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Deteriorating liquidity – Cathay Pacific has a weak control of its empire, despite its IT advantages. This could lead to a decrease in productivity in some areas where they have the least control of. Since its services push through across many sectors, the company may lack the flexibility that some of its more focused competitors possess. The deteriorating liquidity is due to the weak turnover ratios, increasing liabilities, increasing debt, and the lower cash balance.
According to the Cathay Pacific interim report 2009, the below figures show that Cathay Pacific has weak turnover ratios in which the turnover ratio was negative and the inventory turnover is lower.
The current liabilities are increasing which is shown in the below figure.
Increasing debt and lower cash balance may also a weakness which can reduce Cathay’s competitive advantages. It seems that Cathay cannot improve this problem.
- Analysis – Opportunities
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Growth in China (Asia) – According to Boeing forecast 2009, the airline markets are confident in China’s prospect. The growth rate in China is much higher than other regions.
According to the IATA forecast 2010, even though the airline industry had suffered a severe impact because of the economical downturn, the growth rate in Asia seems to be recovered rapidly in the foreseeable future.
The below figure shows the top 10 China city pairs for airline industry. Nowadays, focusing on strong markets such as the Greater China Region is a vital factor to get success in this industry.
The network of Dragon air also covers with these city pairs. It is a great opportunity for Cathay Pacific & Dragon-air to concentrate on development in China.
The coverage in China seems to be important for airline companies. The below figures can indicate the competitive advantage of Cathay & Dragon. The coverage of Dragon is much wider than other airlines, which can serves 18 destinations in China.
Furthermore, as a Cathay’s stronger competitor, Singapore Airlines only serves 4 destinations in China.
The Emirates airways only serves 3 destinations in China.
It is obvious that Cathay has an absolute advagtage to develop the business in China compared with other national airline companies. There is a big room for development of airline industry in China, therefore Cathay is given a great chance to gain greater access in China market.
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Lower fuel price – Fuel expenditure is a larger proportion of the total expense for airline companies. The global aviation industry was hit hard by soaring fuel prices in 2008. If the fuel price is very high, the airline companies must suffer a vital impact because of the high operation cost. Even if the fuel price is not in a lowest point, it is still in a cheaper position. The fuel prices spike above $91/b in January but markets expecting rise to moderate. Cathay can reduce the cost due to the cheaper fuel price to recovery the loss in 2008-2009 while the demand of airfreight is increasing.
According to the Cathay Pacific interim report 2009, the fuel costs decreased due to a 51.9% decrease in the average into-plane fuel price to US$63.7 per barrel and an 8.1% reduction in consumption to 17.5 million barrels. It gives a significant decrease to the Net fuel cost compared with 2008.
- Expansion – Opportunities exist for Cathay Pacific Airways to continue with its current strategy of establishing large branches worldwide. The opening of new locations and branches offer Cathay Pacific Airways the opportunities to exploit market development. This could lead to the diversification of the company’s branches from large super centers to local-based sites.
- Analysis – Threats
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Economic downturn – The global economic is getting worse due to the Financial Tsunami. As the air cargo industry has a derived demand – base on the international trade volume. Economic downturn leads to decrease of demand of consumer goods and raw materials. This gives a severe impact to Airlines including Cathay Pacific.
For Passenger section, economic recession also is a threat to airlines. People are likely to save and reduce their travel expenses to cope up with the recession. People expenditure is the most likely affected with the recession and thus also affects airlines since people do not mostly travel in times of economic recession.
According to Cathay Pacific interim report 2009, there was a rapid decline of Available Seat Kilometers (ASK) in most of the market. The Revenue from passenger services fell by 22.9% to HK$21,809 million and yield fell by 19.7% to HK49.7 cents, reflecting weak demand from premium class travelers, competitive pressure on economy class fares and the strong US dollar.
