FINAL REPORT the impact of COVID 19 on the demand, supply, and market price of the aviation sector in vietnam

VIETNAM NATIONAL UNIVERSITY, HANOI UNIVERSITY OF LANGUAGES AND INTERNATIONAL STUDIES ____*******____ ENGLISH FOR ECONOMICS FINAL REPORT The impact of COVID-19 on the demand, supply, an

VIETNAM NATIONAL UNIVERSITY, HANOI UNIVERSITY OF LANGUAGES AND INTERNATIONAL STUDIES

*******

ENGLISH FOR ECONOMICS

FINAL REPORT The impact of COVID-19 on the demand, supply, and market

price of the aviation sector in Vietnam

Student’s name: Le Thi Thao Van Student ID: 18061276

Class: BK - ENG 3072 - 01

Hanoi, 2022

Table of Contents

Abstract 1

1 Introduction 1

2 Conceptual background 3

2.1 Aviation 3

2.2 The role of aviation in economic development 3

2.3 Demand factors 4

2.4 Supply factors 5

3 Analysis 6

3.1 Impacts of Covid - 19 on the demand side 6

3.2 Impacts of Covid - 19 on the supply side 8

3.3 Impacts of Covid - 19 on price fluctuations 10

3.4 Impacts of Covid - 19 on revenues 12

4 Recommendation 14

4.1 Vietnam’s aviation development target 14

4.2 Solutions to restore and develop Vietnam's aviation 15

5 Conclusion 20

Reference list 21

Abstract

Since the end of 2019, the SARS-CoV-2 strain has become a horrible obsession

of the whole world because it has swiftly expanded throughout population communities and devastated practically every element of not only the economy but also social life For economies, the Covid-19 pandemic has caused difficulties for all actors involved in the economy, from large corporations to enterprises, and affects the employees directly involved in the production and business processes of enterprises The aviation sector is expected to be one of the businesses most affected

by this epidemic The objective of this study is to analyze the damage after many waves of COVID-19 on the demand, supply, and market price of the aviation sector

in Vietnam In general, the COVID-19 pandemic’s impact on the aviation industry

in Vietnam is a big concern, which may require a timely economic policy response and financial scheme to better support aviation enterprises in coping with the challenges during post-pandemic recovery

Key words: Vietnam's Aviation, Covid - 19, demand, supply, market price

1 Introduction

Vietnam is the world’s seventh fastest-growing aviation market Aviation generates huge revenue for destinations and contributes to overall economic development for a plethora of countries, especially the nations dependent on international trade In other words, there is a strong link between aviation industry development and economic growth, which also stimulates the development of other related businesses and sectors in a country However, aviation is a vulnerable industry that may crash due to potential risks such as global pandemics (Shakya 2009)

In the service sector, there are many affected industries in the first group, which is the aviation industry, whose estimated influence rate is 100% (GSO, 2020)

A report by the International Civil Aviation Organization (ICAO) showed that global air passenger numbers will drop by 68% in 2020 due to countries closing borders and restricting travel Only 1.8 billion passengers chose to travel by plane, compared with 4.5 billion in 2019 The number of flights dropped sharply in March and April 2020 According to IATA, the global airline industry's passenger transport activity in September 2020 fell 72.8% year-on-year

Figure 1: Number of commercial flights globally from January to December (2018 – 2020)

(Source: General Statistics Office)

In Vietnam, the COVID-19 pandemic and its impact on the aviation industry are major concerns due to multiple lockdowns imposed since 2020 Aviation activities in Vietnam in general particularly fell into a state of crisis and almost total paralysis until March 2021 Most of the services and activities associated with transportation, domestic and foreign transportation were stopped or interrupted, which led to devastating consequences, including a loss of revenue for the aviation industry and a loss of jobs for workers From June 2020, the domestic tourism industry started to recover; however, with the impact of the next waves of COVID-

19, the situation once again became a struggle, with a difficult economic recovery from the pandemic anticipated The Civil Aviation Administration of Vietnam (CAAV), the agency under the Ministry of Transport (MOT) that regulates the aviation industry, provided that the number of air passengers in Vietnam likely dropped by 46% to 43 million and Vietnamese carriers lost more than $1.3 billion or worse in revenues

