VIETNAM AIRLINES

GROUP 4 – INTERNATIONAL BUSINESS 57A

I. Introduction of Vietnam Airlines

Vietnam Airlines is the flag carrier of Vietnam, the country with population of 85
million and 330 000 square meter. It was established in January 1956 by the
Government and marked the birth of aviation industry in Vietnam, and served only
domestic flights (Vietnam Airline, 2008). After the end of Vietnam War, from 1976,
Vietnam Airlines started international flights, including South East Asian countries
and China. Another turning point of Vietnam Airlines is year 1993 when this airline
became the national flag Airlines of Vietnam. Nowadays, Vietnam Airlines connects
19 cities throughout the country and 42 international destinations (including code-
sharing services) in Asia, Europe, US and Australia,.

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Mission: As a flag carrier, Vietnam Airline wants to be the bridge between Vietnam

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and other countries in the world and “bring Vietnam cultural to the world” (Vietnam

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Airline, 2008). rs e
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The International Air Transport Association (as cited by Chan (2000)) predicts air
travel in Asian Pacific will account for 40 % in 2010. The potential of this airline
market increases due to the fact that the attractive of tourism, the emerging
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economies and the increase number of middle-class. Unlike in Western country,

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surface transportation, such as railways, highways in Asia is not good and therefore, it
can create opportunities for airline transportation as the only and the faster way.

Like other countries in Asia, the potential of Vietnam market is high and untapped. In
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2007, 4.2 million foreign visitors travelled to Vietnam, 16 per cent more than in 2006
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(Sydney Morning Herald, 2008). And according to Sydney Morning Herald (2008),
Vietnam is ranked as number 4 by The World Travel and Tourism Council on its list of
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the world's fastest growing travel destinations.

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Vietnam's domestic market is also highly potential due to the fact that surface
transportation infrastructure is not competitive. It takes more than 30 hours to travel
by train, from Hanoi to Ho Chi Minh City, much higher than nearly 2 hours of normal
flight. Other alternative is coaches which also take time and inconvenient. Although
average income per capita of Vietnamese is only 835 US Dollars (in 2007) (General
Statistics Office of Vietnam, 2008), lower than other neighbour countries, such as
Thailand, Malaysia, Singapore; the income increases gradually in the last few years
increase 7% per annum, shows the tourism potential of this airline in Vietnam
market. Moreover, due to high population density and business opportunities in two

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 largest economic hubs of Vietnam: Hanoi and Ho Chi Minh City, travel demand for
business purpose is very high.

However, aviation service quality in Vietnam is far behind the international standard.
It is very easy to find tons of articles of customers' complaints about all three
domestic airlines in Vietnam: Vietnam Airlines, Indochina Airlines, Jetstar Pacific.
Even in Vietnam Airlines, the national flag carrier and full service airline, service
delivery is mainly product-oriented which has set the mind of management board to
be far apart from customer-oriented. Customer dissatisfaction varies from booking
services, poor catering, the temper of air crew to luggage delivery services.

II. PRICING STRATEGY

1. Factors to consider in setting prices

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a. Internal Factors

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They all depend on Vietnam Airlines’s marketing objectives. Firtsly, VNA want to

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maximize the current profit in order to make the highest net income for the company.

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Besides, VNA want to have the most professional staff such as accomplished pilot and
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steward, they have to pay high salary to keep them stay working for the airline. So
that they must set the price at a suitable point to maintain the quality of the brand
and make profit simultaneously. Thirdly, VNA is a leader in the airline domestic
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market share and it always tries to sustain the position.They have a wide range of
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shareholders so that the price must be setting up at a standard level.

b. External Factors
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There are a lot of external factors that VNA needs to consider while setting the price.
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Costs are the very first external factors that VNA have to care about. They are base
fare, taxes and airport fees, fuel surcharge, operation and advertising cost, etc.
Moreover, there are more and more people can afford to traveling by planes so the
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price will be increasing following up the price-demand relationship – the more

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demand, the higher price. In addition, they also need to refer the market price wisely,
especially the competitors’s prices. Chosing suitable pricing-strategy is extremely
important because according to the psychological factor, customers tend to think
“The higher the price, the better the quality” and compare prices between similar
products of competitors. Last but not least, government’s regulations, which are
powerful influences to the company, sometimes can be game changers in the market.

2. Marketing Objectives

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 In long-term strategy and direction until 2020, VNA aim to continue to affirm the
leading position of the national airline in the domestic market and continue to
expand its operations widely to Southeast Asia, Asia and improve service quality and
increase competitiveness in the international market.

