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Settlement of the power conflict between top management of Cathay and pilots Essay

1. INTRODUCTION

1.1 Background Information

Since 1993, Cathay Pacific Airways Limited (“Cathay”) has experienced the threat of industrial actions initiated by unions. On 1 July 2001, another industrial action was commenced, resulted in a three-month chaos in Hong Kong’s tourist industry.

Being the representatives of the pilots of Cathay, Mr Nigel Demery, the President of Hong Kong Aircrew Officers’ Association (“HKAOA”), informed Cathay’s top management that the pilots refused to accept Cathay’s new pay proposal. Members of the HKAOA have decided to commence industrial actions to force Cathay’s top management to accept their demand.

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The event was followed by a sharp increase of pilots reporting sick leaves. Unlike previous industrial actions, Cathay’s top management held firm to their original standpoint and dismissed 52 pilots and chartered additional aircraft to moderate the problem of pilots reporting sick and absence from work. However, the incident did not come to an end. On the contrary, the problem escalated when HKAOA reacted by announcing support of the sacked pilots by taking legal actions against Cathay for the unfair dismissal.

The pilots’ industrial action caused a financial loss of US$12.8 million to Cathay each day. In fact, this was not the first time for the pilots to use industrial actions as a mean to press the top management in accepting their demands. Three industrial actions have been taken place since 1999. These frequent industrial actions have not only caused financial loss, but also harmed the company’s overall reputation. Table 1 provides a summary of the industrial actions that has been taken place since 1993.

2. OBJECTIVES

2.1 Objectives

The chief objectives of this report include:

> Settlement of the power conflict between top management of Cathay and pilots

> Moderate the power of pilots in order to avoid or reduce industrial actions in future

2.2 Analysis of the Existing positions of both parties

Luthans (1992, p.426) said that formal organizations are highly political and power is the name of the game. Managers and non-managers in an organization often manipulate power to accomplish goals. Cathay’s top management holds legitimate, reward and coercive power to perform various specific tasks and decisions. Legitimating refers to an upward appeal, which adds weight to an influence attempt by showing support from senior managers, rules or procedures.1 On the other hand, coercive power means the using of threats, intimidation and coercion to gain compliance.2

In the recent industrial action, the top management tried to utilize their legitimate and coercive power to gain pilots’ compliance. Apart from the effectiveness of this position-based power strategy, the use of coercive power always causes negative consequences such as weakening relationships.

In contrast, the pilots hold strong expert power. Pilots have high-value expertise. Referring to the strategic contingencies model3 which focused on individual power and how it is obtained, the subunits that are most central to the flow of work in an organization acquires power. The major revenue of Cathay comes from passenger and cargo services. It is impossible for an aircraft to operate without a pilot. The past industrial actions showed the strength of pilots’ expert power. Thus, the power conflict between top management and pilots must be settled in the long run.

Besides, Cathay’s pilots manipulated the coalition strategy to accomplish their goals. HKAOA is a typical coalition of pilots. At present, Cathay employs 1,500 pilots, more than 75% of the pilots are members of the HKAOA. Thus, each industrial action evoked by HKAOA has caused a significant impact on Cathay’s business and reputation.

Given the fact that the majority of the general public was of the view that the pilots have been over-demanding and created much chaos to the tourist industry in Hong Kong (According to the interview results as well as from the media), it is a good opportunity for Cathay to take advantage of the situation and to moderate the power of the unions.

3. SOURCE OF INFORMATION

3.1 Source of Information

This report is based on both primary and secondary information from various means. This includes:-

? Interview with representatives of both Cathay and the HKAOA.

? Annual & Interim Reports of Cathay

? Newspapers

? Magazines and Journals

? Cathay Pacific Airways’ Official Web Site

4. FINDINGS

Our findings are mainly based on the following sources:-

* Interview Findings

* Financial data published in the Next Magazine as showed at Tables 1-5.

* Review of Cathay’s existing policies and procedures as showed in Appendix 1.

