If there was an award for the most drawn-out equitization in an emerging market, Vietnam Airlines would win hands down. The national flag carrier has been circled by bankers eager for advisory work on an eventual listing since the mid-1990s.
But it wasn’t until Vietnam’s growing State budget deficit and public debt made it increasingly difficult for the government to find funding for its development projects and a string of State-owned enterprise (SOE) failures that Vietnam Airlines began to welcome investors with open arms.
Stepping up its game
Just a few years ago, the only real choice for those travelling in Vietnam, both Vietnamese and foreigners alike, was Vietnam Airlines, which has historically dominated both the international and domestic markets. With little competition, its ticket prices simply weren’t affordable for most local travelers.
But the rapid development of Vietnam’s economy and a burgeoning middle class created the ideal environment for the growth of the aviation industry in ways few would have expected in a developing country.
In 2007, Vietnam Airlines formed a joint venture with Qantas to operate Jetstar Pacific, a low-cost carrier that primarily flies domestic routes and to a handful of regional destinations, but it has had limited success after failing to expand in the 2007-2013 period, when nearly every other Southeast Asian low-cost carrier grew rapidly.
Other newcomers, including Mekong Air, have come and gone, some due to flawed business models and a lack of economies of scale and others as victims of timing.
Passenger traffic has grown by more than 50 per cent since low-cost carrier Vietjet Air’s launch at the end of 2011, with passenger growth of 17.2 per cent during the 2011-2016 period being among the highest in the region. In addition to a surge in local travelers, record numbers of foreign tourists are now visiting Vietnam.
International tourist arrivals surpassed 10 million the first time in 2016, a 26 per cent increase from the previous year, and 2017 is on track to break that record, with 10.47 million arrivals in the first ten months, an increase of nearly 130 per cent year-on-year, according to the Vietnam National Administration of Tourism.
From one jet and two domestic routes in 2011, Vietjet Air, now the country’s largest private carrier, has gone to 40 jets (with 182 more on order) and a network of 36 routes in Vietnam and 17 internationally, including Thailand, Singapore and China. Competing head-to-head with Vietnam Airlines and Jetstar, Vietjet Air has already staked out a 43 per cent share of the domestic air travel market. Its success is down to its modern fleet, averaging 3.3 years old, savvy marketing, low fares, and low costs.
With increased competition, Vietnam Airlines’ market share fell from 76 per cent in 2012 to 56 per cent in 2014, 48 per cent in 2015, and 42.5 per cent in 2016, but the national flag carrier has recently upped its game.
In 2016, it posted consolidated revenue of VND71.6 trillion ($3.14 billion), up 3.6 per cent against 2015. Pre-tax profit grew remarkably, to VND2.6 trillion ($114.1 million), jumping 140 per cent from the previous year.
All profitability indexes improved from a year earlier, with the consolidated profit margin at 3 per cent, better than the 1.2 per cent recorded in 2015, while that of the parent company was also 3 per cent, a significant improvement against the 0.5 per cent in 2015. Consolidated return on equity was almost 15 per cent against 7 per cent in the previous year, while that of the parent company was 12 per cent, far higher than the 2.5 per cent in 2015.
2017 came with further domestic expansion being limited as the market became saturated, while international expansion posed more challenges and risks.
This was reflected by the cautious business plan adopted by Vietnam Airlines for the year, with CEO Mr. Duong Tri Thanh telling the Center for Aviation (CAPA) in January that growth recorded in 2016 in both the overall market and the airline would be hard to match, and intensifying competition will likely impact profitability. “I don’t think we can repeat ourselves at such a high rate,” Mr. Thanh said.
In reality, however, 2017 marked the first time Vietnam Airlines regained domestic market share by growing faster than the overall market since the launch of Vietjet Air, according to CAPA.
The first nine months this year saw it earn consolidated pre-tax profit of over VND2.3 trillion ($101.64 million), surpassing its annual target by 40 per cent.
Nearly 108,000 flights were conducted during the period, 90.8 per cent of which were reported as “on time”, with the airline serving over 16 million passengers, up 5 per cent year-on-year.
After failing to attract foreign investors in its long-awaited initial public offering (IPO) in 2014, Vietnam Airlines Chairman Mr. Pham Ngoc Minh told VET in November that it has wrapped up discussions with potential investors over the sale of another 4.1 per cent stake.
Japan’s largest airline, ANA Holdings Inc., with an 8.8 per cent holding in Vietnam Airlines from a $108 million deal in 2016, participated in the negotiations, he said.
More than 8,700 interested investors, both domestically and internationally, were involved in the negotiations, Mr. Minh said. This is surprising, as just three years ago the bulk of its 3.5 per cent stake on offer at the 2014 IPO was eventually acquired by just two Vietnamese banks, with no foreign institutional investors participating.
Foreign investors have since then voiced their disappointment at the small stake on offer and the small free-float, with concerns that change to the company may only come slowly and that minority stakeholders would have little in the way of influence.
But the situation is now different, especially as there is a roadmap. The government has said it will reduce its stake in Vietnam Airlines to 51 per cent from 2019 to 2020, from about 86 per cent now.
The first batch of shares from the additional stake sale could be sold later this year or early 2018, Mr. Minh said, with a 2017 share sale enabling the carrier to continue implementing its ambitious investment plan of expanding and upgrading its fleet and improving overall service quality.
Meanwhile, ANA Holdings, which is limited by Japanese regulations to a 10 per cent stake in Vietnam’s national flag carrier, said it is not interested in an additional holding.
“The good relationship between Vietnam Airlines and ANA has been as successful as expected, but we do not have any plans for additional investment as of now”, ANA’s Director of Corporate Communications, Ms. Yuko Yoshimura, told VET. “We believe we have an understanding on this with Mr. Minh.”
Currently listed on the Unlisted Public Company Market (UPCoM), since January 3, Vietnam Airlines is set to switch to the Ho Chi Minh Stock Exchange (HoSE) next year for further investment opportunities. “The listing might come after the stake sale, and we are still waiting for the government’s approval,” Mr. Minh said.
After a strong 40 per cent surge on its stock market debut, to VND39,200 ($1.73), shares closed at VND33,000 ($1.45) after the trading session on November 24, valuing the firm at $1.78 billion. This is, however, lower than that of Vietjet Air, who listed one month later on HoSE but is now enjoying a market value of $2.57 billion and a share price of VND129,500 ($5.7).
With its current performance, Vietnam Airlines projects 2018 revenue to rise about 13 per cent against this year, while consolidated pre-tax profit may be “at least” VND1.6 trillion ($70 million), with 10 per cent passenger growth next year from 22 million this year.
On the market front, the airline forecasts domestic air travelers will rise 12 per cent next year to 35 million, as economic growth makes travel affordable for more Vietnamese. “We are confident about our prospects,” Mr. Minh said.
VN Economic Times