AirAsia lands Vietnam joint venture

Four years after first announcing its intentions, MalaysiaÆs AirAsia receives approval for a joint venture in Vietnam.

AirAsia is finally establishing a base in Vietnam through a joint venture with VietJet Air, four years after announcing plans to enter one of Southeast Asia's most talked-about aviation markets.

Under the terms of the agreement, the Malaysian low-cost carrier has taken a 30% stake in Vietnamese upstart VietJet for Vnd180 billion ($9.5 million) through its wholly owned subsidiary AA International. Sovico Holdings, a diversified Vietnamese conglomerate with finance, power generation and real estate businesses, owns 51% and Sovico's chairman, Nguyen Thanh Hung, owns 19%. The new joint venture airline was approved by local regulators on February 9 and will be called VietJet AirAsia.

According to filings with Bursa Malaysia, AirAsia will provide technical, operational and commercial support to its new Vietnamese division and said the airline will launch international and domestic services by June. In a statement VietJet Air said it brought "Vietnamese market insights" to the deal.

Little is known about the Malaysian airline's new partner. According to its website, VietJet Air was launched in 2007 and was to have begun operations in 2009. However, the airline continues to exist only on paper.

A representative of AirAsia said VietJet AirAsia will operate a fleet of Airbus A320s, with three aircraft scheduled to be delivered every year for the next five years.

Vietnam is a sought-after airline market. The International Air Transport Association reported that total air passenger traffic in the country was 12.5 million in 2007, the most recent number available from the industry body, and estimated that the market would grow at an annual rate of 7.7% through 2011.

"AirAsia's move is the culmination of over four years of efforts to establish itself in Vietnam -- a key Asean growth market -- and reflects the inherent difficulties of expansion-minded carriers," said Peter Harbison, executive chairman of the Centre for Asia-Pacific Aviation (CAPA).

AirAsia's establishment of a local operation in Vietnam, its fourth in Southeast Asia, comes three years after its first attempt failed and four years after the airline first announced plans to enter Vietnam. In 2007, the airline announced a joint venture with Vietnamese ship builder Vinashin to create a local airline called Vina AirAsia but the deal fell through when it failed to receive regulatory approval.

The airline originally outlined its intentions to establish local operations in the Philippines and Vietnam in 2006. AirAsia currently has local subsidiaries in Indonesia and Thailand in addition to its Malaysia home base.

Hafriz Hezry Harihodin, an aviation analyst at Malaysia's AmResearch, said in a report that he "does not rule out" the airline establishing additional hubs in eastern Southeast Asia. AmResearch has a buy rating on AirAsia with a fair value of M$2 ($0.58) per share.

The airline's shares closed up M$0.02 at M$1.40 on the Bursa Malaysia yesterday. AirAsia raised $144 million through a successful follow-on in September last year.

The carrier's entry into the Vietnamese market pits it against its new partner Jetstar. The Australia-based airline's local JV, Jetstar Pacific, operates domestic routes but has encountered problems with regulators who have temporarily jailed two executives over allegations of inaccuracies in the airline's finances and controversy over its logo last year.

Experts generally see AirAsia's entrance into the market as a positive. "Given that Jetstar already has a base in Vietnam, in the form of Jetstar Pacific, this will be an interesting situation where we might see cooperation, as opposed to heads-on competition, between the two airlines," said Shashank Nigam, airline marketing and branding strategist and chief executive of Simpliflying. "In the end, I think this might actually turn out to be beneficial for both the airlines."

He added: "It's other airlines like Tiger Airways, Malaysia Airlines and Vietnam Airlines that now need to act swiftly to ensure that they don't lose a lot of market share."

CAPA's Harbison largely agreed with Nigam but noted that "it will more likely be seen as a dampener on the Jetstar-AirAsia alliance".

AirAsia and Jetstar signed an agreement in January to conduct joint procurement for their Airbus A320 fleets, share some airport facilities and use their combined clout to influence future aircraft design specifications in January.

AirAsia, along with its Thai, Indonesian and long-haul subsidiaries, operates a fleet of 72 aircraft to 61 destinations in Asia, Australia and Europe. In the third quarter, AirAsia reported revenues of M$739.7 million, up 4% year-on-year, and an operating profit of M$34 million.

The airline said it did not use advisers and it is unclear whether Sovico-owned HD Bank advised the Vietnamese partner on the deal.

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