In an air cargo environment where freighters continue to idle in many locations around the world and airline cargo bosses lose sleep worrying about how to fill those still operating, Vietnam offers a studied contrast. It is – at least for now – a market in want of more maindeck capacity.
One of the rising stars of the global economy, Vietnam was one of Asia’s fastest growing economies in 2014, driven largely by manufacturing and aided by rising personal consumption. In 2014 Vietnam’s GDP was US$171.4 billion, up from only $33.6 billion just over a decade earlier. And with the World Bank recently revising the country’s growth forecast upwards to 6.2 per cent for 2015 as a whole, Vietnam looks set to continue its economic ascendency.
Currently the world’s fourth largest textile exporter it is expected within the next two years, to overtake Singapore to become the world’s fifth largest electronics exporter after leap-frogging the Philippines and Thailand. All of this has been a boon for the air cargo sector, which is seeing tremendous growth alongside the country’s rocketing economy.
According to Do Xuan Quang, CEO of VietJet Air Cargo, total air cargo tonnage uplifted in 2014 amounted to 741,000 tonnes, up a substantial 18.5 per cent over 2013. Of this, international cargo comprised 587,000 tonnes, up 19.6 per cent year-on-year, said Do speaking at the Air Freight Logistics (AFL) Vietnam 2015 event earlier this year in Ho Chi Minh City (HCMC).
The commodity structure of Vietnam’s exports include garments and textiles (30 per cent), footwear and leatherwear (35 per cent), electronics (20 per cent) and seafood frozen and live seafood (15 per cent), according to Do.
“You can see we have many opportunities for air cargo in Vietnam,” says Do, adding that the government has moved to boost key infrastructure like airports, warehousing and cargo terminals. “In Hanoi, HCMC and Danang in central Vietnam, all airports are undergoing renovation and new construction,” he added.
Challenges
And while agreeing that Vietnam is the “top place for growth and top place for business and airfreight,” Clement Blanc, managing director of DHL Global Forwarding, Vietnam said there are a number of issues that are holding back even greater development of the market.
Blanc was also speaking at the AFL event. The post-2008 economic crisisinduced shift for many carriers to sharply increase their focus on maximising loads in passenger bellies and the scaling back of freighters also dove-tailed with customers who didn’t want, or need to make use of large freighters, Blanc said.
“Customers now don’t want to use large aircraft, what they want is shorter ground times at origin, faster expedition and a reduction of inventory especially. So it’s about financing, it’s about reduction of inventory. And that’s why I think smaller capacity freighters are one of the solutions for the Vietnam market,” Blanc said.
Another key challenge operating in Vietnam is the geographic diversificatin of production, which is split between Hanoi in the north and Ho Chi Minh City in the south.
“We have two major economies basically – Hanoi which is very heavy on technology and has been growing extremely fast in the last 4-5 years and Ho Chi Minh that is very, very heavy on retail, garments and footwear,” he says. This creates two very different types of air cargo with garments and footwear being highly volumetric compared with the more dense technology products out of Hanoi.
“Currently we do have an issue because we cannot consolidate these two volumes together. If we could consolidate these two volumes it would be much more competitive for our not just our customers, but overall for Vietnam as an investment location and a sourcing origin, because then the cost of air freight would go down a lot and this would really help,” Blanc said.
This becomes all the more imporant he emphasises, with the coming Free Trade Agreements with various countires, ASEAN Economic Community (potentially by end of this year) and the Trans-Pacific Partnership trade deal that Vietnam is participating in.
Capacity crunch
“With these coming FTAs there will be more growth and we need to be prepared for that. The market is booming but 70 per cent of the capacity we have is passenger aircraft and we are not seeing the capacity developing as fast as the market.
Most of these passenger services also rely on narrowbody aircraft like A320s and B737s, notes Do. Of the 48 international airlines operating to and from Vietnam there are no less than 75 freighter flights per week, with over 40 out of Hanoi alone, Do says. These maindeck services provide a total capacity of 6,000 tonnes per week – a volume that has grown by a factor of nine from 2009.
And yet both Do and Blanc reflect the view on the ground that there just isn’t enough cargo capacity – both widebody bellies and maindeck – to cater to the surging economic growth.
Customers, Blanc notes, don’t want to wait for five days for a freighter to fill up and fly. “The transit time starts with pick-up from factory so they need their goods to be flown out as soon as possible. So we need more frequencies and maybe smaller freighters.”
And there is a need for more direct routings,” Blanc says pointing to the fact the biggest trade partner of Vietnam is the US and there are no direct flights connecting the two.
“We need to address that to make Vietnam more attractive and faster to markets. The other thing is capacity on freighters – customer don’t really want to wait for five days to fill the aircraft and fly – the transit time is pick up from factory so they need their goods to be flown out as soon as possible. So we need more frequencies and maybe smaller freighters.
“Overall Vietnam is a growing market, a lot of good things are happening here, but still I think there is a lot of work needed from the airline industry in order to be more transparent in terms of pricing, to be more effective in terms of consolidation and to be more competitive in terms of speed to market, especially into the US.”
High-tech stimulus
The ongoing market potential is clear from looking at the high tech sector alone.
Global tech giants have been cascading into Vietnam including Samsung, Intel, LG, Panasonic, Microsoft, Suwon and Apple supplier Wintek.
Korean giant, Samsung for instance, annouced late last year plans for a new US$3 billion smartphone fatory in addition to its existing $3 billion plant near Hanoi. So substantial are Samsung’s export volumes that it is planning to operate its own cargo terminal at Hanoi’s Noi Bai International Airport from end of this year, according to the country’s Civil Aviation Authority.
The growth of high-tech electronics production has been rapid. Ten years ago, Vietnam was only a small link in the global electronics supply chain. Today, it is a major electronics production base with an expansion of 78 per cent per year in exports for the past four years to reach US$35 billion in 2014, Singaporebased DBS Bank said in a research note in early July.
By the end of last year, electronics shipments by Vietnam had accounted for 23 per cent of all exports, up from only five per cent four years earlier. As such the industry has become a key driver of the economy, making up 23.4 per cent of GDP, up from just 5.2 per cent in 2010.
The rapid growth came about from a confluence of factors including the structural shift in regional electronics supply chains, the DBS report said. The Southeast Asian country has captured market share from many of its regional peers following a process seen repeatedly across Asia: Earlier players saw income and wages rise, opening the door for lower cost producers.
Faced with weak global demand, intensifying competition and persistent cost pressure, many manufacturers were searching for cheaper locations from which to produce making the need to restructure supply chains even more urgent.
Vietnam’s pro-foreign direct investment policies, a weaker currency and competitive labor force all added more impetus to growth of the sector in subsequent years and many of these high-tech electronics producers have shifted away from China, something that was made easier by the fact Vietnam is just next door.
The government expects electronics exports to reach $40 billion by 2017 – a target that would only requre a modest growth rate of five per cent per year, according to the DBS report.
Homegrown lift
Do’s own carrier, VietJet Air is wellplaced to tap this air cargo growth with planned cargo operations using a combination of B737 and A330 freighters while seeking partnerships with other carriers on longhaul routes.
“VietJet Air Cargo is now handling all passenger belly capacity,” Do said. “At the end of 2014, our fleet was about 20 A320s and will reach to 30 A320s in 2015 and to 40 in 2016. We will be expanding our global network and planning to operate freighter feeders with B737-300/400Fs, as well as mid-range A330-200Fs in the Asian region,” he said.
