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Impact of the lockdowns on the economy | Interview with Professor Cedomir Nestorovic from ESSEC

Oct 2020

Professor Cedomir Nestorovic teaches international marketing and geopolitics at the ESSEC business school in Singapore. He shares his thoughts on the impact of the lockdowns on the economy and, more specifically, on the ASEAN region's tourism sector. He talks about why ASEAN can recover faster and significantly the role airlines have to play in helping tourism recovery in the region.

What is the impact of COVID-19 on the general economy and ASEAN tourism?

It was devastating. However, we cannot entirely blame COVID-19 for this. The impact on the economy is not necessarily COVID. It is the lockdown that has stopped all the economic activity. We are having lockdowns because, for many countries, there is no other option. However, it was not possible to lockdown whole countries like Indonesia.  You may lockdown a province or a municipality or a city, but you cannot restrict movement in the entire nation made up of more than 15,000 islands. 

If we had an alternative, we could fight COVID without lockdowns and continue the economic activity. We can even continue as usual and only have the people who are sick isolated. You respect the different measures to prevent the disease's spread but isolate only the people who have the disease or have the symptoms, but not everyone. 

We are imposing the lockdowns to save lives, but you will bring down the economy after a few months. Look at the Philippines. Many people there work in the, let's say, unofficial economy. That means they are living from one day to another. If they don't have an income, it's over for them. For the others working in the official economy, you can have help coming from the state or your company. But for the people working in the streets and not considered official workers, what kind of support will they receive? So it means that you must open the economy. It was the same thing in India; they realized that many people depend on the economy staying open. We may have more deaths because of this and not because of the disease itself. So that's the dilemma between lives and livelihoods.

What can countries do to get over this and get some semblance of normalcy?

That's a very tough question because we have two options. The first one is when the state is stepping in, and in many countries, they have announced additional budgets. For instance, here in Singapore, we have $100 billion earmarked to help the economy recover, so that you don't lose many jobs. However, even in Singapore, we have lost many jobs. So we will have a situation where people are going to lose their jobs. So either the state is helping them or let the market take care of it. If we leave it to the market, some companies will disappear, and of course, we will lose jobs, and people will have to readapt to something else. 

I would say that most countries have taken the first option, which is for the state to help with massive injections of money to the economy. Today no one is talking about budget deficits, and no one is talking about how to repay the loans. For instance, in Europe, they are talking about a 500 billion Euro budget, but who will repay this. It means that we are engaging the future generations with debt. This is the only option that the politicians have found to help the people who will lose their jobs, and many of them will lose jobs.

How will ASEAN recover from this pandemic?

ASEAN will recover sooner than some other western countries. Even in the past, except for Singapore, the government's involvement here was not significant. People don't expect the government to do something for them. If they do something, that's okay, we take it, but we will try to do it ourselves if they don't. It means that the ASEAN region will be more resilient than the other areas. In some countries, if a manufacturing plant closes in a small city, that's the death of that place. But here in ASEAN, people are versatile. They will go to another location to find a job. This is not something that you see very often in Europe. In Europe, when for instance, one plant is closed, as it is happening today in France's automotive industry, but 70 kilometers away, they offer the possibility for you to continue to work; people don't want to move. In Indonesia, they will travel 1000 kilometers to find a job if necessary. 

That's the difference between Europe and ASEAN. In Europe, people don't want to move from a particular geography. But in ASEAN, this is not the case. Many people from ASEAN are already working abroad. Look at Filipinos,  Indonesians, people from Myanmar, Cambodia, or Vietnam, and they don't hesitate to go somewhere else to find a job. That kind of mentality is better preparing them to overcome this crisis.

How do we get the tourism sector, which is such an integral part of the economy, restarted?

Tourism is an essential part of the economy, especially here in ASEAN. In countries like the Philippines and Thailand, they represent a considerable part of the GDP. So for them, I see two problems. The first one is the airline connectivity. Without airline connectivity, we are stuck, and we cannot use boats to go there. 

The airline industry is the worst hit. Changi Airport has lost 95% of its turnover, and they have only 5% for the transit traffic and the people who are coming back to Singapore. Apart from this, they don't have anything and have stopped the construction of terminal five. 

Some airline companies will disappear, and we will not have the frequency that we used to have in the past. If, for instance, you could go to Langkawi or Cebu or any other place, let's say three times a day. Now, it will not be the case, and maybe there will be only one flight a day or three times a week. So you are automatically reducing the number of potential passengers who can go there because of the airline industry's limiting capacity. 

The second problem will be the facilities. Many hotels will also disappear because there is no turnover. 

Everyone hopes that it will bounce back when it is over. But I'm not so sure that everyone can survive. So I presume that many businesses will disappear. The United Nations World Tourism Organization (UNWTO) is predicting some scenarios. They are gloomy scenarios, and they have revised them practically every month, negatively. So we don't have a very bright situation. 

I see domestic tourism as potential, especially in Vietnam, the Philippines, or Thailand. But even domestic tourism will be at risk since the middle class is also hit by a decrease in household income due to job losses. So people are not keen to go immediately for a holiday, even domestically.

Creating travel bubbles is an option. Bubble means you leave home, go to the airport, get on the plane, go to the resort, you stay in the resort, and come back without seeing anything else. In the past, we used to do this, as well. It is not something new. So if you create a bubble, maybe we can restart some travel. Without such arrangments, we have to wait. 

What is your outlook for 2021 or 2022?

I think people want to go back to normal and travel again. We have seen this in Europe. When they partially opened something, immediately hundreds or thousands of people started gathering. However, if we see a reduction in the number of flights, we will have problems. Secondly, if we are increasing the price of flights, we will not have the low-cost tourism that we used to have in the past. This was essential here in ASEAN because before the pandemic, you could take AirAsia or Tiger air and pay $50 to go someplace. I don't think this will come back any time soon, because you will have additional costs and will not have the frequency we used to have. 

