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VietJet orders Boeing planes, bikinis not included

25 May 2016

Vietjet MAX8200 airplane

Photo from VietJet press release

How many bikini-clad flight attendants does it take to buy 100 Boeing aircraft? Answer: zero. All it takes is a signature from one feisty lady in a power suit that Bloomberg predicts will be the first Southeast Asian woman self-made billionaire.

Vietnamese low-cost carrier VietJet is owned and run by Nguyen Thi Phuong Thao, a 46-year-old entrepreneur who has shown that it is perfectly legitimate (and fun) to have relationships with American and European (companies) concurrently.

In February 2016 when we last saw her at the Singapore Airshow, Madam Nguyen had just penned a deal worth USD3.1 bln, including one with Airbus to form a flight and maintenance training centre in Ho Chi Minh City. Read here.

On Monday 23 May she again basked in the limelight by inking an order for 100 Boeing 737 MAX 200 in the presence of both the American and Vietnamese presidents. The value of this deal was put at over USD11 bln although airlines that buy in bulk typically get a very substantial discount from the manufacturer.

Vietnam has a population of about 90 million. Many are young, at least 30% are aged under 35. There’s a lot of potential for airlines to make money in such a market and VietJet has done well since it started on Christmas Day 2011.

But is the airline biting off more than it could chew with this latest order from Seattle? It would appear so, for several reasons. VietJet now operates just over 30 Airbus A320/A321 planes. Majority of the aircraft are on operating leases.

Firstly, the airline now accounts for at least 35% of seat capacity domestically, competing against flag carrier Vietnam Airlines and Jetstar Pacific. VietJet’s seat capacity is up 75% YoY; Vietnam is Asia’s fastest growing domestic market, faster than Indonesia even.

The number is growing, we understand, and it wouldn’t surprise anyone if VietJet controls half of the domestic market by 2020. However, the yields, we suspect, aren’t that great.

Secondly, when an airline takes delivery of an aircraft every other month or so – as VietJet is doing – it incrementally erodes the company’s cashflow. Unless of course margins are so good the airline can withstand the weakened currency (Vietnamese dong) and higher jet fuel prices (yes, it will rise again).

Thirdly, it’s been reported Madam Nguyen plans for an IPO sometime this year, hoping to raise USD300 mln either in Hong Kong or Singapore. BNP Paribas, Deutsche Bank, JP Morgan and VietCapital are mandated as underwriters.

It’s not a good time to list, in our opinion. Especially if you’re an airline. There just isn’t much appetite and interest among the investment community. Just take a look at some of the share prices of listed airlines within the region. With the exception of Cebu Pacific, many are languishing. Tigerair has been delisted, and for a good reason, too.

Fourthly, the Boeing 737 MAX 200 is a plane with almost 200 seats. It was designed for Ryanair. While we think Ryanair has no issue maximizing this plane, the same might not be true for VietJet. Bigger isn’t necessarily better.

VietJet's cabin crew

Now imagine them in bikinis… would you be tempted to buy VietJet shares? Pic/VietJet

The A320s have been doing what they’re supposed to do and while VietJet may not be able to get as many of them as quickly as it wants, it’s a good time to reassess the market and strengthen the coffers. Not everything is as rosy as it looks.

Once oil prices stabilise and inch up, there’s going to be very heavy turbulence. That’s coming, not just yet, but it’s coming…

VietJet had planned to fly to Vladivostok in Russia’s Far East but the plan was shelved following the depreciation of the Russian rouble. Now it’s focusing on East Asia, namely South Korea and Taiwan and that is sensible given the number of Taiwanese and Korean leisure and business travelers into Vietnam.

The last time an Asian LCC decided on a dual-type fleet, the American president also presided over the signing ceremony. In November 2011, Indonesia’s Lion Air agreed to buy 230 Boeing planes worth almost USD22 bln at catalogue prices. The first Boeing aircraft is slated to arrive in 2017. Like VietJet, Lion Air is solid domestically, controlling over half of Indonesia’s market. It has since tied up with a Malaysian partner to form Malindo and created another subsidiary in Thailand (Thai Lion Air).

What will VietJet do next? There could be tie-ups with other carriers. Additionally, it may come face to face with Lion Air in the not-too-distant future given that the Indonesian carrier has plans to expand in Indochina, including Myanmar and Vietnam.

VietJet has stated its intention to go into the low-cost, long-haul market, too, which in our view isn’t a very good move. Thus far, VietJet’s available seat kilometer (ASK) has been quite spectacular – its load factor is said to be averaging 90%! This will be severely compromised once it crosses a certain radius (beyond 6 hours).

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