Research Korner: Cathay Pacific Case Studies

A Business Case Study of Cathay Pacific Airways

Business Case Study     Background of the Business             Cathay Pacific Airways in an international Hong Kong based airline that offers scheduled passenger and cargo to 118 destinations in 37 countries and territories. The company has earned the reputation as one of the world’s leading airlines and Asia’s biggest and most regarded airline. The company was founded in 1946 in Hong Kong. Cathay Pacific is committed to uplifting Hong Kong’s airline industry and invests in making Hong Kong one of the world’s aviation hubs. In addition to Cathay Pacific’s expanding fleet of aircraft, the company has invested in other related businesses such as catering, aircraft maintenance and ground-handling. Cathay Pacific owns Hong Kong Dragon Airlines Limited (Dragonair) and partners with Air China Limited. In addition, the airline is also a major shareholder in AHK Air Hong Kong Limited which is an all-cargo carrier offering scheduled express-freight services within Asia (Cathay Pacific Annual Report 2007).             The company together with its subsidiaries employ almost 20,000 people in Hong Kong. In 2007, Cathay Pacific recorded a total profit of HK$7,023 million. The key driver for this profit was strong passenger demand, helped by a weak dollar, fuel hedging gains and the profit contribution from its associates such as China Air. In 2007, the company also faces problems especially the rising fuel prices. The company gained from the strong passenger demand especially from first class and business class passengers (Cathay Pacific Annual Report 2007).             However, the gains in 2007 were not maintained in 2008. Cathay Pacific’s Interim Report for the first half of 2008 reveals that the company has lost HK$663 million for the first six months of 2008. The main reason for this was the exorbitant fuel increase. In line with the company’s commitment to the environment and in order to cut fuel price, Cathay Pacific constantly updates its aircraft fleet, making sure to operate the most modern, fuel-efficient fleet possible.   Organizational Structure             The company has a functional organizational structure with the Chairman on top of the organizational hierarchy. The organization is divided into different functional units that are headed by a Director. This organizational structure according to Sims (2002) is based on early management theories regarding specialization, line and staff relations, span of control, authority, and responsibility. The major functional subunits are staffed by specialists in such disciplines as engineering and accounting. It is considered easier to manage specialists if they are grouped together under the same head and if the head of the department has training and experience in that particular discipline. The management team is composed of the following:   <ul style="margin-top: 0in; margin-bottom: 0in" type="circle"> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Chief Business Executive and Chairman – Chris Pratt</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Chief Executive – Tony Tyler</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Chief Operating Officer – John Slosar</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Director of Corporate Development – Augustus Tang</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Finance Director – Robert Atkinson</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Director of Flight Operations – Nick Rhodes</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Director of Information Management – Edward Nicol</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Director and General Manager Cargo – Ron Mathison</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Director of Corporate Affairs – Quince Chong</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Engineering Director – Christopher Gibbs (Management Team, Cathay Pacific, 2008)</li> </ul>  The functional organizational structure that Cathay Pacific has in place promotes specialization of skills. People are grouped together who perform similar work and face similar problems. This facilitates communication within departments and allows specialists to share their expertise. It permits clear identification and assignment of responsibilities, and employees easily understand it.    Mission and Objectives of the Business             Cathay Pacific is an International airline that aims to be the most admired airline in the world. The company is committed to Hong Kong and its aviation industry. The company made substantial investments in making Hong Kong a prime aviation hub in the world. The company strives to: 1. Ensure that safety comes first 2. Provide quality service “Service Straight from the Heart” 3. Achieve product leadership 4. Reward employees with rewarding career opportunities   Key Business Strategies 1. Award Winning Products and Services             In May 2007, Cathay Pacific introduced its innovative new three-class long-haul in-flight product on its existing long-haul fleet. Included are First Class Suites, full-flat beds with enhanced privacy in Business Class and Unique Economy Class seats that recline with their own shell. The airline also introduced new state-of-the art entertainment for its passengers.             