So I presume that people still want to travel. But the problem of cost and the availability of flights will limit this. Then there will also be an issue concerning the availability of facilities such as hotels and restaurants. But I think the main problem is the flights. If you don't have air connectivity, we cannot travel.

How will the airline industry come back?

We have here two discussions, economy class, and business class. The business class tickets were an excellent source of income for airline companies. For people who are not used to traveling business class, there is a perception that it is a luxury. But for the business people who have to arrive in good shape for their meetings, and sometimes get back the same day, it is not a luxury.

As people are now getting comfortable with video conferencing, business people will not travel anymore or travel less. Many companies might even get their employees to switch to economy class. So for the moment, I don't think that we have a clear understanding of what will happen, but I anticipate the Airlines will look at the cost per seat or the yield per seat that they can get. Many companies will restructure, or they will disappear. 

We already see that many Airline companies are now in trouble. For instance, Air France and Lufthansa have received subsidies. At the same time, they are laying off people. So I don't know how they will justify that. Hopefully, Singapore Airlines will not lay off people for the moment. But we can never be sure about what may happen in the future. The airline companies are deeply stressed. They don't think that they can recover within the next two years. They will need a little bit more time to recover. There will be a restructuring of the industry. Without the support of Hong Kong or the People's Republic of China's help, Cathay Pacific may not continue. For the other national carriers,  the state may bail them out to keep them afloat.  But for some others, especially private airlines such as Virgin or Ryanair, we are not so sure about their future. 

Here in Asia, or especially in Southeast Asia, people are used to traveling, and they will go back to travel as soon as possible. Meaning that as soon as we have flights and are affordable, they will come back because they're used to that.

I see my students here. They wait for the weekends to travel somewhere within the region. They used to go to the Philippines, Indonesia, Myanmar, which is no more than four or five hours of flying time. 

How will ASEAN collaborate, to both reinvigorate the economy and also the tourism sector?

I think concerning the economy, they have to insist that the supply chains we used to have, which are the global supply chains, continue to exist. For instance, Singapore is very much dependent on international trade, and especially on supply chains. So they have to insist and persuade the Europeans and the Americans that they can continue to be in Southeast Asia, and that the supply chains in Southeast Asia are resilient. This is the most important thing for them because many of these countries here in ASEAN depend on corporate orders from Europe or America. So they must continue this with Japanese, Koreans, and the Americans. 

Now when it comes to the tourism industry, I would say two things. The first one is short-term, and the second one is long-term. For the short-term, as I have indicated before, if there is no vaccine, we have to invent something. So I think that is where bubble tourism is a necessity. For the time being, like Zoom is a necessity for us, bubble tourism is also a necessity. If required, you can ask people to have a COVID-19 free certificate before going to someplace. They will have to be in one place and not travel to any other place. Of course, it is not something nice because you would like to have the freedom to move around. But it's better than nothing. We should try to open up some elements while respecting safety protocols and not lockdown everything where everyone loses. 

When all this is over, we will start travel but maybe not be the old-normal. I think for a certain number of years, people will be afraid to travel long-distances. They would be interested either in domestic tourism or short distance, but not the long haul. ASEAN has to promote more intra-ASEAN tourism rather than long-haul markets. Yes, of course, Japan, Korea, and China, but not to focus very much on America and Europe for let's say medium-term.

What will be the new normal of travel, both from a technology point of view plus behavior point of view?

I think that there would be some changes. At least, in the beginning, people will be more interested in keeping a healthy distance. They will look at the other people, and they will scrutinize other people if the other people are safe, who is sitting in the next seat in the airplane, etc., they will try to clean everything. Only a few will not do so, but the great majority will pay attention, and they will respect the health measures implemented even today by the airline companies.  

In the long-term, they will forget because human beings tend to forget soon. As soon as there is a vaccine, and if you have a vaccine next year, most of these restrictions will be lifted. But people will get used to the mask. Here in Asia, we have been used to the mask, especially if you're going to Japan or Korea. You could find a mask everywhere, even when there was not a pandemic. Some people will continue to wear a mask for years because they are afraid of what is going on. 

When will we have a vaccine? 

So there are people who are against the vaccines because they don't know what is inside. And they don't want to do this. Of course, the great majority will accept, because this will be the only way we can travel and how we can engage with other people. I read some papers about the vaccine business because this is a huge business. Who is going to be the first to propose a vaccine? 

Is this vaccine a common good, or is this vaccine like any other product in the market. If it is like any product in the market, in that case, the price will be very high to reap the return on investment immediately. Suppose it is a common good, who is going to invest. Many countries have decided to invest in this because they expect that it will be a common good. Still, you also have private companies, which are on the market. For them, it is not a public good, and it is a source of profits. So we'll see who is going to be the first one to launch this. 

On top of this, when you have the vaccine, you will not have billions of shots. So there will be a question of prioritization. It will be a messy thing. Who will be the first to get the vaccine? And you know, that some countries already fought for the masks. You can imagine what will happen for the vaccine. Unfortunately, I expected there would be some messy things about the vaccines as well.

How long will it take for the tourism industry in ASEAN to get back to the levels of 2019?

If we have a vaccine, let's say the vaccine is by the beginning of next year. In that case, by the beginning of 21, I expect that we can return to the same level. That is in about maybe one to two years provided again that we will have enough flights and the prices will be affordable. Intra ASEAN is very much low cost; it is not a business traveler market, we have them, but the great majority is low cost. In that case, we are talking about the economy class; we are talking about low-cost companies. And for them, the price sensitivity is exceptionally high. So if the vaccine is there, if the price is there, we will go back immediately.

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