VietJet Air 2015 outlook: more rapid

domestic growth as it defers longhaul plans. IPO late 2015

VietJet Air is planning to focus on domestic expansion and growing its North
Asian network in 2015 asVietnams leading LCC again aims to double in
size. VietJet is seeking to grow further its share of the Vietnamese domestic
market, which has already surpassed 30%, while launching services
to China,Hong Kong and Japan.
VietJet Air roughly doubled its fleet and traffic in 2014, ending the year with six
million passengers and almost 20 aircraft. The airline aims to again double
passenger numbers in 2015 as the fleet is expanded by about another 10
aircraft.
But VietJet has made a major and sensible strategic adjustment in deciding to
focus primarily on the domestic market. Plans for acquiring widebody aircraft and
entering the long-haul sector have been delayed for at least three years. Instead
VietJet is considering regional aircraft, which would be used to further bolster its
domestic position.

VietJet is already one of the 10

largest LCCs in Southeast Asia
VietJet launched services at the end of 2012 and has quickly become one of the
largest LCCs in Southeast Asia. VietJet is now the eighth largest LCC in Southeast
Asia based on current seat capacity.
VietJet already has surpassed both of Singapores LCCs Jetstar
Asia and Tigerair and will likely overtake Indonesia AirAsia and
potentially Thailands Nok Air by the end of 2015.
Nok, Indonesia AirAsia, Jetstar Asia and Tigerair were all established in 2004
eight years before VietJet began operations.

Southeast Asias top 10 LCCs ranked by seat capacity: 19-Jan-2015 to 25-Jan2015

Rank
1
2
3
4
5
6
7
8
9
10

Airline
JT
AK
5J
FD
QG
DD
QZ
VJ
D7
TR

Total Seats
1,083,194
550,260
366,997
338,040
230,760
218,204
198,360
156,060
122,148
120,240

Lion Air
AirAsia
Cebu Pacific Air
Thai AirAsia
Citilink
Nok Air
Indonesia AirAsia
VietJet Air
AirAsia X
Tigerair

Note: Lion Air capacity data includes flights operated by regional subsidiary Wings Air
Source: CAPA Centre for Aviation & OAG

VietJet Air currently serves 13 domestic and five

international destinations with a fleet of 19 A320s
VietJet Air currently serves 13 domestic and five international destinations with a
fleet of 19 A320s in single-class 180-seat configuration. VietJets Vietnam
operation added nine aircraft in 2014 while its new joint venture in Thailand took
its first aircraft. CAPA will look at Thai VietJet Air, which is currently operating
charter flights and plans to launch scheduled flights in Mar-2015, in a separate
analysis report to be published later this week.
The 19 aircraft currently at the Vietnamese operations includes the first two
aircraft from its 63-aircraft order with Airbus, which was completed in Feb-2014,
and one wet-leased aircraft. The wet-leased A320, which is sourced
from Bulgaria-based BH Air, is not included in the table below as it has not been
registered in Vietnam.
VietJet Air fleet: as of 20-Jan-2015

Aircraft
Total:
Airbus A320-200
Airbus A320-200neo
Airbus A321-200

In Service
18
18
0
0

In Storage
0
0
0
0

Note: only includes aircraft registered in Vietnam; VietJet Thai Air and wet-leased aircraft are excluded
Source: CAPA Fleet Database

VietJet will add another 13 aircraft in 2015

VietJet managing director Luu Duc Khanh said at a 16-Jan-2015 media briefing
in Singapore that the group is slated to take in 2015 nine additional aircraft from
its order with Airbus. This includes its first A321, which will be delivered in Mar2015.

Mr Luu said VietJet is also looking at leasing four additional A320 family aircraft,
which would give the group a fleet of 33 aircraft by the end of 2015. The group
has tentatively allocated three of the 13 aircraft expected to be added in
2015 to Thai VietJet Air and 10 aircraft to its original operation in Vietnam.
As is the case with all of Southeast Asias LCC groups, there is some degree of
flexibility when it comes to both allocations between affiliates and total fleet size.
But VietJet will certainly have another year of rapid growth in 2015 with most of
the additional capacity being injected into the Vietnamese domestic market.

VietJet tones down its international ambitions

VietJet is now taking a relatively conservative approach to the international
market. It has dropped plans to launch a long-haul operation, which Mr Luu
expects will be relooked at in three to five years. It is also not planning to expand
its network in Southeast Asia but will pursue some expansion in the VietnamNorth Asia market, where competition is less intense.