4.1 Interview Findings

4.1.1 Interviews with HKAOA (Interviewee: Mr. Spurrier M.)

? According to HKAOA, Cathay was intimidated by aggressive interviews by managers about delays;

? For other managers – or employees acting on Cathay’s instructions – had followed pilots into the cockpit to watch them doing flight checks even though they did not possess the required qualifications to know what was necessary, as such, prosecutions for those people may be possible under the safety law of Air Navigation Ordinance as intimidation risked distracting pilots from their jobs;

? The pay demand was reasonable to Cathay;

4.1.2. Interviews with Cathay Management (Interviewee: Mr. Tang)

? Many crews were being put under extreme pressure to sign the HKAOA’s lawyer’s letter;

? Cathay’s net recurring profits has already been forecasted to fall by 20% to 25% in 2001 due to the global economic downturn;

? The pay demand of HKAOA was unacceptable;

4.1.3. Interviews with the Human Resources Department (Interviewee: Mr. Chau)

? Employees remuneration represented about 25% of Cathay’s ‘Total Operating Expenses’;

4.1.4. Interviews with a Cathay passengers (Interviewee: Mr. Lee)

? The respondent described the pilots’ pay demand as unreasonable while the economy was still recovering;

? He complained that the pilots’ threat of industrial action had thrown his holiday plans into chaos and the pilots’ union was selfish especially during peak travel seasons;

4.1.5. Interview with Tourists’ Right Association

? They said that industrial actions would not gain the support of the general public and would only injure Hong Kong’s reputation and tourism industry;

? They claimed with anger that the pilots earned well in Hong Kong, but tried to endanger Hong Kong tourism industry;

4.1.6. Media Comments from the Next Magazine, Hong Kong

? Analysts said it would be hard for the pilots to pressure Cathay into roistering changes because of the financial implications;

5. SWOT ANALYSIS OF CATHAY

5.1 SWOT Analysis

A SWOT analysis may help management to identify the company’s strengths and weaknesses against its major competitors in the industry and to explore the opportunities and threats for effective strategic planning purposes. The analysis has been summarized from our findings and observations by various means as mentioned in Section 4 of this report. The SWOT analysis is mainly based on our observation and analysis on the financial information provided in Cathay’s annual report and from that of the Next Magazine.

5.1.1 Strengths

? Strong management team such as the director of corporate development, Tony Tyler, has implemented tough policy;

? Code share agreements with a number of other international airlines to provide greater flexibility such as British Airways, Japan Airlines, Malaysia Airlines, South African Airways. Swissair, THY Turkish Airlines;

? With the decisions made to cut schedules and bring in charter aircrafts, the level of flight disruptions and delays have been considerably reduced, and the effect on sickness levels have to reduce;

? With the prevention from government regarding overseas airlines in carrying passengers in Hong Kong to other destinations, Cathay became a ‘price maker’;

5.1.2. Weaknesses

? Existence of ‘Tenure’ employment contracts strengthen pilots’ power;

? Contracts are issued to pilots according to HKAOA’s instructions, for example, all newly recruited pilots must start from the entry post of a Junior Pilot regardless of his/her previous experience;

? Long history of tolerance to pilots for their industrial actions created wrong perception to pilots that industrial action was an effective way in request for a demand;

? Lack of local pilots as substitutes in time of strike;

? High cost of training a Cadet Pilot (approximately US$128K);

? Huge amount of financial interest of about US$1.3 million a day and labor cost of US$2 million per day;

5.1.3. Opportunities

? Prolonged industrial action created unnecessary anxiety to passengers and the public, resulting in the loss of confidence in pilots and its union;

? Insufficient coalition between the union and pilots as not all the pilots are willing to participate in the industrial actions;

? As pilots were sacked, Cathay could recruit pilots at a lower cost;

? Intensive trainings were held in an Adelaide aviation training school;

? Only a 3-year contract for new recruitment could be signed;

? More better experienced pilots can be recruited with closure of airlines subsequent to the 911 tragedy in America.

