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03/27/2012

The Past, the Present and Possible Future of the Cathay Pacific Airlines


The Past, the Present and Possible Future of the Cathay Pacific Airlines

 

Introduction

            Within the last decade, the airline industry has witnessed many changes on the way airline companies operate. The changes are evident on the operation itself including organizational planning, implementation of strategies, leadership structures and even staffing and marketing. Such changes are the epitome of how resilient the airline companies with the demands of the industry itself. Cathay Pacific Airlines, the flag carrier of Hong Kong, is not exemption since it also goes through many changes from its early years and between the 1960s and 1990s as well as today. Considerably, the strategic direction that the Cathay Pacific Airlines is seeking to pursue will definitely define its future.

In this report, the earlier period, present and the possible future of the Cathay Pacific Airlines will be discussed. It is the goal of the discussion to look at the changes that Cathay Pacific had embraced embraces and will embrace onwards becoming ‘the world’s best airline’.    

Overview

            On the 24th of September 1946, by American Roy C Farrell and Australian Sydney H de Kantzow founded Cathay Pacific Airlines since Cathay was the ancient name given to China and Pacific because Farrell supposed that the airline will be only flying on the Pacific region. While its headquarters and main hub is in Hong Kong International Airport, the company initially operates passenger flights to Manila, Bangkok, Singapore and Shanghai. Expansion was fast and in the 1960s, the coming of age of Cathay Pacific took place. Business grew at an average rate of 20% annually between 1962 and 1967, leading to the initiation of international services to Osaka, Fukuoka and Nagoya in Japan. Progress continued from the early 1970s to the late 1980s but the 1990s was a difficult time for the airline industry. It was during this time that Cathay Pacific changed and acquired a new identity through changing the green and white striped livery into the dynamic and now famous ‘brushstroke’ image. 

The recent past of Cathay Pacific

            On the other end of the spectrum, the Chinese government had, in the 1990s, attempted to take over Swire Group which operates Cathay Pacific but was motivated by considerations that are very difficult from those in Hong Kong. A hostage effect, the attempt could threaten the stability of Hong Kong to which the Swire Group strongly refuted. For them, in Chinese government, there is no firewall between the regulators and the regulated but the regulatory agencies of the government own, and directly profit from, commercial concerns that compete with other firms. As such, if Cathay Pacific will remain under Hong Kong government’s authority, Hong Kong’s economy and its people will benefit. Unlike when it falls to Chinese’s authority, Hong Kong will crumble and Cathay Pacific will rival with airline companies in China (Cohen and Ziao, 1997).

What appears to be the most notable change for Cathay Pacific in the recent past was the acquisition of Dragonair as its subsidiary. On the 6th of June 2006, Dragonair became a wholly owned subsidiary of Cathay Pacific through shareholding realignment. By virtue Myron Chartier’s change management model or the change by rational problem solving, Cathay Pacific aimed at solving a disturbance to the organization.

1) Disturbance is evident on the fact that China is emerging as one of the most important market in the global economy, and penetrating the whole Chinese market would be the most strategic move any airline could consider. However, the history tells us that it would still be difficult for Cathay Pacific to penetrate the Chinese market considering the extent of enthusiasm of the government to control the airline before. Nonetheless, Cathay Pacific is already operating two passenger routes between Hong Kong and Mainland (HKTDC, 2000).

2) One decision left for Cathay Pacific is to acquire assets that are traditionally unique to a Chinese company to extend services to Mainland but this would be legally tedious as the Chinese economy is known to prioritize companies operating in Mainland. Or better yet, acquire an airline company that is already operating in China but is also headquartered in Hong Kong, considering logistics and corporate culture. Yet, another choice is to create a small airline company that will solely operate in China and with another brand name but with airline services complementary to Cathay Pacific’s services, by which would be very expensive for Cathay Pacific.

3) Nevertheless, the key problem that should be addressed is the acquisition of access to Mainland China, and maximize airline services that would be available to the Chinese travelers. Even before contemplating on which among the services to offer to the Chinese market, Cathay Pacific needs to decide on how it can actually gain an access to Chinese market. It should, further, be a legitimate process since the Chinese government will definitely protect the interest of its airline companies especially its flag carrier (HKTDC, 2000).