This report aims to also approach different research directions and methods to analyze the influence of the Covid-19 pandemic on the aviation sector in Vietnam, recognize the challenge they are facing in aviation, and identify strategies to overcome short and long-term challenges

2 Conceptual background

2.1 Aviation

According to research by Edwin D Phillips and Robert W Kaps (2005), aviation is defined as the knowledge and practice related to the use of an airborne vehicle for commercial, research, military or charity in the earth's atmosphere Aviation is a transport economic field that applies modern and high-tech techniques with highly international activities, associated with safety and security, forcing synchronous operations in a tight process

2.2 The role of aviation in economic development

There is no denying that the aviation industry is the engine of economic development One of the main reasons for this importance is the globalized nature of the industry, helping to connect different continents, countries, and cultures As a result, global aviation has been key in facilitating efficient travel to distant places, enriching many lives in the process As a driving force for socio-economic development, the growth of the regional aviation industry plays an essential role in the markets and locally in which it operates Regional aviation will not only improve connectivity between major cities to Vietnam's lower-density locations but also promote Vietnam's international connectivity to regional and global destinations The key point of the aviation industry in economic growth and its limitless potential is evident in the industry's achievements before the COVID-19 pandemic

The aviation industry has also been a key contributor to global economic prosperity, not only as a result of the tourism industry boosting local economies but also because it has allowed for improvements in global trade The aviation industry plays an important role in driving the growth of the tourism industry, especially in developing countries Aviation carries 2 billion passengers a year, 40% of international tourists now travel by air The air transport industry creates a total of 29 million jobs globally 70% of businesses reported that using airline services is inevitable to serve a large market Air travel accounts for 10% of total trade revenue, generate a significant source of foreign currency revenue, and has a relatively good impact on the economic situation of countries

Domestic and international trade activities are being promoted to expand according to the trend of globalization, leading to the growth of the air transport system, specifically accounting for 40% of inter-regional goods export turnover The

impact of aviation on the global economy is estimated at $2,960 billion, equivalent

to 8% of the world's GDP

The International Air Transport Association (IATA) showed that the air transport industry including airlines and supply chains contributes an estimated $2.6 billion to Vietnam's GDP Spending by international visitors contributed an additional $9.9 billion, bringing the total to $12.5 billion Revenues from the air transport sector and international visitors arriving by air accounted for a total of 5.2%

of the country's GDP

According to the IATA report, the air transport industry has supported 2.2 million jobs Airlines, airport operators, airport businesses (restaurants and retailers), aircraft manufacturers, and flight assurance service providers employ 42,000 people

in Vietnam In addition, by purchasing products and services from local suppliers, the industry has also supported an additional 174,000 jobs Furthermore, the aviation industry is estimated to support an additional 182,000 jobs through employee wages

As a result, part or all of these wages will be spent on consumer goods and services International visitors to Vietnam by air are estimated to support an additional 1.8 million jobs through expenditures that contribute to the local economy

This sector will play an important role in creating economic value by creating high-value and skill-demanding job opportunities, thereby contributing to the growth

of the economy in our country With its major contribution to the economy, the aviation industry is the catalyst of sectors including (but not limited to) commerce, tourism, and social development Thanks to the positive impact of the aviation sector, other industries will also see a long-term productivity boost

2.3 Demand factors

Economists use the term demand to refer to the quantity of a good or service that consumers are willing and able to buy at different prices in a given time, assuming other things are constant

In this relationship, price means what a buyer pays for a unit of the specific good or service, also called the independent variable Quantity demanded is the total number of units purchased at the price - is the dependent variable Assuming all other things are constant, the quantity of a good or service demanded in a given period of time will increase when the price falls and conversely, will decrease when the price increases Here are some typical factors affecting demand:

First, the price of goods and services affects the quantity demanded according

to the law of demand When the price of goods and services increases, the quantity demanded of goods and services decreases and vice versa

The second factor is the price of related goods Two groups of related goods affect the quantity demanded of the goods under study: substitutes and complements

