Why Vingroup’s airline venture was grounded

The biggest private group in the country recently withdrew its proposal to establish private airline Vinpearl Air, just weeks after announcing it was planning first flights in a few months.

Vingroup CEO Nguyen Viet Quang said in a statement that the company’s heavy investment in the aviation market, currently dominated by big, experienced, players, could lead to an "oversupply."

With state-owned Vietnam Airlines and budget carrier Vietjet dominating the Vietnamese skies, there are valid grounds for Quang’s concern.

Vietnam’s aviation infrastructure is already stretched, with the current five commercial airlines expanding over the years to accommodate growing travel demand.

Officials had actually warned Vinpearl Air of parking space shortage for its jets if it chose the Noi Bai International Airport in Hanoi as base.

"Vingroup should note that after 2020 Noi Bai International Airport will run out of parking space and Tan Son Nhat International Airport will also have no space and flight slots available by 2022," the Ministry of Transport said in an evaluation report on Vingroup’s proposal.

The aviation market has been recording double-digit growth in the last four years, but the growth rate is declining. Annual growth in the number of passengers carried by domestic carriers reached 30.3 percent in 2016, but fell to 11.3 last year, according to the General Statistics Office.

The slower growth makes it difficult for carriers to make bigger profits.

Vietjet’s gross profit margin in the first nine months of last year was 14.24 percent, down from 15.48 percent in 2017. Vietnam Airlines’s gross profit margin in the third quarter last year also dropped by almost one percent year-on-year, with costs rising faster than revenue.

"Vingroup choosing to step out the aviation market is a correct decision, as it would have had to bear big losses, given that the market has adequate players now, serving different categories of passengers," said aviation expert Nguyen Thien Tong.

A new airline will take years to establish and win the trust of its customers, while profitability remains uncertain in a market with signs of oversupply, he added.

New player Bamboo Airways last year ignited hope for aspiring carriers by breaking years of dominance by Vietnam Airlines and Vietjet and taking 5.4 percent of the market share as of September, according to data from brokerage MB Securities Jsc.

Other carriers waiting in the wings were Vinpearl Air, Vietravel Airlines of tourism company Vietravel, and KiteAir of hospitality firm Thien Minh Group.

But Tong said that as new players seek to fly, Vietnam Airlines and Vietjet will also expand their fleet to ensure their dominance.

Bamboo Airways’ share of 5.4 percent is still far away from the 42.9 percent of Vietnam Airlines and 35.9 percent of Vietjet.

"The increasing number of jets, combined with declining air travel growth rate, will lead to lower occupancy and bigger losses for new airlines," Tong added.

Wheels firmly on the ground

Another reason for Vingroup’s withdrawal is a desire to direct its resources optimally to developing technology and industry, CEO Quang said.

The group has been pouring big bucks into its auto business VinFast. The subsidiary had an asset value of VND84 trillion ($3.62 billion) as of September last year, second only to Vingroup’s real estate business, and accounted for a quarter of the group’s total assets.

Vingroup has also been making new smartphone and TV models, and plans to produce more smart devices in its factory in the northern Hai Phong City which is capable of manufacturing 26 million devices a year.

In this situation, an initial investment of VND4.7 trillion ($202.9 million) in an airline that has to be expanded in upcoming years is likely to be a spoke in the conglomerate’s wheel, dilute its priority and take attention away from the auto and tech business.

Although an airline could feed Vingroup’s network of 43 Vinpearl resorts across the country with 17,000 rooms, the group has other options to increase the number of customers.

"Most airlines in Vietnam are starting to have an oversupply in transport capacity, so instead of competing, we will partner with them to bring more customers to our Vinpearl resorts," Vinpearl CEO Vu Tuyet Hang said in a statement.

Although the decision to shut down an airline before it began flying might "shock" observers, this is part of the group’s development strategy, she added.