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### Viewing cable 04HANOI3092, VIETNAM'S AVIATION INDUSTRY TAKES OFF

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
04HANOI3092 | 2004-11-17 03:59 | 2011-08-25 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Hanoi

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    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

`