Cathay Pacific believes that its business is selling experience to the passengers. The emotional bonding with the passengers is the key to building loyalty and one of the major factors that encourage the customers to repurchase the airline products. The biggest difference of Cathay Pacific to its competitors is its people. The employees at Cathay Pacific are the ones who bridge the gap between product development and customer expectation. The passengers in Cathay Pacific always feel welcomed, appreciated and reassured. Passengers that travel with Cathay Pacific know that they are in good hands. Service Straight from the Heart is a programme that aims to develop cultural change within the airline focused on improving customer service. Service is the principal means of differentiating between airlines and is highly influential in customer choice.  Cathay Pacific has expressed within its programme its understanding of the importance of the people within the organization and its recognition of the contribution of those people to its success.   2. Hub and Fleet Development             Leveraging its codeshare arrangements with Dragonair, Cathay Pacific added new destinations to its network – Busan, Changsa, Fuzhou, Kathmandu, Qingdao, Sendai and Wuhan. The company also increased the number of flights in some of its major routes. The company maintains an enormous fleet with a total of 112 aircrafts. Cathay Pacific constantly adds new aircrafts in its fleet. 3. Pioneer in Technology             Cathay Pacific continues to be a leader when it comes to technology and innovation. It was among the first airlines in Asia to use electronic ticketing. In order to offer consumers with added convenience, the company also supports of Online Check-In. 4. Commitment to Human Resources             In 2007, Cathay Pacific and its subsidiaries employed more or less 26,000 people worldwide. With the expansion of Cathay Pacific’s fleet, more jobs will be created. The company is an employer of choice providing career opportunities for new graduates. The company continues to introduce leading-edge training and development programs to enhance the knowledge, skills and abilities of its workforce.             Human resources or human capital is the intangible resources of abilities, effort, and time that workers bring to invest in their work (Davenport 1999). The people at Cathay Pacific are the major contributors of strategic capability to the company. One of the advantages of Cathay Pacific over its competitors is the quality of service that the staff provide to its customers. Service has a big impact on the customers’ perceptions about the company’s product. Because of the importance of its people, Cathay pacific formulated an employee development strategy through proper and effective training. This strategy is expected to strengthen Cathay Pacific’s position in the marketplace.  Employee development can be an essential ingredient of an organization’s competitive advantage. Employee development includes all of the education and training that organizations might invest in their employees such as training employees to perform effectively in their current jobs, orienting employees to the workplace, developing them for advanced positions or programs, and building organizational capability for future success (www.cathaypacific.com). Cathay Pacific promotes a working environment wherein the employees are free to act in both the company’s and passengers’ best interests.   Stakeholders of the Business             A stakeholder is defined as an individual or a group that has one or more of the various kinds of stakes in a business. The individual or group can affect or be affected by the actions, decisions, policies, practices, or goals of the organization (Sims 2003).       A. Internal Stakeholders <ul style="margin-top: 0in; margin-bottom: 0in" type="circle"> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Shareholders – the shareholders participate in distribution of profits, additional stock offerings, assets on liquidation, inspection of company books, election of board of directors and other rights established in the contract with the firm. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Employees – Employees are believed to be a source of competitive advantage. The knowledge, skills and abilities of the employees contribute to the success of the organization. In return, the employees expect economic, social and psychological satisfaction in the place of employment. The employees also expect freedom from arbitrary and capricious behavior on the part of company officials. The employees expect to share in fringe benefits, freedom to join union and participate in collective bargaining, individual freedom in offering up their services through an employment contract. </li> </ul>   B. External Stakeholders <ul style="margin-top: 0in; margin-bottom: 0in" type="circle"> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Customers – the customers are the source of the firm’s earnings. The customers purchase the firm’s products and services in exchange with satisfaction of needs, wants and requirements. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Suppliers – the suppliers are part of the firm’s value chain. In exchange with the suppliers products, services or expertise the firm is expected to be a source of business and facilitate a professional relationship in contracting for, purchasing, and receiving goods and services. