Increasing competition will cut down airlines’ profits

Bamboo Airways had its first commercial flight only a few months after being granted aviation business license. This is the fifth airline in Vietnam after Vietnam Airlines, VietJet Air, Jetstar Pacific and VASCO.

The thing that FLC Group, Bamboo Airways' holding company, has persistently pursued the aviation sector shows the potential of the domestic aviation market. In the past five years, aviation companies have benefited greatly from the increasing travel demand.

Even when oil prices rose sharply, thereby resulting in fuel prices and airfare increases in 2018, domestic airlines still grew very fast and continued to report huge profits.

Leading the market, Vietnam Airlines had a profitable year when its total revenue in 2018 reached about VND102 trillion (roughly $4.4 billion), up 22 per cent over the same period and pre-tax profit was estimated at VND2.8 trillion (roughly $121 million), down 11 per cent.

With two brands, namely Vietnam Airlines providing traditional services and Jetstar Pacific providing low-cost services, the company is accounting for 58 per cent domestic market share and 35 per cent international market share. Last year there were 22 million passengers and 350,000 tons of commodity carried by Vietnam Airlines.

In 2018, fuel prices increased by 32 per cent compared to 2017, making the profit of Vietnam Airlines somewhat decrease. In addition, the company's income was thought to be affected by that of Jetstar Pacific.

Before Bamboo Airways joined the market, the domestic aviation market was the confrontation between Vietnam Airlines and VietJet Air, the largest low-cost airline in Vietnam.

Revenue from passenger transportation has risen steadily over the years thanks to the expansion of the fleet and the increase in the number of flights. In the third quarter of 2018 only, revenue from this segment reached VND6,702 billion ($289 million), up 30 per cent over the same period.

According to the financial report, VietJet Air's revenue in the first nine months of 2018 grew 50 per cent and profit after tax increased by 15.5 per cent. The airline carried 16.88 million passengers, an increase of 34 per cent over the same period last year.

In the last quarter of 2018, thanks to the decline in oil prices and international visitors’ increasing travel demand to Vietnam, VietJet Air was expected to enjoy a profit. In previous years, the company suffered losses in aviation services in the last quarter due to a sharp drop in airfares during the least busy time of the tourism industry.

Although the airlines had good business results in 2018, the demand for domestic travel has shown signs of slowing down and could bring an unsatisfactory prospect to aviation companies.

The airlines also stated that they will face difficulties in achieving high revenues in 2019 and profits will come from the decline in oil prices and service fees from international visitors traveling to Vietnam.

Vietnam Airlines planned to focus more on the international market by increasing the number of wide-body aircraft. North Asia is currently the largest international market of Vietnam Airlines, accounting for about 54 per cent of the company's international market capacity, followed by South Asia (34 per cent) and Europe (seven per cent).

Compared to other domestic airlines, Vietnam Airlines has advantages and long-haul routes thanks to its full range of services. The company planned to open the route to the U.S. in 2019.

Besides, since 2016, Vietnam Airlines has changed the model from buying to selling and leasing aircraft so as to reduce financial pressure. Currently, about 40 per cent of Vietnam Airlines’ aircraft fleet is under operating lease model. It is expected that in the next three years, Vietnam Airlines will receive 21 new aircraft.

Vietnam Airlines' strategy continues to clash with that of VietJet Air. The airline is also targeting the foreign aviation market and is constantly adding international flights. An analysis company estimated that in 2018, Vietnam Airlines continued to lose more two per cent of the domestic market share and six per cent of the international market share to VietJet Air.

The fact that the first Bamboo Airways official flight took off will make the market competition fiercer. Positioning itself under the hybrid model, Bamboo Airways will "encroach on" with both traditional model of Vietnam Airlines and low-cost model of VietJet Air.

Bamboo Airlines also plans to open international routes similar to what Vietnam Airlines and VietJet Air have been doing. Analysts said that airfares are likely to drop due to the presence of the newcomer. In the short term, this will negatively affect the airlines’ profits.