INS 3007 – Group 6 2020

FINAL REPORT
COPORATE OF FINANCE- INS3007

Group members:
1. Vũ Thị Lan Anh-17071243
2. Nguyễn Hương Giang -17071255

Prepare for: Chu Văn Hùng.

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INTRODUCTION
The report is to analyze leasing & buying strategy and research a new leasing &
buying strategy for Vietjet Air-one of the airline in Vietnam. First of all, it is the
initial process of understanding the company- Vietjet air, before analyzing. It
consists of 4 mains contents. Firstly, we understand the business like: brief
information, management and governance, main areas of activity, SWOT of Vietjet
Cor. Next, we will analysis the leasing & buying strategy such as: overview leasing
& buying activities of the business; advantages & disadvantages of this activities;
income statement analysis; and recommendations.

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TABLE OF CONTENTS

I. UNDERSTADING THE BUSINESS..................................................................4

1. Brief information..............................................................................................4
2. Management and Governance........................................................................4
3. The Main Areas of Activity.............................................................................4
4. SWOT of Vietjet...............................................................................................5
4.1 Strengths............................................................................................................5
II. ANALYSIS............................................................................................................9
1. Overview of leasing & buying activities of Vietjet Cor.................................9
2. Advantages and disadvantages of leasing & buying in Vietjet Cor...........11
3. Analysis............................................................................................................11
3.1 Analysis income statement and leasing &buying activities of Vietjet.......11
3.2 Reasons why Vietjet Cor. leases & buys.......................................................14
III. Recommendations & Conclusion.....................................................................16

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I. UNDERSTADING THE BUSINESS

1. Brief information

- Company name: VIETJET AVIATION JOINT STOCK

COMPANY
- Abbreviated name: VIETJET, JSC
- Trading name: VIETJET AIR
- Stock’s code: VJC
- Founded: 27 November 2007
- Headquarter: 302/3, Kim Ma Street, Ngoc Khanh Ward, Ba Dinh
Distric, Ha Noi, Vietnam.
- Charter capital: VND 5,416,113,340,000
- Total common shares: 541,611,334 shares

2. Management and Governance

2.1 Vision

 To become the most preferred and prestigious airline in Vietnam and in the
region

2.2 Mission

 To continuously expand our flight network nationally, regionally and globally

 To make air transport more popular in Vietnam and in the region
 To provide satisfaction to passengers with excellent service and a friendly smile

2.3 Core value

 Safety – Fun and Friendly - Affordable price - Punctuality

3. The Main Areas of Activity

Main Air transport Ancillary Direct supporting Aviation Aircraft trading

activitie services services to air education and
s transport training

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-Domestic -Seat selection -Ground -For pilots -Buy and sell

Detail and -Pre-ordered operation -For cabin aircraft
international food services crews -Lease and
passenger, -Baggage cargo -Technical -For technicians leaseback
cargo transportation support and others -Aircraft
transportation -Duty-free -Routine and transfer
-Promotion shopping non-routine
tourism -Travel maintenance
insurance -Spare parts
-Shuttle bus supply services
between airport -Fuel provision
and central city

4. SWOT of Vietjet
4.1 Strengths

 Reputable: It constantly ranks in the top of the most prestigious airlines in

Vietnam. It has a wide range of rewards since it was established on 23
July 2007.
 Won Best Ultra Low-Cost Airline Award for two consecutive years.
 Awarded the highest ranking for safety with seven stars by
AirlineRatings.com.
 Won the Top Airlines by Absolute Passenger Growth in Southeast
Asia at Changi Airline Awards 2018.
 Honored with Asia’s Best Flight Attendant Wardrobe at NOW
Travel Asia Magazine.
 Honored as The best customers’ choice airline award at award
ceremony of Cool Product Awards 2018.
 Money-saving:
 Vietjet is based on the low-cost airline business model with specific
features such as point-to-point flight, focusing on operating short-
haul routes with high frequency, focusing on cost control and web-
based distribution channel.
 It has built a strong and well-recognized brand in Vietnam:

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 Thanks to a good distribution network and its advertising spend, It

is easy to see that the majority of Vietnamese will think about
Vietjet Air or Vietnam Airline first when they want to travel or go
on a business trip.
 Safety, security and quality assurance:
 The Company has achieved the highest ranking of international
safety standard by a number improvement in resources
management, efficient use of quality management systems, data
analysis systems and safety management. Throughout the years,
Vietjet has been proud to be the leader in the application of flight
data analysis system and actively partners with Airbus to
implement Safety Management System, meeting aviation safety
standards in accordance with the regulations of the International
Civil Aviation Organization (ICAO... to which Vietjet is a member
to minimize potential risks, preventing incidents that may occur in
operation activities.
 Moreover, the process of recruiting pilots and flight attendants is
extremely strict to maximize the customer’s safety. All of their
staffs will have to undergo the training process before serving the
customers, especially the pilots.
 Vietjet’s mission is to make air travel become the popular means of
transportation in Vietnam and in the world, and bring innovation to
aviation services.
 High-class services with young, professional and enthusiastisc staff:
 Add-on services
 Seat selection
 Pre-ordered food
 Luggage transport
 Duty-free products
 Travel insurance
 Private jet Vietjet is known for guaranteed quality services not
only in Vietnam but also in surrounding countries. Vietjet has
been selected and trusted to provide private jets services, carrying

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famous artists and business families from Bombay (India) to Phu

Quoc (Vietnam) to attend the wedding party of a famous Indian
billionaire couple.
 In-flight meals In-flight meals served with a diversity of seasonal
menu include nine hot dishes, instant food and snacks, added with
more than 20 types of hot and cold drinks in European and Asia
styles are prepared by five-star restaurant chefs. In addition,
Vietjet also serves vegan diet and dietary meals specially ordered
by passengers.
 Unlimited entertainment with high-tech equipment Vietjet’s
aircraft are equipped with hi-tech device to meet the needs of
passengers on flights. Passengers can watch latest movies, play
interactive games, listen to music in flights.
4.2 Weaknesses
 Joint venture tactics:
 Since the early days, Vietjet has discussed with potential partners to
form an alliance with other low-cost carriers throughout Asia.
However, Vietjet failed in most of the joint venture negotiations and
only succeeded in Thailand.
 Most of Vietjet's profits come from sale and leaseback activities:
 They currently have 28 aircraft from Airbus and most of them have
been resold or leased. The total number of currently and ordered
aircraft of Vietjet. The benefit of this plan is that it generates
immediate profits. However, in the long run it can become a
weakness. Airlines that profit from subleasing will have to pay
higher rates than average.
 Delay:
 It is true that Vietjet Air has lots of delays every year. Sometimes,
their flight may even be delayed by several hours. The guests feel
very uncomfortable when there is no one tell them about schedule
changes. Lack of pilots is a common problem of Vietjet Air when
there are too many guests, the number of seats for each flight is full.

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4.3 Threats
 Competitors:
 Of course, each business has its competitors. There are 2 key
competitors are Vietnam Airlines and Jetstar Pacific Airlines. In
this case, Jetstar Pacific Airlines is the direct competitor in the low-
price segmentation.
 Besides, Vietnam Airlines is known with the high-quality services
and huge international market.
 Environmental issues:
 Natural conditions such as rain, storm, etc. often affect the quality of
flights. Most flights go through the South China Sea where the
climate is very erratic. When the aircrafts fly into a thunderstorm
area, it is very dangerous if they are struck by lightning.
 Unlike other airlines, this airline's aircraft is very prone to shakiness
in the face of bad weather.
 Customers demand are increasing; customer’s behaviors often change.
 Customers always want to buy cheaper air tickets even Viejte Air’s
ticket are extremely reasonable. They expect the company will cut
the tickets prices as much as possible. The consequence is that its
profits will decrease significantly in the long run. In the worst case,
the customers will not choose Vietjet Air when they put a higher
price for each ticket.

4.4 Opportunities

 Market growth:
 In 2018, Vietjet continued to maintain its leading position in domestic
market with 46% market share. In international markets, Vietjet
dominated the number of flights and the number of passengers
transported to and from key markets in Asia such as Korea and Taiwan,
and China. Vietjet carried more than 23.1 million passengers
throughout its region-wide flight network, accounting for 46% of
Vietnam’s 50 million air passengers, operating nearly 118,923 flights

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with 261,000 hours of safe operation, while maintaining a load factor

of 88.06%, technical reliability of 99.64%, and an OTP of 84.2%
compared to the OTP average of 78.69% of the world’s airlines in
2018.
 Develop marketing and sales:
 Vietjet has main distribution channels including:
 Website and mobile apps
 Ticket agents
 Ticket office
 Vietjet helpdesk
 Retail units and correspondent banks with more than 3,000
transaction points

 Strengthen the Vietjet brand:

 In the future, there will be more and more people buying Vietjet ’s
tickets. Thererfore, this siuation will help Vietjet brand to consolidate.

