Supply and Demand of Vietnam's Aviation Sector

Running head: ECONOMICS
Economics
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1
ECONOMICS
(a) Supply and demand of Vietnam’s aviation sector
The aviation sector of Vietnam was initially dominated by the flag carrier, Vietnam
Airlines and its budget airline, Jetstar Pacific. With the launch of VietJet Air in 2011, the flag
carrier got some competition. VietJet Air provides same services at a lower price than the other
airlines in the market, which is helping its demand to increase among the customers. All the
airlines are increasing their fleet size in the next few years to increase the traffic in the aviation
industry of Vietnam. However, there are other low cost carriers in the industry, such as, AirAsia,
which will give competition to VietJet in the domestic industry. According to the report, the low
budget airline, Jetstar Pacific, which is wholly owned by Qantas, the Australian airline, will
increase it number of airplanes and will continue to compete in the low cost market. The flag
carrier, Vietnam Airlines, is also increasing its fleet from 82 to 150 by 2020. VietJet will also
increase its fleet size from 11 to 63, with a provision to buy another 30. Thus, it can be said that,
the supply of aircrafts in the industry is increasing sharply.
According to the law of demand and supply, when the supply of a commodity increases
in the market, other things remaining the same, the price falls. At the same time, when the price
of the commodity falls, its demand increases. Hence, with a change in the market supply of
goods and services, the equilibrium price also changes (Kreps, 2019).
Similarly, the demand for low cost airlines is higher than the other airlines that provide
same or similar services at a higher price. Other things remaining the same, when the price of a
commodity falls, its demand increases (Bade & Parkin, 2015). In case of the higher demand for
VietJet, it is seen that the customers are satisfied with the services at lower price, which is

2
ECONOMICS
S1
S2
D1
Price
Quantit
y
P1
P2
E1
E2
Q1 Q2
D2
Q3
P3 E3
pushing the companies to increase their fleet size and market supply of aircrafts. Thus, the
market equilibrium price will be changed when the market supply of aircrafts will be increased.
Figure 1: Market forces in aviation industry
(Created by author)
As seen from the above diagram, it can be seen that initial equilibrium was at E1, with
corresponding price P1 and quantity Q1. When the airlines increase the market supply, the
supply curve shifts downward from S1 to S2, other things remaining the same. At the new supply
level, the price falls from P1 to P2. Thus, the new equilibrium is reached at E2, demand
remaining the same. However, when the price falls, the demand for the product increases as per
the law of demand and supply. Hence, the demand for the airlines increases and the demand
curve shifts rightwards to D2 from D1. It will push the price slightly higher to P3. Thus, it can be
seen that the new equilibrium is achieved at point E3.