Domestic travelers taking to the skies in the first half of 2024 may have been surprised to see foreign flight attendants welcoming them as they boarded. Rather than investing in new aircraft, many local airlines have opted to wet-lease (renting the aircraft along with the pilots and crew) from other airlines, including international carriers, to maintain flight frequency and meet customer demand.

A report from the Civil Aviation Authority of Vietnam (CAAV) shows that the market continues to grow compared to the same period last year and is approaching pre-pandemic 2019 levels. Total passenger numbers reached nearly 37.5 million, an increase of over 3 per cent year-on-year and representing 97 per cent of 2019 levels. International passengers stood at 20.3 million, up 38 per cent and nudging ever closer to 2019 levels. Domestic passengers, however, fell by 18 per cent year-on-year and 7 per cent compared to 2019, totaling just over 17.2 million.

Market pressures

Vietnamese airlines ferried nearly 9 million international passengers in the first half, a 28 per cent increase against the same period of 2023 and capturing 44 per cent of that particular market. Vietnam Airlines and Vietjet Air held market shares of 17.8 per cent and 24.5 per cent, respectively. The top 10 international markets with the highest number of passengers coming to Vietnam in the first half of 2024 were, in order, South Korea, China, Taiwan (China), Thailand, Japan, Singapore, Malaysia, Australia, Hong Kong (China), and India.

Mr. Do Hong Cam, Deputy Director of the CAAV, said that while the Chinese market has not yet reached pre-2019 passenger levels, it has shown positive signs of recovery, while other markets have either approached these levels or experienced slight growth, with particularly strong growth seen in Australia and India.

Concerning the domestic market, airlines have had to cut seats on domestic routes due to fleet challenges, resulting in passenger declines compared to both 2023 and 2019. Despite this, airlines maintained a network of 50 domestic routes connecting Hanoi, Ho Chi Minh City, and 20 other airports nationwide. Vietnam Airlines and Vietjet Air were the largest domestic carriers, with market shares of 42 per cent and 44 per cent, respectively, followed by Bamboo Airways, with 7 per cent, Vietravel Airlines with 3 per cent, and Pacific Airlines and Vasco.

Seat utilization on domestic routes is generally over 80 per cent and on international routes over 70 per cent. Vietravel Airlines had the highest seat utilization rate, at over 90 per cent on both domestic and international routes.

The reduction in fleet size is among several factors negatively impacting airline performance. They also face challenges in leasing aircraft due to high rates. Rising fuel prices and foreign exchange rate fluctuations add to the pressure, particularly as many costs are paid in foreign currencies. Airlines such as Bamboo Airways and Pacific Airlines, meanwhile, are currently restructuring and experiencing financial difficulties. “These factors impact supply and contribute to fluctuations in airfares on domestic routes during peak periods,” Mr. Cam noted.

Preparing for wet-leases

Vietnamese carriers are grappling with a reduction in fleet size due to engine recalls by Pratt & Whitney, which have impacted the A320/321 fleets of Vietnam Airlines and Vietjet Air, while the restructuring efforts of Bamboo Airways and Pacific Airlines have naturally had an impact on their fleets. The engine recall and disruptions in supply chains for parts and materials are causing ongoing difficulties in engine maintenance, replacements, and new aircraft acquisitions, which are expected to persist through the latter half of 2024 and into 2025.

Regarding fleet changes, a senior official at Vietjet Air reported that, as of July, the carrier had grounded ten of its aircraft, with one more to be grounded in October. It has sent ten engines out for repair, with three others removed and put into storage. Another eleven engines are expected to be sent out for repair over the remainder of 2024. “Under the recall program, all 50 engines on 25 of our A321neo aircraft must be removed for repair, and this program could extend into 2025 or longer,” the Vietjet Air official said.

As of the end of June, Vietnam Airlines had grounded 12 of its aircraft and anticipates grounding 17 by the end of the fourth quarter. Pacific Airlines, meanwhile, returned all of its leased aircraft as part of its restructuring efforts, which led to a halt in operations last April. It then resumed operations at the end of June after reaching leasing agreements with Vietnam Airlines over three aircraft.

Bamboo Airways, which operated over 9,500 flights and ferried more than 1.3 million passengers in the first half of 2024, posted average seat occupancy of 85 per cent. The airline is currently restructuring its fleet and route network, leading to the return of a significant number of its leased aircraft. As of June, its fleet included seven aircraft, six of which were dry-leased and one wet-leased, with one other temporarily grounded for an engine overhaul.

