Cathay Pacific Airways: China or the World? Doreen P.

Estalar

Cathay Pacific Airways: China or the World

Company Background

1946. Cathay Pacific was founded by Roy C. Farell and Sydney de Kantzow 1948. Cathay was incorporated, and the Swire Group became its largest shareholder 1986. Dragonair was founded by K. P. Chao to capitalize the great opportunity in China market. 1987. China International Trust and Investment Corporation Hong Kong Limited (CITIC HK) became the Cathays second largest shareholder. CITIC HK was a leading red chip company (the popular terminology for a company with strong ties to China) controlled by Beijings China International Trust and Investment Corporation. 1990. Cathay and Swire acquired 30% and 5% respectively of Dragonairs issued capital. Cathay transferred some senior executives, as part of management agreement, and China routes to Dragonair. The first half of 1990s was great for Dragonair, in contrast to Cathay and the global airline industry. It established itself as the preferred carrier for passengers traveling to and from China. 1992. Dragonairs shareholders were CITIC Pacific (46.15%), Cathay (30%), Swire Pacific (13.16%), and the Chao family (5.57%). o The China National Aviation Corporation (CNAC), the commercial arm of the regulatory Civil Aviation Administration of China, had established CNAC HK to act as its commercial vehicle in Hong Kong.
o

1995. March. CNAC announced that it had applied for licenses with a new airline company to fly between China and Hong Kong, and Hong Kong and Taiwan (a very profitable route for Cathay). o September. CITIC reduced its holdings in Cathay from 12.5% to 10%.
o

1996. The following shareholder changes were occurred: o CITIC Pacific increased its holdings in Cathay to 25% o Swire Pacifics was diluted from 52.6% to 43.9%. o Dragonairs stakeholders: CNAC group 35.86% CITIC Pacific 28.49% Cathay Pacific 17.79% Swire Pacific 7.71%
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Cathay Pacific Airways: China or the World? Doreen P. Estalar

Chao family 5.02% Shortly after the deal, Dragonairs right to fly in China was increased.

1999. Cathay together with American Airlines, British Airways, and Qantas formed strategic alliance named Oneworld. 2001 o Shareholders status CITIC Pacific held 25.60% in Cathay and 28.5% in Dragonair Cathay held 19% in Dragonair Swire held 45.60% in Cathay and 7.70% in Dragonair CNAC group held 43.30% in Dragonair. o Market Share: Dragonair in China: 35.59% (exhibit 1) Cathay outside China: 38.73% (exhibit 2) o Economic turndown. Cathays traffic had already been affected by the economic slowdown after the September 11, 2001 attack.

I.

Problem: What strategy is the best for Cathay Pacific Airways to develop the mainland market? Objective:
a. Long-term: To be the worlds best airline.

II.

b. Short-term: To penetrate the lucrative Chinese mainland market III. Areas of Consideration a. Strong alliance with CNAC Pros: Smooth operation in China Cons: Cathay might become too much dependent on CNAC b. Reliance on Dragonair Pros: Profitability will also increase Cons: The individuality might be deteriorated. Also, it might lose its brand image as the Heart of Asia c. Invite more airlines in their alliance. Pros: Can easily penetrate the world Cons: Cathay might cannibalize its own market share

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Cathay Pacific Airways: China or the World? Doreen P. Estalar

IV.

SWOT Analysis
a. STRENGTHS

i. Resources. By the mid-1990s, it had a fleet of aircraft that were among the youngest in the world, while its replacement program involved orders and options for US$9 billion in new aircraft. ii. It has a good relationship with key officials in China which is helpful in the penetration of China market. iii. 2001. It provides scheduled passenger and cargo services to 50 destinations around the world. Also, Cathay was employing over 14,700 people in 30 countries and territories around the world, which helped position the carrier as the Heart of Asia. The airline carrier owned 7 aircraft and leased 62 more, while its average passenger fleet was 5.9 years, amongst the lowest of any major airline. iv. It is under a strong strategic alliance which has the following benefits: revenue generation, protection and feed, and savings from joint purchasing and shared airport and city facilities. b. WEAKNESSES
i. 2002. Its 2001 net profit fell 87% from the preceding year, from

$645 million to $84.7 million only. c. OPPORTUNITIES i. China Market 1. Theres a rapid growth in economic activities which led to great demand for air travel throughout China. The outbound travel potential of 1.25 billion people and several hundred thousand businessmen presented a huge potential windfall for the industry. 2. Apart from passenger service, the mainland is also expected to become more important on the cargo side. ii. Global Opportunities 1. Airline industries experts forecasted that by 2020, global airlines would purchase 16,000 aircraft worth US$1,200 billion. It was estimated that infrastructure providers, airports and air traffic services, around the world spend US$3,500 billion to the world economy or 12% of the total. More than 190 million jobs were generated by the global aviation industry or 8% of the world total. Capital investment for travel and tourism was at US$733 billion a year, more than 11% of the world total.

