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UEH UNIVERSITYUEH COLLEGE OF BUSINESSSCHOOL OF ECONOMICS**********ESSAYCOURSE: MICROECONOMICS (21C1ECO50109705)Topic: RESEARCH OF THE DEMAND AND SUPPLY OF AVIATION IN VIETNAM IN THE FIRST NINE MONTHS OF THE YEAR 2021 (1/2021 – 9/2021)Lecturer: Mr. Nguyen Thanh Trieu, MA and MPhil in Economics Class:...

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UEH UNIVERSITY UEH COLLEGE OF BUSINESS SCHOOL OF ECONOMICS

**********

ESSAY COURSE: MICROECONOMICS (21C1ECO50109705) Topic: RESEARCH OF THE DEMAND AND SUPPLY OF AVIATION IN VIETNAM IN THE FIRST NINE MONTHS OF THE YEAR 2021 (1/2021 – 9/2021) Lecturer: Mr. Nguyen Thanh Trieu, MA and MPhil in Economics Class: FNC03 Practice group: Group 5 Group members: Student name

Responsibility in Assignment

Participation %

1. Nguyễn Quang Duy

Part 2.4 – 2.5

100%

2. Bùi Nguyễn Bảo Hân

Part 2.1 – 2.3

100%

3. Nguyễn Văn Hùng

Part 2.1 – 2.3

100%

4. Đỗ Lê Nhã Quỳnh

Part 2.4 – 2.5

100%

5. Lê Thanh Trúc

Part I, II.1, III

100%

Signatures: a. ________________

d. ________________

b. ________________

e. ________________

c. ________________ Date Submitted: November 29th, 2021

TABLE OF CONTENTS PART I: INTRODUCTION ......................................................................................................... 1 PART II: ESSAY CONTENT ...................................................................................................... 2 1. THEORETICAL BACKGROUND ..................................................................................... 2 1.1. Quantity demanded........................................................................................................... 2 1.2. Quantity supplied ............................................................................................................. 3 1.3. Supply and demand together ............................................................................................. 4 2. RESEARCH OF THE DEMAND AND SUPPLY OF AVIATION IN VIETNAM IN THE FIRST 9 MONTHS OF THE YEAR 2021 (1/2021 – 9/2021) ......................................... 4 2.1. The actual situation in the first nine months of 2021 and comparison of figures with 2020 4 2.2. Causes of fluctuations in air services in Vietnam in the first nine months of 2021 ............. 5 2.3. Assess the current situation of quantity demanded, quantity supplied, and prices of aviation services in Vietnam.................................................................................................... 5 2.4. Orientation of the aviation industry in the future ............................................................... 8 2.5. Solution for the aviation industry ...................................................................................... 8 PART III: CONCLUSION ......................................................................................................... 11 SOURCE AVAILABLE ............................................................................................................. 12

TABLE DATA AND GRAPH Table 1.1: The determinants of quantity demanded Table 1.2: The determinants of quantity supplied Table 1.3: A change in Supply, Demand or both Supply and Demand to equilibrium Table 2.1: Flight data table for the first nine months of 2021 Graph 2.1: Description of supply and demand of Vietnam's aviation industry in first nine months of 2020 and 2021

PART I: INTRODUCTION The development of the field of transportation goes hand in hand with people's desire to travel and transport quickly and conveniently. Therefore, along with the advancement in science - technology, the aviation industry was born to serve people’s increasing needs for transportation. Up to now, aviation has gradually become an extremely important industry of the economy, a modern bridge for transporting people and goods between regions in a country as well as between countries and territories in the world. Over the past 60 years, Vietnam's aviation industry has continuously developed from small to large, from rudimentary to modern, from incomplete to complete, making a significant contribution to the development of tourism, trade,... in particular and the entire Vietnam’s economy in general, especially in the period of international integration of the country. Vietnam's aviation market is very vibrant and has a very fast development speed, flexibly applying modern science – technology. Its quality is increasingly being improved towards international standards.

