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AirAsia is entering a market where the skies are already crowded with key players, including the ambitious budget carrier Vietjet.   © Reuters
Company in focus

AirAsia set to meet its match in Vietnam's Vietjet

Low cost-carrier drives growth by copying from Southeast Asia's budget pioneer

KUALA LUMPUR -- Three times Tony Fernandes has tried to take AirAsia Group into Vietnam, one of Southeast Asia's fastest growing aviation markets. Three times he has failed. Now, the unstoppable head of the region's first and largest low-cost carrier is going for a fourth attempt.

But he may have met his match in Vietnam's Vietjet Aviation, which in just seven years has snapped up 45% of the local market, largely by imitating -- and sometimes topping -- AirAsia's brash, confident business model.

Fernandes, a former accountant and Warner Music executive, started his airline with just 1 ringgit ($0.24), 40 million ringgit of debt, and a planeload of confidence. He faces off against Vietjet's highflying Nguyen Thi Phuong Thao, who made her first million dollars trading goods while studying in Moscow. Thao has gone on to become one of Southeast Asia's first female self-made billionaires, partly thanks to deployment of her early wealth in the creation of Vietjet.

Both understand the vast potential of Vietnam, an emerging economy with an annual growth rate ranging between 6% and 7% over the past three years. Of its population of 95 million, over 40% is between 25 and 59 years old. Yet budget-flight penetration is one of the lowest in Southeast Asia, at 1.7 aircraft per million people operated by low cost carriers, compared with 2.1 in the Philippines and 2.6 in Indonesia, according to Vietjet.

It is this potential that makes Fernandes determined to crack the Vietnamese market, the missing piece in the puzzle for the Malaysia-based airline with operations in India, Indonesia, Japan, the Philippines and Thailand. "AirAsia is an ASEAN airline," said Fernandes on Dec. 6. "And in ASEAN, Vietnam is one of the remaining countries with a large population that we are not in."

His latest attempt was sealed in December when AirAsia struck a deal to set up a joint venture with Vietnamese tour operator Thien Minh Group, by the second half of 2019. AirAsia will hold 30% of the venture.

AirAsia Group CEO Tony Fernandes (Photo by Tsuyoshi Tamehiro)

But Vietnam's skies are already crowded with several key players vying for airspace. In addition to Vietjet, national carrier Vietnam Airlines and its low cost affiliate Jetstar Pacific Airlines, jointly owned with Australia's Qantas Group, operate commercial flights. A fourth, Bamboo Airways, is hoping to make its first commercial flight in the coming weeks.

Vietjet, focusing on the same price-conscious market and often employing the same savvy marketing techniques, arguably poses the most significant challenge to AirAsia's Vietnamese ambitions.

Founded in 2007, the budget airline carried its first passengers in 2011 and has seen compound annual sales growth of 46% over the past three years. Its fleet of 60 aircraft is one of the youngest in aviation, with planes averaging less than 3.5 years in age. The carrier has placed orders for a further 371 jets to be delivered by 2025, according to its investor relations website.

Vietjet, which listed in February 2017, recently overtook AirAsia in terms of market capitalization with a value of $3.6 billion in September -- the second-highest for a Southeast Asian carrier after Singapore Airlines. Meanwhile, AirAsia's market value stands at $2.5 billion, even though it dominates the region through a joint venture network operating 208 aircraft, with another 375 jets on order.

Yet both carriers face challenges. Barely two weeks ago on Dec. 25, Vietnam's aviation regulator halted Vietjet's expansion and put the airline under supervision following incidents which it said represented a "serious threat" to aviation safety. In recent weeks, one aircraft landed on the wrong runway after being forced to return to the airport following a technical error, and others have reported false alarms tied to software installed in new planes delivered last year.

Vietjet is expected to remain under supervision until Jan. 15, when the regulator will decide whether the airline should be allowed to resume adding flights. A Vietjet spokesperson said the company was coordinating with authorities to ensure the "highest level of safety" in its operations.

Meanwhile, AirAsia also faces headwinds from rising fuel costs and overcapacity across its network. All units except Malaysia reported operating losses in the third quarter, when net operating profit fell two-thirds due to higher financing costs, signaling the "start of tough times ahead," according to Raymond Yap of CIMB Research.

AirAsia also suffered a setback to plans for Chinese expansion. In August, the carrier aborted a project to enter the market with a state-backed Chinese partner, when bilateral relations soured in the wake of a new government in Malaysia.

Fernandes this week admitted that the company needs to focus on making its existing franchise profitable before looking for new partnerships.  "AirAsia will not be opening up any more new airlines for the next three years," he tweeted on Jan. 2, saying the Vietnam joint venture would be the last until units in Indonesia and Philippines return profits.

Vietnam may now be key to keeping the carrier's momentum in the region going, but success is far from guaranteed.

The country has been on AirAsia's radar since 2005, just four years after the airline's founding. The carrier initially offered to support Vietnam's Pacific Airlines, the predecessor to Jetstar Pacific, but lost out to Qantas.

Its first serious attempt to break into the market was made in 2007 through a joint venture with Vietnam Shipbuilding Industry Corporation, or Vinashin, in which AirAsia had a 30% stake. Reports in Vietnamese media suggested the partnership failed over government reluctance to license new airlines, especially those with foreign investors.