4) Acquisition of Dragonair would be the most plausible solution for Cathay Pacific since it can resolve the key problem which is to expand flight network into the Mainland China. Not only that, the acquisition process would also mean that Hong Kong will be reinforced as an international aviation hub. The acquisition of Dragonair enabled Cathay Pacific to access the restricted yet growing Chinese market while also tapping on opportunities to share resources. However, the acquisition is not without difficulties as there are oppositions from airline companies operating in the Asia Pacific region. The motivation of Cathay Pacific of the acquisition was also allegedly because of international and domestic passenger flows in China (Holloway, 2008).

5)  In terms of application, Cathay Pacific decided to create a long-term agreement with Dragonair. According to China Daily (2006), the agreement is vested to last for six years, benefiting Dragonair in the process also because this airline company has unprofitable routes in Mainland. Problem is that Dragonair, despite the declining flights, is also an established airline company in Asia Pacific region. A solution to this is to maintain the corporate brand of Dragonair same with that of Cathay Pacific.

6) Nonetheless, satisfaction of the change is apparent on considering that the move was also strategic from the perspective Cathay Pacific operators. Being a global airline therefore means to serve major cities in Mainland China while also making its Hong Kong headquarter reached a global stature (Flattoau, Matthews and Lott, 2006).

            As such, the recent past of Cathay Pacific is an epitome of the airline company’s capability of risk-taking and rising triumphantly over these risks. Acquiring Dragonair is a change that requires trading off of assets, capitalizing on declining profitability of the acquiree. Even so, Cathay Pacific realized that this change is the materialization of its long term goal to access Mainland China. Since Cathay Pacific is also an airline company that also invests on quality products, the change process could be profitable in the long run.    

The present of Cathay Pacific

            As Holloway (2008) puts it, airline companies will capitalize on the demand wherein the expected massive increases demand for air travel in the region are critical. This is more so for airline companies that are already serving the Pacific region which will be likely to be flown more frequently and for longer periods. This is what Cathay Pacific and Dragonair had done consolidating their assets and complementing the services of each other (Flattoau, Matthews and Lott, 2006). The motivation of the change is to obtain access to Mainland China.

In explaining the strategy that Cathay Pacific had implemented, using the specific stages of Kotter’s (1996) change model in an inductive manner on why Cathay Pacific chooses such strategy will be explored.

1) Establishing a sense of urgency – to overcome complacency, create a strong reason why change is needed.

First, Cathay Pacific established a sense of urgency both to the operation and the alliances. Dragonair which operates in 23 Mainland cities in addition to other five destinations relied heavily on Cathay Pacific for the purpose of feeding its China-bound traffic. There is a win-win situation therefore for both Cathay Pacific and Dragonair specially that the corporate identities of the two will remain (Flattoau, Matthews and Lott, 2006).

2) Creating the guiding coalition – build a team with right composition of power, level of trust and shared objective to lead the change.

Next was to create a guided coalition in the macro level wherein the primary players are Cathay Pacific and Dragonair. There is also the considerable supervision of the Oneworld alliance officials as the operation of the three will generally affect the nature of operation of Oneworld beneficially and detrimentally. On the detriment side, this has created a powerful grouping that could lead to monopoly of the airline industry in the Asia Pacific region, to which other alliances like that of Star Alliance strongly refutes for (HKTDC, 2000).

Having mentioned Oneworld, another major change that Cathay Pacific had embarked on is connecting with other airline companies that aimed at airline marketing and developing client relationships. Cathay Pacific, to further international initiatives, founded the Oneworld global alliance which highlights the frequent flyer programme (FFP). Oneworld enables its members to offer customers more services and benefits than any airline could provide alone. As this reflects a growing consolidation in the airline industry, Cathay Pacific and other international and regional carriers were able to grow with the network and achieve economies of scale (Page, 2007). 

3) Developing a vision and strategy – which clarifies direction, motivates people and helps coordination.

In developing the vision and strategy, enhancing the cooperation between the two carriers in adequately serving the needs of the travelers was the goal. Joint venture roots are planned between Mainland and Hong Kong despite the fears of dominating the vertical integration of air cargo operation. In lieu with such vision and the strategy, short term wins are created like opening additional routes to which both carriers can explore and maximize. The cargo operation was also a short term win that enables China and Hong Kong to account for about 40% of total cargo (Flattoau, Matthews and Lott, 2006).

