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Low-flying option?
Son Nguyen
Friday,  Apr 7, 2017,06:55 (GMT+7)

Low-flying option?

Son Nguyen

The Ministry of Transport is now facing a tough choice: whether to advocate competition in the civil aviation industry to benefit the public by refusing proposals to impose a floor airfare, or to curb competition by siding with national flag carrier Vietnam Airlines and its affiliate Jetstar Pacific. It is tough because the two State-owned carriers want a floor air ticket price set to ensure profitability, but taking this option means putting the public interests at stake, let alone it goes against the basic rules of the market economy.

Such a dilemma, so to say, has stolen the spotlight in local media these days.

In their proposals sent to the ministry, both Vietnam Airlines and Jetstar Pacific call for a floor airfare as a cushion in the fierce price war against private airline Vietjet Air. The private carrier, meanwhile, insists on maintaining the status quo, meaning it can offer air tickets at zero dong to attract passengers.

Jetstar Pacific reasons that seat supply in the domestic aviation market has been increasing by over 30% a year, forcing carriers to slash their ticket prices, sometimes to levels below cost. “This situation affects the business efficiency and the sustainable development of the aviation industry,” Lao Dong newspaper reports, citing the air carrier’s proposal.

Similarly, Vietnam Airlines says that its revenue per passenger has been falling over the years, from an average of VND1.58 million a passenger in 2014 to VND1.48 million in 2015 and just VND1.3 million in 2016, Tuoi Tre newspaper reports. The national carrier suggests that a floor airfare of VND1.54 million be imposed to ward off price undercutting. Vietnam Airlines says that if the floor price is in place, its revenue will increase by some VND2,500 billion after one year.

Vietjet strongly rejects the proposals, saying the imposition of a floor price goes against the Competition Law and bucks the international trend. It explains that not any country in the world applies the floor price, so such a move will distort the market, according to Lao Dong.

The standpoint by Vietjet is widely advocated by economic and transport experts.

The news website VOV.VN, quoting experts, says that the application of a floor airfare is against the law, violates competition rules, and directly hurt the public interests.

“Competition is the primary principle of the market, and there must be competition so prices can be lowered,” the news website quotes economist Nguyen Minh Phong as saying. He bluntly stresses that “imposing a floor airfare is illegal.”

Nguyen Tri Hieu, another economist, points out that imposing a floor price on domestic air services is unreasonable, and the people’s rights and interests will be hampered. “It is not aligned with the market rules… (State intervention will be needed) only if an air carrier undercuts others by offering services at prices below cost. Otherwise, if the air carrier still makes a profit when lowering airfares, it is good news,” Hieu is quoted as saying on the news website.

Ngo Tri Long, an economic expert, argues against the floor airfare proposal. He explains that to avoid monopolistic power, the law regulates a ceiling price for dominant enterprises when selling products or services, and a floor price when such enterprises are buyers. “In aviation, air carriers are sellers, so a floor price cannot be regulated,” he says in Lao Dong.

According to Long, any arguments for a floor price in the civil aviation market are totally non-market and against the law, especially the Pricing Law.

Pham Sanh, a transport expert, asserts that all countries in the world allow for free competition, and State intervention is necessary to safeguard the interests of the people, especially the poor.

Tran Toan Thang, deputy head of the business environment and competition division under the Central Institute for Economic Management, expresses concern that the application of a floor price will certainly kill competition. “The floor price applicable to domestic air services will be harmful to consumers and limit the competition among air carriers... Meanwhile, the Government has reiterated its role to create a mechanism of healthy competition so that enterprises can supply consumers with commodities and services at the best prices,” he says in Tuoi Tre.

Competition resulting in lower prices is beneficial for consumers, says Thoi bao Kinh te Sai Gon. The weekly news magazine says that competition is only harmful if market players ignore safety or quality standards when slashing prices, and under such cases, State management agencies need to step in, not to regulate prices but to guarantee safety and quality standards.

In a press meeting on Wednesday, the Ministry of Transport said it is still weighing three options over airfares, namely maintaining a ceiling price but not a floor one; or doing away with both the ceiling and the floor price; or keeping the status quo.

Deputy Minister of Transport Nguyen Hong Truong said that the ministry would consider all the three options on the basis of ensuring the benefits of all stakeholders, namely the State, the enterprise and the consumer.

However, there are worries that the transport ministry, as the administering agency of State-run air carriers, may have a decision that is biased towards State benefits.

At the ministry’s news briefing this Wednesday, Lai Xuan Thanh, head of the Civil Aviation Administration of Vietnam (CAAV), hinted at the possibility of State intervention.

“It does not mean that in a market-oriented economy, competition is totally unchecked, without any State vehicles employed to regulate market prices. Even in aviation agreements signed with international partners, there are provisions that the State has the authority to apply regulations against monopoly and unequal competition,” Thanh is quoted as saying in Thanh Nien newspaper.  

Thanh is even more straightforward in Nguoi Lao Dong, saying “the prevalent Aviation Law still allows for using the ceiling price and the floor price as tools to regulate market prices.”

The market is now waiting for the next move by the Ministry of Transport and CAAV to see whether the aviation industry can further fly high with healthy competition, or a low-flying option is taken. However, it is expected that the free-market trend will prevail, as confirmed by Deputy Minister Nguyen Hong Truong, who says in Nguoi Lao Dong that in this case, “no benefit is greater than the people’s benefit.”

The Saigon Times Daily

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