Hong Kong Local Airline Industry
Cathay Pacific
Cathay Pacific is an international airline servicing over 90 destinations and carrying over 15 million passengers each year. Cathay Pacific Airways, based in Hong Kong offers scheduled cargo passenger services to over 90 destinations throughout the globe. Cathay Pacific is deeply committed to Hong Kong, where the company was founded in 1946, and continues to make substantial investments to develop Hong Kong’ aviation industry.
Oasis Hong Kong
Oasis Hong Kong started its operations if October 2006. The Hong Kong-based airline aims to make frequent long haul travel accessible to everyone. Oasis provides its passengers with low fares and high standards of comfort and service.
Objective
Hong Kong-based Cathay Pacific Airways, one of the biggest airlines in the region is not exploring the budget airfares’ market and that the emergence of the low-cost carriers does not hurt the business. Cathay Pacific is claiming that they intend to cater to a different market segment. Cathay Pacific believes that the key to the competition is value for money and offering the best services.
Oasis Hong Kong Airlines on the other hand is focusing their attention on budget conscious market. The airline company aims to make air travel available for everyone. Oasis Hong Kong offers budget long haul flights without compromising the quality of service.
Consumer Demand
The Oasis Hong Kong Airlines is using a low-cost strategy to attract its target market. The target market that Oasis wants to attract is the budget conscious passengers who are willing to trade some extra product features for a lower price. These passengers are more satisfied with the basic services that an airline can offer and try to avoid extra expenses caused by added services. Oasis Hong Kong Airlines is catering to a different market segment. The company believes that there is a great demand from business and leisure travelers seeking value fares and direct routes from Hong Kong to major cities around the world. Oasis Hong Kong Airlines offers affordable luxury for smart travelers. The company is committed to making long-haul flights available to more people. The company offers a new choice for the smart passengers who want value for their money.
Cathay Pacific
Cathay Pacific uses Differentiation as its target market positiong strategy. According to (2000), a differentiation strategy is one where wide product ranges and higher quality products are offered for the convenience of customers as well as added services. A differentiation strategy in which a product offering is different forms that of one or more competitors in a way that is valued by the customers.
The emergence of cheap long-haul airlines does not bother Cathay Pacific Airways. The company maintains that they cater to a different market which values service and product features more than price. Cathay Pacific offers quality service and luxurious features and amenities. Interior layout and configuration of the aircraft is one of the considerations of Cathay Pacific’s passengers. Space is considered as the key comfort variable. Another important offering of Cathay Pacific that sets it apart from its competition is its high in-flight service and catering standards. In flight service and catering standards according to (2002), cover the nature and quality of food and beverages provided, the number of cabin staff for each class of cabin, the availability and range of newspapers and magazines, in-flight entertainment and communications, give-aways for passengers as well as for children and so on. Cathay Pacific exerts a great deal of effort to the planning of airline meals and meeting target catering standards. Another competitive advantage of Cathay Pacific is the services offered to passengers on the ground. Cathay Pacific’s super hub at Hong Kong International Airport offers a wide range of services and benefits aimed at making the passengers’ arrival, departure and connections as smooth, convenient and pleasurable as possible.
Other intangible aspects of comfort and source of differentiation that Cathay Pacific is offering are efficiency, helpfulness and friendliness of staff, both the cabin crew in the air and the ground staff at check-in, in the airline lounges and at the boarding gates.
Nature of Competition
The key issue in the nature of competition in the airline industry is whether an airline wants to be a global network carrier or a niche player. A global carrier would aim to provide a worldwide network of routes and destinations. It can do this by linking its own wide route network with that of a handful of alliance partners through their respective hubs to create a truly global system. The alternative is to be a niche carrier. The niche to focus on may be either geographical or a particular type of service (2001).
At present Cathay Pacific is a global carrier while Oasis is focusing on the alternative approach and still remains as a niche player. Hong Kong was one of the most competitive places in the world with 70 airlines serving the state and 4 to 5 airlines serving most of the major routes. Passenger in Hong Kong have a wide variety of choices of airlines, flight schedules and airfares.
Maintaining Cathay Pacific’s Current Price
Since Cathay Pacific caters to a different market segment than Oasis Hong Kong, it is more advisable for Cathay Pacific to maintain its current price rather than lower it. Cathay Pacific uses a differentiation strategy that is difficult to copy by its competitors. Cathay Pacific is renowned for its quality service, top of the line technology and superb added features. The differentiation strategy of Cathay pacific is able to create a loyal market for the airline company. A market that values comfort, luxury, accessibility and unique facilities and services along with Cathay Pacific’s reputation. I think that it will not be an advantage for Cathay pacific to lower its price. The reason why Oasis Hong Kong has a lower price is because it has lower operating costs. If Cathay Pacific opts to lower its price to match Oasis Hong Kong, it must endeavor to lower its operating costs. Cathay Pacific will have to sacrifice their service, facilities and other amenities to reduce its price. It is more advisable if Cathay Pacific maintains its price and at the same time offer promotions and programs that will give discounts and flexible fare to the price sensitive passengers.