4) Empowering employees for broad based action – to eliminate barriers, time constraints.

            Such an alliance change must mean that decision of Cathay Pacific’s must pass through acceptability within the key stakeholders and decision makers. One way that Cathay Pacific has explored is empowering stakeholders through involving them in information sharing. The employees are the most notable shareholder who will be directly affected by the change. From its corporate image, the people are the key in providing ‘Asian hospitality on the ground and in the air.’ There is the opportunity therefore to rethink strategically on how the acquisition of Dragonair, which basically aimed at strengthening the Asia Pacific region hub, will contribute in uplifting the philosophy of Asian hospitality while also developing Hong Kong as a global transportation hub (HKTDC, 2000).

5) Generating short term wins – to stay the on the course as major change will take long time.

In utilizing these short term wins, Cathay Pacific would be able to capitalize on outbound passenger traffic and its increase in the coming years. While Cathay Pacific is maximizing the opportunities provided by the access to Mainland China and extend the operation into cities that Dragonair operates, Dragonair could benefit in the volume of cargos that is coming in and out of China as well. Aside from this, Dragonair could eliminate the other competitions to Cathay Pacific in the long run like All Nippon Airways (Flattoau, Matthews and Lott, 2006).

The future of Cathay Pacific 

Using SWOT analysis, Cathay Pacific aspires to be a leader and will help to share future policies that affect the aviation industry by working with government and its partners as the strength. Cathay Pacific also identifies leveraging its brand and demonstrating that it is a company that can be trusted is its next target. A key part of the corporate reputation for the future points to the communication with its staff and getting them involved in delivering a more sustainable growth path (Flattoau, Matthews and Lott, 2006).

Cathay Pacific’s weakness would be on its organizational structure that has become inefficient as the company become more complex. This could hinder Cathay Pacific’s ability to manage its international network of subsidiaries and other alliances. Prior to acquisition of Dragonair, Cathay Pacific has lost its competitive advantage which resulted in declining sales because of intensifying competition. During the 2000s, Cathay Pacific realized that there is the need to overcome the challenges of competition thus acquiring Dragonair. Future challenges of additional competition brings if Cathay Pacific will not resolve in strategic option (Page, 2007). 

An opportunity and a threat, what Cathay Pacific and Dragonair can do to remain competitive in the regional and global airline industries is to strongly disprove the open skies in Hong Kong. Major routes of Cathay Pacific are also being served by five foreign airlines hence passengers have wide choices of carriers as well as schedules and fares of flights. Open skies therefore could threaten the operation of Cathay Pacific and Dragonair. This is to protect the financial stability of Hong Kong as well as that of the two carriers. Cathay Pacific and Dragonair have crucial roles in maintaining the interests of the entire aviation industry particularly in the Asia Pacific region (HKTDC, 2000).

Conclusion

            In sum, Cathay Pacific is an airline company that embraces changes for the betterment of the business, that is, strategic changes. Such changes within Cathay Pacific surround and are built around the interplay among the various functions of management. These are evident on the operation that include marketing, strategic alliances, technological integration and management control. Nonetheless, the most apparent change in the recent past of Cathay Pacific is the foundation of Oneworld alliance and acquisition of Dragonair.

My findings

            To wit, the acquisition that brought both external and internal changes to the operation of Cathay Pacific is the acquisition of Dragonair. Conforming to the principle of competence-enhancing change, Cathay Pacific embraced the change which is basically externally driven but the emphasis is on macro and global as well as on short-term to long-term adaptation. There is a clear objective on the side of Cathay Pacific, that is, to access the Chinese market. It is this objective that keeps the management grounded hence strategize on integrating the change on its operation successfully.  

            As the discussion made use of Myron Chartier’s, Kotter and SWOT analysis, it was revealed that Cathay Pacific Airlines is one company that is not easily shaken by changes. Instead, fundamental changes in operation are what make it more profitable today. I say this because if the Dragonair acquisition never materialized Cathay Pacific Airlines will not realize its additional capabilities.  

References

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