5.1.4. Threats

? The corporate image was spoiled by the HKAOA strike;

? As flights were delayed or suspended, loyal customers have been lost, resulted in loss of competitiveness;

? Aviation market has been opened up for competition;

? Owing to the pilots’ expertise, substitutes would be extremely difficult in the case of sickness;

? The pilots are forced to sign a letter drafted by the HKAOA’s lawyers to Cathay and were intimidated by having their names as non-signers on its website when they refused to sign;

? The union’s source of income was supported by the membership fee from 80% of the 1,500 pilots at 1% of their income and was proposed to increase the contribution up to 5%;

6. PROBLEM-SHOOTING AND RECOMMENTDATIONS

6.1 Problems & Difficulties

? The industrial action has been too powerful for the company to deal with. This was evidenced in the prolonged action that has caused substantial damage to the tourism industry;

? High level of dependency on foreign pilots to carry their passengers;

? The HKAOA vowed no resolution to the Cathay dispute unless all the pilots who have been unfairly dismissed were reinstated.

6.2 Recommendations and Strategies

Our recommendations are made to achieve 3 chief objectives:-

i) Strengthen the power of the company

ii) Weaken the power of the pilots

iii) Building-up relations with the pilots

6.2.1 Strengthen the power of the company

In order to strengthen the power of Cathay, “playing games” will be a good tactic. Authority game can be used to resist the power of the pilot. History indicated that Cathay lost in 3 industrial actions (from 1993 to 2000), as the company did not resist the power of the other party. Hence, the company original policy should be strictly adhered in order to win the game. In July 2001, Cathay proved that the “Authority Game” tactic was feasible with its firm adherence to its proposed pay, benefits and roistering package with up to 9% increment (Table 2 showed the salary package as proposed by Cathay). On the other hand, Cathay has publicly refused to consider negotiating with the pilots again unless they withdrew their industrial action.

Besides, Cathay may consider using the coalition-building game to form alliance with other airlines, preferably nearby airlines. Coalition game is another power-base game to increase power through forming of alliances or coalitions with groups within the subunits of the company or groups outside the organization.4 Cathay can then enjoy immediate assistance by chartering additional aircrafts and rebook passengers on other aligned airlines. This increases the flexibility for Cathay even if HKAOA imposes further destructive actions. Moreover, all airlines should agree not to hire bad-listed pilots.

Furthermore, Cathay can inform outsiders about the injustice and irresponsible actions of pilots via a whistle-blowing tactic. Firstly, they should let the public know the prospect and earnings of a qualified pilot, i.e. create a high-income earner image for the pilots (Table 3), during recruitment of cadet pilots. In general, the general public will not accept high-income earners taking industrial actions to fight for salary increment. Secondly, they may let the media know that more than 10,000 passengers were adversely affected by the industrial action in July 2001. Besides, joint efforts with the Government are required to show the economic damage to Hong Kong during the industrial action.

6.2.2. Weaken the power of the pilots

Political influences are a good way to conform the pilots to meet organizational value. This can be done by position-based influence strategies through pressure and threats in return for compliance. Besides, coercive power depends on fear.

During the industrial action in July 2001, 52 pilots were sacked without any reasons. The action tended to show the firm position of Cathay and intimidated the pilots to accept the offer. Since Cathay could afford to pay sacked pilots a “better than most” package, as the Hong Kong labor laws offered the company with “certain flexibility”. This implies that further dismissal of pilots is possible.

The enforcement of pressure and threat can be achieved by the issuance of written statement warning that lateness will not be tolerated as this would breach of the employment contracts, which may in turn lead to dismissal. Moreover, the announcement of cutting foreign-based pilots is a feasible alternative.

Another way is to abolish the “tenure employment” so as to reduce pilots’ employment security. The new employment proposal is a three-year contract for newly employed pilots. Renewal of contract is subject to performance, i.e. diluting the portion of permanent pilots.

Substitutability refers to the ability to engage other pilots to perform the job of the existing pilots.5 This implies that if Cathay has or can obtain alternative sources of pilots to perform the job done by the existing pilots, the pilots’ union can be diminished. Therefore, Cathay can consider hiring pilots from other airlines, who have been sacked during the redundancy programs, e.g. America Airline, Continental Airlines, etc.

The reduction in the dependency on foreign pilots becomes the most important aspect of power which is a function of dependency. This is because the greater Cathay’s dependency on the foreign pilots, the greater the pilot unions’ power has over Cathay. It can be observed that in August 2001, 10 local pilots have completed their Cadet Pilot Programme at BAE SYSTEMS Flight Training in Adelaide, South Australia. The 10 graduates brought the number of cadet pilots who have graduated from Cathay Pacific’s training programme to almost 150 since its first launch in 1988.

