This article discusses the possibility and eligibility of foreign airlines as regards to their market positioning strategy in Vietnam from a legal perspective.

Phuong M. Nguyen (LL.M.), Senior Legal Counsel of EP Legal
 

With the population in excess of 86 million people, Vietnam has become a potential market for both international and domestic airlines. The operation of foreign airlines is, however, restrained by the Vietnamese Government for the time being to the extent that domestic routes may only be exploited by domestic airlines. This article will therefore discuss the possibility and eligibility of foreign airlines as regards to their market positioning strategy in Vietnam from a legal perspective by reference to the regulations on investment, competition, antitrust, intellectual property, consumer protection and the like.

A shortcut for market entry

In a helicopter view, even though Vietnamese Government has committed to open market access for foreign investment in services since WTO membership in January 2007, air transportation services in domestic routes still vested in domestic airlines1.  Foreign investor may, pursuant to the regulations on civil aviation of Vietnam, engage in this market segment by way of partnership with Vietnamese entities or individuals under the form of a joint venture company (JVC); however, the foreign ownership shall not exceed 49% of the JVC charter capital provided that each foreign investor holds not more than 30% thereof. To this effect, we have witnessed the participation of Qantas Group (Australian) and AirAsia (Malaysian) in JetStar Pacific Airlines (JPA) and VietJet AirAsia (VJA) respectively.
As enabled by the Law on Civil Aviation and authorized by the Ministry of Transportation (MOT), the ownership of the foreign parties in JPA (27%) and VJA (30%) are unchallenged. Nonetheless, the eligibility of the JVCs to operate domestic flights remains questionable. In the absence of an official definition of the so called “domestic airline” under the civil aviation regulations, the concept of “domestic company” in the investment regulations is hereby employed. According to Article 2 of Decision 88/2009/QD-TTg promulgating the regulations on capital contribution and share acquisition in Vietnamese companies, Vietnamese companies comprise, inter alia, joint stock companies, liability limited companies, partnership, private enterprises incorporated and operated under the Law on Enterprises. In this sense, a domestic company is not defined by the level of foreign ownership but the jurisdiction it is subject to. By that virtue, both JPA and VJA are considered domestic enterprises which are eligible to provide and operate domestic flights within the territory of Vietnam.

Notwithstanding the possibility to establish JVCs in civil aviation domain, the current regulations keep silent on the acquisition of shares by foreign investors, especially foreign airlines, in existing domestic airlines. In principle, Article 10 of Decree 139/2007/ND-CP on the implementation of the Law on Enterprises, foreign investors are entitled to purchase shares in domestic companies with the ownership ratio stipulated under the specialized laws if any. The shortcut of foreign airlines by way of share acquisition is thereby enforced.

He cries wine and sells vinegar

There is no doubt that foreign invested domestic airlines are licensed to operate in domestic routes under the current legal regime. The extent for foreign participation in such entities is limited to the rights and obligations of a minority shareholder in those JVCs. Nonetheless, passengers may have a feeling as if they were served by JetStar Airways in the domestic flights operated by JPA. By way of employing the logo and business style of JetStar Airways, JPA is definitely confused with JetStar Airways, a subsidiary of Qantas Group. Is it considered an infringement of intellectual property regulations?
The JPA’s employment of JetStar Airways trade mark is survived by a franchise agreement as explained by the parties. Pursuant to Article 16 of Circular 26/2009/TT-BGTVT on the air transportation and general aviation services, a franchise agreement is a type of cooperation contracts where an airline is licensed to use trade name, flight code, logo or other trade marks of another airline for the marketing, sales and exploitation of the former’s services in Vietnam. In other words, Circular 26/2009/TT-BTGVT acknowledged this form of foreign investment in Vietnam.

According to commercial regulations, franchise is permitted as long as the following conditions are fully satisfied2:

(i)    The business system under this franchise has been operated at least one year;
(ii)    The franchise has been registered with the Ministry of Industry and Trade; and
(iii)    Services or goods under this franchise are not prohibited for trading.