Understanding the role and importance of aviation in Vietnam, our group 5 decided to choose the topic: “Research of the demand and supply of aviation in Vietnam in the first nine months of the year 2021 (1/2021 – 9/2021)”. In the research process, there will be inevitable shortcomings, we are looking forward to your comments to make the research become better. Sincerely thanks, Group 5.

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PART II: ESSAY CONTENT 1. THEORETICAL BACKGROUND 1.1. Quantity demanded 1.1.1. Definition Quantity demanded (denoted by QD) means the amount of a good that buyers are willing and able to purchase. 1.1.2. The determinants of quantity demanded a. Price: According to the law of demand: Other things equal, when the price of a good rises, the quantity demanded of the good falls, and vice versa. The quantity demanded is negatively related to the price. b. Number of buyers: The more buyers in the market are, the more quantity demanded rise, and vice versa. c. Income: With a normal good, when buyer’s income falls, the demand for the good falls, and vice versa. With an inferior good, when buyer’s income falls, the demand for the good rises, and vice versa. For example, mobile phone is a normal good, when buyer’s income falls, he/she will choose to purchase a better one; Instant noodles are inferior goods, when buyer’s income falls, they will choose to it them instead of dishes whith higher prices. d. Prices of Related Goods: The two goods are called substitutes when a fall in the price of this good reduces the demand for another good. The two goods are called complements when a fall in the price of this good raises the demand for another good. e. Customers’ taste: If you like something, you will buy more of it, and vice versa. f. Expectations: Your expectations about the future may affect your demand for a good or service today. For example, if there is an expectation that the price of petrol will increase at weekend, people will tend to get more pertrol since today.

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Table 1.1: The determinants of quantity demanded VARIABLES THAT AFFECT QUANTITY DEMANDED

A CHANGE IN THIS VARIABLE

Price

Represents a movement along the demand curve

Income

Shifts the demand curve

price of related goods

Shifts the demand curve

Tastes

Shifts the demand curve

Expectations

Shifts the demand curve

Number of buyers

Shifts the demand curve

1.2. Quantity supplied 1.2.1. Definition Quantity supplied (denoted by QS) means the amount of a good that sellers are willing and able to sell. 1.2.2. The determinants of quantity supplied a. Price: According to the law of supply: Other things equal, when the price of a good rises, the quantity supplied of the good rises, and vice versa. The quantity supplied is positively related to the price. b. Number of sellers: The more sellers in the market are, the more quantity supplied rise, and vice versa. c. Input prices: The supply of a good is negatively ralated to to price of inputs used to make the good. A fall in input prices makes the production more profitable at each output price, which helps firms produce more goods or services. d. Technology: Advanced technology helps firms increase their productivities, and thus more goods and services can be produced. e. Expectations: Your expectations about the future may affect your supply today. Producers make their supply decisions based on expectations.

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Table 1.2: The determinants of quantity supplied VARIABLES THAT AFFECT QUANTITY SUPPLIED

A CHANGE IN THIS VARIABLE

Price

Represents a movement along the supply curve

Input price

Shifts the supply curve

Technology

Shifts the supply curve

Expectations

Shifts the supply curve

Number of buyers

Shifts the supply curve

1.3. Supply and demand together 1.3.1. Definition Equilibrium is a point that at which the supply and demand curves intersect. It is a situation in which supply and demand have been brought into balance. The price at which these two curves cross is called the equilibrium price, and the quantity is called the equilibrium quantity. At the equilibrium price: Quantity of the good that buyers are willing and able to purchase = Quantity of the good that sellers are willing and able to sell. Surplus is a situation in which quantity supplied is greater than quantity demanded. Shortage is a situation in which quantity demanded is greater than quantity supplied. 1.3.2. A change in Supply, Demand or both Supply and Demand to equilibrium Table 1.3: A change in Supply, Demand or both Supply and Demand to equilibrium No change in Supply