Influence of Demand on Costs
There are two aspects of demand, which have impact on costs, namely route traffic density and sector length. The traffic density on a route and the sector length on that route will influence the size and type of aircraft chosen for that route. Aircraft type, and more especially the size of the aircraft, is a key determinant of unit costs. Route traffic density also influences the frequencies which are needed and will thereby affect the annual utilization, that is, the number of hours flown by each aircraft. The higher the utilization the lower the costs. Cathay Pacific has a competitive advantage that is built on its differentiation strategy. If the company chooses to adapt the low-cost strategy that Oasis Hong Kong has, the company would have to give up its objective which is to offer its passengers with superb experience through excellent products and outstanding service. Cathay Pacific’s acquisition of DragonAir last 2006 offered opportunities for the airline to penetrate the mainland market. Perhaps one strategy that Cathay Pacific can use instead of lowering its price is to strengthen its differentiation by establishing customer loyalty. According to Philip Chen, Chief executive of Cathay Pacific, the people at Cathay Pacific understand that they are in a business of selling an experience. Cathay Pacific believes that the emotional bonding with the customers builds loyalty and encourages the passengers to repurchase its products. It can be argued that Cathay Pacific can retain its price and still gain competitive advantage. Differentiation is not enough because many airlines can copy Cathay Pacific’s strategy. It is the people at Cathay Pacific that differentiate Cathay Pacific from its competitors.
A change in the airfares in Cathay Pacific may affect the demand for Oasis, it does not affect the demand for, but only the quantity demanded for Cathay Pacific. In a free market, the point of intersection of the supply and demand schedules is of particular significance. At this particular price, and only at this price will the desires of demanders and suppliers be simultaneously satisfied. At any other price, either demanders will want to buy more than suppliers want to sell (shortage) or suppliers will want to sell more than demanders want to buy (surplus). If Cathay Pacific reduces its price there will be a possibility of unequal supply and deman.
Demand Elasticity
Demand elasticity according to O’connor is assumed to refer to price elasticity. Price elasticity refers to the sensitivity of the public to the price of a product. The concept of elasticity of demand is used to describe a particular property of demand curve. It describes the effect of a change in practice on quantity demanded – the extent to which quantity demanded stretches when price changes. The consumers of Cathay Pacific developed loyalty to the airline so the price is not the main issue why the consumers are purchasing the products and services of Cathay Pacific.
Match Oasis Hong Kong’s Price
Consumers are expected to benefit if Cathay Pacific will engage in a price war with Oasis Hong Kong. Better quality service and lower prices are expected. I think it is impossible for Cathay Pacific to maintain its company objectives and at the same time enter to a price war with Oasis Hong Kong. Cathay Pacific would have to copy the low-cost strategy of Oasis Hong Kong and would have to give up its differentiation strategy. The company will have to take measures in order to lower its price.
On the other hand, Cathay Pacific can lower its price as a Predatory pricing strategy. Predatory pricing behavior involves the reduction of price in the short run so as to drive competing firms out of the market or to discourage entry of new firms to gain larger profits via higher prices in the long run than would have earned if the price reduction had not occurred (2000). In the case of Cathay Pacific and Oasis, Cathay Pacific holds a much larger market power associated with the segmentation of markets. Cathay Pacific may use the predatory attempt as a precursor to merger acquisition.
Conclusion
Studying the local airline industry in Hong Kong revealed that the airline industry is open for competition and that new players like the Oasis Hong Kong Airlines can freely enter the market. The Hong Kong airline industry is one of the most competitive markets in the world. The stiff competition among different airlines provides a considerable advantage to consumers, offering them wider options and pushing the airlines to improve their products and services. So is it necessary for Cathay Pacific Airways to reduce its price to match Oasis? It can be argued that as Cathay Pacific holds more market power, the region’s biggest airline may opt to weaken and eventually drive Oasis out of the competition. Cathay Pacific once it decides to reduce its price in order to drive out Oasis will gain monopoly of the airline industry in Hong Kong. Unreasonably low fare is described as predatory. This is a fare set so low that it threatens to drive a competitor out of a market and that, moreover, is not justifiable by the airline’s cost and demand situation.
It is not advisable for Cathay Pacific to reduce its price just to match Oasis Hong Kong’s. Cathay Pacific and Oasis are catering to different market segments. Cathay Pacific caters to consumers who value service, comfort and luxury while Oasis is attracting passengers who are more price-sensitive. When we analyze the elasticity of the consumers of Cathay Pacific we will discover that the airline tries to encourage loyalty among its consumers to lessen their sensitivity to the price of the product. It can be argued that increasing o0r reducing the airfares at Cathay Pacific will greatly affect the consumers’ perception. In addition, sudden changes in price has a possibility to produce unbalanced supply and demand.
However, Oasis is planning to stiffen its competition with Cathay Pacific. Oasis is currently expanding its fleet and planning to widen its routes and destination. The expansion of Oasis’ fleet will also enhance the airline’s cargo capacity. If the competition will continue, the consumers can expect better products and services in the future.
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