return to: MA Projects

   

Master of Arts in Commercial Diplomacy Project

 

 

A STRATEGY FOR THE VIETNAM CIVIL AVIATION
ADMINISTRATION TO PROMOTE US-VIETNAM

BILTERAL CIVIL AVIATION AGREEMENT

 

 

By: Chi Nguyen
 
Advisors: Professor Geza Feketekuty
Professor Bill Monning
Professor William Arrocha
Professor Robert McCleery
Monterey Institute of International Studies,
Monterey , California
December 2001

 


Table of contents

SCENARIO
EXECUTIVE SUMMARY
BACKGROUND

Overview of Civil Aviation Sector of Vietnam and the US

Vietnam Civil Aviation Sector
US Civil Aviation Sector

Overview of US-Vietnam Air Transport Market
US Airlines Planning to operate in the US-Vietnam Market
Overview of the Historical Development of International Aviation

I. Chicago Convention on International Civil Aviation and

  1. The International Civil Aviation Organization

  2. Regulations of ICAO

  3. Regulations of Air Services

  4. Traffic Right/ Freedoms of the Air

  5. Bilateral Agreements

  6. Bilateral Agreement between the US and ASEAN

  7. Bilateral Agreement between Vietnam and others

II. “Open Skies” Policy

  1. US “Open Skies” Agreements

  2. “Open Skies" in Asia Pacific

  3. SEAN with “Open Skies” Process

  4. “Open Skies” in Sub-Region: CMLV

  5. Vietnam and “Open Skies” trend

US-Vietnam BCAA in the Context of Vietnam ’s integration into
International Organizations……………………………………………….            28

  1.   Vietnam and the WTO

  2. Vietnam and ASEAN

  3. US-Vietnam Bilateral Trade Agreement

RECOMMENDATION

To Vietnam
To the US

ANALYSIS PAPER

  1. POLICY ANALYSIS

  2. POLITICAL ANALYSIS

  3. COMMERCIAL ANALYSIS

  4. ECONOMIC ANALYSIS

  5. LEGAL ANALYSIS

NEGOTIATION STRATEGY PAPER

  1. DOMESTIC POLITICAL STRATEGY

  2. INTERNATIONAL NEGOTIATION STRATEGY

  3.  PUBLIC REALTIONS STRATEGY

  4. BATNA

  5. BUDGETING

APPENDIXES  
GLOSSARY
 
REFERENCES


SCENARIO  

This project was completed to fulfill the requirements for the Master of Arts in Commercial Diplomacy at the Monterey Institute of International Studies (MIIS).  

For the purpose of this Masters Project, I assume the role of an aviation specialist at the Department of Planning and Marketing of the Civil Aviation Administration of Vietnam (CAAV).  

Vietnam is attempting to develop its civil aviation sector through modernization policies, particularly policies that foster better relations with the United States . I am tasked by the General Director of the CAAV to integrate Vietnam into the regional and global air transport system, and to develop an effective strategy for a US-Vietnam Bilateral Civil Aviation Agreement.

EXECUTIVE SUMMARY

Vietnam ’s civil aviation sector has made vast improvements over the past ten years. Nevertheless, the sector is still largely under-developed relative to other countries in Southeast Asia .  The Vietnamese government recognizes the strategic importance of the civil aviation sector to its economy and has shown its support through generous subsidies and favorable treatment. Despite this support, benefits generated by the sector have proven insufficient. To advance Vietnam ’s civil aviation sector, it is critical that drastic modernization actions be taken and mechanisms introduced to increase competitiveness with civil aviation in other Southeast Asian countries and throughout the rest of the world.  

The US-Vietnam Bilateral Civil Aviation Agreement is vital for Vietnam . The agreement should reflect recent regional and global network trends, which require modern equipment, information technology, and financial regulations. Bilateral aviation cooperation between the US and Vietnam will benefit both countries, especially if the US-Vietnam Bilateral Trade Agreement is reached.  

The US-Vietnam Bilateral Trade Agreement will help ensure that Vietnam is competitive in the global market; it will also attract more foreign investment and contribute to the modernization of Vietnam ’s civil aviation sector. In addition, the agreement would lead to management improvements, enhance Vietnam ’s technical and commercial cooperation with foreign airlines, and generate benefits for aviation and other sectors of the economy. The agreement, however, would require adjusting current legal documents to make them compliant with international aviation regulations. Finally, the US-Vietnam Bilateral Civil Aviation Agreement would expedite Vietnam ’s accession to the WTO.  