VietJet is looking at potential joint venture

opportunities in North Asia
VietJet also plans to start small and expand slowly in Thailand. The group has
dropped consideration of a third affiliate in Southeast Asia, where it had been
looking at Myanmar. Instead, VietJet is looking at potential joint venture
opportunities in North Asia, where it sees more opportunities as the market is not
as saturated with LCCs. VietJet could establish a carrier in North Asia by the end
of 2015 although the new potential JV has not yet been allocated any aircraft.
The new more conservative approach to international expansion is sensible,
given the steep competition. VietJets plans for expanding outside Vietnam were
initially overambitious.
International expansion can be challenging and risky at this stage. While VietJet
has quickly developed a widely recognised brand that Mr Luu says is known by
99% of the Vietnamese population, it is not yet well known in other Asian
markets.
VietJet is right to focus on its strength and pursue opportunities within Vietnam,
which has emerged as one of the worlds fastest growing markets. Now is the
time to cement its position in the domestic market and secure additional slots
at Ho Chi Minh, which are starting to become scarce.

Vietnam has plenty of domestic opportunities

VietJet plans to add capacity on trunk routes through a combination of more
frequencies and up-gauging flights from the A320 to A321. But VietJet also sees
an opportunity to add three to five new domestic destinations using its current
A320 fleet.
It also sees opportunities to launch new point to point routes which are not
currently served by any carrier. The rise of Vietnams middle class in secondary

cities is opening up opportunities for new routes such as from Haiphong, one of
Vietnams four largest cities, to the popular island destination of Phu Quoc or the
mountain holiday destination of Da Lat.
Several of Vietnams relatively under-served provinces are eager to attract more
LCC services to boost local economies and domestictourism. Vietnam is also
constructing new airports. For example there was a groundbreaking ceremony on
18-Jan-2015 for an airport in the south-central resort town of Phan Thiet which is
expected to become operational in 2018.
Meanwhile Vietnam is investing in upgrading several existing airports. Phu Quoc
has seen rapid growth since a new airport opened in late 2012, replacing an
airport which could not accommodate A320s.
See related report: Phu Quoc sees surge of new flights, led by VietJet and
Vietnam Airlines, as new airport opens

VietJet considers acquiring regional aircraft

There are still several airports which are only served by Vietnam Airlines or its
regional subsidiary VASCO. Most of these airports can only accommodate
regional aircraft and some cannot be upgraded because of geographic
limitations.
VietJet is now studying the potential acquisition of regional aircraft, which Mr Luu
said would be used to serve smaller airports as well as open or take over
thin routes which are more suitable for smaller aircraft. VietJet is in talks
with ATR, Bombardier and Embraer and plans to make a decision on regional
aircraft by the end of 2015. If we do it well do it this year, Mr Luu said.

Adding smaller aircraft at this phase is lower risk than

the original plan for expanding in the other direction
by acquiring widebody aircraft
Adding smaller aircraft at this phase is lower risk than the original plan for
expanding in the other direction by acquiring widebody aircraft. Smaller aircraft
would enable VietJet to penetrate new domestic markets, supporting its efforts to
continue increasing its share of the domestic market.
VietJet has opportunities for further domestic market share gains as well as
opportunities to grow with the overall market. While Vietnams domestic LCC
penetration rate has more than doubled since the launch of VietJet, reaching
about 41% in 2014, it is still lower than the other four main domestic markets in
Southeast Asia (Indonesia, Thailand, Malaysia and the Philippines).
Vietnam LCC capacity share (% of seats): 2003 to Jan-2015

Note *figures for 2015 are for January only

Source: CAPA Centre for Aviation & OAG

Given its position as Vietnams leading LCC and the relatively small number of
airlines in Vietnam, VietJet could potentially capture over 50% of the domestic
market. The leading LCC in the Philippine market, Cebu Pacific, already has
about a 60% share of the domestic market in the Philippines while AirAsia has a
nearly 50% share of the Malaysian domestic market. Malaysia and the Philippines
are similarly sized domestic markets and are only slightly larger than Vietnam.
VietJet currently accounts for about 32% of domestic seat capacity in Vietnam,
according to CAPA and OAG data. Vietnam Airlines accounts for a leading 54% of
domestic capacity, giving it by far the largest domestic market share among the
main flag carriers in Southeast Asia. Jetstar Pacific, which is 70% owned by
Vietnam Airlines and 30% by Australias Jetstar Group, accounts for the
remaining 14% of domestic capacity in Vietnam.
Vietnam domestic capacity share (% of seats) by carrier: 19-Jan-2015 to 25-Jan2015

