AirAsia moves into Vietnam

AirAsia recently revealed that it would be buying a 30% stake in proposed Vietnamese start-up carrier, Vietjet, allowing the Malaysian based airline to enter the Vietnam market under the guise of Vietjet AirAsia.

Malaysia-based AirAsia has a stated ambition to build a base in every Asian country. AirAsia already has two subsidiary brands in the Asia-Pacific market – Thai AirAsia and Indonesia AirAsia – but the carrier lost ground in the Vietnam market to Qantas, which invested in local carrier Pacific Airlines and formed Jetstar Pacific. Vietjet has been trying to launch for almost two years without success and AirAsia will be hoping to bring its successful low-cost model to the Vietnamese market and capture market share from Vietnam Airlines and Jetstar Pacific.

As well as matching the competitive threat of Jetstar Pacific, AirAsia views the Vietnam market as ripe for low-cost growth. Vietnam has a dominant flag carrier that has dual hubs at Hanoi and Ho Chin Minh City; a large population of 86 million; strong economic growth; a good tourism product; and a central geographical location within Asia-Pacific.

The Vietnam market is primarily centred on the Hanoi and Ho Chi Minh City markets. Ho Chi Minh City accounts for 49% of all domestic and international departures, while Hanoi accounts for 30% according to Flightbase (February 14–20, 2010).

State-owned Vietnam Airlines is the dominant carrier in the market place, operating 67% of all domestic and international flights, followed by Jetstar Pacific, which has an 8% market share.

The table below illustrates the top five carriers by market share:

Source: Flightbase February 14–20, 2010

The table not only underlines the strength of Vietnam Airlines, but also illustrates the dominance of the legacy carriers in the Vietnam market.

Despite this, AirAsia, Thai AirAsia and Indonesian AirAsia already operate several frequencies into Vietnam with scheduled services from Bangkok, Kuala Lumpur and Jakarta and it is believed that AirAsia will initially base aircraft in Ho Chi Minh City from May this year.

AirAsia’s Dominance

The Thai AirAsia and Indonesian AirAsia brands were launched in 2004 and the respective airlines have already grown in both markets where they are regarded as important players.

In Thailand, Thai AirAsia is the second largest carrier in the market, offering 92,081 weekly scheduled seats, secondly only to flag-carrier Thai Airways and with a market share in terms of scheduled seat capacity of 11%. Market leader Thai Airways has a 41% share of scheduled seat capacity. The main base for Thai AirAsia is Bangkok from which it operates 23 destinations and over 52,500 weekly seats (see table below), but it also has a smaller presence from Phuket where it operates to five destinations.

Source: Flightbase February 14–20, 2010

Indonesia AirAsia has become the sixth largest operator in a market that has enjoyed a low-cost boom in recent times. It currently offers over 52,000 weekly seats across all of Indonesia, with a market share of just 4%. The largest operator in the Indonesian market is Lion Air, the low-cost operator, followed by flag-carrier Garuda, with other low-cost operators such as Mandala and Merpati. Other LCCs have tried and failed in the Indonesian market, such as Adam Air. Indonesia AirAsia now operates into six Indonesian markets, Bandung, Jakarta, Bali, Yohyakart, Medan and Surabaya.

Vietjet Potential

It is thought that Vietjet will base its aircraft in Ho Chi Minh City and will initially link to AirAsia’s existing bases and destinations. Its current bases are Kuala Lumpur, Bangkok, Jakarta, Kota Kinabula, Kuching and Senai. AirAsia already servesvHo Chi Minh City from some of these markets through its existing carriers, but Vietjet may be able to offer an early morning departure to some of the large business centres such as KUL and offer onward connections. Vietjet will also look towards other AirAsia served destinations and effectively joining the dots in the network.

The table below shows some of the markets that are served by AirAsia and its subsidiary brands. It also demonstrates the existing network from Ho Chi Minh and if it has scheduled links to AirAsia destinations.

Vietjet & Jetstar Pacific

It is expected that there will be limited overlap with Jetstar Pacific, as that carrier serves predominantly domestic points, however it does provide connections to the extensive Jetstar and Jetstar Asia networks. However, it will raise a few interesting issues, such as will Vietjet AirAsia serve Singapore and compete with Jetstar, which operates a four-times weekly on the Singapore–Ho Chi Minh City route or will the new relationship between AirAsia and Jetstar mean that the two carriers will avoid repetition of certain destinations? Jetstar does not currently serve AirAsia strongholds from Ho Chi Minh City.

Jetstar, Jetstar Asia and Jetstar Pacific Destinations from Ho Chi Minh City:

There are undoubtedly challenges ahead for VietJet AirAsia with there being a number of issues in Vietnam’s aviation sector, particularly for low-cost start-up carriers. These include price controls set by the government on domestic routes, slot allocation where Vietnam Airlines has historically been awarded the most desirable slots, and a shortage of skilled workers.

However on February 6, 2010, the Transport Ministry of Vietnam reportedly proposed prices of US$37 for fights shorter than 300km; $46.75 for flights from 300km to under 500km, $64 for flights from 500km to under 850km and $98.41 for flights from 850km. (These were published in Thanh Nien News, February 6, 2010).

Carriers believe the new caps will enable more flexibility, allowing them to raise prices during the peak season or on popular flights, and cut prices on flights that have fewer customers, potentially making it easier for Vietjet AirAsia to start serving new destinations.

Vietjet will no doubt stimulate market growth in Vietnam and will have the same success as the other AirAsia subsidiaries; it will be interesting to see how the network develops both against Vietnam Airlines and Jetstar Pacific.