In Apr 21st, IATA published another “Assessing prospects for domestic market.” In the assessment, market confidence is marked as a key, even dominant factor for recovery. After the Pandemic is control, Chinese domestic market is on a steady pace to get back, whose experience is worth sharing and take into consideration. This article analyzes the Assessment, and give personal thoughts about when the market will go back to normal.

Air China Airbus A330 B-6076, 2019.12 in Beijing

1.Domestic Market was under huge impact

According to FlightRadar24, take the data when pandemic starts (When China has 100+ confirmed cases) as base line, a trend of fluctuating decrease is observed, in two significant periods. American and Chinese market are the dominant domestic players, with 27% and 24% of total. Hence, the change of those two markets will strongly influence the whole picture.

Source: IATA Economics analysis based on data provided under license by FlightRadar 24. All rights reserved.

The first stage is from Jan.19 to early March, when Asia Pacific domestic market experiences a toboggan, with a 40% decrease and finally reach 70%. Other markets still business usual, even a 10% increase is observed in American.

The second stage starts from mid-March, when the Pandemic influences the world as a whole. Asia Pacific market controls the influence and hold 70% of capacity. Whereas America market decrease for 60%. Other region in the world almost grounded completely, in Europe, Middle East, Latin America and Africa, only 10% capacity is under operation. As a whole, the world market operates in 30% of its initial capacity.

Compare to international market, where travel restriction will force capacity falls, domestic market can show current expectations thanks for little restriction. In the first stage, similar to the trend observed in International market (analyzed in previous article), the impact is regional. Chinese market’s decline causes the region total experience a fall. According to FlightRadar24 and WHO,  as the Pandemic got controlled domestically in China, a recovery trend is observed in late Feb and kept the steady rate. In the second stage, all markets are affected by the Pandemic, some even grounded completely.

2. Chinese Market is still prudent

Although China controls the Pandemic best in the world, the cancellation rate is high, even higher than North American market. The writer suspect that is to save the effort and avoid another outbreak. There’ no doubt that the great result China has gained is due to strict regulation.

3. Confidence is the key in future recovery

Source: IATA Economics using data from Markit

In the Assessment, IATA forecasts that post-Pandemic Confidence recovery trend, take Chinese market for an example. According to the graph, the Manufacturing Confidence (Blue Line) decrease 20% on the greatest, and get back to usual now. The fast recovery of blue line isn’t observed on the Service Confidence. About that, Chinese market current have it 50% off, still on the road to recovery.

The reason why Manufacturing Confidence recovery fast is that the output is “Item”. When the Pandemic is primarily controlled and government calls for “back to work”, the factor of production back to post Pandemic really fast. There’s even a cost decline due to subsidy. With the productivity increase, confidence will have the same trend. In Macroeconomics concept, those policies stimulate the production from supply shock. But for service industry, as the key is to “Interact” with people, there’s still lack of confidence due to people’s unwillingness to interact.

Another factor lowers the demand for service is that some services are no longer needed. Due to the Pandemic, consumer learned some techniques due to no service available, such as cooking. After they know how to do that, they can self-produce them. This will structurally decrease the scale of the third industry in long run. To deal with that, firms in the third industry should cultivate demand, not increase price with a hope of increase in revenue. Take airlines’ strategy for an example, when advocating for ancillary service, the “differentiation” is important, but if there’s more demand, a greater base will lead to higher yield, on the greater scale.

Source: IATA Economics using data from Markit

Compare by regions, Chinese firms experience a fast recovery in confidence, with the trend, business confidence will back to normal soon. But in America and Australia, the confidence is still far from rebound. Speaking in a market scope, the capacity won’t recover as long as the confidence is still in a basin.

In short, the Pandemic affects the global market strongly. On macro level, the loss of confidence and expectation drops the loading factor in a same way as travel restriction does. In order to regain expectation, airlines needs to stimulate the demand, to build confidence in the market.

Pearce, Brain. (2020.Apr.21st)  Assessing prospects for domestic markets. IATA Economics.

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