Cathay’s investment brings long-term commitment to develop Hong Kong aviation industries as well as reducing the dependency of the majority of the 90% overseas pilots. Obviously, foreign pilots are the source of power. Rule of thumb, if Cathay can have its own local pilot team, Cathay will not reply to hire the pilots from overseas. The sources of pilot unions will be diluted. Therefore, it is very important to speed-up the training of Cathay’s own local pilots team.

6.2.3 Develop relations with the pilots

Building up better relationship with pilots is a long-term solution. This can be achieved through interpersonal influence. With the application of position-based influence strategies, Cathay can offer rewards or benefits in exchange/return for pilots’ compliance. Rewards can be anything that another person values which is the opposite of coercive power. In Cathay’s case, rewards can be monetary rewards, fringe benefits, favorable promotion prospects, flexible shifts or flight territories. If the company can give someone something of positive value or remove something of negative value, the company will have reward power over that person.

Emphasis should be made on the fact that Cathay’s pilots are still the most expensive pilots when comparing to other American and European Airlines. This has been achieved during all public announcement and negotiation (as shown in Table 4 and Table 5).

Motivating the pilots is crucial to Cathay’s long-term success. It is important to build up common goals and values to obtain support or commitment with personal-centered strategies. These are strategies that rely on an individual’s characteristics and abilities to access expert and referent power bases, or inspirational appeals and consultation.6 One suggestion is that the pilot ‘s remuneration package should split into basic salary and performance bonus, which relates to the company ‘s annual profit.

The outcome, consensus or agreement can be achieved through Normalization. Normalization influence can gradually change the opinions and the behaviour of pilots by reciprocal process and informational influence to achieve conformity.7 In fact, coercive and reward powers are counterparts of each other. If Cathay can remove the Unions’ powerful/dominant value from pilots or inflict negative values upon them, Cathay will have coercive power over them.

As mentioned earlier, legitimate appeal can add weight over influence attempt by showing support of the senior management. Cathay may provide indication to the general public that the pilots are under intolerable pressure from Unions. First, it can be done through media to pronounce the number of calls that management had received complaints from pilots on managing Unions intimidation. Alternatively, it will be a good tactic for management to show care and understanding of pilots’ difficulties and to encourage them to follow the instructions from HKAOA by signing the lawyer’s letters back to Cathay.

Lastly, ethical success will confront ethical dilemmas by the referent-powered management, like Mr. Tony Tyler. It is important that emphasis should be stress on Cathay’s pilots, Unions and the general public that the current package offered by Cathay is the best. The termination of industrial action is for the good benefits of pilots, passengers and the public instead of Cathay itself, which meets the utilitarian outcome. The packages offered allow the pilots an option to choose for their terms of package. The emphasis is on fairness, freedom of choice and individual rights. No strict rules for the pilots. In return, the dismissal of industrial action is expected from pilots. Message may be made to the general public with emphasis that Cathay has confidence over the pilots’ professionalism and legitimate power. They will be responsible for their actions. In addition, Cathay may show appreciation for those pilots who have filled in for their absent colleagues.

7. SUMMARY

7.1 Summary

Since 1999, Cathay encountered threat from industrial strikes every few years (Table 1). Cathay compromised with HKAOA in the previous three strikes and gave in to the HKAOA industrial actions. This year, the fourth industrial action organized by HKAOA with an aim to fight for higher pilots salary increment and shorter working hours have caused Cathay loss of over millions of profits, not to mention the damage on its reputation and the loss of significant market share to major competitors. (Appendix 1 provides a summary of the vision of Cathay and its traffic figures from June to November 2001)

This report has examined the current power between Cathay and HKAOA and accordingly recommended Cathay’s management to take proper actions to counter HKAOA’s industrial action and to end HKAOA’s threats in future.

We have interviewed both the Cathay’s management and HKAOA’s representative and gathered necessary information from other public means. We then evaluated these information to perform a SWOT analysis and based on it defined the problems facing by Cathay in its current situation.

