attention to private participation instead of solely state contribution. Particularly, the Prime Minister has recently approved to invest in Quang Tri airport and Sapa airport under PPP, promising to increase the participation of private enterprises in airport infrastructure investment. The Ministry of Transport has also proposed mobilizing public capital resources to invest in the entire airport in the form of PPP. Overall,  bright prospects for investment are waiting for the private sector and foreign investors.  

Airfreight 

As of airfreight, it has been playing an important role in supporting the global trading system, conducting an estimated 35 percent of global trade. According to the CAAV, the approximate number of international passengers by air decreased by 93% in 2021. Meanwhile, freight transport increased dramatically by 21.3 percent compared to 2020, reaching approximately 1.1 million tons of cargo. The upturn in cargo freight can be attributed to Decision No. 318/QD - TTg dated March 4, 2014, in which the Prime Minister plans to develop 8-10 cargo aircraft. This rising trend is maintained steadily, with cargo airlines' gain in the frequency of flights to and from Vietnam. For example, DHL express, an international express delivery service provider, officially opened a new route operated by Kalitta Air between Ho Chi Minh City and the United States last February. DHL Express representative announced that the opening of this new route is to meet the increasing transportation needs for the e-commerce sector between the two countries.

Many commentators are of the view that the growth of e-commerce along with some recent maritime incidents, e.g., the 2021 Suez Canal obstruction, will likely boost the demand for air freight in the future. Additionally, 5 airlines are operating simultaneously in Vietnam, yet the nation still lacks a cargo-specialized airline. 

Seeing this opportunity, IPP - Air Cargo by Mr. Jonathan Hanh Nguyen is in its final preparation stages to become the first Vietnamese airline that provides specialized freight services. It is waiting for the operating license to finish its legal process. The IPP's prompt actions are considered compatible with the country's development orientation and e-commerce trend. Therefore, the MOT has proposed to the Prime Minister to speed up the procedures, granting IPP Air Cargo a business license for air freight transportation. As of now, the IPP has signed a Memorandum of Understanding with the Boeing Company to purchase ten  B10 B777 Freighters that are worth 3.5 billion USD. If this deal is completed successfully, IPP Air Cargo will become the cargo airline with the largest capacity in Southeast Asia. 

Existing problems 

Despite the untapped potential and the government's recovery policies, unexpected global crises are having significant impacts on Vietnam’s aviation industry. Under the impact of the conflict between Russia and Ukraine, the abrupt increase in fuel prices has had a great influence on airlines since fuel costs account for the largest proportion of the operating expenses. Not to mention, some airlines also have to adjust their flight route to ensure safe operation for the crew and customers. Rerouting of flights has significant impacts on costs, leading to higher fuel prices and consequently higher fares, which directly reduce the demand recovery. For example, the Hanoi - Paris route has had to alter its flight path to avoid flying through China and Kazakhstan, making the flight time longer by 2 hours and 5 minutes and increasing the operating cost by 20,000 USD for each flight. To reduce input costs, the flight control department would have to recalculate and reevaluate more optimal alternative routes. The industry is making a great effort to emerge into a ‘new normal' 

Conclusion

All things considered, although operational challenges and concerns about the Covid epidemic are still causing difficult times for the aviation industry, Vietnamese airlines are still experiencing a rebound in demand due to their determination to speed up the recovery process and the government's supportive policies. For further insights about the Vietnamese aviation sector's chances and challenges in this critical time, please contact Viettonkin's proficient consultants. With more than 10 years of experience in consulting, our professional team will provide you with thorough analysis and detailed advice to help you navigate from a global perspective.