An increase in Supply

A decrease in Supply

No change in Demand

P same Q same

P down Q up

P up Q down

An increase in Demand

P up Q up

P ambigous Q up

P up Q ambigous

A decrease in Demand

P down Q down

P down Q ambigous

P ambigous Q down

2. RESEARCH OF THE DEMAND AND SUPPLY OF AVIATION IN VIETNAM IN THE FIRST 9 MONTHS OF THE YEAR 2021 (1/2021 – 9/2021) 2.1. The actual situation in the first nine months of 2021 and comparison of figures with 2020 - Due to the pandemic’s impact, Vietnam's aviation industry declined heavily and could not recover; the aviation industry suffered unprecedented losses in history. In the first nine months of 2021, all Vietnamese airlines only performed 105,384 flights, corresponding to a decrease of 29.1% over the

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same period. In the first six months of 2021 alone, the number of flights and passengers is 60-70% compared to the time before the pandemic. Especially from the end of May until now, the aviation industry’s revenue has decreased by 80-90%. With two outbreaks at the peak time of the Lunar New Year and the holiday from April 30 to May 1 and on May 31, Ho Chi Minh City officially applied Directive 15, which hit the industry hard. domestic airline of our country. Vietnam's domestic aviation has suffered a severe decline, with daily output only 20-30% compared to the period 3-4/2021. Even the first two weeks of June only correspond to 5-10% of the average transport volume in April 2021. The throughput of Vietnam's airports in the first six months of 2021 is estimated at 26.8 million passengers, down 19.4% over the same period in 2020. Table 2.1: Flight data table for the first nine months of 2021

- Cancellation rate: 1.9%, up 1.0% over the same period. - Delay rate: improved to 5.6%, down 9.9% compared to the first nine months of 2020. - The punctuality rate of the top three airlines is 96.8%, 93%, 96.9%, respectively. - Short-term liabilities of the three aviation industries continued to increase, reaching the milestone of 50,000 billion VND, as of June 30, 2021: •

Vietnam Airlines has an overdue debt of up to 13,337 billion VND

•

Vietjet Air, short-term loans, and outstanding liabilities amount to 13,800 billion VND.

2.2. Causes of fluctuations in air services in Vietnam in the first nine months of 2021 At the online conference of the SBV to support airlines affected by the COVID-19 pandemic on the afternoon of September 28, 2021, Mr. Bui Doan Ne, Vice President and General Secretary of the Vietnam Aviation Business Association Nam, said that the impact of the COVID-19 pandemic became beyond the tolerance of the airline business. The pandemic continued to last longer than anticipated, causing extended downtime for airlines. 2.3. Assess the current situation of quantity demanded, quantity supplied, and prices of aviation services in Vietnam 2.3.1. General assessment based on the theory

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The airline industry is called a luxury good from a microeconomic perspective, so its elasticity is always greater than 1. Specifically, when we look at the analysis graph accompanying the above data, we see the following shift: a. Before the 4th wave of the COVID-19 pandemic, when the supply (here we understood as the number of flights successfully taken off and landed) was always stable, people tended to go. The activities such as traveling and working from place to place by airplane were still at a hustling rate. b. When the pandemic broke out, the aviation industry had to close, then the production supply curve (the number of flights taken off) was significantly reduced. Like the graph here. Graph 2.1: Description of supply and demand of Vietnam's aviation industry in first nine months of 2020 and 2021

P 𝑆1 𝑃1

Eq’m1

𝑆2 𝐷1

𝑃2

Eq’m2 𝐷2 Q 𝑄2 𝑄1

*Note: - The graph is only for general purposes. It reflects the overall perspective due to the many data from many different sources. - All data (people, goods...) is converted to the number of flights to get the best possible data overview. *Where: D1, S1: Number of flights according to demand and supply in the first nine months of 2020. D2, S2: Number of flights according to demand and supply in the first nine months of 2021. Eq’m1, Eq’m2: Equilibrium of flights in 2020 and 2021, respectively Because of the pandemic, the supply and demand curves have been severely affected. - Regarding the demand curve, users cannot travel or go on business trips to other places by plane. The demand for and use of services is drastically reduced. ⇒ The demand curve shifts to the left. - Regarding the supply curve,

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•

Because of Directive 16, commercial airports are limited, so the number of flights allowed to operate is reduced. ⇒ The supply curve shifts to the left.

