Since its establishment in 1946, Cathay Pacific has been a profitable airline company, which experienced periodical growth. In 1998 however, the airline experienced a loss of US $70 million, a stark contrast from earning $218 million in profits in the previous year. For Cathay Pacific, this was the first loss experienced by the air carrier since 1963. Cathay Pacific’s economic hardship was mainly the result of a financial crisis, which affected the Asia-Pacific region at that time. As a result of this crisis, air travel heavily declined, resulting in low passenger loads and yields.
For Cathay Pacific, this translated into a decline of 12.9% in revenue. Additionally, Cathay Pacific also faced a series of problems with its labor department due to disagreements over negotiations and the handling of in-flight operations. This conflict resulted in strikes and delays for the airline. Cathay Pacific’s problems were exacerbated by the media, which closely scrutinized the airline’s actions. As a result, Cathay Pacific also had a crisis in Public Relations. This report discusses the key issues that have surrounded Cathay Pacific and provides an analysis with some recommendations to tackle the situation at hand.
Despite its well-known reputation in the Asia-Pacific region, Cathay Pacific faced many challenges that would have a significant impact on its business. By examining the changes that have taken place in the company and the airline industry over the years, the following key issues can be identified. Cathay Pacific needs to address these key issues in order to be successful in the future.
UPDATE – WHAT HAS HAPPENED SINCE 1999
In a bid to escape its 18-month financial slump, Cathay Pacific strategically used Hong Kong as the main hub for air transport in Asia. Additionally, the company’s performance in Europe and North America was able to compensate for the airline’s poor performance in Asia. These initiatives paid off as Cathay Pacific earned a profit of $285 million in 1999. Cathay Pacific was also fortunate in its timing, as its participation in the “One World Alliance” began to increase traffic for the airliner. “One World Alliance” is a joint effort among different airlines to share frequent flier points and promotions in a bid to attract fliers.
2000 was a good year for Cathay Pacific for several reasons. Firstly, the Asian economy was gradually improving which resulted in more passengers returning to travel. Secondly, Cathay Pacific’s continued cost cutting and capital investment strategy began to show significant results. The company posted profits of $642 million, a jump of 130%.
In 2001, the entire air industry suffered a large blow from the September 11th terrorist acts. As a result, airline travel dramatically declined, affecting all the companies. Cathay Pacific’s response to this business climate was to maintain its strategy of cost cutting and investment.
In 2003, Cathay Pacific encountered yet another catastrophe in the form of the SARS crisis. The SARS crisis was especially troublesome for Cathay Pacific because Hong Kong was identified as “ground zero” for the syndrome. Tourism and air travel to Hong Kong rapidly declined. As a result, the company lost up to $3 million a day. In response, Cathay Pacific dramatically cut services across its network by more than 45%. The company also grounded 40% of its flights.
In 2004, the SARS crisis had died down and regular air travel had resumed. Cathay Pacific proceeded to invest heavily in upgrading its in-flight services. Such upgrades included: new in-flight entertainment and bigger, comfortable business class and first class cabins. As a result of the previous years, the airline also decided to refocus on its freight department in a bid to hedge the risk of sudden declines in passenger travel. From 2004 and onwards, Cathay Pacific saw a 60% increase in passenger traffic (in comparison to 2003) and its cargo volume also increased by 15.8%. At the same time however, Cathay Pacific also saw its costs increase in terms of in-flight services, labor and landing expenses. Additionally, the general rise in fuel resulted in a cost increase of 25% for the airline.
TAKING A LOOK AT THE COMPANY AND AIRLINE INDUSTRY
By using various tools to assess the external environment and internal attributes of Cathay Pacific it is clear that there some peculiar challenges in the airline business (refer to Appendices A – C). Rising fuel costs, natural disasters and diseases and deregulation of the market can pose serious threats to this business. However, Cathay Pacific enjoys a high reputation and a strong Asian economy where consumers are flying more frequently due to increasing disposable income. Together, Cathay Pacific needs to assess the opportunities that are presented to it within a highly competitive industry by focusing on the key issues as discussed subsequently.
