Jetstar’s new Ho Chi Minh service opens up new capacity in Australia-Vietnam market

    Jetstar Airways is returning to the Vietnamese market in May-2017 with a daily 787 service to Vietnam. The Qantas Group is betting the market has expanded sufficiently since its initial attempt at long haul low cost flights to Australia in 2006 to 2008 flights but potential overcapacity in the Australia-Vietnam market could pose a challenge.

    Jetstar plans initially to operate four weekly flights from Sydney to Ho Chi Minh and three weekly flights from Melbourne to Ho Chi Minh, both using 335-seat two-class 787-8s. Sydney-Ho Chi Minh marks a resumption of a route Jetstar served from 2006 to 2008 with 303-seat A330-200s while Melbourne-Ho Chi Minh is a totally new route for Jetstar – although is currently served by Vietnam Airlines.

    Ho Chi Minh was one of the first destinations for Jetstar’s long haul operation, which commenced in 2006, but the nonstop service from Sydney lasted only two years.

    In Sep-2008 Jetstar downgraded Sydney-Ho Chi Minh, from nonstop with A330s to a one stop service via Darwin with A320s. In Mar-2012 Jetstar Airways suspended service to Ho Chi Minh entirely.

    Jetstar Airways failed to generate sufficient loads in its initial foray in the Vietnamese market. The airline carried just under 300,000 passengers between Australia and Vietnam in the nearly six years it initially served Ho Chi Minh, with an average load factor of only 71%.

    The highest load factor Jetstar achieved in the Ho Chi Minh market was 75% in the fiscal years ending Jun-2010 and Jun-2011. This indicates that the switch to smaller A320s and the stop in Darwin did not lead to a sufficient improvement in performance to justify maintaining the service. In the final nine months of the Darwin-Ho Chi Minh service the average load factor was only 63%.
    Jetstar had been premature in its initial decision to launch Ho Chi Minh. The Australia-Vietnam market was too small back in 2006 and 2007 to support two nonstop competitors.

    Vietnam Airlines’ load factor to and from Australia was also only slightly more than 70% at that time. Jetstar succeed at stimulating some demand, leading to faster growth in the overall market, but not enough to justify the capacity it added to the market.

    The Darwin-Ho Chi Minh route was lower risk than Sydney-Ho Chi Minh as it could be served with narrowbody aircraft. However, it gave Vietnam Airlines a competitive advantage from Sydney. Darwin has a Vietnamese community but it is a tiny community compared with Vietnamese communities in Melbourne or Sydney. Jetstar had to rely mainly on domestic connections beyond Darwin.

    Australia-Vietnam market is now growing

    The Australia-Vietnam market since Jetstar’s withdrawal in 2012 has grown, enabling Jetstar to reconsider the market. Vietnam has emerged as a popular holiday destination for Australians. Jetstar is banking that the market is now big enough to support two nonstop competitors. Jetstar also believes it can outsell Vietnam Airlines as the market consists predominantly of outbound travellers from Australia, where it has a strong brand and distribution network.

    Australian visitor numbers to Vietnam have increased by nearly 50% since 2009, according to General Statistics Office of Vietnam data. Vietnam recorded over 300,000 visitors from Australia in 2016, making Australia its eighth largest source market.

    The inbound Australia-Vietnam market is still tiny – although has long term potential for growth. There were only 69,000 Vietnamese visitors to Australia in 2016, representing a 22% increase compared with 2015, according to Tourism of Australia data.

    …but perhaps not fast enough

    While the overall Australia-Vietnam market is clearly growing, it is not clear the 2,345 extra one-way weekly seats provided by Jetstar from 10-May-2017 can be absorbed. Overcapacity is particularly a concern as Vietnam Airlines is also increasing capacity to Australia – from late Mar-2017 – as it launches three weekly flights from Hanoi to Sydney using 274-seat 787-9s. Vietnam Airlines already serves both Sydney and Melbourne daily using 787-9s.

    The new Hanoi flight will result in a 21% increase in Australia capacity for Vietnam Airlines. Combined the new flights from both Vietnam Airlines and Jetstar will result in a more than 80% increase in Australia-Vietnam capacity. Such a surge in capacity will obviously impact yields and load factors.

    In its initial foray with long haul flights to Vietnam, in 2007 to 2009, Jetstar only operated three weekly flights. Reentering the market with a daily service from the beginning is bold and may prove unsustainable.

    Ultimately Jetstar and Vietnam Airlines may need to adjust their Australia-Vietnam capacity. Vietnam Airlines and Qantas are curiously partners, codesharing on Australia-Vietnam flights and co-owning the Vietnamese LCC Jetstar Pacific. In this case, they are competitors and the looming battle over Australia-Vietnam passengers could strain their relationship.

    Jetstar Airways passenger traffic and load factor to/from Ho Chi Minh: FY2007 to FY2012

    Note: *FY2009 includes combination of Sydney A330 and Darwin A320 services
    Source: CAPA – Centre for Aviation and Australia BITRE