For the US , the agreement would help reinvigorate a stagnant air transportation market. Expanding its flight network with Vietnam will generate benefits for the aviation industry and recover economic damages caused by the September 11 attacks. Moreover, the agreement would further the US policy of “making more friends and enlarging international cooperation” to fight terrorism and ensure a peaceful life for the American people.

 

What would be the scope, content, and rate of progress of finalizing an US - Vietnam BCAA agreement? Would it take the form of a traditional bilateral agreement, or a modernized “Open Skies” agreement?  

A traditional bilateral aviation agreement only embraces First, Second, Third, and Fourth Freedoms of the Air (see Background), which limit flight routes, designate airlines for each country, and determine load, frequency, fares and charges. Most of the time, traditional aviation bilateral agreements are based on reciprocity.  

An “Open Skies” Agreement is an expansion of a traditional agreement. It is more “open” than a traditional one in terms of routes and designations, capacity and frequency, code-sharing, double-disapproval pricing, charter, cargo, doing-business, charges and fees, competition, and CRS. An “Open Skies” Agreement deepens the requirements for safety and security set forth in the traditional agreement.  

Vietnam may favor a traditional agreement, since the “Open Skies” agreement would create economic, political, and social instabilities in Vietnam due to the immaturity of Vietnam ’s aviation industry. The US would prefer an “Open Skies” agreement, which would enable the US to quickly enter the promising US-Vietnam air traffic market and expand its route network with as few limits as possible.  

Differences in each country’s aviation development and contrasting points-of-view among stakeholders in the two countries would put the anticipated US-Vietnam BCAA in a difficult situation. In order to create an US-Vietnam BCAA that would harmonize the interests of both parties, it is highly recommended that the CAAV create a strategy to:  

·         Introduce a time frame for the US-Vietnam BCAA, to be implemented first as a traditional bilateral agreement, then as an “Open Skies” agreement.  

·         Build consensus among leaders and staff of the CAAV, Vietnam Airlines Corporations, and other involved units on the time-frame, changes to the Civil Aviation Law, and other legal documents.  

·         Build consensus among key members in the Central Committee and the Political Bureau (PolitBuro), and gain support of the Secretary General of the Communist Party. Their support is crucial for reaching the US-Vietnam Bilateral Civil Aviation Agreement.  

·         Develop a legislative strategy to persuade the National Assembly to adapt the time frame of the US-Vietnam BCAA and incorporate the amendments, which are introduced in the Legal Analysis section, to the Civil Aviation Law of Vietnam. The key players are the members of the Law Commission and the Economic and Budget Commission. These two Commissions have decisive influence on amending the law, budgeting for the implementation of the US-Vietnam BCAA, and financing the aviation sector to buy aircraft and equipment.  

·         Build consensus among government officials of the State Office and of the President’s Office, namely the Prime Minister and the President, and other related ministries and departments, for a time-frame of the US-Vietnam BCAA.  

·         Build a coalition with the five US airlines planning to serve the US-Vietnam air services market (United Airlines, American Airlines, Northwest Airlines, Continental Airlines, and Delta Airlines). Gain support from the coalition on the time-frame of the US-Vietnam BCAA.  

·         Lobby the US Government, specifically the Legislative Branch, Executive Branch, Department of Transportation (DOT), and Federal Aviation Administration (FAA), through the aforementioned US airline coalition. Convince the government to pass the US-Vietnam Bilateral Civil Aviation Agreement under the traditional form, to build a foundation for the “Open Skies” Agreement later.  

·         Send talking points via the Ministry of Foreign Affairs of Vietnam to the US Congress, the Bush Administration, the State Department, the DOT, and the FAA to convince them of the benefits of the Agreement. Reiterate the main objectives: to help the US economy recover, strengthen national security, and develop a “healthy” US aviation sector after the September 11 attacks.  

·         Work closely with the government of Vietnam , the Ministry of Foreign Affairs, The Ministry of Trade, and the National Committee for International Economic Cooperation to conduct an international strategy. The strategy should bring to the WTO Working Group the knowledge that Vietnam has achieved significant steps towards accession to the WTO.  

·         Execute a domestic public relations strategy, making use of television, radio, and newspapers to build public support and generate knowledge on the necessity of the US-Vietnam Civil Aviation Agreement.  

Introduce an international public relation strategy. This strategy should stress cooperation between the Ministry of Foreign Affairs, the Embassy and General Consulate of Vietnam in the US , the CAAV, and the coalition of five US airlines.


