Southeast Asia’s emerging powerhouses

China and India have long been touted as the growth engines of Asian aviation but two other nations promise to be future powerhouses of the airline industry. After the pandemic, Vietnam will almost certainly be one of the region’s winner.

by ASSOCIATE EDITOR AND CHIEF CORRESPONDENT, TOM BALLANTYNE  

October 1st 2020

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It is no accident Vietnam’s airline sector is leading the way in recovery from the coronavirus pandemic. The country’s government acted swiftly when the outbreak began and despite a recent increase in cases the situation appears to be under control. Read More »

The result? A study released last month by Oxford Economics forecasts Vietnam is expected to be the only Southeast Asian economy to report expansion this year, with its GDP to rise by 2.3%.

The Global Economic Outlook report said recovery prospects look brightest for Vietnam, which had contained the COVID-19 outbreak very effectively until recently. Vietnam’s performance stands in stark contrast to the rest of Southeast Asia, where growth is predicted to contract by 4.2% in 2020.

Vietnam’s domestic flight network had returned to 2019 levels in recent months until another wave of the virus, in July and August, saw services fall by around 30%. Nevertheless, General Director of Vietnam Airlines, Duong Tri Thanh, has said domestic flights in the last five months of the year would be around 70% of last year, much higher numbers than most other countries in the region.

What the figures indicate, according to analysts, is when restrictions on international travel ease, the Vietnamese aviation sector will be well positioned to attract growing numbers of tourists and foreign investment.

The Vietnamese government’s approach to the COVID-19 crisis has been steady and measured. For example, Hanoi froze approval of entrant airlines until 2022. Transport Minister, Nguyen Van The, said supporting existing operators must take top priority. There are five commercial airlines operating within Vietnam, but two players dominate the market. Flag carrier, Vietnam Airlines (VNA), and low-cost carrier, VietJet Air, command a combined 75% market share. Pacific Airways (formerly Jetstar Pacific), a wholly-owned VNA subsidiary after Qantas Airways recently offloaded its 30% holding, has another 10%. Newcomer Bamboo Airlines is the fourth major airline in the county and VASCO, another VNA subsidiary, plays a minor role.

Vietnam’s Hanoi-Ho Chi Minh City is the world’s fourth busiest domestic pair in seats offered and the most lucrative in-country route in Southeast Asia. Vietnamese air travel has grown nearly 20% annually for the past five years. In response, the Transport Ministry plans to spend $15.4 billion to develop 23 airports by 2030.

There are high barriers to entry into the Vietnam air passenger market for foreign aviation companies; specifically a cap of 34% ownership of a domestic airline. Southeast Asia’s largest budget carrier, the AirAsia Group, has made four unsuccessful attempts to add the nation to its network. Vietnam remains the only country in the region that does not have foreign-owned budget airlines operating in its home market.

Last month, Vietnam Airlines and Vietjet resumed international flying post the pandemic hiatus with flights from South Korea. Vietjet, which is marketing itself as a new age carrier, sweetened its September 30 re-launch of Seoul-Ho Chi Minh City (HCMC) and Seoul-Hanoi-HCMC from October 7 with a new deluxe ticket class and upgraded  benefits for members of its Skyboss frequent flyer brand. Members will be offered business class style services, including priority check-in and boarding, luggage packages and seat selection.

Vietnam Airlines beat VietJet in re-opening the Seoul-Vietnam route by a few days, but the vibrant LCC, along with young full service Bamboo Airways, is testing the mettle of the flag carrier both domestically and regionally.   

While there remains a great deal of uncertainty about the impact of the pandemic on Asia-Pacific airlines, it is assumed that recovery will come at some stage. And if past performance is anything to go by, Vietnam will resume its spectacular growth in the aviation sector.

The International Air Transport Association’s (IATA) statistics show Vietnam is one of five global markets with the largest increases in passengers after China, U.S., India and Indonesia. Its annual growth rate from 2011 to 2015 was 32.65%. The total Vietnam aviation industry, including international traffic, increased by 2.6 times in scale, from 23.7 million passengers in 2011 to 61.2 million in 2017.

By 2030, the Boston Consulting Group forecasts 16% of Vietnamese will be affluent compared with 5% in 2018, another factor offering the promise of more major growth in the country.

Like Vietnam, Indonesia has seen impressive growth in its aviation sector since the airline industry was deregulated in 2000. Airline passengers have increased from nine million in 1990 to around 90 million in 2016 and the country’s airline fleets have soared more than ten-fold, from 102 aeroplanes in 1990 to 1,030 in 2017. Airline expansion has been underpinned by the country’s economic growth, the emergence of LCCs and the expansion of the country’s middle class.

But unlike Vietnam, Indonesia has not managed the pandemic outbreak competently. As a result, its growth has stalled, especially as it already has growing pains ranging from lack of safety overnight and airline mismanagement that has led to airline losses. It does not, however, detract from the potential for growth post-pandemic.

Indonesia’s unique geography, with most of its major cities separated by mountain ranges and seas means transportation by land or sea can take days and this gives the aviation sector a competitive edge. While there are more than 60 scheduled and unscheduled airlines operating in Indonesia the market is dominated by flag carrier, Garuda Indonesia, its domestic subsidiary Citilink and Indonesia’s largest airline, budget Lion Air. Other operators include Batik Air, a Lion subsidiary, Malindo Air and Thai Lion Air. Before the crisis domestic traffic was reporting double-digit growth for five years.

All in all, post the COVID-19 recovery there is little reason to doubt the miserable hiatus in air passenger services is merely a pause in both Vietnam and Indonesia before they resume their rapid trajectories.