Shares of the world’s most successful airline defy the risk of insolvency

Shares of the world’s most successful airline defy the risk of insolvency
Shares of the world’s most successful airline defy the risk of insolvency

(Bloomberg) — A surprise return to profitability has made Vietnam Airlines JSC the world’s best-performing airline stock this year, shaking off the risk of bankruptcy as the company’s post-pandemic recovery finally gains momentum.

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The state-owned airline has gained 179% so far in 2024, driven by a recovery in travel demand, helping the company post a record first-quarter profit after more than four consecutive years of losses.

It’s an impressive turnaround for an airline that until recently faced bankruptcy and a threat of being delisted from the Ho Chi Minh Stock Exchange. It now outperforms regional rivals such as Singapore Airlines Ltd., whose shares have risen 7.8 percent this year, and Air China Ltd., whose shares have fallen 3.7 percent.

Vietnam Airlines expects “record revenue and profit” this year, according to a July 4 statement from PYN Fund Management, one of the company’s few institutional investors. Analyst Huyen Tran highlighted the airline as PYN Elite Stock of the Month for June, forecasting growth in passenger numbers and revenue this year.

Airlines across Southeast Asia are seeing a revival in demand as key tourism markets slowly start to pick up. Visitors from China, which was Vietnam’s biggest source of tourists before the pandemic, have returned in the first six months of this year, more than tripling year-on-year. As the largest local carrier with connections to the mainland, Vietnam Airlines is set to benefit.

The company remains alert to the challenges facing its business: In a statement last month, Vietnam Airlines Chairman Dang Ngoc Hoa referred to “macroeconomic uncertainties” facing the industry, adding that the airline’s “primary goal” is to reduce losses while keeping revenue and expenses in balance.

Nevertheless, the airline has expansion ambitions this year by adding new routes to Southeast Asia and Europe, as well as adjusting the frequency of its flights and increasing capacity on key routes to “capitalize on demand.”

Vietnam has big plans for long-term growth in the tourism sector. Tourism is considered one of the key industries for the economy, which is expected to grow by 6% this year and 6.5% in 2025, according to a survey conducted by Bloomberg.

“Vietnam’s drive to increase its popularity among foreign travelers is likely to become a key growth driver for local airlines such as Vietjet and Vietnam Airlines,” say Bloomberg Intelligence analysts Tim Bacchus and Eric Zhu.

The target of reaching 70 million international arrivals by 2045 “could make the country the second largest tourism destination in Southeast Asia after Thailand,” they said.

The domestic aviation market is also experiencing a significant upturn. According to the Civil Aviation Administration of Vietnam, the number of passengers will increase by 15% this year compared to 2023. Domestic cargo trade will increase by 8.5% compared to last year.

Despite the recent rally in share price, the airline remains a relative small fish with a market capitalization of 76 trillion dong ($3 billion). That makes it about half the size of Australia’s Qantas Airways Ltd. and a fifth the size of Singapore Airlines.

A statement on the company’s website said Vietnam Air is targeting a profit after tax of 4.2 trillion dong this year, a significant turnaround from a loss of 5.6 trillion dong in 2023.

Future tests

One potential obstacle to expansion is a shortage of aircraft. The country’s aviation regulator has encouraged airlines to lease more planes to meet rising demand after a number of jets were grounded due to engine recalls.

There may be further challenges ahead.

Analyst Che Thi Mai Trang of Ho Chi Minh City Securities downgraded the airline from “reduce” to “sell.” She said the share price “seems to be overvalued.” The brokerage also lowered its earnings forecasts “as domestic demand was weaker than expected.”

The airline, whose shares are only allowed to trade in the afternoon due to the failure to announce results on time, has yet to push ahead with its planned restructuring and refinancing efforts.

Last month, the National Assembly approved an extension of 4 trillion dong in state-backed loans – a sign of support from the government, which controls an 86 percent stake in the airline.

The airline has described 2024 as a year of overcoming challenges and recovery. The focus is now on “laying the foundation for sustainable development”.

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