Vietnam's VietJet Gamble

Although 57 years is not quite a round number, it is the number of years that have passed since the last French soldier departed Vietnam in April, 1956. On Sept. 25, in Paris, 40 years after establishing diplomatic ties in 1973, the prime ministers of both countries, Vietnam's Nguyen Tan Dung and France's Jean-Marc Ayrault, formalized a strategic partnership capped off by a US$10 billion Airbus order.

While the strategic partnership served to cement existing French-Vietnamese relations and chart a course for the road ahead, the meeting also provided an opportunity for Prime Minister Dung to address international concerns, such as Vietnam's internet censorship and crackdown on bloggers.

It is a business deal, however, that could end in disappointment. The purchaser in this transaction, ranging from US$8 billion to $10 billion depending on the types of aircraft to be delivered is VietJet, Vietnam's low-cost and only privately-owned airline.

Founded in 2007 and flying since 2011, the airline, presently with a fleet of only nine planes, has gone ahead with an order of 92 jets (62 confirmed; 30 optional). These planes will primarily be A320 models, with the first to be delivered in 2014 and the last in 2022. They are to be financed through a planned Initial Public Offering, either in Hong Kong or Singapore, as well as loans from foreign banks backed by export credits.

Even at a glance, this deal should raise red flags from Airbus. From a fleet of nine to 92 in less than a decade, VietJet will encounter serious growing pains, to say nothing of its purchase commitments. In 2012, the airliner posted a pre-tax profit of about $5.7 million at the end of July, but it would close the year at a loss. There are big questions whether regulators in either Hong Kong or Singapore will look upon VietJet's financial and corporate structure with anything approaching enthusiasm.

How such a small airline can secure the financial support necessary for the US$10 billion purchase is a question that is undoubtedly being asked by Airbus' executives. In addition to the cost of the planes is the cost of maintenance, fuel, and pilot training, among others. To maintain an eventual fleet of 92 jets, VietJet will most certainly have to post more than about US$6 million in mid-year profit.

Although the number of middle-class air travelers is increasing rapidly across Asia as economies grow, VietJet's management is betting into a growing string of competing budget airlines including Malaysia's Air Asia, Indonesia's Lion Air, Singapore's JetStar Asia, Nok Air in Thailand and many others competing for those passengers. At the moment, VietJet's only international destination is Thailand. Securing landing rights from governments is always problematical, especially when those governments seek to protect their national carriers' turf.

The Airbus order is nothing more than a gamble on the part of VietJet and its supporters in the Vietnamese government who wish to take advantage of the rising tide of middle-class travelers. Yet, for Vietnam, simply purchasing planes is not enough to draw these potential tourists to its country.

Details regarding the financing of the order remain unknown. However, what is certain is that the Vietnamese people will be left with the tab should the gamble fail.

Need for good governance

If nothing else, the Airbus order raises the danger of yet another in a series of economic mismanagement episodes under the helm of the Communist government. A lack of accountability and transparency has allowed the government to do as it so pleases at the expense of its citizens.

Since 1975, the Communist government of Vietnam has attempted to rebuild the country and heal old wounds with some success and a good deal of failure. However, as the country matured, so too has the aspirations of the people.

Nevertheless, institutions for good government remain elusive. The brightest minds in Vietnam seek opportunities abroad or are stifled by the system they inhabit. Those with money are able to leave the country, while those without must stay. Freedom of independent thought is censored, and any criticism of the government is punished.

The strong, paternal hand of the Communist government is increasingly facing resistance from a people who now wish to take control of their own lives. If the Communists wish to remain relevant, they must be willing to respect the aspirations of their citizens, lest they be left behind as a relic of a bygone era.

Foundations for the future

The strategic partnership between France and Vietnam may be old foes healing old wounds, but the afterglow of a job well-done will only last for so long. In much the same way the relationship between Vietnam and the United States has developed, so too there is a possibility that France will raise objections to Vietnam's human rights record, although the French government has long shied away from comments that might endanger its exporters. For a successful, long-term relationship, Vietnam and France must have as its foundation something unshakable, something permanent.

Unfortunately, the two countries differ with respect to core values and beliefs regarding the rights of citizens. However, these differences need not be permanent, and Vietnam need not adhere to the same path it has travelled since 1975. Opportunities for improvements abound. All that is required is for the Vietnamese government to seize said opportunities.

(Khanh Vu Duc is a lawyer and part-time law professor at the University of Ottawa who researches on Vietnamese politics, international relations and international law. He is a frequent contributor to Asia Sentinel.)