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Competitors – competitors are also important stakeholders. They expect the company to observe the norms of competitive conduct established by society and industry.</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Governments – the Hong Kong government and other governmental departments are important stakeholders that have direct impact on the firm’s strategies. The government expect the firm to pay taxes, to adhere to the letter and intent of public policy dealing with the requirements of fair and free competition; discharge of legal obligations. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Local Communities – the local communities are also important stakeholders. The firm needs to participate in community affairs and to provide regular employment and support to the local government. </li> </ul>     Relationship between the Business and Its Environment             The business is affected by a variety or environmental factors. Political, Economic, Social and technological factors affect Cathay Pacific. In order to succeed in the airline industry, Cathay Pacific changed its strategies in accordance with the changes in its environment. Political             The company is subject to government policies and regulations. The company must also follow the standards and procedures set by governing bodies. Policies on climate change affect the company’s operations and strategies. Economic             Hong Kong remains the financial hub of Asia. There is minimal rate wars in this side of Asia as there are few direct competitors. Cathay Pacific joins alliances and partnerships with other airlines in order to minimize competition and to avoid price wars. Hong Kong has codesharing partnerships with Dragonair, giving both airlines more capabilities to enter markets that are risky to do on their own. Perhaps one of the challenges that Cathay Pacific faces in the economic sphere is the fluctuating fuel price. Social             There has been a steady demand among business passengers. As Hong Kong continues to be on the center of Asian economy, an increase in demand in business flights is expected. However, passengers are also exploring other affordable alternatives. Technology             Technological advancements are introduced in a breathtaking speed. Airlines spend considerable amount of money in order to keep up with the trends. There is an expansion of wireless technology.   Integration to Risk Management             Cathay Pacific moves in an industry where risks abound. Competition is very stiff and there are numerous threats. In this section, I will discuss the various risks that the company is facing or may face in the future. 1. Operational Risk – this is the risk that failures in computer systems, internal supervision and control, or events such as natural disasters will impose unexpected losses in a firm’s derivative positions (Culp 2001). There are environmental disasters that Cathay Pacific cannot control such as typhoon, storm, earthquake, and others. These disasters can cause operational risks for Cathay Pacific. Another possible source of operational risk is system failure. Being an organization that relies heavily on technology, system failure can cause severe losses for the company. Management failure also poses as a major risk. 2. Regulatory Risk – this is the risk that actions take by regulators constitute events that can unexpectedly raise costs and risks for market participants. There are two forms of regulatory risk. First is procedural regulatory risk, which is the risk that legal uncertainties and financial losses will result from ill-conceived and costly changes to statutory or administrative regulations. The second type of regulatory risk is judgmental regulatory risk. This risk stems from inadequately informed examiners and regulatory auditors who attempt to review the derivatives of a firm based in incomplete information (Culp 2001). 3. Customer Loss Risk – this is risk that the business loses its customers, either because a competitor attracts them away or because they no longer demand the products and services that the company is selling. If either the demand curve shifts in for exogenous reasons or available substitutes for the good or service being sold become relatively more attractive, the business will find itself in great difficulty (Culp 2001).   References   Cathay Pacific, Annual Report 2007, viewed 27 August 2008, <http://downloads.cathaypacific.com/cx/investor/2007_Annual_Report_en.pdf>   Cathay Pacific, Interim Report 2008, viewed 27 August 2008, <http://downloads.cathaypacific.com/cx/investor/2008InterimReport_en.pdf>.   Cathay Pacific, Management Team, viewed 27 August 2008, <http://www.cathaypacific.com/cpa/en_INTL/aboutus/cxbackground/managementteam>.   Culp,C., 2001, The Risk Management Process: Business Strategy and Tactics, Wiley, New York.     Davenport, T. O., 1999. Human Capital: What It Is and Why People Invest It, Jossey-Bass, San Francisco.     Sims, R., 2002, Managing Organizational Behavior, Quorum Books, Westport, CT   Sims, R. 2003, Ethics and Corporate Social Responsibility: Why Giants Fall, Praeger, Westport, CT.

A Business Case Study of Cathay Pacific Airways

Business Case Study Background of the Business Cathay Pacific Airways in an international Hong Kong based airline that...