As a matter of fact, the franchise between Qantas Group and JPA is validated by the satisfaction of three conditions as above indicated. However, Article 7.2 of Decree 35/2006/ND-CP on the commercial franchising activities under the Commercial Law also provides that a business license is a precedent condition for the business operation of conditional services like the case of civil aviation. As a matter of principle, the franchise between Qantas Group and JPA whereby JPA can exploit the trade mark of JetStar Airways must be indicated in its business license. Notably, the Minister of MOT, on 2 November 2009, requested JPA to design its own logo instead of using JetStar logo. According to the Civil Aviation Administration of Vietnam (CAAV), JPA is operating its air carriage services under the trading license governed by the Law on Civil Aviation, not under the franchise to build up and operate an airline system for JetStar Airways. If it is the case, the stipulation of Circular 26/2009/TT-BGTVT regarding franchise agreements will not make any sense.

To whom the bell rings

The intensive entry of foreign cheap fare airways in Vietnamese market recently has been deeply concerned by domestic airlines. Vietnam Airlines has officially protested the share acquisition of AirAsia in VJA. It is alleged that foreign cheap fare airlines managed to bend the laws in order to obtain trading license in Vietnam. This matter therefore will be discussed in the ambit of competition laws.

First, it is ascertained that the share acquisition of foreign airlines in domestic airlines is not an act of economic concentration as identified in Article 16 of the Law on Competition. Particularly, Qantas Group and AirAsia are currently minority shareholders of JPA (27%) and VJA (30%) respectively, which does not authorize the two foreign parties to control the domestic airlines.

Second, domestic airlines may be vulnerable with the pricing policy of those cheap flight airlines when the latter enter into this market segment. The applicable fares offered by JPA are much more competitive than those offered by Vietnam Airlines. As provided in Article 13 of the Law on Competition, a market dominant player, whose market share accounts at least 30% or who is capable of substantially restraining competition, is prohibited to dump its goods or services under their costs of goods/service sold. The Vietnam Competition Authority hitherto has not made any conclusion in this regard.

Third, does JPA mislead customers by using JetStar logo and trade mark? Pursuant to Article 40 of the Law on Competition, enterprises are prohibited from using instructions which contain information about commercial names, business slogans, business logos, etc. in other to mislead customers in their understanding of goods and services for competitive purposes. However, this stipulation does not apply to the case at hand since JPA does not use any trade marks of other domestic airlines to mislead customers. The employment of JetStar Airways is authorized by the franchise agreement as described herein above.
Not only domestic airlines but also customers, who are direct stakeholders in the market positioning strategy of foreign airlines, may be affected by the entry of foreign airlines. There is no doubt that customers may benefit by competitive pricing policy and service quality at international standards of foreign invested airlines. However, the acts of advertising, display, introduction of goods/services which mislead customers are strictly prohibited under Decree 55/2008/ND-CP on the implementation of the Ordinance on customer protection. The customers in such case may lodge complaints to the service supplier or sellers or any entity or individual in charge of goods and services provided that their legitimate rights and interests are infringed. As a result, no cases of customer right infringement have been reported so far against the operation of JPA.

In a nutshell, the current legal regime of Vietnam for the operation of foreign invested airlines is unceasingly challenged in terms of investment, intellectual property, completion any anti-trust as well as customer protection. From legal perspectives, it is not jurisprudent to condemn foreign airlines to obtain trading licenses by unlawful ways. From commercial perspectives, the engagement of those foreign airlines must be governed by legal regulations consistently in order to protect customers’ rights and maintain a fair competitive market in Vietnam.

FOOT NOTES

1. According to WTO commitments, foreign airlines are permitted to provide services of sales and marketing air products in Vietnam through their ticketing offices or agents in Vietnam.

2. Article 5, Decree 35/2006/ND-CP on the commercial franchising activities under the Commercial Law