_HOW TO HANDLE COST REDUCTION WITH THE UPS AND DOWNS IN THE AIRLINE INDUSTRY WITHOUT COMPROMISING SERVICE OR QUALITY?_
This issue is the top priority for Cathay Pacific since the airline takes pride in providing “Service from the Heart”. Top Cathay officials have heavily endorsed this company mission statement and as a result, the company has been the recipient of several industry awards, which recognized Cathay Pacific for quality service. This is Cathay Pacific’s differentiating factor in a heavily competitive industry. The company has taken several decades to form this brand association and must therefore strive to maintain this association in the consumer’s minds to remain competitive.
Managing and respecting the Union, working with them to cut costs, etc. This will ensure that employee morale is not affected by any cost cutting initiatives and employees remain motivated to provide top quality service to Cathay passengers. This will also avoid disruptions in service and cancellations of flight due to personnel strikes.
Employ part time positions to handle fluctuations within the market and to handle seasonality. This will help to reduce overall labour costs.
Flux staff between different destinations at different peak times. This will increase the efficiency of Cathay Pacific’s labour force and scheduling.
Reduce fleets during high and low seasons.
Invest in aircrafts with newer fuel efficient technology
Government partnership to subsidize fuel costs (leverage Cathay’s government relations).
Point to point vs. Hub spoke (if possible -forecasting which areas will be applicable)
Allocation of some staff to Dragon Air during low season.
Leverage strong loyalty programs to make it more attractive for flyers to stay with the airline
_HOW CAN CATHAY PACIFIC MAINTAIN GOOD RELATIONS WITH ITS EMPLOYEES?_
This is a critical issue for Cathay Pacific since the company relies on its award-winning customer service to differentiate itself from other airlines. Staff members are Cathay’s front-line representatives to the customers therefore maintaining good employee morale and attitude is a critical issue. Simply stated, if the staff is not happy, profits will decline. Cathay Pacific needs to invest equally into its staff and as much as it does into its mechanical upgrades. Cathay Pacific has had a history of strained relations with its labour management. It should consider adopting the following recommendations:
Leverage Asia’s large labour market to recruit people with lower salary expectations.
Employ training practices from other companies in other industries known for quality service, such as allowing new trainees to fly on board Cathay Pacific as a customer to get a different perspective and provide suggestions for improvement (Practiced by the Ritz Carlton).
Reconfigure scheduling that allows staff who fly long routes to stay in the destination city for several days to relax, instead of flying back right away.
Provide employee perks such as spa discounts/packages in partnership with hotels
Hire an ombudsman as a neutral party to facilitate employee issues with the company.
Provide continuing studies in language courses for employees to upgrade themselves (In order to promote a long-term career growth and enrichment with Cathay)
Promote the “personalization” of in-flight staff (such as including staff profiles in magazines in flight) and assign staff to specific areas to familiarize passengers with his/her steward/stewardess.
Employ “ownership” and profit sharing concept similar to Westjet and Southwest Airlines to encourage staff to take pride in the company and to be accountable for results.
Group performance incentives in order to promote teamwork (leverage Asian collectivist culture) and reward the entire crew’s performance as a team.
_HOW SHOULD CATHAY DIFFERENTIATE ITSELF FROM OTHER AIRLINES?_
The combination of the growing popularity in air travel and the “deregulation of the skies” by governments (e.g. India) has resulted in a growing number of direct and indirect competitors (see Competitor Analysis in Appendix D) for the airliner, such as new alliances and low-cost carriers. Cathay Pacific must therefore find a way to maintain its relevance to the market and continue to appeal to air travellers.
Innovative partnerships with popular high-end companies such as Louis Vuitton. Cathay could design the interior of a plane in partnership with Louis Vuitton to reinforce its premium image and appeal to the tastes of local people who love luxury brands.
Leverage its unique Chinese and British history by providing fusion-type services (East meets West) such as dim sum meals and British style tea times in-flight
Promote the aesthetics of in-flight staff through redesigned uniforms that are distinct to Cathay Pacific and to the Hong Kong area.
New types of in-flight entertainment such as fashion shows on board
Capture the business market by partnering with corporations (corporate accounts) to be the exclusive mover of selected companies in Asia and around
Maintain a detailed customer relations marketing database that can customize a traveler’s experience based on their individual preferences (e.g. if a passenger enjoys drinks wine on their flights, a member of the crew would record this in the passenger’s profile and ensure a glass of wine is waiting for them when they board the plane).