It added one wet-leased aircraft in July to boost capacity for the peak summer season and is seeking additional engines to bring another aircraft into service while awaiting engine maintenance to be conducted. By the end of the year, the airline plans to lease one or two more aircraft, either dry or wet, to restore services on certain routes. However, leasing aircraft remains challenging due to high rates. The airline is considering reopening international routes it operated prior to its restructuring by the end of the year or within the first half of 2025, initially focusing on high-capacity markets like Thailand, Taiwan (China), and South Korea.

In response to the significant declines in operational aircraft, Vietnamese carriers are actively seeking and negotiating aircraft leases to replace those that have been grounded. Alongside efforts to find leased aircraft, they have also implemented various strategies to maintain or increase capacity, such as reducing turnaround times, optimizing daily aircraft use, and increasing flights during peak afternoon and evening hours. These measures have secured positive results, contributing to increased seat supply.

Vietravel Airlines currently operates a fleet of three A321-200 aircraft with CFM56 engines, which are unaffected by the global engine recall. In the first half of this year it ferried over 700,000 passengers, a 39 per cent increase compared to 2023, and posted average seat occupancy of above 90 per cent. This success is attributed to its efforts to boost capacity with additional night flights to meet passenger demand.

Though not directly affected by the engine recall, Vietravel CEO Nguyen Minh Hai noted that the carrier faces indirect challenges due to extended maintenance times caused by parts shortages, longer transportation times, and increased costs from escalating global conflicts.

During the second half of 2024 and into 2025, Vietravel Airlines plans to add another wet-leased aircraft and is negotiating to lease one or two more for the end of the year. However, high leasing rates significantly increase operational costs and affect its business performance and bottom line. Restrictions from Article 3 of Decree No. 92/2016/ND-CP, dated July 1, 2016, meanwhile, limit the carrier’s ability to lease wet aircraft.

Proposals in the pipeline

Despite the recovery and growth anticipated in the aviation market over the second half of 2024 and into 2025, airlines are still grappling with significant challenges, particularly in regard to fleet maintenance and expansion as well as rising input costs such as maintenance, aircraft leasing, and fuel, as well as fluctuating exchange rates.

In response, Bamboo Airways has suggested that the CAAV report to the Ministry of Transport and the government on extending support for airlines by maintaining lower environmental taxes on aviation fuel through the end of 2025, cutting air navigation and domestic flight landing fees by 50 per cent, and revising fare ceiling regulations based on major input costs like fuel. Such measures would help all airlines build their resources for future growth. It also called for discussions with tourism regulatory bodies to explore effective cooperation and address issues of common concern.

Vietravel Airlines, meanwhile, has been experiencing difficulties in maintaining its slot allocations due to factors such as weather, technical issues, airport capacity, and other unavoidable circumstances. Its historically limited number of slots and smaller fleet make it challenging to adjust flight schedules during disruptions, which impacts slot utilization and scheduling alignments. Engine recalls and supply chain disruptions are also hindering its search for dry-lease aircraft.

In terms of solutions, the airline’s leadership has proposed granting new slots to carriers with fleets of three aircraft or fewer, excluding wet-leased aircraft. to better manage schedule adjustments amid market fluctuations and other disruptions. They also recommend that the government consider fine-tuning or removing the restrictions on the number of wet-leased aircraft outlined in Decree No. 92, which would allow Vietravel Airlines to acquire additional aircraft.

Furthermore, its leadership proposed continuing with reductions to import taxes on aviation fuel to 0 per cent, extending the environmental tax on aviation fuel to VND1,500 (6 US cents) per liter, which is a 50 per cent reduction from the rate contained in Circular No. 53/2019/TT-BGTVT dated December 31, 2019, through to the end of 2025, and permitting airlines to impose fuel surcharges on domestic routes if Jet-A1 prices exceed $105 a barrel.

The carrier also suggested reducing ground service fees, airport management fees, and service charges for night flights, which would help lower ticket prices for passengers, as current fees include an additional 10 per cent management fee for night flights. Lastly, its advocates for relaxing visa policies between Vietnam and other countries to facilitate easier travel for more international visitors to Vietnam and for Vietnamese travelers heading abroad.