Hanoi - Vietnam Airlines, the state-owned carrier that dominates domestic air travel in fast-growing Vietnam, ought to be sitting pretty these days. With the country's gross domestic production growing 7 per cent a year or more, rising disposable income and a burgeoning tourism industry, Vietnam seems a promising place for an airline to do business.
Indeed, Vietnam Airlines carried a record 4.43 million passengers in the first half of 2008, up 15 per cent over the same period in 2007, with revenues growing 28 per cent to 733 million dollars. But over those six months, according to a July 15 announcement, the company made a net loss of 5 million dollars.
Like airlines around the world, those operating in Vietnam are feeling the pinch of high fuel prices. But airlines in Vietnam face an added burden as well: price controls.
"Domestic carriers in Vietnam are subject to fare caps set by the government," said Ted Walters, an aviation consultant in Vietnam.
Those fare caps currently limit the price of an economy ticket from Hanoi to Ho Chi Minh City to a little over 100 dollars.
The combination of volatile fuel prices and regulatory limits on tickets have put the brakes on what looked to be a year of ambitious expansion in Vietnam's airline industry.
Vietnam's first privately owned airline, VietJet Air, had been scheduled to debut late this year. But those plans have been shelved indefinitely, and the company has postponed leasing its first aircraft, two Boeing 737s.
VietJet Air's business plan had forecast oil prices of 70 dollars a barrel in late 2008. Even after falling rapidly in recent weeks, oil Monday stood at 114 dollars a barrel.
The country's sole budget carrier, JetStar Pacific, also had big plans this year. The company was formed in 2007 when Australia's Qantas bought an 18 per cent stake in Vietnamese state-owned budget carrier Pacific Airlines and added its own JetStar budget brand.
But by the time JetStar Pacific debuted at the end of May, CEO Luong Hoai Nam said it was not profitable due to high fuel costs. The company announced Friday it would end service between Ho Chi Minh City and the coastal resort city of Nha Trang effective September 5.
JetStar Pacific Chief Operating Officer Daniela Marsilli said the Nha Trang route had been a temporary one geared at high summer tourist demand, and that there were some bright spots in the outlook for the airline industry.
"The positive news, for an airline, is that the fuel surcharges came into effect last week," Marsilli said. Airlines had pressed for months to be allowed to tack fuel surcharges onto ticket prices, and the government granted the request on August 8.
Meanwhile, JetStar Pacific announced Friday it would launch three new international routes, to Siem Reap, Singapore and Bangkok. And Marsilli said the airline is gradually trading in its older Boeing 737's for new Airbus 320's, which will save some 4 per cent in fuel costs.
But the fare caps remain in place, meaning companies' ability to pass on fuel price rises to customers is limited. The fare caps do not apply to business or first-class tickets, but while that could allow Vietnam Airlines, it does nothing for budget carrier JetStar Pacific.
Beyond rising fuel costs, airlines have been hit by macroeconomic instability in Vietnam, where the year on year inflation rate hit 27 per cent in July. A rapid fall in the black-market value of the Vietnamese dong in May led some banks to fear a currency crisis might be in the offing, discouraging international investors from backing airline ventures.
Airlines must pay for jet fuel in dollars, while their revenues in Vietnam are in dong. Were the dong to fall rapidly against the dollar, the business might become unsustainable.
The industry has also suffered from slower than expected growth in tourism to Vietnam this year, due in part to excessively optimistic price hikes.
"A lot of hotels which were riding on a very good season last year just boosted up their prices in the hope of having another good season," said George Ehrlich-Adam, Vietnam general manager of tour operator Exotissimo. "Some hotels went up 40 to 50 per cent, and the outlook for the end of the year will be pretty flat, or even down in occupancy for some hotels."
Vietnam's inflation problem means tourists might opt for other Asian countries, where inflation has not been quite as bad this year.
"The compounded effect of higher hotel prices, plus airfares, plus inflation in Vietnam, which added costs to food and transport - right now I would say Vietnam is in not such a rosy situation," Ehrlich-Adam said.