II. ANALYSIS

1. Overview of leasing & buying activities of Vietjet Cor.

 Performance of leasing & buying activities

Initially, airlines will sign a contract to buy aircraft with
manufacturers (such as Airbus or Boeing) and prepay a contract worth
1-5%. They will then agree to sell and lease these planes to rental
companies (leasing companies).
At the time the aircraft is handed over by the manufacturer, the airline
will receive the aircraft and hand over the ownership papers to the
leasing company, and use the cash flow from the lessor to pay the
manufacturer. According to some industry experts, the airlines achieve
a surprisingly high profit after the activity is due to discounted prices
by Airbus or Boeing. It is much lower than the normal transaction like

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transactions between the aircraft manufacturers and the leasing

companies.
In contrast, the lessor also has properties at a cheaper price than
buying from Boeing, Airbus and there are immediate customers
willing to lease. Leasing time is usually 6-12 years and pay a fixed
monthly leasing fee. In the case of Vietjet, this airline had to pay
nearly $ 160 million for 40 leased aircraft in 2016.
 Overview leasing & buying activities of the air plane industry
In 2016, the Vietnam Airlines Company - Vietnam airline company,
sold and lease backed:1 Boeing 787-9 aircraft and 3 Airbus A350
aircraft purchased by the airline in 2017. Similar to Vietnam airlines,
In May 6, 2018 Bamboo Airway, an airline owned by the FLC Group,
sold and lease backed: 20 Boeing 787 Dreamliner aircraft with USD
5.6 billion bill.
 Overview leasing & buying activities of Vietjet air
In 2013, Vietjet bought 100 Airbus aircraft. In 2016, there was also an
additional 10 aircrafts to sales and leaseback operations. In particular,
revenue from this activity brings Vietjet about to be listed on the stock
exchange more than 11,700 billion VND, accounting for 42.5% of the
total revenue. With the cost of purchasing the aircraft announced in
the financial statements is VND 10,370 billion, the sale-lease has
brought more than VND 1,330 billion in profit. In other words, Vietjet
will get about USD 5.5 million per aircraft when sold to leasing
companies. And in 2019, Beoing and Vietjet signed the confirmation
of handing over 100 Boeing 737 Max 200 aircraft with total value of
11.3 billion USD. At the same time, Vietjet sold it to the leasing
company. Previously, in November 2018, Vietjet ordered 50 Airbus
A32neo aircraft with total value $ 6.5 billion. Now, Vietjet Air has
purchased a total of 171 Airbus aircraft and has been delivered 55
Airbus aircraft. However, Vietjet immediately sold these aircrafts to
leasing companies and they leaseback their aircrafts.

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2. Advantages and disadvantages of leasing & buying in Vietjet Cor.

 Advantages of leasing & buying activities

- Having a large amount revenue and profit: the airlines will sign
contracts to buy aircraft with the manufacturer and pay 1-5% of the
contract value in advance. And then Vietjet will negotiate the sale
and leaseback to leasing companies. Vietjet will receive a profit
from discounting by the manufacturer and a revenue from leasing
company.
- Reduced depreciation costs: When Vietjet leasebacks planes, the
aircraft and related debts will not appear on Vietjet’s balance sheet.
Therefore, the company also doesn’t record depreciation for these
aircraft, so its profit is higher.
 Disadvantages of this activities:
- High leasing cost: Vietjet has to leaseback aircrafts to serve flights.
Therefore, this is always a fixed cost and the cost will be higher if
the exchange rate increases. In fact, the cost of Vietjet’s leasing
activities is increasing over the years. In particular, in 2014, the
cost for this activity was VND 1,046 billion and increasing to VND
3,575 billion in 2016.
- Restrictions on areas of activity: aircrafts are leased, so the aircraft
will be limited to fly and land in some areas.

3. Analysis

3.1Analysis income statement and leasing &buying activities of Vietjet.

a. Revenue

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Revenue
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0
2016 2017 2018 2019

VietJet's revenue from selling aircraft in 2017 reached VND 19,783

billion, the highest level in history.

The total number of new aircraft received in the year reached 17, outperforming the
number of new aircraft in 2016 of 11 aircraft.