Reinforce customer service by starting a survey initiative during the flight with incentives to passengers for participation (a small gift such as a keychain, luggage tag, luck draw)
Provide a “stretching room” during long hauls, which allows passengers to exercise while on-board.
APPENDIX A: PEST ANALYSIS: AIRLINE INDUSTRY IN ASIA-PACIFIC
POLITICAL & REGULATORY
The airline industry is heavily regulated by the government and the air services agreements (ASAs) in each nation. In the past governments favoured national flag carrier airline. Governments still gravitate towards protection of national airlines and often support these airlines through economic hardship and downturn.
Airline industry is starting to open up. Globally low-cost carriers have started to emerge in the market as they are now able to service domestic routes.
Fairs are regulated by the Orient Airlines Association (OAA) in Asia.
Discussion of open skies agreement between the U.S. and China will bring in more competition for regional aircraft carriers.
Strong Asian economy, especially with the economic growth in China.
Increasing fuel costs which represent 30% of airline operating costs are posing a threat to operating margins.
Growing industry in Asia expected to grow at a compound annual growth rate of 9.3% between 2005-2010.
The employment levels in Asia continue to be very strong, therefore people have more disposable income for travel.
Asia Pacific carriers managed the biggest increase in load factors of 1.9 ppts, to 74.6%, well above the next-best region, North America (+0.7 ppts) and Europe (+0.6 ppts) and the global average +0.9 ppts
Trend towards strategic global alliances between airlines continues to increase.
Travel in Asia and Malaysia have increased in popularity as the Asian economy continues to boom. There is more international travel, 134 million international passengers were carried on Asian Pacific airlines during the year, up 4.5%. Traffic in revenue passenger kilometres (RPK) terms rose 3.9%.
As the baby boomer generation ages they will have time and disposable income for travel in retirement.
The fear of terrorist attacks has increased airport safety measures around the world.
Scare of the Avian flu threatened to affect the airline industry, but has not had a severe impact on the industry. The International Air Transport Association has been in close contact with the WTO to manage the situation to avoid another crisis like SARS.
Trend towards either super-premium airlines or low-cost carriers in the industry. Consumers are looking for a luxury experience or a low-cost experience “Demand for luxury travel is strong, propelled by global wealth, robust business travel and growing desire to bypass the hassles of long security lines, cramped seating and greasy airport food. While airplane cabins and in-flight service may be similar, there’s more differentiation on the ground — and more demand from passengers willing to pay for speed, comfort and efficiency.”
Loyalty programs and air miles are growing in popularity.
Technological advances in on-line ticketing and e-tickets have virtually eliminated traditional, printed tickets within the industry.
On-line check-in systems have reduced some overhead costs and have helped to increase traffic flow at airports.
In-flight entertainment, internet is now offered on-board the aircraft as well as fax, phone and satellite TV for business travelers.
APPENDIX B: PORTER’S FIVE
FORCES ON THE AIRLINE
Strong brand name in Asia as a top airline – received airline of the year award in 2006 from the OAG. Hong Kong and China account for 40% of the company’s sales. Well positioned for future growth.
A diversified portfolio of business units, has acquired business to achieve forward and backward integration along the supply chain (see Appendix X on business units).
Strong business growth, especially in catering, laundry, and other services segment +46% over 2005.
A geographically diverse portfolio of routes, spans the globe.
A diversified portfolio of food brands across multiple categories.
Strong increase in passenger and cargo growth indicating growth in market share.
One of the best frequent flyer programs in the world.
Rapidly decreasing margins and a decline in operating efficiency. The company’s operating margins have decreased from 12.3% in 2004 to 8.6% in 2006. The company’s net margins have decreased from 10.3% to 7% from 2004 to 2006.
Weak employee relations continue to plague the organization. Company has a history of poor employee relations since the 1993 strike. In 1999 pilots revolted against management resulting in the cancellation of 1,000 flights after management refused to negotiate on pilots’ demands for improved working conditions and increased pay. In 2005, the company lost two law suites related to a breach in contract for increased cabin crew pay.
