Groundwork laid for high-flying aviation

08:00 | 15/02/2020

With a number of notable changes taking effect this year, Vietnam is expected to see a big step in the development of its civil aviation industry. Vaibhav Saxena and Nguyen Hoang Anh Linh, lawyers at Vietnam International Law Firm, analyse the potential market developments on the back of new positive rules.

groundwork laid for high flying aviation
Vaibhav Saxena and Nguyen Hoang Anh Linh, lawyers at Vietnam International Law Firm

From January 1, with the goal of reducing and simplifying business conditions and creating favourable conditions for investors to access the aviation market, Decree No.89/2019/ND-CP dated November 15, which amends and supplements some articles of Decree No.92/2016/ND-CP on conditional business sectors in the industry, and Decree No.30/2013/ND-CP on air transport businesses and general aviation activities, regulates that airlines shall meet a minimum capital, including equity and loan capital, of VND300 billion ($13 million) for operating up to 10 aircraft; VND600 billion ($26 million) for operating from 11 to 30 aircraft; and VND700 billion ($30 million) for operating over 30 aircraft.

Previously, charter capital requirements set out for an airline operating in the first group was VND300 billion ($13 million) for domestic services and VND700 billion ($30 million) for international services; the second group was VND600 billion ($26 million) for domestic services and VND1 trillion ($43.5 million) for international services; and the latter group was VND700 billion (about $30 million) for domestic services and VND1.3 trillion ($56.5 million) for international services.

By this, Decree 89 not only lowers the requirement on capital but also removes the difference regarding capital conditions between international and domestic aviation transportation, which will help accelerating competition within and development of the aviation market in Vietnam.

The market share of the civil aviation market by the end of December was divided across five main players – Vietjet Air (42.2 per cent), Vietnam Airlines (34.5 per cent), Bamboo Airways (12.3 per cent), Jetstar Pacific (10.6 per cent), and VASCO (1.9 per cent).

Although the Vietnamese market has recently seen conglomerate Vingroup abruptly withdraw its Vinpearl Air project and pull out of the market altogether after it was deemed that heavy investment might lead to oversupply, other newcomers such as Viettravel Air and Kite Air are planning entry in the near future and will compete with current airlines for a part of the market share using the new, looser requirements in charter capital. Foreign ownership ratio

In addition to requirements regarding capital, Decree 89 also loosens regulations on foreign ownership of any airlines established in Vietnam by increasing the limit from 30 per cent to 34 per cent. In detail, the foreign-invested enterprises shall satisfy the following conditions:

- Foreign ownership must not exceed 34 per cent of total charter capital;

- The largest charter capital ratio shall be owned by either a Vietnamese individual or Vietnamese legal entity;

- In the case of a Vietnamese legal entity investing in the airlines, the foreign ownership ratio of such entity shall not exceed 49 per cent of total charter capital.

Additionally, Decree 89 also removes the requirement on the transfer of stakes and capital contribution in foreign-invested airlines to overseas investors, which would only be proceeded two years after the issuance of aviation licence.

This increase of foreign ownership limit may be aimed at harmonising the attraction of international capital, but still ensures and protects the rights and interests of domestic equivalents.

This may not be a significant change but will certainly bring benefits to listed airlines like Vietnam Airlines and Vietjet, and airlines that will perhaps list in the future such as Bamboo Airways, since it will be easier for such groups to raise capital by funding prospects via increasing the foreign ownership ratio.

Airport business requirement

In addition to relaxed conditions for airlines, the government is placing attention on infrastructure of the civil aviation market by setting better conditions for enterprises. Decree 89 stipulates that the minimum capital level to be selected is VND100 billion ($4.35 million), while foreign investors cannot hold more than 30 per cent of the charter capital for airport business companies.

Such a requirement is much lower than previous legislation, which contained minimum capital of the same amount for enterprises providing services at a domestic terminal, but VND200 billion ($8.7 million) for those at an international terminal.

Currently, there are major developments with regards to aviation infrastructure, which can be seen via the three biggest airport projects:

- The expansion of Noi Bai Airport, which is around $3.7 billion for the period of 2018-2021 including the increased capacity of Terminal 2 for up to 15 million passengers per year; a new domestic terminal; and additional aircraft parking lot.

- The expansion of Tan Son Nhat Airport worth over $1 billion, with the feasibility study approved while having in-principle approval being considered by the Prime Minister.

- Long Thanh International Airport, with around $16 billion total investment capital – the biggest airport project in Vietnam and the proposed second airport for Ho Chi Minh City.

The site is situated approximately 40km east of the city centre, and it will have four runways and be able to handle over 100 million passengers annually. The feasibility study has been submitted to the National Assembly for consideration.

In addition to these significant projects, there are also plans to upgrade a number of Tier 2 airports including Cat Bi, Phu Bai, Chu Lai, and Phu Quoc.

Elsewhere, Van Don Airport is being developed by the private sector. It received its inaugural flight in December 2018 and is the new gateway for Halong Bay, already servicing international flights.

Development of Van Don, Tan Son Nhat, Cam Ranh, Dong Hoi, and Phu Cat airports both involve private investors and demonstrate a significant example of increasing interest from such investors in airport development projects.

With the stronger conditions brought about by Decree 89, the involvement of foreign investors in development of Vietnamese aviation infrastructure may be increased and lead to faster improvement.

Aircraft age limitation

Decree 89 also sets the age limit for used aircraft imported into Vietnam.

For passenger transportation purposes, used aircraft age shall not exceed (i) 10 years accounting from the manufacturing date to the date of import into Vietnam under a purchase agreement; or (ii) 20 years accounting from the manufacturing date to the expiration of the leasing contract. In addition, the age of used helicopters must not exceed 25 years from the manufacturing date.

For cargo transportation and commercial purposes, used aircraft age shall not exceed (i) 15 years accounting from the manufacturing date to the date of import into Vietnam under a purchase agreement; or (ii) 25 years accounting from the manufacturing date to the expiration of the leasing contract.

To be imported into Vietnam, an aircraft must be certified by the US Federal Aviation Administration, the European Aviation Safety Authority, or the Civil Aviation Authority of Vietnam.

This new requirement may require investors in aircraft to have a different analysis when leasing their aircraft. This is because whilst the benefit accruing to the airline operators is a critical part of the analysis, the long-term value retention of these high-cost assets and their liquidity (how many airlines will continue to want to operate the aircraft and how many investors will continue to want to acquire them) are the most significant considerations.

Understanding these requires specialist skills and extensive industry experience gained over several industry cycles.

General market development

Globally speaking, the commercial aviation industry is big business, generating hundreds of billions of US dollars to the global economy.

In Vietnam, the aviation sector is undergoing a prolonged boom that is opening the country to a new tourism market, while putting a strain on the airlines and airports of Vietnam. Therefore, the market is considered a fruitful one.

This is in part because a rising tide of prosperity. These days, more Vietnamese people can afford to fly back to their hometown instead of taking a long train journey, or taking weekend trips to far provinces instead of getting an overnight bus and ferry.

In addition, the Vietnamese tourism industry is also developing at a huge rate, which consequently brings benefit to transport services like aviation.

Despite the fact that the civil aviation market requires a huge investment amount and takes times for investors to gain profit, this boutique market in Vietnam is developing at a significant rate.

The issuance of Decree 89 may be the next step for the government to attract more investment, while developing the field in a stable and sustainable way.

Currently, the aviation sector is among the hardest hit by the novel coronavirus epidemic. However, this hurdle may be in the short term. It is likely to recover soon after the epidemic stops thanks to its growth potential.

Copyright by https://www.vir.com.vn/