In general, Cathay is facing a powerful union, which has a very strong bargaining power due to the pilots’ expertise power. Hence, we have recommended Cathay to deploy political games to strengthen the company’s power and to weaken the power of the pilots. In addition, we have recommended management to build up a long-term co-operative relationship with the pilots after the power struggle. By doing so, we trust Cathay can end this industry actions in a reasonable period and to prevent the same problem happen again in future.

8. REFERENCE & BIBIOGRAPHY

8.1 REFERENCE

Interviewee: Mr. Chau W., Director of Personnel, Cathay Pacific Airways Ltd.

Interviewee: Mr. Lee, passenger of Cathay Pacific Airways Ltd.

Interviewee: Mr. Spurrier M., Image Director of HKAOA.

Interviewee: Mr. Tang A., Director of Corporation Planning, Cathay Pacific Airways Ltd.

Luthans F. (1992). Organization Behavior 6th ed. Singapore: McGraw-Hill.

8.2 BIBIOGRAPHY

Annual Report 2001, Cathay Pacific Airways Limited

Botton V. & Agencies, “Cathay chaos may start today” South China Morning Post, 3rd July 2001.

Botton V., “Pilots put battle plan into action” South China Morning Post, 4th July 2001.

Botton V. & Agencies, “Cathay may ground all flights” South China Morning Post, 22 September 2001.

Botton V., “Cathay warns it may close foreign bases”, South China Morning Post, 28 September 2001.

Botton V., “Secret Cathay peace talks fail” South China Morning Post, 29 September 2001.

Bowman J., “Cathay turns screw on pilots” South China Morning Post, 30th June 2001.

Bowman J., “Union denied access to Cathay mail boxes” South China Morning Post, 3rd July 2001.

Cheng A., “Narrow nationalistic views clouding the Cathay issue” South China Morning Post, 19th July 2001.

Cheung C.F., “Thousand stranded at airport” South China Morning Post, 8th July 2001

Cheung J., “Dispute may open extra routes” South China Morning Post, 8th July 2001

Interim Report 2001, Cathay Pacific Airways Limited

Ivancevich, J., Olekalns, M. & Matheson, M. 2000, Organizational Behavior and Management, 1st Aust. Ed, Irwin, Sydney

Lai C.Y., “Cathay Strike”, Next Magazine, 28th June, 2001.

Lai C.Y., “Cathay vs HKAOA” Next Magazine, 12th July,2001.

Lo J., “Rostering and overtime remain key issue in Cathay negotiation” South China Morning Post, 4th July 2001.

Luthans, F., 1992, Organizational Behavior, McGraw-Hill, Singapore.

Mintzberg H., 1983, Power in and around Organizations, Prentice-Hall, N.J., USA.

Mullins, L., 1989, Management and Organizational Behavior, Pitman, Great Britain

Pfeffer J., 1981, Power in Organizations, Pitman Publishing, M.A. USA.

Porter L.W., Lawler E.E., and Hackman J.R. 1975, Behavior in Organizations, McGraw-Hill, N.Y., USA.

Kotter P. 1987, The Empowered Manager, Jossey-Bass, San Francisco, USA.

Reuters, “Airline job cuts hit Europe” South China Morning Post, 21 September 2001

Robbins S. P., 1994, Organizational behavior, 4th ed., Prentice Hall, N.J, USA.

See http://www.cathaypacific.com

Tichy N.M., 1986, The Transformational Leader, N.Y., USA.

1Ivancevich J, Olekalns M, Matteson M (2000), Organizational Behavior and Management, 1st Aust ed., McGraw-Hill, pg. 401.

2 Ibid.

3 Ibid, pg 393.

4.Ivancevich J, Olekalns M, Matteson M (2000), Organizational Behavior and Management , 1st Aust ed. McGraw Hill, pg.403.

5 Ivancevich J, Olekalns M, Matteson M (2000), Organizational Behavior and Management , 1st Aust ed. McGraw Hill, pg.395.

6 Ivancevich J, Olekalns M, Matteson M (2000), Organizational Behavior and Management , 1st Aust ed. McGraw Hill, pg.401.

7 Ivancevich J, Olekalns M, Matteson M (2000), Organizational Behavior and Management , 1st Aust ed. McGraw Hill, pg.397.

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