Leverage cargo business as the Asia Pacific cargo market continues to show double digit growth and accounts for 15-20% of the world cargo market.
Economic growth in Asia, particularly China and India, where Cathay Pacific has a well established brand name. Share of worldwide travel for Asia Pacific is expected to grow from 25% in 2003 to 31% in 2023. Huge opportunity for revenue growth.
Boom in Asian tourism as the economy continues to rise and the region becomes more travel friendly and popular with tourists from around the world.
Rising fuel prices, which account for 30% of operating costs in the industry. This could dramatically affect Cathay’s profitability.
Continued de-regulation in the airline industry. Competition from low cost carriers in the US and Europe continues to rise. Low cost carriers are also growing in popularity in Africa and the Middle-East. This could result in loss of revenues and increased price competition in the market which could further depress margins.
Foreign currency fluctuations may affect the company’s profits. The company must ensure that it hedges against any currency risk in the future to maintain profitability.
Labor Costs are higher than the industry average which could have a deep effect on profits in an economic downturn.
Unpredictable, extreme weather could threaten profitability.
Fluctuations in the economy and the threat of terrorism and diseases (Avian Flu). The airline industry is particularly susceptible to world disasters and downturns in the economy.
APPENDIX C: SWOT ANALYSIS CATHAY PACIFIC 2007
APPENDIX D: COMPETITOR ANALYSIS
COMPETITOR # 1 – SINGAPORE AIRLINES (DIRECT COMPETITOR)
Singapore Airlines is a direct competitor of Cathay Pacific. Both companies are based in Asia and cater to a market segment that is willing to pay a premium for excellent service. The following is a brief overview of Singapore Airlines.
SINGAPORE AIRLINES DID NOT DO WELL FINANCIALLY IN 2006 COMPARED TO 2005
The company recorded revenues of approximately $8,233.6 million during the fiscal year ended March 2006, an increase of 11.1% over 2005. The operating profit of the company was approximately $748.8 million during fiscal year 2006, a decrease of 7.9% over 2005. The net profit was approximately $765.7 million in fiscal year 2006, a decrease of 8.3% over 2005.
MARKET SHARE -DEMAND FOR SINGAPORE AIRLINES IS GROWING EVERYWHERE…EXCEPT FOR EUROPE…
Singapore Airlines operates 669 weekly flights to 64 cities in 35 countries. East Asia, SIA’s largest geographical market, accounted for 51.1% of the total revenues in the fiscal year 2006. Revenues from East Asia reached approximately $3,429.1 million in 2006, an increase of 6.5% over 2005.
Europe accounted for 17.3% of the total revenues in the fiscal year 2006. Revenues from Europe reached approximately $1,162.1 million in 2006, a decrease of 0.6% over 2005.
South West Pacific accounted for 14.1% of the total revenues in the fiscal year 2006. Revenues from South West Pacific reached approximately $947.9 million in 2006, an increase of 6.7% over 2005.
Americas accounted for 9.1% of the total revenues in the fiscal year 2006. Revenues from Americas reached approximately $611.8 million in 2006, an increase of 7.8% over 2005.
West Asia and Africa accounted for 8.3% of the total revenues in the fiscal year 2006. Revenues from West Asia and Africa reached approximately $553.3 million in 2006, an increase of 7.5% over 2005.
The company extended the network to Abu Dhabi, Hyderabad, Karachi, Lahore and Moscow. In addition, frequencies were increased to Adelaide, Bangalore, Beijing, Guangzhou, Ho Chi Minh City, Hong Kong, Kolkata, Penang, Perth and Taipei.
SINGAPORE’S TOURISM WING
Tradewinds Tours & Travel Private, a wholly owned subsidiary of SilkAir is licensed as a tour operator. It provides inbound and outbound package tours, hotel accommodation, organize conventions.