Average profit from selling aircraft increased by 22.3% to VND 148 billion (about
USD 6.5 million) since all 17 aircraft were A321 compared to 3 A320s and 8 A321
aircraft in 2016. Also, VietJet signed a contract with the French company GECAS
France for the lease and purchase of 6 A321neo aircraft worth $ 800 million.

From 2017 to 2019, Vietjet experience a significant decrease in revenue and gross
profit. Meanwhile, Revenue from the sale of Vietjet’s aircraft in 2016 was 11,600
billion VND, increased to 19,800 VND in 2017 and decreased to 18,600 billion VND
in 2018, accounting for 42%, 47% and 35% of total revenue, respectively. Hence, the
decrease of revenue closely related to the decrease in revenue from selling aircraft
activities of Vietjet.

b. Ability to cover debt

Interest Coverage ratios

25 23.32 23.59

20
15.96
15 14

10
5
0
2016 2017 2018 2019

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The interest coverage ratio indicates the firm's ability to guarantee repayment of loan
interests. At the same time, this financial indicator also shows the financial ability that
the business creates to cover the cost of borrowing capital in production and business.
Interest rate is the ratio of debt and the rate of return used to determine the probability
that a company pay interest on its outstanding debt. From 2016 to 2018, Vietjet
experienced an increase in interest coverage ratio, which reflects their ability to pay
the interest payment of the loans. However, the entity’s ability to cover the interest
expense decreased significantly in 2019, indicating the risk that the company cannot
meet their obligation. However, this ratio would not affect the Sales and leaseback
activity as the asset lease expense does not include the interest expense.

c. Financial structure

Total liability/Total assets

80
76.4
75
69.5
70
66.54
65 64.08

60

55
2016 2017 2018 2019

Debt ratio of Vietjet Air improved from 2016 to 2018. In 2019, the ratio indicates the
increased percentage of a company's assets that are provided via debt. It can be
inferred that the Vietjet Air use a large portion of external funds to extend their assets,
which includes planes. It is probable that the company has a high pressure when
applying Sales and leaseback activities when combining with the fixed leasing cost.

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Financial leverage
160 143.58
140
120
100
76.4 79.33
80 66.54 71.02 64.08 69.5
60
39.39
40
20
0
2016 2017 2018 2019

Hệ số tự tài trợ(VCHS/Tổng nguồn vốn) Nợ/ Vốn chủ sở hữu

d. Financial performance

Profitability ratio
80 72.53
70 66.2
60
50 43.32
40
30 26.31
15.55 19.62
20 15.08
8.66
10
0
2016 2017 2018 2019

ROE ROA

Return on Assets (ROA) is an indicator of how well a company utilizes its assets, by
determining how profitable a company is relative to its total assets. VietJet Air’s ROA
ratio from 2017 to 2019 decreases approximately about 5% each year. This reflects the
life cycle of the firm is now in between the Maturity and Decline phase. Hence, the
ability to optimize the operation of VietJet Air needs improvement for better
efficiency. On the other hand, in general, this ratio of VietJet Air in 3 years is still
higher than the average ROA ratio of aviation industry, 8.46 % (Source:
csimarket.com). Thus, though VJC's profitability is tending to decrease, the rate of
return fell, it was still attractive to investors and higher than the industry average.
Thus, this leads to the risk that the company cannot pay the fixed lease expense.

3.2Reasons why Vietjet Cor. leases & buys

 Accounting treatment benefits

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Recognition under VAS - Vietjet recognizes their SLB as an operating lease: “The
lessee (the seller) is only allowed to recognize the proceeds from the sale to other
income on the income statement. The essence of the sublease transaction is the
operating lease. Thus, according to the Vietnamese accounting system, if the
conditions are not recognized as revenue, the proceeds from the re-lease sale must be
recognized as a loan.”

The first goal is that when recording the operating lease of leased aircraft (also the
aircraft that Vietjet has sold to the lessor), Vietjet will recognize the revenue and profit
immediately from the sale of aircrafts in the income statement for the period.

The second goal is that when these huge assets of nearly 50 trillion are recorded in
operating lease, this asset will disappear from Vietjet's financial statements. That
means that the corresponding huge, committed loans also become "invisible" on the
financial statements. At this time, the financial ratios are not as beautiful as they have
transformed into extremely attractive numbers.