The next factor is consumer income According to Engel's law, consumers will have different conceptions of the same good with different income levels Engel

divides goods into two categories: (i) Goods for which, as income increases, the

quantity demanded of the good increases; When income falls, the quantity demanded

of a good is called a normal good (ii) Commodities when income increases, the

quantity demanded of goods decreases; When income falls, the quantity demanded

of a good increase is called a secondary good

Moreover, the taste is the preference or interest of a group of people about certain goods and services that affect consumer psychology Taste determines the type of goods that consumers want to buy

Besides, the number of buyers reflects the size of the market The more consumers in the market, the greater the demand for goods and services The fewer consumers in the market, the smaller the demand for goods and services

2.4 Supply factors

Supply is the quantity of a good/service that sellers are able and willing to sell

at different prices in a given period of time assuming other things constant (ceteris paribus) Meanwhile, quantity supply reflects the quantity of a good or service that sellers are willing and able to sell at different prices during a given period of time, assuming other things remain constant Some factors that affect supply, including:

The price of goods and services affects the quantity supplied according to the law of supply When the price of goods and services increases, producers will produce more goods to put on the market to earn more profit and vice versa

The prices of products directly affect the cost of production and thus the quantity of a good that producers are willing to sell

Government policies such as legal policy, tax policy, and subsidy policy all have a strong impact on the quantity supplied When government policy favors

producers, producers are encouraged to produce, causing the quantity supplied to increase and the supply curve to shift to the right and vice versa

The number of sellers has a direct effect on the number of goods sold in the market When there are more sellers, the quantity supplied increases, causing the supply curve to shift to the right and vice versa

3 Analysis

Before the pandemic happened, Vietnam's aviation market was considered a

"gold" market The Civil Aviation Administration of Vietnam shows that the air transport market continuously has high growth, with an average growth rate of 20.5%

in passengers and 13.2% in cargo (period 2014 - 2018) In 2019, the growth rate will continue to be maintained at double digits with a growth rate of 11.8% in passengers and 3% in cargo compared to 2018 Total passenger transport reached 78.3 million passengers and freight reached more than 1.25 million Not only the growth in tourists, but Vietnam's aviation also increased by 11% compared to 2018 in terms of goods (1.5 million tons) According to the International Air Transport Association (IATA), Vietnam is recognized as one of the fastest growing aviation markets in the world and the fastest in Southeast Asia with an average growth rate of 15.8%/year

It is expected to achieve an average growth rate of over 10% in the next 5 years and reach 150 million passengers transported by 2035

The COVID-19 pandemic is having an enormous impact on the aviation industry, affecting passenger traffic, air cargo demand, price fluctuations, and incoming revenues

3.1 Impacts of Covid - 19 on the demand side

The order to restrict flights, social distance, and social isolation to prevent the spread of the COVID-19 epidemic has caused many international and domestic flights to close The aviation industry is one of the industries that have suffered the most damage under the impact of the Covid-19 pandemic, the volume of air transport has continuously decreased deeply, specifically compared to the same period in 2019; Domestic visitors decreased by 24%, leading to many negative impacts on the production and business activities of enterprises in the industry In the first 9 months

of 2020, the number of passengers transported by air only reached 22.5 million passengers, decreasing 45.5%, and rotated 25.4 billion passengers, down 55.9%;

freight transportation reached 196.6 thousand tons, decreasing 39.4% and 2.6 billion tons, decreasing 54.2%

Figure 2: Air passenger transport in the months of 2019 and 2020

(Thousand passengers) (Source: General Statistics Office)

Specifically, according to the General Statistics Office, international visitors

to Vietnam in the first 10 months of 2020, were estimated at more than 3.8 million arrivals, down 73.8% over the same period last year Statistics of the National Administration of Tourism show that in the first 10 months of 2020, domestic tourists reached 42.5 million (down 41% over the same period in 2019) After ceasing international and domestic flights at the end of March, the number of passengers in April decreased by 88%, and in May, the number of passengers dropped sharply by 91% With the reopening of domestic routes from April 23, 2020, the number of passengers has gradually improved, however, until July 28, passenger flights to/from

