Vietnam airline market structure

Vietnam’s aviation market is under real pressure. With only two major carriers, ticket prices between cities are quite high.

Vietnam Airlines and Vietjet Air dominate an uncompetitive market. In busy periods, the limited number of aircraft forces airlines to fly empty return legs to main airports. These non-revenue flights cause heavy losses, and airlines raise fares to offset them.

Long Thanh International Airport is expected to replace Tan Son Nhat as Vietnam’s biggest airport. This report examines how market structure and government price intervention affect pricing, production, and equilibrium; how production costs drive supply decisions; and whether more competition would improve consumer and producer welfare.

Market structure describes the organizational characteristics of a market. Mankiw’s Principles of Economics identifies four main types:

Vietnam’s airline industry is an oligopoly led by Vietnam Airlines and Vietjet Air. With two dominant carriers holding substantial market power and aware of their interdependence, one airline’s pricing directly affects the other’s. Firms often compete on service quality and frequent flyer programs rather than price, and the small number of rivals can lead to tacit collusion or price leadership as airlines closely watch each other’s moves.

Production decisions such as fleet expansion and route planning are cautious, because each airline must anticipate its competitor’s reaction.

The Ministry of Transport regulates and oversees pricing in aviation. It sets a price framework for domestic air transport, and airlines must operate within these limits.

Despite public concern about high taxes and fees, the Ministry of Finance clarifies that many charges are not state budget fees but prices for specialized aviation services.

The intervention stops airlines from raising fares beyond the maximum, protecting consumers while still letting carriers cover operating costs and limiting abuse of market power in an oligopoly.

A price ceiling makes air travel cheaper and raises demand. But if the ceiling sits below the equilibrium price, airlines may cut flights to avoid losses. More people want to fly than there are seats, leading to overbooking and weaker service quality.

Consumer surplus generally rises because fares are lower, while producer surplus falls as airlines earn less per ticket. That limits investment in fleet and service, and the result is a deadweight loss: the market becomes less efficient.

The government must make domestic air travel affordable while keeping the industry healthy. A price ceiling looks attractive but can create more problems than it solves. In the model below, supply slopes upward (airlines offer more seats at higher prices) and demand slopes downward. Their intersection gives the equilibrium price, P_E.

Better alternatives: promote competition by simplifying rules for new airlines and encouraging low-cost carriers, which shifts supply and lowers prices. Investing in airport infrastructure and air traffic management also reduces airline costs.

Price controls may be justified temporarily in emergencies, to prevent price gouging or protect social equity, paired with long-term measures such as income support. Overall, they risk fewer flight options, stagnant innovation, and weaker competition.

Production costs strongly shape airline supply decisions and market dynamics:

Fuel dependence is especially hard for private airlines because the supplier, Vinapco, is state-owned.

Case: Vinapco vs. Pacific Airlines (2008)

Established in 1993 to supply aviation fuel to Vietnam Airlines, Vinapco has held a monopoly on fuel supply to every other airline in Vietnam. It is a significant example of monopoly abuse by a state-owned enterprise.

VND/ton agreed fee (~US$32.9)

593K

VND/ton demanded (~US$41.6)

750K

Flights delayed

~30

Passengers affected

5,000+

In 2007 the two firms agreed a fuel contract for 2008. In March 2008, Vinapco tried to raise the fee unilaterally, citing global price fluctuations. Pacific Airlines objected, since the price for state-owned Vietnam Airlines was not adjusted. When Pacific refused, Vinapco cut off its supply on April 1, 2008. After the Minister of Transport intervened, Vinapco resumed supply despite the ongoing pricing dispute.

More airlines could replicate the competitive landscape seen in Thailand and lead to more affordable tickets. Competition pushes airlines to cut prices, improve efficiency, and negotiate better terms with suppliers such as fuel providers. Lower prices make flying accessible and raise demand, boosting consumer welfare.

Long Thanh International Airport is a promising milestone. It should relieve congestion at Tan Son Nhat, add capacity and infrastructure, and create room for new airlines. At the groundbreaking of phase 1, then Prime Minister Nguyen Xuan Phuc said the airport system would make an important contribution to Vietnam’s strength. The expansion should support a competitive market that sustains lower fares and long-term industry success.

Two airlines dominate Vietnam’s aviation market, keeping ticket prices high and limiting competition and affordability. More competition usually means lower fares, which would make flying more accessible.

Long Thanh International Airport will ease congestion at Tan Son Nhat and improve infrastructure, potentially attracting more airlines. Government regulation plays a key role in fair prices and operating standards. By encouraging new entrants and investing in airport development, Vietnam can build a more competitive sector that lowers ticket costs, boosts economic growth, and improves the passenger experience.

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