Source: CAPA Centre for Aviation & OAG

VietJet should pursue domestic expansion before

competitors can respond
Jetstar Pacific accelerated expansion in 2014 after several years of limited to no
growth. But Jetstar Pacific is still expanding at a much slower clip than VietJet and
has said it plans to focus primarily on the international market.
See related report: VietJet Air and Jetstar Pacific plan more international
expansion in 2015

VietJet seems to have a window to continue growing

and take market share away from its governmentowned competitor
A strategic adjustment at the Vietnam Airlines Group to rely more on its budget
brand in the increasingly competitive domestic market seems inevitable. But at
least for now VietJet seems to have a window to continue growing and take
market share away from its government-owned competitor.
VietJet is unlikely at this point to encounter significant government resistance as
its low fareshave successfully stimulated growth and boosted local economies,
appealing particularly to the provincial governments. But it makes sense to focus
on domestic growth before competition intensifies either with another new
entrant or a response by Vietnam Airlines.

Suspending plans for long-haul operation is

sensible
Long-haul operations could be a distraction, particularly at such an early phase in
VietJets development. For example Asias oldest LCC,Cebu Pacific, only launched
its long-haul unit in 2013. Cebu Pacific had added turboprop aircraft five years
earlier, in 2008.
VietJet has been studying the long-haul low-cost model over the last year. It was
initially looking to acquire widebody aircraft as early as 2015 with the aim of
bringing the VietJet brand to overseas markets that have large Vietnamese
populations, particularly Australia, Russiaand the US.
But Mr Luu pointed out that the demand in the short-haul market is very strong,
making it hard to justify investing in a long-haul operation at this time. Its
better for me to focus on what we are doing best, Mr Luu said, adding that
VietJet will still eventually expand into the long-haul market. My expectation is
three to five years down the line.

VietJet drops plans for Vladivostok

VietJet also has dropped plans for serving Far East Russia, which is within A320
range of Hanoi. VietJet signed a Memorandum of Understanding with Vladivostok
Airport in Sep-2014 with the aim of launching service on the Hanoi-Vladivostok
route sometime in 2015.
See related report: VietJet Air international expansion enters new phase with
Cambodia and Russia
Mr Luu said the depreciation of the Russian rouble makes Hanoi-Vladivostok a
challenging route. There is still sufficient demand to bring tourists from Russias
Far East to Vietnam but it is a price sensitive inbound leisure market. The
decision to postpone Vladivostok is wise as VietJet would struggle to get fares
that in USD terms were sufficient to cover the cost of the operation, which would
be relatively high as it is a long route approaching the range limits of the A320.
VietJet also has toned down ambitions for growing its regional network within
Southeast Asia, another sensible adjustment given the intense competition in the
Southeast Asian market. VietJet currently serves three destinations in Southeast
Asia Bangkok, Siem Reap and Singapore. It currently operates three daily flights
to Bangkok including two from Ho Chi Minh and one from Hanoi one daily
flight from Hanoi to Siem Reap and one daily flight from Ho Chi Minh to
Singapore.

VietJet recently dropped a second daily frequency on

the Ho Chi Minh-Singapore route
VietJet recently dropped a second daily frequency on the Ho Chi Minh-Singapore
route only a few months after the flight had been added. Ho Chi Minh-Singapore
is an extremely competitive market with three other LCCs offering almost 18,000

weekly return seats. VietJet now has only a 13% share of LCC capacity and a 7%
share of total seat capacity on the Ho Chi Minh-Singapore route, making it the
smallest competitor.
See related report: Jetstar Pacific battle with VietJet Air intensifies as Bangkok
and Singapore routes are launched
Thailand-Vietnam is another highly competitive market but is strategically
important for the group following the establishment of Thai VietJet. Siem Reap is
a less competitive market not currently served by any other LCCs. Other
potential Southeast Asian markets such as Kuala Lumpur and Manila however are
served by foreign LCCs. VietJet has wisely decided to stay away from such
markets for now and instead focus on domestic opportunities and international
markets where competition is less fierce.

VietJet will focus its regional international

expansion on North Asia
VietJet became the first LCC to serve the Vietnam-Taiwan market in Dec-2014,
when it launched services from Ho Chi Minh to Taipei. It competes against Jeju
Air on the Hanoi-Seoul route but each carrier has only one daily flight.
VietJet has been successful so far in the Korean and Taiwanese markets and is
now looking at adding in 2015 a second destination in each country Busan
in Korea and Kaohsiung in Taiwan. VietJet already operates charters to Busan.
VietJet is also looking to serve Hong Kong, China and Japan in 2015. These are
again markets not served by any LCCs from any Vietnamese gateway. VietJet has
already been operating charters to China and has been receiving requests from
local Chinese governments and agents to offer scheduled services.
Mr Luu said VietJet is looking at using its soon to be newly delivered A321s to
serve Tokyo Narita. Tokyo would be VietJets longest route at about five to six
hours from Hanoi or Ho Chi Minh.

