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Aviation industry: Vietnamese airlines are vulnerable

Aviation industry: Vietnamese airlines are vulnerable

Wednesday 18, 03 2020
The negative effects of COVID-19 on the aviation industry are expected to be much more profound than any other pandemics.

World aviation to suffer a loss of USD 113 billion

The COVID-19 pandemic that broke out in early 2020 was seen as a shock to the global economy, in which the aviation industry, connecting continents, is experiencing the most difficult time in history. In its latest forecast report on March 5, the International Air Transport Association (IATA) proposed two scenarios for this sector in 2020.

In the first scenario, if COVID-19 is only limited within countries where there has been a large number of people infected, the revenue of global air transport is estimated to decrease by USD 63 billion (equivalent to 11%). In the other scenario, if the spread expands to many other countries, the damage could reach USD 113 billion (equivalent to 19%).

In particular, the Asia-Pacific region is expected to lose USD 49.7 billion (equivalent to 23%). IATA's forecasts do not include impacts of COVID-19 on aircraft cargo operations. In Vietnam, on February 27, Director of the Civil Aviation Authority of Vietnam – Dinh Viet Thang - said the Covid-19 epidemic could reduce the revenue of Vietnamese airlines by about VND 25,000 billion in 2020. However, with the current spread of this epidemic, it is likely that the forecasted figures will become outdated if COVID-19 is not controlled well soon.

Airlines suffer the biggest losses in the aviation industry

Aviation industry: Vietnamese airlines are vulnerable

Like many other industries, the aviation chain requires many components to operate smoothly. In addition to the widely known airlines and port companies, there are many other businesses that provide services at the airport or even serve passengers on board.

Statistics show that air transport enterprises are the segment with the lowest gross profit margin (11 - 15% on average). This index is tending to decline due to increasingly fierce competition. In Vietnam, there has been a new airline, Bamboo Airways, which began operating in January 2019.

In addition, there are also other airlines waiting to be eligible for flight, including Vietstar Airlines, Vietravel Airlines, and Kite Air, giving customers more options besides the household names of Vietnam Airlines and Vietjet. Air. Comparing the two largest carriers in Vietnam shows that Vietjet Air's gross profit margin is equivalent to, or even slightly higher than Vietnam Airlines’ although it operates under Low-Cost Carrier (LLC) business model (that of Vietnam Airlines is Full-Service Carrier (FSC)).

Thus, along with high ticket prices are large operating costs, while low-cost airlines are very good at optimizing operations. The bright side of the air carriers is the strong growth of ancillary business, which is essential for LLC airlines such as Vietjet to offset the losses from transportation.

Last year, the contribution from this activity to Vietjet's revenue reached VND 11,122 billion, an increase of nearly 35% yoy and accounted for more than 28% of the contribution to main business revenue. For Vietnam Airlines, this field also brought the national airline about VND 5,232 billion, up 18%.

However, the proportion of contribution to revenue is much lower with just over 5%. The two aviation catering businesses, Noi Bai Aviation Catering Joint Stock Company (NCS) and Danang Airport Services JSC (MAS), had a gross profit margin of 15 - 25%. Air transport businesses, or catering businesses, are much inferior if compared to enterprises with a "natural monopoly" position such as those providing port services, terminal service or freight service.

The gross profit margin of these businesses is improving over time. This is in stark contrast to the decline of air transport businesses like Vietnam Airlines or VietJet. Particularly, Airports corporation of Vietnam (ACV), an enterprise specializing in providing aviation services such as passenger service, land clearance, ground service, security screening, and non-aviation services such as airport commercial space leasing, is the biggest beneficiary when the demand for traveling and transporting goods by air increases.

Last year, ACV's revenue reached more than VND 18,290 billion, up 13%, and profit before tax reached VND 10,240 billion, an increase of 36% over the same period of the previous year. It can be seen that the profit growth rate of this business is double the revenue. In the last two years, gross profit margin of Airports corporation of Vietnam reached 48%.

This is a super-profitable rate for large scale businesses. In addition to ACV, a number of businesses specialized in warehousing services, cargo terminals at the airport, passenger transport, cargo in the apron, duty-free sales and restaurant business such as Cargo Services JSC Hoa Bai, Noi Bai Airport Services JSC and Tan Son Nhat Airport Services JSC all have profitability ratios of up to approximately 50%.

Also operating in the terminal business, thanks to the low-cost land allocation and the provision of additional services such as airport parking, office leasing, parking, etc. another company founded by ACV - Saigon Cargo Service JSC achieved a profit margin of nearly 80%, the highest among aviation service companies in Vietnam.

​>> Vietnam’s aviation sector to suffer a loss of VND 25,000 billion in 2020

Source: Vietnambiz

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