BACKGROUND

AN OVERVIEW OF THE CIVIL AVIATION SECTOR OF VIETNAM AND THE US

 

A. VIETNAM ’S CIVIL AVIATION SECTOR:  

HISTORICAL DEVELOPMENT (1956–2001)  

The Civil Aviation Administration of Vietnam (CAAV) was founded 45 years ago by the Vietnamese Air Force (Ministry of Defense). It was handed over to the Ministry of Defense by the French, with only a few airports and cargo. The cargo airplanes were used strictly for military purposes. Over the years the civil aviation sector has steadily grown into one of the country’s fastest growing economic sectors. From a modest fleet of only five small airplanes aided by Czech and Slovak , Vietnam Airlines has rapidly evolved into a major regional airline. In the early 1970s, the Vietnamese airlines served only three international routes. Currently, the Vietnamese airlines serve over 16 domestic locations and 24 major international cities, including Singapore , Manila , Kuala Lumpur , Hong Kong , Paris , Taipei , Kaohsiung , Seoul , Osaka , Sydney , Melbourne , Phnom Penh , and Reap.  

1.       From 1965 to 1975:  

Founded in accordance with Decision No. 666/TTG of the Vietnamese government in January 1956, the Vietnam civil aviation sector expanded during the wars in Vietnam , primarily for military purposes. During this period, flight routes were operated in the North of Vietnam. The Civil Aviation Administration of Vietnam (CAAV) was established and the Ministry of Defense was tasked with three main functions: (1) state management; (2) national defense; and (3) commercialization of air transportation. During the 1970s, the infrastructure of the civil aviation sector strengthened, and the airports were equipped with flight management and operations.

 

2.       From 1976 to 1989:  

After April 1975, the same system of airports was expanded to the Southern airports. These airports were furnished with better materials and improved technical facilities. The total number of aircraft increased to over 50, which included aircraft from the former Soviet Union and the United States . The CAAV’s primary responsibilities remained state management, national defense, and the commercialization of air transportation. The CAAV also executed Vietnam ’s business activities in a subsidized economy with a limited market. The average number of passengers in several domestic and international routes to China , Laos , Cambodia , and Thailand was about 250 thousand per year.  

By the early 1980s, Vietnam fell into a deep economic crisis from a dramatic decrease in foreign aid. Because of the lack of foreign aid, the aircraft were not replaced. The demand for domestic and international air transportation routes increased, however, due to the Bilateral Civil Aviation Agreement signed between Vietnam and other countries. In an attempt to meet the demand the CAAV focused on restoring, repairing, and maintaining the aircraft, and securing the necessary equipment for economic and military purposes. To carry out the maintenance the CAAV set up bases in North and South Vietnam .  

Numerous years of serving primarily military functions caused the the civil aviation sector to neglect its own economic efficiency. All the rights and responsibilities of the sector had been ensured through the subsidizing mechanism. Moreover, there were many inefficient personnel and unprofessionally trained employees.  

By the late 1980s, the civil aviation sector had restructured its personnel system and methods of doing business. The two main tasks of the civil aviation sector were: (1) air transportation; and (2) air services. The civil aviation sector incorporated socialism, and remained under a planned and centralized management system.

 

3. From 1990 to 2000:  

The 1990s were the most important decade in the development of Vietnam ’s civil aviation sector. This period is also known as the “Renovation” path for Vietnam . Vietnam Airlines, the national carrier, was established in 1989, according to the Decision No.225/CT of the Chairman of the Council of Ministers. The Vietnam Airlines Corporations is a state-owned company, organized through regulations on enterprise under the direct supervision of the CAAV. This model clearly separated the functions of State management and air transport enterprises.  

During the 1990s, the civil aviation sector underwent a number of changes in management. Vietnam Airlines and many other businesses were put under the authority of the CAAV. In May 1995, according to decision No. 328/TTG of the Prime Minister, Vietnam Airlines Corporations was established following the model of “General Companies 91”.[1]  

During this period the civil aviation sector developed dramatically. The domestic and international air transportation market, measured by the number of passenger and cargo, expanded by 35%.[2] The infrastructure was upgraded, and staff numbers and quality improved. However, the Asian financial crisis, which began in 1997, has had an adverse effect on air transport activities. Though the years prior to the financial crisis showed a steady decrease in the civil aviation sector growth, from 31% in 1995 to 17% in 1996, the most dramatic downturn occurred in 1997, which brought only 3% growth.[3]  

Vietnam ’s civil aviation sector remains underdeveloped relative to regional competitors Thailand and Singapore . This is primarily because the material and technological facilities remain inadequate and non-uniform, and capital is limited. Thus, the demand for air services cannot be met and Vietnam remains a weak competitor.