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Cathay Pacific Airways: China or the World? Doreen P. Estalar

d. THREATS i. Competition. 1. With the Chinese takeover, Chinese airline operators were likely to move into Hong Kong to compete head-on with Cathay. 2. Other airlines joined the Asia Mile Travel Reward Programme, a loyalty program offered by Cathay.
ii. Governmental Regulations. The Civil Aviation Administration of

China had gradually decentralized the civil aviation rights to established regional airlines in order to stimulate air travel. In addition to Air China, the mainlands flagship carrier, new airlines included China Eastern (Shanghai based), China Southern (in Guangzhou), and China Northwest (based in Xian).
iii. Economic downturn. Cathays operations were greatly affected by

the September 11, 2001 bombing, to the point that it was forced to cut back several routes. V. Alternative Courses of Actions
a. Rely on Dragonair to penetrate the China

Advantages i. Dragonair can become a feeder airline for Cathay which can help the latter to penetrate the China market.
ii. Cost reduction. The Cathays Pacific key managers can find ways

to combine elements of the two carriers operations, while working to keep morale intact at Dragonair House. iii. Common ownership will create opportunities for growth and expansion, thus creating more job and career opportunities over the longer term. The enlarged company will, of course, maintain the rigorous standards of productivity, cost management and efficiencies that have underpinned Cathay Pacifics remarkable success in the past. iv. Cathay Pacific and Dragonairs combined networks and capabilities have the potential to deliver more destinations, greater travel choice, enhanced convenience and, therefore, better value for its customers.

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Cathay Pacific Airways: China or the World? Doreen P. Estalar v. Cathay Pacifics ownership of Dragonair can create a company

able to fully exploit the dual strengths of both airlines: Cathay Pacific as a full-service global network carrier and Dragonair as regional airline with predominantly mid-size short-haul fleet and established network focused on the Chinese Mainland and some secondary regional destinations. The seamless integration of both airlines operations will generate hitherto unobtainable opportunities for Cathay Pacific to increase efficiency, create new and stronger streams of revenue, expand both its network and market share and further strengthen Hong Kongs strategic position as a global aviation hub and gateway to the Chinese Mainland. Disadvantages vi. Might be restricted by the government to have some destinations in China which might affects the Cathay objective of growth. CNAC could promulgate rulings that favoured itself while penalizing Cathay, or even rescind its primary landing slots in the new Hong Kong airport.
b. Develop alliances with CNAC

Advantages i. Cathay can still enjoy the benefits it has in the ownership of Dragonair while having a strong alliance with CNAC. ii. Theres a greater opportunity for Cathay for expansion as it develops strong alliance with CNAC. The latter might grant the former the additional routes in China market. iii. Cathay can take advantage of partners local market knowledge and working relationships with key government officials in China. It is very important to get working relationship with local government officials Disadvantages iv. Cathay might cannibalize its own market share while having a strong alliance with CNAC. v. Theres a possibility for Cathay of losing its identity and individuality. c. Try to go it alone (Cathay Pacific Airways) Advantages i. All the profit will be enjoyed by Cathay alone. Disadvantages

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Cathay Pacific Airways: China or the World? Doreen P. Estalar ii. Cathay might face long-term growth constraints if it has no strong

ties with the Chinese.

iii. It might take time for Cathay to have a strong presence in China. iv. Costly. It might cost Cathay a huge amount of money in building its

presence in China. v. Might be restricted by the government to have some destinations in China which might affects the Cathay objective of growth. CNAC could promulgate rulings that favoured itself while penalizing Cathay, or even rescind its primary landing slots in the new Hong Kong airport. (same in alternative course #1)
VI.

Recommendation. It would be best for Cathay to develop alliance with CNAC, alternative course of action #2. Having an alliance would help Cathay achieve its objectives, to penetrate the lucrative Chinese market. However, it must develop strategies that would overcome the disadvantages of having an alliance. Action Plan a. Maintain a good working relationship with partners. b. Increase the capacity through expansion of frequencies and introduction of new destinations. c. Ensure that quality and brand are not compromised and the service proposition to the customer remains strong d. Continuous improvement of promotional strategies that would attract a lot of passengers without affecting its profitability. e. Improve the brand image via social media means like Face book, Twitter, Flicker and YouTube. f. Make use of the technology.

VII.

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