Meanwhile, the International Financial Reporting Standard IFRS 16 - "Lease" was

issued from January 2016 and effective from January 1, 2019, has had a major change.
IFRS 16 requires the lessee to recognize a liability in a lease, whether it is a finance
lease or an operating lease, unless the rental is negligible, or the lease term is less than
12 months.

In addition, according to the new accounting standards, VietJet must fully report its
financial lease obligations, in addition to reporting depreciation and interest expenses
separately instead of including these costs in operating leases.

 Discount on large purchases

According to a securities company, with the purchase of a large number of aircraft

from 50-100 units per order, Vietjet can receive a large discount from 40-60% of the
listed price. For example, the listed price of Airbus A321neo aircraft is 129.5 million
USD (on the 2018 price list, Vietjet has recorded a buying cost of about 42-45 million
USD), equivalent to a discount of about 65%.

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Thanks to this advantage, Vietjet can sell the right to buy the planes to other buyers
(aircraft charter partners) at a higher price. This is called the sale of the call option or
the sale of the privilege of buying an aircraft. In fact, in Q1 this year, the company
booked VND3,565 billion in net revenue from this activity. Estimated, this is the
revenue from the sale of options for a total of 8 aircraft. This revenue compensated for
the drop in aircraft sales & leaseback revenues.

Profit from the right to buy aircraft reached VND 923.7 billion with a very high gross
profit margin of 25.9%, while the sale and leaseback of aircraft in the first quarter of
last year reached VND 752.4 billion in profit. As can be seen, the sale of rights to buy
aircraft has a lower revenue, but it is more profitable than selling and leasing aircraft.

 Long-term source of fund

The core meaning of Sales and leaseback activity is that aircraft leasing units allows
the airlines to borrow money, the collateral is the aircraft, paying the debt through the
main rental for that plane. Additionally, the leasing expense is fixed and charged with
no interests. Hence, with a 5-year leasing contract Vietjet Air can have a long-term
fund with no interest expenses included.

III. Recommendations & Conclusion

The fact that Vietjet Air chooses to strongly apply sale and leaseback shows that the
airline is confident in its development prospects as well as in the Vietnamese aviation
market. Vietjet accelerated and became a growth phenomenon thanks to the sale and
leaseback of aircraft, but the company has become too dependent on this activity. It is
not difficult to realize that Vietjet will be under high pressure when this activity cannot
continue to be deployed.
There are various factors that can affect Vietjet Air’s application of Sales and
Leaseback activity. First, Vietjet will have difficulty in meeting the annual asset lease
expense when the market has negative changes, especially the adverse effects affecting
tourists to Vietnam such as the pandemic of Covid 19. Vietjet’s profit will be attenuated
because the rental cost of the aircraft is a fixed annual cost. Also, the increased
challenge of saturation and fierce competition sooner or later will reduce the number of

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new aircraft purchased from Vietjet, or in other words, the revenue and profit of Vietjet
will decrease 70-80% when this enterprise cannot use this activity.
It is recommended that Vietjet Air should implement strategy to strengthen and increase
revenue from operating activities and find proper solution to reduce the affect from
Sales and Leaseback activity.

References

1. 2019 Annual Report. (2019). [online] Vietjet Air, pp.3-5. Available at:
https://ir.vietjetair.com/File_Upload/financial-information/annual-reports-
root/annual-reports/AR_VIETJET_FINAL%20seal%202606%20ENG.pdf
2. Vietjet 2017, 2018, 2019 Audit Financial report. Available at:
https://ir.vietjetair.com/Home/Menu/annual-reports
3. 2017 Đầu tư online. Available at:

https://baodautu.vn/vi-sao-cac-hang-hang-khong-ban-roi-thue-lai-cung-mot-
chiec-may-bay-d59115.html

4. Sale and leaseback' sẽ đem về trên 2.000 tỷ lợi nhuận cho Vietjet trong nửa cuối
năm 2018?

https://vietnamfinance.vn/sale-and-leaseback-se-dem-ve-tren-2000-ty-loi-
nhuan-cho-vietjet-trong-nua-cuoi-nam-2018 20180504224211618.htm?
fbclid=IwAR2bGN8WeitoHv7-k_q0HAOcfy-
JOLp7U4qTn9RUpIcu2C8t1AqfUseB6MQ

5. https://baogiatran.vn/tai-sao-cac-hang-hang-khong-ban-roi-thue-lai-cung-mot-
chiec-may-bay-cua-chinh-minh

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