 

STRUCTURE OF VIETNAM ’S CIVIL AVIATION:  

1.         Structure and management mechanism of Vietnam Airlines Corporations:  

The Vietnam Airlines Corporations (hereafter Corporation) was established on May 27, 1995 according to the Decision No. 32/TTG of the Vietnamese Prime Minister. The Corporation consists of:  

·         Seven dependently financed units, including Vietnam Airlines (VNA) the core unit of the Corporation

·         Eleven independently financed units

·         Six joint-ventures

·         One joint-stock company (Pacific Airlines)

·         Two professional units

 

2.         Method of operations of the Vietnam Airlines Corporations:  

2.1.    Air Transportation:  

The Vietnam Airlines Corporations includes three air transport businesses: Vietnam Airlines (VNA) — the core unit, Vietnam Air Service Company (VASCO), and Pacific Airlines.  

·         Vietnam Airlines (VNA): VNA handles most of Vietnam ’s air transportation, both for passenger and cargo services in domestic and international markets. VNA belongs to the dependently financed business of the Vietnam Airlines Corporations.

 ·         VASCO: Established in 1988, VASCO is a dependently financed business of the Corporation. Its operations are mainly aviation photography and geographical exploration. VASCO provides services for electricity, forestry, ambulance, and charter flights.  

·         Pacific Airlines: Established in 1990 by the Decision 12/90-BGTVT of the Ministry of Transportation, the joint-stock Pacific Airlines consists of seven state-owned shareholders. In 1994, the government assigned CAAV to manage and restructure Pacific Airlines. Even though Pacific Airlines operates in a narrow realm with three wet-leased[4] aircraft, it seems to have the potential for growth. At the present time, Pacific Airlines has two domestic flights per day ( Hanoi Ho Chi Minh City ), and nine international flights per week ( Ho Chi Minh City Kaohsiung , and Saigon Taipei ).

 

2.2.   Related services in the air transportation assembly line:  

The services included in the air transportation assembly line are ground (NIAGS, MIAGS, TIAGS), cargo (TCS), and air catering services (TACS). In addition, aircraft maintenance (A75, A76) and aviation computer sciences are available. Presently, NIAGS, MIAGS, and TIAGS are available for Vietnam Airlines, and are financed together with air transportation. Vietnamese Airlines also provide services for foreign airlines at international airports like Noi Bai, Tan Son Nhat, and Danang. Over the past few years, these services have proven to be quite efficient.   

To date, aircraft maintenance centers (A75, A76) provide limited technical services for VNA. After being upgraded and improved, these centers will attempt to provide full services for VNA and sell services to international airlines.

 

3.         Status of the Vietnam Airlines Corporations’s property and resources  

3.1. Flight Routes:  

3.1.1. International flight routes:  

Vietnam Airlines has direct flights from Hanoi and Ho Chi Minh City to 24 international locations. Six cities are located in the North-East Asia region (Kwangchow, Hong Kong, Taipei, Kaohsiung, Osaka, and Seoul), six in South-East Asia (Bangkok, Singapore, Kuala Lumpur, Manila, Vientiane, and Phnom Penh), two in Australia (Sidney and Melbourne), two in Europe (Paris and Moscow), and one in the Middle East (Dubai). Indirectly, Vietnam Airlines also invests under the form “block seat”[5] to four other international locations ( Berlin , Vienna , San Francisco , and Los Angeles ).  

Currently, Vietnam Airlines is facing major competition from a number of international airlines. The Vietnamese airlines are often unable to compete in air-ticket prices and quality of services.

 

3.1.2. Domestic Flight Routes:  

Vietnam Airlines flies to 15 domestic locations throughout Vietnam . Most of the domestic routes are not profitable, with the exception of the Hanoi–Ho Chi Minh City route. The Hanoi–Ho Chi Minh route benefits from a high percentage of foreign passengers (20%). Shorter routes are operated by smaller aircraft with high expenses, such as the ATR-72 and Folker-70. These routes suffer from a lack of passengers, particularly those with island and mountainous destinations. Domestic entrepreneurs have been unable to find business opportunities in these places. Profits from international routes and services like ground service, construction, air catering, etc., are used to make up for these losses.  

The airfare for domestic routes remains relatively high given the average income of the population. Many Vietnamese passengers are unable to afford domestic fare prices. GDP per capita in Vietnam is approximately USD$370, while a typical round-trip fare for Hanoi–Ho Chi Minh City is USD$150.[6] Overall, Vietnamese domestic flights are affordable to a limited subset of travelers.

