On March 31 AirAsia signed an agreement with Vietnam’s Gumin Co Ltd, Hai Au Aviation Joint Stock Company and Tran Trong Kien (owner of the two firms), to start a low-cost carrier in the country. The plan is for the airline to launch flights early 2018.
AirAsia is hoping it will be third time lucky in 10 years in penetrating the Vietnamese market, having failed twice – once in 2007 (in a planned partnership with Vinashin) and then in 2010 with VietJet.
The project is slated to require an investment of about USD44 million, of which AirAsia needs to inject just 30% and the rest from Gumin.
However, a news portal in Vietnam is casting doubts on the JV, raising the plan’s legitimacy and feasibility. It claims that AirAsia has yet to submit an application to form the JV with Gumin and Hai Au Aviation.
In any case, AirAsia’s desire to have Vietnam is understandable. The country is Southeast Asia’s fastest growing market, with an annual growth of 17% in the past decade. Passenger traffic for the next 10 years is likely to continue to post double-digit figures.
Vietnam has a population of around 90 million, and some 70% are between the ages of 15 and 64. Vietnam is also Southeast Asia’s fifth largest aviation market, after Indonesia, Thailand, Malaysia and Singapore. It is estimated that the middle class comprises between 25% and 35% of Vietnam’s population.
That said, Vietnam’s economic growth slowed to around 5.1% in 1Q17 – the slowest in three years – with the industrial sector suffering from its smallest expansion since 2011.
Annual inflation in March was around 4.6%, the slowest pace since November 2016. But a hike in higher food demand and fuel prices rising 35% in 1Q17 pushed the CPI up an average 5% year-on-year. That’s a four-year high. Read Bloomberg’s report on Vietnam’s economy here.
AirAsia’s thrust into Vietnam makes commercial sense, as it pushes for a pan-Asian discount carrier and it is relatively inexpensive, too, with the 30% investment amounting to less than MYR60 million. It’s a cheap price to pay to get a foothold in a market that still has strong upside in the next decade.
But AirAsia may find the going considerably tough, given that VietJet now controls almost half of the domestic market, with Vietnam Airlines and Jetstar Pacific sharing the remainder.
Indeed, the competition is going to become more intense following VietJet’s recent IPO and aggressive fleet expansion. In our view, Vietnam will see close to 50 million passengers in 2017 as low fuel prices ensure lower fares amongst the key players.