US embassy cable - 04HANOI3092

UNCLAS SECTION 01 OF 04 HANOI 003092 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR E, EAP/BCLTV, AND EB/TRA 
STATE PASS TO EXIM ROBERT MORIN 
TRANSPORTATION FOR EOPPLER AND DMODESITT 
USDOC FOR ITA/TD/SIF/EALFORD 
FAA FOR AFS 50 AND AIAA 400 
AMEMBASSY BANGKOK FOR TSA SWALLOOPPILLAI 
AMEMBASSY SINGAPORE FOR FAA HNESBITT 
 
E.O. 12958: N/A 
TAGS: EAIR, EINV, PREL, VM 
SUBJECT: VIETNAM'S AVIATION INDUSTRY TAKES OFF 
 
SENSITIVE BUT UNCLASSIFIED - HANDLE ACCORDINGLY 
 
1. (U) SUMMARY: Vietnam's aviation industry is seeking to 
catch up with those of other countries in the region.  The 
government has dramatically changed its approach to the 
industry by allowing foreign carriers to increase their 
share of the market, but the change is unlikely to harm its 
domestic carriers.  On the contrary, the GVN anticipates 
robust growth within the sector and has embarked on an 
ambitious airport development plan to accommodate the 
increase in air travel through the year 2020.  U.S. and 
Vietnamese carriers are also moving to take advantage of the 
provisions granted under the United States - Vietnam Air 
Transport Agreement (ATA) that became effective in December 
2003.  END SUMMARY. 
 
 
AN INDUSTRY WITH HIGH GROWTH AND GREAT POTENTIAL 
--------------------------------------------- --- 
 
2. (U) Vietnamese air transport markets are once again 
becoming attractive after the regional economic crisis of 
1996-1998.  From 2001-2002 the aviation industry in Vietnam 
experienced a growth rate of over 20% in passenger traffic 
and 30% in cargo traffic.  In 2003, 6.9 million passengers 
traveled through Vietnam's international and domestic 
airports.   The SARS epidemic in early 2003 slowed the high 
growth rates from those of 2001-02, but the industry 
recovered in the latter half of 2003 and attained even 
higher rates of growth in the first half of 2004.  With a 
population of 81 million, annual economic growth rates 
between 7-8%, and increasing investment and tourism, Vietnam 
has much potential for future aviation growth.  One new 
trend that will also help spur growth is that with rising 
incomes more Vietnamese are traveling abroad for leisure. 
 
GVN SHIFTS POLICY TO FAVOR COMPETITION 
-------------------------------------- 
 
3. (U) The Civil Aviation Administration of Vietnam (CAAV), 
under the Ministry of Transportation, has been tasked to 
open the Vietnamese aviation market to foreign carriers. 
CAAV's long-term goal is to reduce the market share of 
Vietnamese air carriers to 35%.  In 2002, Vietnamese air 
carriers controlled 46% of the market.  Their share declined 
to 43.8% in 2004. This policy change was not only reflected 
at the negotiating table with the United States last year, 
but it is also evident in the practice of allowing foreign 
carriers to increase their frequencies and seats.  CAAV 
believes that this will boost tourism, support business 
development, and increase the overall size of the aviation 
transport market. Vietnam Airlines (VNA) seems to agree with 
the GVN's assessment of future growth.  In preparation for 
market expansion, they are going ahead with plans to acquire 
several long and medium range aircraft through purchase and 
lease agreements in 2005. 
 
VIETNAM'S AIR TRANSPORT MARKET AND VIETNAMESE CARRIERS 
--------------------------------------------- --------- 
 
4. (U) Three Vietnamese air carriers and 20 foreign carriers 
currently operate at three international and 20 domestic 
airports in Vietnam.  In the first six months of 2004, all 
23 airlines carried four million passengers, both 
international and domestic, and 104,000 tons of cargo, a 
growth of 34% in passengers and 12.4% in cargo compared to 
the same period of 2003.  Out of nearly 2.5 million 
passengers flying internationally in the first six months of 
2004, Vietnamese carriers carried nearly 1.1 million, 
achieving a growth rate of 40.9%.  Foreign carriers 
transported the remainder, achieving an even higher growth 
rate of 44.7%. In the first six months of this year, 
Vietnamese carriers transported almost 30% of a total of 
77,465 tons of cargo for a growth rate of 44.3% over the 
first six months of 2003.  In contrast, cargo transported by 
foreign carriers only grew by 4.7% over the same period. 
 