The development strategy of Vietnam Airlines in the domestic market consists of two
main groups. Firstly, to continue to develop as the only domestic carrier with 4-star
quality services, combining international and domestic flights, serving diversified
needs of customers, firmly grasping customer groups with high demands. for service
quality. Secondly, implementing the dual-brand strategy between VNA and Jetstar
Pacific, comprehensive coordination of products, flight networks, sales and marketing
policies, etc. focused on the axis routes to cover the strip and VNA Group (including
VNA, Jetstar Pacific and Vasco) to 2020 at over 60%.

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In the international market, VNA continues to maintain a competitive strategy by

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direct flight, providing diversified destinations and reasonable flight times with

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world class quality service, specifically such as open routes to the United States and
Australia with their Boeing 787-9s and A350-XWBs.

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=> VNA needs to set the price level in which to be suitable to segmented markets.

3. The Impacts of Marketing Mix

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Vietnam Airlines has a relatively good service policies. Vietnam Airlines has a staff of
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highly qualified dealers. Distribution system of Vietnam Airlines stretches from north
to south and many representative offices in the region and around the world.
Vietnam Airlines has a fleet of young and modern fly compared to competitors in the
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market of Vietnam. Vietnam Airlines is the national airline of Vietnam. Therefore,

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Vietnam Airlines has a competitive edge over other competitors in building close
relationships with local governments and authorities.
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=> The price set will be higher comparing to other domestic airlines.
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4. General pricing approaches

Full-Cost pricing (selling price arrived at by adding overheads and profit margin to
the direct cost per unit of a product) approach for almost all passengers as well as
markets.

Variable cost pricing (pricing method in which the selling price is established by
adding a markup to total variable costs) for certain passengers.

Skimming pricing for niche markets.

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 5. Value-based pricing and Cost-based pricing

Cost-based pricing Value-based pricing

Cost-based pricing identifies the Value-based pricing is setting price
overall fixed, variable, and indirect based on buyers' perceptions of value
costs of production and prices that independent of cost
product accordingly.
Cost for fuel 1 year economy class price
Cost for plane Economy class excursion price
Cost for service ( technical, PEX - price
commercial,...) IT- price
General operating expenses GA – price
Selling expenses
Etc.

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6. Market-skiming pricing strategy

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The first new product pricing strategies is called price-skimming. It is also referred to

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as market-skimming pricing. Price-skimming (or market-skimming) calls for setting a
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high price for a new product to skim maximum revenues layer by layer from those
segments willing to pay the high price. This means that the company lowers the price
stepwise to skim maximum profit from each segment. As a result of this new product
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pricing strategy, the company makes fewer but more profitable sales.
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Many companies inventing new products set high initial prices in order to skim
revenues layer by layer from the market. An example for a company using this new
product pricing strategy is Apple. When it introduced the first iPhone, its initial price
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was rather high for a phone. The phones were, consequently, only purchased by
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customers who really wanted the new gadget and could afford to pay a high price for
it. After this segment had been skimmed for six months, Apple dropped the price
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considerably to attract new buyers. Within a year, prices were dropped again. This
way, the company skimmed off the maximum amount of revenue from the various
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segments of the market.

However, this new product pricing strategy does not work in all cases. Price-
skimming makes sense only under certain conditions. The product’s quality and
image must support the high initial price, and enough buyers must want the product
at that price. Also, the costs of producing smaller must not be so high that they
overshadow the advantage of charging more. And finally, competitors should not be
in sight – if they are able to enter the market easily and undercut the high price,
price-skimming does not work.

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 7. Market-penetration pricing strategy

The opposite new product pricing strategy of price skimming is market-penetration

pricing. Instead of setting a high initial price to skim off each segment, market-
penetration pricing refers to setting a low price for a new product to penetrate the
market quickly and deeply. Thereby, a large number of buyers and a large market
share are won, but at the expense of profitability. The high sales volume leads to
falling costs, which allows companies to cut their prices even further.

Market-penetration pricing is also applied by many companies. An example is the

giant Swedish furniture retailer Ikea. By introducing products at very low prices, a
large number of buyers is attracted, making Ikea the biggest furniture retailer
worldwide. Although the low prices make each sale less profitable, the high volume
results in lower costs and allows Ikea to maintain a healthy profit margin.