CREDIT CARD AND ALLIANCE PARTNERSHIPS
IN 2004, SIA AND THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED (HSBC) ENTERED A REGIONAL PARTNERSHIP THAT ENABLED HSBC’S CREDIT CARDHOLDERS IN CERTAIN ASIAN COUNTRIES TO CONVERT THEIR CREDIT CARD REWARDS POINTS TO SIA’S KRISFLYER FREQUENT FLYER MILES. ADDITIONALLY, SINGAPORE AIRLINES IS A MEMBER OF STAR ALLIANCE, AN INTERNATIONAL AIRLINE ALLIANCE COMPRISED OF 18 INTERNATIONAL CARRIERS. CODESHARE PARTNERS INCLUDE: SILKAIR, VIRGIN ATLANTIC AIRWAYS, MALAYSIAN AIRLINES, ROYAL BRUNEI AIRLINES.
WITH AN OPEN SKY POLICY BEING DISCUSSED IN THE INDIAN CABINET THE COMPANY COULD LOOK TO A RE-AWAKENING OF ITS RELATIONSHIP WITH TATA, ITS INDIAN STRATEGIC ALLIANCE PARTNER. THE OPPORTUNITY WOULD ALLOW THE COMPANY TO INCREASE THE TRAFFIC TO THE INDIAN SUB-CONTINENT, WHICH WOULD POSITIVELY AFFECT ITS REVENUES. SINGAPORE AIRLINES CURRENTLY HAS A CODESHARE AGREEMENT WITH AIR INDIA.
Singapore Airlines will be the first to fly the new Airbus A380. Around the same time, the company will also receive the first of new Boeing 777-300ERs. SIA has a youngest fleet of aircrafts. The company operates 90 passenger aircraft with an average age of its fleet is about six years. The company has also recently taken the delivery of its 61st Boeing 777 aircraft, making the airline the possessor of the youngest fleet of aircrafts. A young fleet of aircrafts is of immense importance in the airline industry as it keeps maintenance costs low in addition to decreasing security issues related to the performance of the fleet.
FUEL COSTS ARE A LONG-TERM PROBLEM
The Group’s expenditure on fuel was over $4.2 billion in 2005-06: 35% of total expenditure. This relates to an increase of about $1.5 billion over the previous year. Before that, the average expenditure on fuel was about $1.8 billion a year for three years.
Little can be done by the airline industry about fuel costs. One option for Singapore airlines is to strive for savings at the margin, through improvements in flying practices, pursuit of new and more direct flying routes, extension of weight reduction programs to keep aircraft light, and devising more cost-effective hedging programs. The company will also continue the policy of maintaining a young fleet of aircraft, to benefit from the latest technology in the area of fuel consumption.
All facts taken from Marketline (Datamonitor)
COMPETITOR ANALYSIS – AIR INDIA
It is necessary to conduct a competitor analysis involving Air India since analysts predict that India will become one of the largest market for air travel within the near future. India, alongside China, is projected to become a major economic power in the world therefore Cathay Pacific must be diligent in capturing the Indian market early in order to capitalize several years down the road.
Air India is national flag carrier of India, with its headquarters located at Mumbai, India. It offers wide range of services, including passenger transportation, cargo, ground service, engine overhaul services, etc. Currently, Air India and its subsidiary have 47 aircrafts in total.
Air India merged with Indian Airlines, using the name “Air India”. In 2004, the airline expanded the business to cover more market to low-cost area by starting Air India Express. Currently, the airline is considering merging with Jet Airlines, another Indian carrier, in order to increase market share of overall Indian airlines and compete in global market. In addition, Air India is speculating to join Star Alliance, the biggest alliance, to expand its network.
At this moment, Air India flies to 95 destinations around the world.
Africa: Kenya, Tanzania
Asia: China (HK, Shanghai), Japan (Osaka, Tokyo), South Korea
South Asia: Bangladesh, India, Pakistan
Southeast Asia: Indonesia, Malaysia, Singapore, Thailand
Southwest Asia: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates
Europe: France, Germany, UK
America: Canada (Toronto), US (Chicago, LA, NY, Newark)
It has non-stop flights between India and London, India and New York, and also has plans to expand more non-stop flights to other parts of US such as San Francisco, Washington DC.
Air India has several codeshare agreement with other airlines, such as Air France, Air Mauritius, Aeroflot, Emirates, Kuwait Airways, Lufthansa, Malaysia Airlines, Singapore Airlines, Swiss, Thai Airways, Turkish Airlines. These codeshare agreements allow the airline to expand its network to cover several parts of the world.