 

3.2. Air Craft:  

The Vietnam Airlines Corporation lacks capital, especially the capital to develop a fleet. Its main assets are leased aircraft. The aircraft that VNA currently possess, including those Vietnam received from loans, accounts for only 30%. By comparison, other countries in the region own 70–80% of their aircraft.[7]  

At the moment, the Corporation operates 24 aircraft, including six Boeing B767-300s, 10 Airbus A320s, two Folker-70s, and six ATR-72s. Among these, 6 aircraft are owned assets (4ATR, 2 Folker-70) and 18 are dry-leased.[8] The total value of investment in aircraft is USD 800 million, which includes spare engines and accessories. Of the USD 800 million, the Corporation’s property is USD 100 million, about 15%.[9]  

Compared with other airlines in the region, the Corporation’s aircraft fall far behind in quality, number of seats per kilometer, and flight distance. The average number of seats on each flight is 135, compared with an average of 232 in the Southeast region. The maximum flight distance for a Boeing B767 is 12 hours, and for a B747, 14 to 16 hours.  

With such vast deficiencies in capital and assets, the Corporation does not offer strong competition to other airlines.  

3.3. Maintenance:  

The technical infrastructure of the Corporation consists of two Aircraft Maintenance Centers , A75 and A76. In 1998, the Corporation initiated more control over its operation by introducing the aircraft maintenance program, making it less dependent on foreign partners. This program keeps adequate documentation, changes aircraft parts (as prescribed by manufacturers), and stores tools and stocks of spare parts. A short-term priority of the Corporation is to establish a regional maintenance facility. The two centers are expanding manufactories, supplying more equipment to boost maintenance capability and complete the technological transfer.  

3.4. Equipment:                                    

The infrastructure for on-board meal supply has been invested and upgraded. The Corporation has 60% shared capital in a joint venture with Cathay Catering Company at Tan Son Nhat International Airport . The length of this joint venture is 20 years. Modern equipment licensed by the International Standard Organization ISO 9000 can supply 15,000 meals per day. The Noi Bai Caterering Company can provide 2,700–3,000 meals per day. The Corporation plans to upgrade Noi Bai Catering Company to improve its production and quality of products. The catering company of MASCO at Da Nang International Airport operates on a narrow scale and only provides meals for Vietnam Airlines.  

3.5. Airports:           

At the moment, CAAV is managing and investing in 19 airports throughout Vietnam . Many of the airports used today were built during the wars in Vietnam , and therefore the facilities and equipment are ill proportioned and outdated. With a low budget, CAAV is attempting to focus on three international airports and a number of domestic airports. 

a.  International Airports: Presently, the civil aviation sector has four international airports: Tan Son Nhat, Noi Bai, Da Nang , and Dien Bien.  

·         Tan Son Nhat Airport : This is the most important airport in Ho Chi Minh City , the largest industrial center of the country. Tan Son Nhat was built before 1975. Due to insufficient funding it has not been upgraded, though projects for piecemeal enhancement have begun. The airport’s equipment and infrastructure are out-of-date and very much behind current international standards. Vietnam Airlines has only recently begun to invest in tunnels that connect the waiting rooms with the main sections of the airport. The Tan Son Nhat Airport is the first airport in Vietnam to build these kinds of tunnels; the rest of the airports will likely construct similar tunnels in the near future. The rapid growth of Vietnam ’s population has made the experience at the airport extremely frustrating. A major construction project has recently been approved. In addition, a new international terminal with the capacity to hold over 10 million passengers per year is expected to be built. The new international terminal will be built in accordance with the standards of the International Air Transportation Association (IATA). The total floor areas of the new terminal will be about 100 square miles, and will cost approximately USD$250 million.[10]  

·         Noi Bai International Airport : Situated in Hanoi ,[11] Noi Bai International Airport has undergone a number of positive changes. Recently, the construction of a new waiting room was completed.   

·         Da Nang International Airport : Situated in the middle of the country, Da Nang International Airport is built upon the old United States air force base. Fewer passengers use this airport than the Tan Son Nhat and Noi Bai International airports. Most passengers using the Da Nang airport come from nearby Thailand , Laos , and Cambodia . Currently, there is no plan for improving the infrastructure or renovating the airport.  

·         Dien Bien International Airport : This is the smallest international airport in Vietnam . It only runs flights to and from Laos , Cambodia , and occasionally private flights to and from Paris . The infrastructure of this airport is extremely under-developed.  

b.      Domestic Airports: The infrastructure for domestic airports is deteriorating and in dire need of restructuring. Investment capital from the government is extremely low due to the tight fiscal budget. Only small airplanes like Floker-70 or ATR-72 are able to land in most domestic airports.[12]

 

Top

Continue to Next Page