5. (U) VIETNAM AIRLINES CORPORATION.  VNA was established in 
1993 through combining 20 aviation businesses.  It currently 
operates a fleet of 38 aircraft: six B777s, five B767s, 10 
A320s, six A321s, nine ATR72s, and two Fokker 70s.  In 2005, 
according to VNA Deputy General Manager of Route and Market 
Planning, the fleet will grow to well over 40 planes if VNA 
realizes its plans to lease additional B777s, B767s, A321s, 
and possibly A330s.  VNA is also in the preliminary stages 
of ordering ten to fifteen B7E7s for possible delivery in 
2009.  These aircraft will replace the B767s and accommodate 
continued growth in traffic.  In the first six months of 
this year, VNA's share of domestic traffic increased by 2.1% 
to 88.3%, and its load factor, or seat occupancy, declined 
0.6% to 75.9%.  Its share of international traffic increased 
by 0.3% to 41%, and its load factor fell 2.4% to 58.2%. So 
far this year, VNA has also opened seven new international 
routes, all to different destinations within countries in 
which it already has a presence.  VNA operates a total of 30 
international routes and 20 domestic routes. 
 
6. (SBU) PACIFIC AIRLINES.  Pacific Airlines is the second 
largest of the three airlines, and VNA owns 86% of the 
company with the remainder owned by other large state-owned 
enterprises.  Pacific Airlines operates one A320 and two 
A321s.  It shares 11.7% of domestic traffic and 2.8% of 
international traffic.  Its share of these sectors has 
declined by 2.1% and 1.0% respectively over the same period 
of last year. However, its load factor has increased by 8.3% 
on international flights and 5.3% on domestic flights to 
70.6% and 77.8% respectively compared to the same period of 
last year. Pacific Airlines is flying on three international 
routes and three domestic routes.  According to Boeing, 
Pacific Airlines has discussed the possibility of acquiring 
B737s. 
 
7. (U) VIETNAM AIR SERVICES COMPANY (VASCO).  Vasco is the 
smallest of Vietnam's three airlines, and it is a wholly 
owned subsidiary of VNA.  VASCO was established mainly as an 
air taxi service and has recently started to fly short 
distances from Ho Chi Minh City to the tourist destinations 
of Con Dao and Ca Mau.  The GVN has backed away from an 
announcement made in early August 2004 that VASCO and the 
Vietnam National Administration of Tourism (VNAT) would 
begin to operate a tourist shuttle to a military outpost in 
the disputed Spratly Islands in early 2005.  VASCO had 
planned to fly VNA's old Russian-built Antonov 38s to a 
refurbished 600-meter runway at a military outpost in the 
archipelago. 
 
AIRPORT ENLARGEMENT AND MODERNIZATION 
------------------------------------- 
 
8. (U) Among nearly 2.5 million passengers flying 
internationally in the first six months of this year, 
1,730,000 passengers, accounting for 70% of traffic, used 
Tan Son Nhat (TSN) airport in Ho Chi Minh City.  Another 
730,000, accounting for 29% of traffic, used Hanoi's Noi Bai 
Airport.  The remaining 1%, 22,000 passengers, traveled 
through Danang's international airport in central Vietnam. 
The year-to-date growth rates of TSN, Noi Bai, and Danang 
are 65%, 49%, and 32%, respectively.  CAAV has already 
turned down several requests from foreign airlines such as 
Thai Airways for increased flight frequency to TSN because 
the airport is running out of capacity on the runways and in 
terminals.  CAAV is in the process of expanding terminals in 
TSN, but will still have to deal with the limitation of two 
 
SIPDIS 
parallel runways that will continue to compel aircraft to 
approach from only one direction. 
 
9. (U) According to CAAV's airport development plan, in 
2010, the three current international airports will have a 
combined annual capacity of 25 million international and 
domestic passengers and 580,000 tons of cargo.  By 2020, 
their annual capacity will increase to 35 million passengers 
and 1.2 million tons of cargo.  A new international airport 
in Dong Nai province, near Ho Chi Minh City, will be built 
to supplement TSN airport. This airport, with a capacity of 
20 million passengers and 1 million tons of cargo, will be 
completed in 2015. Another international airport at Chu Lai, 
a former American air base in central Quang Nam province, is 
being built to serve as a cargo hub.  It will have a 
capacity of 0.6 million passengers and 1 million tons of 
cargo.  It will be complete around 2010. By 2020, its 
capacity will increase to 1.5 million passengers and 4.5 
million tons of cargo. 
 