Air India has three service classes: first class, executive class and economy class. The airline has changed seats for business class and economy class on 747 aircraft. All classes have personal TV, including two TVs in walkway and projector screen on the wall. It also has flat bed seat for first class passengers. Meal on board was awarded as finest in flight cuisine in 1994 and 2003. There are many choices of meals for passengers.
APPENDIX E – RECOMMENDATIONS TO COMBAT NEW COMPETITION FROM CHINA
As mentioned earlier, analysts predict Chinese travellers to make up the bulk of new travellers as a result of the country’s booming economy. As a result, it can be assumed that new players in the airline industry will emerge and join the current fray. In anticipation of this event, the following recommendations are made to Cathay Pacific. These recommendations seek to allow the airliner to protect its current customer base while attracting new travellers as well.
As many Chinese flyers will be flying for the first time in their lives, Cathay Pacific can target this segment through promotion and advertisement. Cathay can promote the experience of flying as a rite of passage – something important that should be remembered. Since these first timers maybe anxious, Cathay Pacific can run a series of programs/commercials on “How to fly” – to educate and attract potential travellers.
Cathay Pacific must also hire more Mainland Chinese workers to cater to the increasing number of Mandarin travellers.
Cathay can take out promotional pricing during peak holiday seasons in China (Golden Week). The potential market for offering low cost, short-haul flights is vast. If Cathay can deliver good value and good experience, it can present itself to be a very aggressive substitute to railway transportation (the current preference of Mainland Chinese travellers)
To diversify passenger’s culinary tastes, Cathay can offer cuisines inspired by different Chinese provinces
In addition, Cathay Pacific can hold culturally driven promotional pricing such as $888, etc.
Cathay Pacific can capitalize in the proximity between Hong Kong and Mainland China and the amount of business between the two regions. As a result, the company can offer “All you can travel” packages, which are restricted to certain locations between the two regions.
Frequent HK – China travelling – all you can travel (restricted locations)
Promotional pricing $888, etc.
Buyers (Low – Med)
Bargaining power of buyers is low to medium. Although there are many different airlines to choose from, passengers are restricted by time of day and the routes of each airline.
Frequent flyer points have made switching costs relatively high in some cases.
Forward integration is impossible due to barriers of entry.
Bargaining power of suppliers is med-high. Supply of aircrafts is dominated by two companies, Boeing and Airbus. The limited number of players lends high power in the industry to both of these companies.
The power of supplier such as caterers, and launderers are low, because airlines can easily integrate backwards to provide these services.
Substitute Products (Low)
For regional airlines the threat of substitutes is high, because the distance is shorter. For international carriers due to the speed, time and cost savings the threat of substitutes is very low.
Barriers to Entry (High)
Barriers to entry are high, as the industry demands high capital start up costs and government regulation awards regulates the routes and prices for the airline industry.
Economies of scale are beneficial to achieve lower prices when purchasing fuel and aircrafts.
Frequent flier points and brand loyalty is another barrier to entry for new firms.
Firm Rivalry (High)
Rivalry is high amongst firms.
Differentiation is increasingly difficult, especially with the emergence of low cost carriers.
High competition leads to price competition which has kept profitability low in the industry.
Cathay Pacific tumbles 55% in year AIRLINES HONG KONG CARRIER WARNS OF TOUGH 1998 AS ASIAN DOWNTURN REDUCES PASSENGER LOADS:; [London edition], Ridding, John. Financial Times. London (UK): Mar 12, 1998. pg. 37
Jacob, Rahul. Financial Times. London (UK): Aug 9, 2001. ; p. 25
Mecham, Dennis (2003)
EPIDEMICS & ECONOMICS A few weeks ago, Asia’s leaders thought SARS would pass. Now, they are settling in for a long, bitter struggle. At risk is the dynamic economic model that made the region such a production powerhouse. Business Week. New York: Apr 28, 2003. ; p. 44
Fuel price will ‘hurt’ Cathay AIRLINES:; [LONDON 1ST EDITION], JOE LEAHY and ENID TSUI. Financial Times. London (UK): Aug 12, 2004. ; p. 25
Datamonitor on Cathay Pacific
Datamonitor, Asia-Pacific Airline Industry