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In order for this new product pricing strategy to work, several conditions must be

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met. The market must be highly price sensitive so that a low price generates more

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market growth and attracts a large number of buyers. Also, production and

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distribution costs must decrease as sales volume increases. In other words,
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economies of scale must be possible. And finally, the low price must ensure that
competition is kept out of the market, and the company using penetration pricing
must maintain its low-price position. Otherwise, the price advantage will only be of a
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temporary nature.
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8. Further information on differences between Market-skiming and Market-

penetration pricing strategy
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 Growth Emphasis
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Penetration pricing is intended to attract a larger contingent of customers away from

competing brands. The idea is to use a better mix of product benefits and a lower
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price to lure customers only modestly satisfied with existing products. This is not
typically the case with skimming, which often leads to a select market of initial
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customers, with broader market appeal coming later when prices are reduced.
Skimming may make more sense with a niche market of highly selective customers.

 Competitor Disruption

Penetration pricing can prevent competitors from cutting into your market at lower
price points. If your upfront price is low and your product or service is of reasonable
quality, the burden falls on other providers to justify higher prices on similar
offerings. With skimming, the door is left open for subsequent competitors to
undercut your prices and defeat your ability to generate revenue and profits from

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 early adopters. A superior product may offset the ability of competitors to attract
quality-hungry customers who prefer your offering.

 Cost Impact

Companies sometimes use penetration pricing in combination with efforts to

minimize costs on products and supplies. By offering a low market price and creating
significant sales volume, you can order more products at once from distributors,
often resulting in bulk discounts. This enables you to maintain reasonable profit even
with low market prices. Skimming is more about operating with a high upfront price
point that creates significant profit margin regardless of your cost basis.

 Profits

Companies not capable of achieving an industry-low cost structure may have a hard

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time earning profit at rock bottom prices with penetration pricing. Penetration

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pricing also does not allow you to take advantage of an eager market of customers

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with money to spend and a willingness to do so. Users of price skimming hope to

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pocket significant profit from initial customers and maintain high enough prices over
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time to maintain steady long-term profit from value-oriented buyers.
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9. Vietnam Airlines results using market-skimming pricing strategy
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 Vietnam Airlines is using market-skimming pricing when launching a new

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product , as they offer a high upfront price to the market, base on the quantity of
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people who can accept that high price or the standard life of theirs.
 Advantages:
 Help supporting the high-quality services image to customer.
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 Maximize the revenue available to the company.

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 It is easier to quote a higher price initially, then gradually reduce it to create mass
market for the product.
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 The high initial price does not attract more competitors to the market.
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SOURCE:

 https://www.ukessays.com/essays/aviation/vietnam-airlines.php
 https://www.ukessays.com/essays/aviation/vietnam-airlines.php
 https://keydifferences.com/difference-between-penetration-pricing-and-
skimming-pricing.html

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 III. Price adjustment strategies of Vietnam Airlines

1. Segmented pricing strategy

In segmented pricing, the company thus sells a product or service at different prices
in different segments, even though the price-difference is not based on differences in
costs.

Vietnam Airlines has three major classes:

 Business class: Vietnam Airlines offers business class for businessman and
high-income person with superior services and the highest price.
 Premium Economy class: Premium economy class provides customer with
additional amenities.

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 Economy class: Passengers will be served with standard service at affordable

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price.

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2. Discount and allowance pricing strategy
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Discount and allowance pricing strategy means that the company reduces the basic
price for customer’s early payment or promoting the product
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If customers book the flight early, they just pay cheaper price.
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3. Promotional pricing strategy

Promotion pricing calls for temporarily pricing products below the list price, and
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sometimes even below cost, to increase short-run sales.

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On occasion of the first anniversary launching new air route, Vietnam Airlines offers
promotion code 15% discount for flights between Hanoi and Sydney.
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(Source: vietnamairlines.com)

4. Dynamic pricing strategy:

Dynamic pricing strategy refers to adjusting prices continually to meet the

characteristics and needs of individual customers and situations.

5. International pricing strategy:

International pricing strategy refers to setting different prices in different markets.

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 Flying from Hanoi to HCMC is far as from Hanoi to Bangkok, Thailand but the flight to
HCMC costs cheaper.

IV. Factors influence price charges in different countries

There are many factors that influence price charges in different countries, such as
economic condition, competitive situation, law and regulation, and so on. In which,
cost and policy are 2 main elements that affect the international price.

1. Cost

Cost plays an important role in price making decision. The prices that the company
should charge in other countries are different. For example, when landing at Hong
Kong International Airport, the airbus A380 pays around $4,735. But in Bangkok
Airport, the A380 just pays about $3,125 for landing charge.

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2. Policy

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Policies in different countries will affects the international price. For instance, a new

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charging scheme spreads over three years aimed at funding the Third Runway came
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into force from September 2016 that led the flight to Hong Kong became more
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expensive.
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