ANALYSIS: VietJet's quest for capacity growth

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At a time when its low-cost peers in the region are deferring aircraft deliveries and cancelling orders, VietJet Air is singing a different tune with its optimistic and bullish outlook.

The 30-month old carrier grabbed headlines earlier this year when it inked a firm order with Airbus for 63 A320 family aircraft, with purchase rights for an additional 30.

Speaking to reporters in Singapore last week, managing director Luu Duc Khanh says that despite the Airbus order, VietJet will eventually need to lease more aircraft to meet the demands of its growth plans. He also did not rule out turning to Boeing for more narrowbodies, should Airbus be unable to meet its demands.

“Vietnam has a population of 90 million, but just less than one aircraft per one million population. Australia however has 25 aircraft per one million people. There is a big gap there, and so the potential for growth is very, very large,” he says.

Joanna Lu, head of advisory for Asia at Ascend, a Flightglobal advisory service, agrees that Vietnam has "tremendous opportunities".

“The market currently shows a lower LCC penetration than any other southeast Asian country,” says Lu. “With the geographical location connecting North Asia and Southeast Asia, Vietnam has the potential to build Ho Chi Minh into an international hub.”

FlightMaps Analytics shows that despite VietJet's youth, it accounted for over half of the low-cost seats originating from Vietnamese cities in April 2014. The other low-cost operators in the market included domestic rival Jetstar Pacific, and foreign LCCs such as AirAsia, Cebu Pacific, Lion Air, Thai AirAsia and Tigerair.

The top three routes, in terms of seat capacity, offered by these budget operators are: Ho Chi Minh to Hanoi, Danang and Kuala Lumpur.

VietJet has proven adept at eroding the domestic market share of Vietnam Airlines and its low-cost subsidiary Jetstar Pacific. FlightMaps shows that in April 2009, Vietnam Airlines held a dominant 75.6% share of the domestic market while Jetstar Pacific had a 16.8% share. Five years on, in April 2014, Vietnam Airlines accounted for 64.4% of the market and VietJet 22.7%. Jetstar Pacific was distant third with a capacity share of just 12.7%.

Looking at total seats from Vietnamese cities to both domestic and international destnations, in April 2009 Vietnam Airlines and Jetstar Pacific together accounted for 850,000 seats, or 68.3% of total capacity. The duo’s market share however slipped to 64.2% in April 2014, while VietJet became the next biggest player with 389,000 seats, 15.2% of the total. As VietJet grows it will inevitably make greater in-roads on international routes.

VietJet now serves 11 points in Vietnam and also has international services to Bangkok. Its top three routes are from Ho Chi Minh to Hanoi, Danang and Haiphong.

VietJet's route network April 2014

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FlightMaps Analytics

Luu says the 30-month old carrier is flying to all domestic airports capable of handling A320s, and that it will continue to increase frequencies on high demand routes. This year it also plans to launch services to five more international points including Singapore, Taiwan and Hong Kong.

He adds that the carrier’s load factors have increased from day one and now average 90%. It has also managed to turn a profit within 19 months of operations. This year, it is aiming to carry 6.8 million passengers, double the 3.4 million carried last year.

Besides leveraging on its position as Vietnam’s largest LCC, VietJet also wants to make a name for itself abroad. It is working to launch Thai VietJet in September, and thereafter set up JVs in Myanmar and selected countries in North Asia. It also has plans to launch a long-haul arm with services to the US, Europe and Australia in the next three to five years, having confidence that the operation would be well supported by the five million Vietnamese living abroad.

“The key drivers of success for an LCC include a sizable source market, efficiency of new aircraft and operation, a supportive government and less competition. That’s why VietJet has found success in the domestic market,” says Lu.

“It will however face intensifying competition from Southeast Asia’s other LCCs, which have greater economies of scale. North Asia would be a lucrative market for VietJet to explore in the first stage of its regional expansion.”

Asked whether it is at all concerned about the stiff competition in the market, Luu says: “Some people have success, some have failure. This is a business, we can’t have everyone successful. What I can tell you, however, is that we’re very confident in our operations.”