Three years later, in 2010, it tried to tie up with Vietjet. That partnership also fizzled, partly because of strict regulations imposed by the socialist government.

Barely a year later, Vietjet took off on its own. Under 48-year old Thao, whose other interests span real estate, banking and industry, the budget carrier has grown from one aircraft and two domestic routes in 2011 to more than 100 routes, about two-thirds of which are international. According to Vietjet's last annual report, Thao and her family still control at least 45% of the airline.

Vietjet's launch was well-timed. The carrier has benefited from the opening up of the country's economy. Demand for air travel began rising after the country joined the World Trade Organization in 2007. Vietnam's underdeveloped land transport has also helped: The marathon 38-hour train ride between the capital of Hanoi in the north and the commercial hub of Ho Chi Minh City in the south can be cut to a comfortable flight lasting an hour and 45 minutes.

According to the International Air Transport Association, Vietnam's air travel sector has logged 17.4% compound annual growth over the past decade. Thao, known by her pilots as the "princess" for her meticulous appearance and style, has been credited with helping to spur that growth by making air travel affordable for ordinary Vietnamese and, in the process, breaking the national carrier's tight hold on the market.

Thao is not afraid to copy formulas that have worked elsewhere -- and in particular for AirAsia. From AirAsia's black PVC seats and fuel-efficient narrow body aircraft to the preordering of in-flight food, Vietjet has adapted the most successful -- and sometimes the most controversial -- initiatives.

For example, AirAsia is famous for its striking stewardesses clad in tight, bright uniforms, who cluster round Fernandes during high-profile promotional events. Vietjet went a step further when it used stewardesses in lingerie to promote its low cost flights -- earning it the unofficial tagline, "Bikini Airline."

Ultimately, however, the focus is on keeping costs low in order to expand the network of cut-price fares. With one of the lowest unit costs in the industry, according to the CAPA Center for Aviation, Vietjet is building market share by connecting Hanoi and Ho Chi Minh City to the country's second-tier cities. But it still lags its bigger rival, with unit costs minus jet fuel of $0.24 in the third quarter of 2018, well above AirAsia's $0.19.

Aggressive expansion might help to bridge that gap, as long as costs are controlled. So, unlike AirAsia -- which enters new markets through strategic joint ventures -- Vietjet has been adding new routes through code sharing with more established carriers, including Japan Airlines and Qatar Airways. It recently began a service between Hanoi and Osaka, and plans other long-haul routes to India, Russia and Australia, Thao told the Nikkei Asian Review in an interview in November.

VietJet Aviation CEO Nguyen Thi Phuong Thao   © Reuters

This policy potentially puts Thao in direct competition with Fernandes and his long-haul unit AirAsia X, which already serves some of the same routes. However, Vietjet's expansion has not yet disturbed the plans of AirAsia X executives. "We don't see Vietjet as a competitor for us -- yet," said Benyamin Ismail, the unit's CEO. Malaysia Airlines is the more important rival, he said, as it focuses on the same markets in Southeast Asia, Australia, China and Japan.

For Thao, Vietjet's next phase of development will be about becoming what she calls a "consumer airline," selling additional goods and services -- known in the industry as ancillaries -- such as duty-free items and travel packages. Ancillaries accounted for 24% of the airline's total revenue in the second quarter of this year, according to CAPA.

Vietjet is also exploring a possible tie-up with U.S. retailer Walmart to push the strategy further.

Meanwhile, AirAsia is also seeking to exploit the opportunities for add-on sales that new technology brings, with ancillaries accounting for just 19% of revenue. "I want my platform to be more than buying airline tickets," Fernandes told the Nikkei Asian Review in an interview in November.

The airline announced in October a partnership with Google Cloud to integrate artificial intelligence into its business, aiming to be a "travel technology" company and not just a low-cost carrier. "We need to be as nimble and quick as a digital company," said Fernandes.

Using AirAsia's huge customer database, Fernandes plans to launch services that include parcel delivery and even online payment, going up against other tech companies. "Competition is good," said Fernandes. "It makes me better."

Nevertheless some analysts warn that the competition in Vietnam is now so fierce that AirAsia risks defeat a fourth time. "If anything the market has become even tougher as VietJet is now much larger and another startup, Bamboo... is presumably close to launching," said Brendan Sobie of the Sydney-based CAPA.

Moreover, there are serious structural obstacles. It was "not realistic" to assume that the international travel market in Vietnam would continue to grow at 20% a year, given the limitations of Vietnam's already congested airports, he added.

Still, other analysts believe there could be scope for AirAsia's more mature model and extended network to take a share in Vietnam more quickly than in other markets. "We see Vietnam as having the ability to succeed at a much faster pace compared to the Philippines and Indonesia, supported by feeder traffic from its other AirAsia affiliates within the region," said Ahmad Maghfur Usman, an analyst at Nomura Research.

Vietjet's Thao is not too worried about AirAsia's threat to her home market just yet. The economics graduate started studying the aviation business six years before getting an airline operating license in 2007. It then took her another four years of preparation to launch the first commercial flight. "It's not easy to run an aviation business in Vietnam," Thao reassured shareholders worrying about new competition at an annual meeting in April.

"Start it and you'll feel the pain."

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