All the new potential North Asia destinations

represent relatively low risk expansion as the flights
would rely heavily on local agents
All the new potential North Asia destinations represent relatively low risk
expansion as the flights would rely heavily on local agents which book a large
and growing volume of tour packages to Vietnam. VietJet already relies heavily
on agents for its existing services to Korea and Taiwan, adistribution model it is
comfortable with as Vietnam is also a market where agents continue to play an
important role.
But overall VietJet will remain domestic-focused with the international flights
providing some diversification along with an opportunity to boost aircraft
utilisation rates through longer routes and some overnight flights. In 2014 we

will expand in the international market conservatively, step by step, Mr Luu

said.

VietJet doubles passenger numbers in 2014 with

a 90% load factor
VietJet is right to be bullish about its own domestic market. An overwhelming
majority of the 10 million passengers it has carried since it launched services on
26-Dec-2012 have been in the domestic market. Its highly successful domestic
operation has enabled the airline to have high load factors and be profitable from
a very early phase.
Mr Luu said VietJets load factor was an average of 90% in 2014 as total
passenger numbers doubled from approximately 3 million to 6 million. He
expects passenger numbers could double again in 2015 to 12 million as demand
in Vietnam remains buoyant.
VietJets international load factor so far has been lower than its overall average.
But at 80% to 85% it is respectable, particularly as three of its five international
destinations were launched during 2014.

VietJet's new more conservative approach should

help IPO prospects
Mr Luu declined to provide financial figures although VietJet has previously stated
it is profitable. The airline is now aiming to pursue aninitial public offering (IPO) in
late 2015 which Mr Luu hopes will raise USD500 million to USD800 million.

Launching a long-haul operation in particular would

have been a drain on resources and represented a
higher level risk that could have raised concerns with
potential investors
The new more conservative international expansion strategy and increased focus
on Vietnams domestic market should make VietJet more attractive to potential
investors. Launching a long-haul operation in particular would have been a drain
on resources and represented a higher level risk that could have raised concerns
with potential investors.
VietJet still has a relatively ambitious long-term business plan and raised some
eyebrows when it ordered 63 aircraft. But the deliveries are spread over seven
years and VietJet has some flexibility with its fleet plan because all of its current
aircraft are leased.
See related report: VietJet Air places major A320 order. Is there room for another
pan-Asia low-cost airline group?

There will be opportunities to return aircraft over the next few years as 12 of the
18 aircraft that VietJet Air currently leases were brought in as second-hand
aircraft, including aircraft that have been subleased from Philippine Airlines. The
other six aircraft were leased in as new aircraft, including its first two aircraft
from its Airbus order, which have been sold and leased back. (The proceeds from
the IPO should give VietJet an opportunity to start pursuing other alternatives for
financing its future fleet.)
VietJet could potentially phase out most or even all of its A320ceos before the
last of its A320neos are delivered. The A320neoaccounts for 42 of its 61
outstanding orders with Airbus. The first A320neo is slated for delivery in 2018
with an engine selection planned for 2015.

Fleet growth should be feasible given the

opportunities in Vietnam
A fleet of at least 60 A320 family aircraft by early next decade is reasonable as
Vietnams rapidly growing domestic market alone should be able to
support a doubling of the carriers fleet. Regional international opportunities will
also grow as Vietnam continues to emerge as a popular international destination.

VietJet does not necessarily need joint ventures to

support the current order
Placing aircraft at joint ventures outside Vietnam is a much bigger unknown and
comes with bigger risks. But VietJet does not necessarily need joint ventures to
support the current order. Ultimately the affiliates outside Vietnam could prove to
be relatively small niche carriers, leaving VietJet to focus primarily (or even
perhaps entirely) on its local market.
The biggest risk clouding the VietJet outlook has always been overambitious
international expansion. Eventually VietJet will look at accelerating international
expansion, including the emerging medium/long-haul low-cost model. But the
new strategy of focusing mainly on the huge opportunities in the local market is
a step in the right direction which should give VietJet a firmer footing in the
dynamic Southeast Asian marketplace. A successful IPO later in 2015 could open
up the door to more rapid expansion, but for now the balance looks.