Unlocking the Skies: Exploring Foreign Investment Opportunities in Vietnam’s Aviation Sector

Foreign airlines seeking to expand into Vietnam’s aviation market have frequently been challenged by regulatory restrictions. We discuss the alternative investment opportunities available within Vietnam’s aviation sector. 

The challenge of attracting foreign investment to propel Vietnam’s aviation sector to new heights has long been a concern for industry planners. Demand for aviation services is huge and still growing but attracting foreign capital has been a struggle.

There are a number of factors contributing to the hesitancy among foreign investors to invest in Vietnamese airlines, however, there are alternative investment avenues within Vietnam’s aviation domain.

In this article, the Vietnam Briefing looks at the challenges foreign investors have faced in Vietnam’s aviation sector, but also the emerging opportunities.

Past challenges investing in Vietnam’s airlines

There have been several instances in Vietnam’s aviation industry where foreign investments encountered significant challenges. One such example is AirAsia, which experienced a series of setbacks in its attempts to establish a presence in Vietnam.

Initially, Malaysia’s AirAsia looked at investing in Vietnam’s Pacific Airlines but ultimately lost out to Australia’s Qantas Group.

This was followed by an attempt to collaborate with domestic transportation company Vinashin, in which it would be responsible for the flights and for contributing 30 percent of the charter capital. However, the government refused to grant permission for the establishment of a new airline with foreign investment, and the plan was subsequently put on ice.

Indeed, the potential in the aviation sector is huge. However, it has not been tapped effectively. – Dinh Viet Thang, Director of the Vietnam Aviation Administration, in an interview with Vietnam Investment Review (VIR).

But not ready to give up, AirAsia offered to become a strategic partner of Vietjet Air. However, this also faced objections from the Aviation Administration and Vietnam Airlines, resulting in the airline losing out for a third time.

AirAsia then went on to announce a joint venture with Thien Minh and Hai Au to establish a new airline in 2017. This attempt was ultimately canceled without explanation, marking the fourth failed attempt at entering Vietnam’s aviation sector for AirAsia.

For the Qantas Group, it was a somewhat different story. It was allowed to buy 30 percent of Pacific Airlines shares and did so, renaming the airline Jetstar Pacific Airlines.

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But, after being a strategic shareholder for 13 years, Qantas Group divested from Jetstar Pacific due to sustained financial losses. In a unique move, Qantas transferred 68 percent of its capital to Jetstar Pacific at no cost rather than selling it to Vietnam Airlines. Jetstar Pacific then returned to its original name Pacific Airlines.

The unsuccessful endeavors of these prominent players in the aviation industry have raised significant doubts about the Vietnamese market’s prospects, creating greater challenges for investors aiming to establish a foothold.

Aside from that, there are a number of other reasons, why many large investors have turned their backs on and withdrawn from the Vietnamese aviation sector.

Regulatory constraints in Vietnam’s aviation sector

From their very first strides in Vietnam’s aviation sector, investors are faced with a multitude of legal obstacles. One significant deterrent is the ownership limitation set by Decree 89/2019/ND-CP. This decree, which revised certain articles of Decree 92/2016, states that foreign ownership in the sector cannot exceed 34 percent of the airline’s charter capital. While this marks a slight increase from the previous limit of 30 percent, it falls below the expectations of businesses, especially when compared to other ASEAN countries.

In contrast to Vietnam’s ownership restrictions, Singapore stands out as the most open country for investment in the aviation sector, with no specific regulations on capital ownership limits. Thailand, Malaysia, and Indonesia also allow a maximum of 49 percent of foreign equity in aviation, while the Philippines sets the limit at 40 percent. Other countries in the region, such as Brunei, Cambodia, Myanmar, and Laos, have some limitations on equity participation, but they do not specify numerical limits. This discrepancy puts Vietnam at a disadvantage in attracting foreign investors who seek greater control and influence over their investments.

Source: “An On-going Processs: Overview of the ASEAN Open Sky Agreement” – Economic Research Institute for ASEAN and East Asia (ERIA)

Specifically, these ownership limits pose challenges for investors as they restrict their power and decision-making authority. Furthermore, the aviation industry requires substantial capital investment with a long period of capital recovery. Hence, the amalgamation of substantial capital demands, restricted partnership influence, and comparatively low investment efficiency understandably instill prudence and caution among foreign investors when it comes to allocating their funds to Vietnam’s aviation sector.

Intense domestic competition in the Vietnam airline market

Despite facing difficulties penetrating the Vietnamese market with Jetstar Pacific, Jetstar CEO, Gareth Evans, still told Forbes that the Vietnam market still holds significant potential.

“Domestically Vietnam is an incredibly competitive market”, he said, adding “there is 35 percent capacity growth.”

The Vietnamese market is highly competitive, with a potential population of over 100 million people and a strong growth rate. In particular, the low-cost segment dominated by VietJet Air is experiencing rapid growth.

VietJet Air’s remarkable ascent exemplifies the groundbreaking advancement of the low-cost airline concept in Vietnam. During the first half of 2023, VietJet Air’s market share experienced a remarkable transformation; with over 10,000 flights, it was responsible for 37.6 percent of all flights among Vietnam’s domestic carriers.

Notably, VietJet Air stands out as one of the few profitable airlines operating amid the challenging circumstances that have plagued the entire industry, particularly in the aftermath of the COVID-19 pandemic.