•

In addition to the supply curve shifting to the left, it also tends to go down because they need to save their working capital in deciding which aircraft to operate during the pandemic season, with a limited number of customers. Using planes with less explicit and implicit costs will result in fewer airfares that buyers pay for and hopefully more customers.

2.3.2. Challeging When the Covid pandemic raged, the aviation and transportation industry was one of the most "hit" industries. A series of flights were cut off, and planes stopped working, airports stopped, and airlines continuously reported losses. Most recently, the Government had to intervene, showing the negative impact of the COVID-19 pandemic on operations—the business of this industry. In addition, Vietnam's aviation industry also faces pressure on resources. Vietnamese airlines' total number of aircraft is about 230, increasing 24 aircraft compared to 2019, equivalent to about 10% of the fleet. According to calculations by industry experts, the whole Vietnamese aviation industry has a surplus of about 58 aircraft, accounting for 26% of the total number of aircraft of airlines. The overabundance of resources leads airlines to lower airfares to attract customers to gain market share. The average ticket price of airlines in April 2021 is only 55% of the same period in 2019. If this situation continues, the airlines will fall into a position of severe operating loss. Passenger transport, gradually reducing competitiveness, especially with foreign airlines. Thereby threatening the sustainable development of the whole industry, creating an imbalance between the aviation industry and other transport sectors. 2.3.3. Opportunities a. For users of air services: According to the Civil Aviation Authority of Vietnam, it is predicted that the situation in 2021 will improve compared to 2020, especially in the second half of 2021, vaccination against Covid-19 will be accelerated in Vietnam in particular and the world in general. Vietnam's aviation market will probably start to recover from the middle of the third quarter of 2021, with the throughput of airports in 2021 estimated at more than 70 million passengers. b. For airlines: VABA (Vietnam Airlines Association) has just proposed to the Ministry of Planning and Investment to report to the Government to submit the National Assembly to allow the application of a refinancing mechanism from 5,000 to 6,000 billion VND for airlines, similar to the tool that has supported Vietnam Airlines Corporation, the refinancing period is 12 months and is automatically extended twice. Based on each firm's size, market share, role, and specific contribution to support liquidity. At the same time, the proposal for airlines to borrow a credit package of about 25,000

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billion VND with a preferential interest rate of 4%, with a term of 3 to 5 years, for airlines to have secured capital to operate. Currently, the environmental protection tax rate for jet fuel in 2021 is being applied at 2,100 VND/liter (equivalent to a 30% reduction). VABA asked the Government to report to the National Assembly for permission to use a 70% reduction of this tax, from 3,000 VND/liter to nearly 1,000 VND/liter, until June 30, 2022. Besides, it is recommended to continue to reduce prices and air service fees at airports. VABA also proposed that the management agency approve and quickly deploy the support, avoiding the case of both lack and delay. 2.4. Orientation of the aviation industry in the future Looking to the future of the aviation industry, Deputy Director of Vietnam Aviation Department Pham Van Hao said that according to the assessment of the International Civil Aviation Organization (ICAO), there will be two development scenarios for the aviation industry. - In the first scenario, aviation will develop according to the V-model, falling to the bottom and overgrowing again. - In the second scenario, aviation will develop the U-shaped model. Rules will fall to the bottom and last from 3-5 months with economic decline. According to the forecast, the aviation market will decrease by 48-71% depending on the development of Disease. Vietnam aviation assessment will gradually recover. Deputy Director Pham Van Hao said the agency is coordinating with research firms to submit to the Government to reopen international flights to our country with the target of Disease control, control the opening of international flights or ignore the disease for economic development. On the side of airlines, Vietnam Airlines leaders said, with an optimistic scenario, Vietnam International Air Market 2022 will recover to an equivalent scale in 2019. "It is expected that Vietnam Airlines will have profit from In 2023 and end the accumulated loss in 2025.", Representative of Vietnam Airlines said. Commenting on aviation industry prospects, Mirae Asset Vietnam Securities Company (MASVN) said that 2021 would remain a challenging year. Specifically, MASVN argues that the aviation industry is in a state of no more extended surplus to recover further until international flights reopen. "The second difficulties that the aviation in...