10. (SBU) Vietnam is rapidly modernizing its flight control 
operations and integrating into regional systems.  The 
revenue from flight operation services is smaller than that 
generated by the monopoly air carrier VNA.  However, it 
contributes more to the state budget because the services 
are low-cost and high yield and air traffic in Vietnam's air 
space is increasing.  In 1992 Vietnam reclaimed from 
Thailand the right to operate Flight Information Region 
(FIR) centers.  Vietnam operates two centers, one in Hanoi 
and one in Ho Chi Minh City.  By 2010, Vietnam plans to 
operate a single center covering the entire country. 
 
TAKING ADVANTAGE OF THE AIR TRANSPORT AGREEMENT 
--------------------------------------------- -- 
 
11. (U) The United States-Vietnam bilateral ATA became 
effective in December 2003.  American Airlines (AA) was the 
first U.S. carrier to seek to take advantage of its new 
provisions.  AA applied for permission to operate two-party 
code-shares with VNA.  This application prompted technical 
assessments on the part of the Federal Aviation 
Administration (FAA) and the Transportation Security 
Administration (TSA) to insure that CAAV properly regulates 
Vietnam's airlines and airports in accordance with safety 
and security standards set by the International Civil 
Aviation Organization (ICAO).  Technical assistance programs 
designed to prepare CAAV for the ICAO assessments are 
currently underway. 
 
12. (SBU) In early 2004, United Airlines (UAL) sought CAAV's 
approval to advance the provision of the ATA allowing direct 
flights between the United States and Vietnam via Hong Kong 
with fifth freedoms (the right to sell tickets separately 
for each leg of the flight).  CAAV approved this request, 
and UAL has set a start date of December 11, 2004 for the 
initial flight out of HCMC.  CAAV approved UAL's application 
for authority to operate daily flights out of HCMC on 
October 18, 2004.  UAL's operations still depend on TSA's 
final approval of TSN airport's security plan administered 
by the Southern Airports Authority (SAA) of CAAV. 
Currently, UAL has no plans to operate flights with beyonds 
from Hanoi unless Tokyo becomes available as an interim 
point in the future. 
 
13. (SBU) The ATA provides for unlimited third-party code- 
sharing agreements between U.S. carriers, licensed foreign 
carriers, and VNA.  Currently, UAL, Delta, and AA take 
advantage of these opportunities.  Continental and Northwest 
Airlines have also expressed interest in taking advantage of 
the provision for direct flights between the United States 
and Vietnam.  Northwest would most likely operate a route 
similar to that of UAL through Hong Kong.  Continental 
Micronesia has considered operating a route between HCMC and 
Hawaii via Guam.  U.S. cargo carriers UPS and FedEx have yet 
to take advantage of the provisions of the ATA allowing 
direct flights.  They are currently servicing the Vietnamese 
market from their regional hubs at Subic Bay in the 
Philippines and will shift to direct services when they 
believe the market will support such service. 
 
14. (SBU) Vietnam Airlines would like to begin operating 
direct flights between the United States and Vietnam in 
early 2006.  They currently plan to fly non-stop between 
HCMC and San Francisco.  This is contingent upon CAAV 
meeting ICAO standards and passing a FAA International 
Aviation Safety Assessment (IASA).  TSA approval of TSN 
airport for UAL's operations will also suffice for VNA 
should SAA/CAAV prove they can maintain adequate security 
operations in the interim.  FAA conducted a Technical Review 
of CAAV in April 2004 and found that CAAV failed to meet 
minimum ICAO standards.  Boeing Corporation has elected to 
support the next stage of a technical assistance program to 
help CAAV prepare for the IASA.  A private consultant will 
be hired to help CAAV create a plan by the end of 2005 to 
implement the necessary oversight and management controls, 
as well as the legislative changes, to bring them into 
compliance with ICAO safety standards.  Many of the 
authorizations and responsibilities granted to CAAV are 
scattered among various regulations and official decisions 
that do not carry the weight of law but will have to be 
consolidated and elevated into one law to comply with ICAO 
standards. 
 
15.  (SBU) Comment: With some guidance, we believe CAAV is 
capable of making the necessary upgrades to insure proper 
oversight and management of safety programs.  A major issue 
will be the legislative reform effort that will take some 
time and the direct engagement of CAAV Director General 
Nguyen Tien Sam, also a Vice Minister of Transportation. 
The National Assembly (NA) already faces a backlog of high 
priority legislation because of commitments made under 
various trade agreements and preparations for joining the 
WTO.  Vice Minister Sam will need to make an effort to have 
the NA give priority to this legislation.  End Comment. 
 
16. (U) Regional Representatives from TSA and FAA have 
cleared this cable. 
MARINE