The continued expansion of low-cost airlines, coupled with this competitive context, presents a challenging environment for investors seeking to establish a strong presence in the Vietnamese aviation market.

Investment opportunities in key supporting industries

The aforementioned challenges highlight the current difficulty for overseas investors to inject substantial capital directly into the airline industry. Such a decision would undoubtedly entail boldness and risk in the present climate. However, while direct investments in airlines or the establishment of new domestic brands may not be as compelling for investors, there are other supporting industries, such as airline catering, spare parts production, and training, that present profitable avenues for investment.

Airline catering

One such area is companies that provide meals and goods for flights. Following a period of stagnation caused by the epidemic, airlines are gradually returning to pre-pandemic conditions, with flights gradually resuming. As travel demand increases, so does the need for in-flight food and beverage services.

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Currently, the supply in this sector is insufficient to meet the growing demand. In Vietnam, there are only four businesses operating in the field of providing airline meals—Noi Bai Catering, Vietnam Airline Catering Services (VINACS), Airport Aviation Services Da Nang (MASCO), and Vietnam Airline Catering Company Limited (VACS).

Notably, there is also already a precedent for foreign-invested companies entering this field. TASECO Airs, recognizing the Vietnam market’s potential, invested in VINACS in 2015. The current business situation in Vietnam’s airline catering industry is also positive, following a period of losses due to the epidemic. For example, sales of Lotus Sky milk tea reached VND 13.9 billion (US$571,500) after it went viral on social media, according to Noi Bai Catering’s 2022 annual report.

Components manufacturing

Spare parts production is also a promising industry that offers lucrative opportunities for investors. Vietnam has low labor costs and a strategic location that investors in the spare parts production industry can capitalize on to establish profitable ventures.

Recently, at the Vietnam International Sourcing Expo 2023, Airbus, the world’s leading aircraft manufacturer, made a significant announcement that has captured the attention of industry insiders. Demonstrating their unwavering commitment to Vietnam, Airbus revealed plans to establish a robust supply chain in the country, collaborating with local companies for the production of cutting-edge aerospace parts.

“Vietnam’s development is a promising signal in the Asia-Pacific region, and Airbus is delighted to be a part of this journey”, Hoang Tri Mai, the CEO of Airbus in Vietnam, emphasized.

In 2019, Universal Alloy Corporation Asia Pte.LTD (UAC), a prominent aircraft components manufacturer from the United States, also made a substantial investment of US$170 million to establish a state-of-the-art manufacturing facility situated in Da Nang. The products manufactured at this factory in Da Nang are made for export to aerospace companies, such as Boeing, Airbus, Embraer, and Bombardier.

These collaborations and investments from these industry giants not only testify to the immense potential of Vietnam’s aerospace sector but also underscore their recognition of Vietnam’s growing influence in the global aviation market.

Training fields

As the industry continues to grow, the demand for skilled experts continues to surge. This is where aviation staff training services come into play, opening up training fields for aircraft pilots, specialized aviation administrators, and technical staff. This is an investment opportunity brimming with potential. In fact, foreign investors are already active in this sector and have already established a number of training facilities.

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Stanford Aviation International Company, in collaboration with Royhle Flight Training from the Philippines, is a prime example. They specialize in pilot training.

Additionally, several international universities have introduced their aviation training programs to Vietnam. Notably, RMIT Vietnam unveiled a Bachelor of Applied Science (Aviation) program in 2021. This comprehensive curriculum prepares students for diverse roles, encompassing airline and airport operations, ground operations, and safety protocols.

Seminars on mechanical engineering in the aerospace industry have also been organized by foreign companies with the desire to cooperate with technical and vocational universities in developing the aviation industry. One notable example is the recent seminar in July between the University of Technical Education, the University of Danang, and UAC Vietnam. This session served as an introduction to the aerospace industry, enlightening students about its various aspects, and the potential career opportunities in aerospace mechanics.

Positive signs for Vietnam’s aviation future

There have been some notable improvements and there has been a lot of positive news in the aviation sector of Vietnam, of late.

Firstly, there has been a focus on infrastructure development. According to the master plan for airport and airport system development from 2021 to 2030, the government has approved the construction of eight new airports, bringing the total number to 14 international airports and 19 domestic airports. Of particular significance is the Long Thanh Airport project, which is set to become the largest airport in Vietnam when completed.

There has also been an increase in aircraft purchases. Vietnam Airlines and Boeing recently signed a memorandum of understanding, solidifying a contract for the purchase of 50 Boeing 737 Max aircraft. This deal, valued at US$10 billion is a significant investment in enhancing the airline’s capacity. Similarly, Vietjet entered into an agreement with Carlyle, a company that specializes in finance and global aircraft leasing, to finance Vietjet to the tune of US$550 million in order to purchase additional aircraft from Boeing.

The development of infrastructure and the purchase of new aircraft allows airlines to increase their capacity, open new routes, enhance passenger comfort, and improve operational efficiency. It is a strategic investment to meet the growing needs of the market and remain competitive in the industry. This also helps investors feel more confident about the growth prospects of the aviation industry in Vietnam.

Aviation in Vietnam moving forward

Despite challenges within the legal framework and the competitive market, Vietnam’s aviation industry possesses abundant untapped potential. While the mentioned aspects are noteworthy, there are numerous other opportunities waiting to be explored for statute investors.

If you require assistance investing in Vietnam’s aviation industry, contact the business advisory experts at Dezan Shira and Associates.

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