VietEcon

Lots of stories out over the past few weeks about AirAsia joining a local partner to bring the airline to Vietnam’s domestic market. It already flies in and out of 5 cities to international destinations (mainly their hubs in KL and Singapore), but it has long seen the domestic market as quite attractive. And it is! Total foreign tourist arrivals grew 20% last year and 29% the year before. Airline passenger numbers grew 12.9% in 2018. And the market is underserved compared to developed countries or even Thailand, based on LCC seats per thousand people or aircraft per million as can be seen in this chart.

CAPACITY IS MUCH LESS THAN DEVELOPED MARKETS AND EVEN SOME OF VIETNAM’S NEIGHBORS

What I wanted to look at was potential overcapacity in the domestic market and how many additional aircraft the market can support. Right now, AirAsia says it will have 5-6 A320 and A321 aircraft at the start and grow to as many as 30 in three years.

Just a quick and dirty test is to look at Vietjet and see how many passengers each of their aircraft serve. They serve about 375,000 passengers per plane with about 1/3rd A320s (180 passengers) and 2/3rds A321 (230 passengers). If AirAsia has the same ratio (1:2) and each aircraft carried about 400,000 passengers a year, it would serve 2.0 to 2.4m passengers. This would be just around 3%* of the total market share in Vietnam. For domestic operations, it would represent 6-7%* of the estimated market, well below Vietjet’s market share of 45%. Plus, there is growth in the market. Maybe not as much as 10%, but still growth.

My conclusion is that the initial 5-6 planes would likely be easily absorbed by the market.

But if it was 30 planes in 3 years, that would be 12 million passengers, or 11% of the total market and almost half of the domestic market. That would be much harder to absorb, and we would likely see massive discounting to drive passenger growth.

Look ahead for part 2 where I examine the market as a whole, and potential capacity. Vietjet has 100 737s (230 pax each) on order with Boeing, and Bamboo wants to have more than 40 planes servicing the domestic market. We could easily see more than 200 planes added to the market in the next three years. Is that a guarantee of oversupply?

* These figures were updated on Jan 8, 2019 to reflect better domestic and international passenger figures. Previously I used a figure given by the government that used all departing/arriving passengers, but this appears to double count domestic passengers. The figures used here now use CAPA figures.