Da Nang were requested to be temporarily suspended exploitation (due to the appearance of a new positive case in Da Nang) has reduced the number of passengers

in transit

From September 8th, flights to/from Da Nang will be opened, and the number

of passengers will gradually increase, but still at a very low level compared to the same period last year due to international flights (accounting for about 60% of the total number of passengers rotated transfers of Vietnamese airlines in 2019) have not yet been reopened With the complicated development of the epidemic, domestic and international arrivals fluctuated greatly

According to the Ministry of Transport, in 2020, the volume of goods through Vietnam's airports is estimated at 1.3 million tons, down 15.6 % The reason is due

to the trade situation, the fluctuating supply and demand of goods due to the

COVID-19 epidemic, and the restriction of air transport activities to prevent the spread of the disease

Figure 3: Vietnam's air cargo volume in the period 2009-2020

(Source: Ministry of Transport)

This is the first negative growth since 2009, but lower than the sharp decline

of the transportation and passenger services segments The cargo terminal service segment is least affected by the COVID-19 epidemic as cargo planes are still maintained to ensure the supply of goods and maintain production and business activities in the world Accordingly, in the first 9 months of 2020 net revenue of the cargo terminal segment decreased by 8.2% due to the decrease in cargo volume due

to the COVID-19 epidemic

Gross profit margin decreased compared to previous years because businesses had policies to support airlines such as supporting cargo storage fees for delayed, canceled flights and other related activities

3.2 Impacts of Covid - 19 on the supply side

At that time when the Covid epidemic was the most complicated and dangerous,

the price of services in the aviation sector dropped to the bottom As a result, airlines were forced to close many routes and reduce the number of domestic and

international flights In the first 10 months of 2020, according to data from CAAV,

the total number of flight transfers made by airlines was 185,870 flights, down 30.5% over the same period in 2019 The strongest decrease belonged to Jetstar Pacific with 13,711 flights, down 54% Vietnam Airlines and VietJet Air also decreased by 24.7% and 39.1%, respectively In contrast, Bamboo Airways is the only airline with a growth in the number of flights with 21,339 flights, up 48% over the same period in

2019

Figure 4: Number of flights by Vietnamese airlines in the first 10 months of 2019 and 2020

(Source: Civil Aviation Authority of Vietnam)

Besides, the market share of airlines also changed significantly Specifically, Vietnam Airlines has surpassed VietJet Air to return to the leading position in the aviation industry with 39.6% market share, up 3.1 percentage points over the same period last year Meanwhile, VietJet Air only accounts for 37.6% of the aviation market share, down 5.3 percentage points over the same period Besides, Bamboo Airways continues to show strong growth in the business when increasing its market share to 6.1 percentage points over the same period in 2019 and reaching 11.5% market share, becoming the second largest airline on the market

According to the Airports Corporation of Vietnam (ACV), in May 2021, the total number of takeoffs and landings at Noi Bai and Tan Son Nhat airports dropped

to a record low On May 23, Tan Son Nhat airport had 173 flights; Noi Bai airport had 101 flights - while on May 26, Tan Son Nhat only had 122 flights and Noi Bai airport only had 92 flights

The data shows that the pandemic had a substantial negative impact on flight volumes for a prolonged period; this had a massive knock-on effect on global business and travel and tourism

3.3 Impacts of Covid - 19 on price fluctuations

After 4 waves of epidemics with serious impacts on the economy and social life, the price situation in the aviation industry also experienced unpredictable fluctuations The number of passengers passing through the airports has dropped to

a record level, and airfares have also hit the bottom for many months in the context

of the complicated developments of the Covid-19 epidemic in many localities

The system of many airlines such as Vietjet, Vietnam Airlines, Bamboo, Pacific Airlines and Vietravel Airlines has recorded the cheapest fares for the Ho Chi Minh City - Hanoi tours departing in early June 2021 Some airlines sell tickets including taxes and fees of less than 500,000 VND/way; Popular prices include taxes and fees from about 450,000 - 800,000 VND/way

For example, at Vietjet, a series of tickets priced at 49,000 VND/way are open for sale for the whole trip between Ho Chi Minh City and Hanoi, excluding taxes and fees Starting in June is also very cheap, from only 450,000 VND/trip including taxes and fees