Furthermore, demands on Business Class and First Class have rapid falls which are the major source of revenue of Cathay Pacific. It also indicates the revenue from passenger flight may suffer more than cargo flight
For cargo section, cargo demand was very weak reflecting global economic conditions. The below figures show the cargo load factor fell by 0.2 percentage point to 66.2%. Capacity was reduced by 14.1% in response to the sustained fall in demand. Yield was under constant pressure for the whole six-month period and fell by 32.8%. Unlike in previous downturns, all markets have been affected. While there are signs the bottom may have been reached, the outlook remains uncertain. A long-term recovery in the airfreight industry will not happen quickly.
The fall in consumer demand in the world’s major economies had a significant adverse impact on the key export markets of Hong Kong and Mainland China. Air cargo tonnage fell and with it yields, as carriers competed for less freight.
It is expected that the revenue from both passenger and cargo flight will hardly be recovered in following few years, which the below table can indicate this situation.
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Global competition – Being number one means that Cathay Pacific Airways is the target of competition, the company to beat, both locally and globally. Top competitors of Cathay Pacific include British Airways, China Airlines, China Southern Airlines and Singapore Airlines. Cathay Pacific Airways might also be exposed to political problems in the countries where the company has operations.
- A slight shift in focus of a large competitor might wipe out any market position that Cathay Pacific Airways has achieved over the years. This could force the company to specialize in rapid response but good value services to local businesses. This would put so much pressure on the company’s consultancy staff to keep informed with the latest changes in technology where possible.
- Critical success factor in airline industry
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Experience – Experience is one of the most important critical success factors for airline companies for success. The classification of experience levels can be divided into two distinctive categories: type of experience and diversity of experience.
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Competition and alliance – It offers one of the greatest barriers to entry in the airline industry. Airline companies will often encounter alliance, predatory competition, slot controls, price crowding, and other offensive tactics from established and major carriers. If airways can improve this situation or form a strong alliance, it can strengthen their marketing position. The coverage of service can also be wider.
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Strategy – It is an important determinant of success. Startups must choose what kind of market they will serve e.g., business, pleasure, or low-fare, and also if the proposed market will be on a regional, national, or international scale. Strategy choices must not only fit customers, but competition as well.
- Success factor in Cathay Pacific Airways
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Diversity and sufficient experience – Cathay Pacific Airways is one of the most experience airline companies in Hong Kong. It was founded in Hong Kong on 24 September 1946. CPA had been expanding increasingly since 1960S that it had earned sufficient experience for running business in Hong Kong.
In January 1990, Cathay Pacific and its parent company, Swire Pacific, acquired a significant shareholding in Dragon-air. It gave an opportunity for CPA to use their experience together with other successful companies, such as Dragon-air to acquire more varied experience for operation not only in Hong Kong, but also Mainland China. That’s why Cathay Pacific Airways can become one of the most successful companies in Hong Kong or even the worldwide.
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Competition and alliance – There is a keen competition in full-service-carrier market, the main competitor for Cathay Pacific Airways is Singapore Airways, their coverage and types of service are almost similar.
However, one significant competitive advantage for Cathay Pacific is the China market. Since 1990, CPA had acquired a significant shareholding in Dragon-air which is the airways focusing on Chain market, this alliance or forming give a great opportunity to Cathay to access this emerging market. This is an absolute advantage compared with other national airways.
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Good strategy – Cathay Pacific Airways marketing strategy is focused in terms of market achievements, marketing strategy and positioning, advertising and promotion campaigns, product development, design and package as well as after-sales service. The target customer generally focus on the businessman which is looking for point-to-point service rather that hub-and-spoke service, therefore, CPA do not need the largest aircraft – A380 because there is only 26 airfield can offer sufficient facilities and infrastructure for this type of aircraft that means it cannot offer the point-to-point service to the customer.
Also, segmentation is a key factor especially in markets where a broad leadership position has yet to be fully developed. Cathay Pacific Airways strives for strong positions especially in the premium and specialty segments. The leading position in the airline industry in Hong Kong and the recently established market in China is infrangible. As a result, these good strategies and planning make CPA being a successful company in the airline industry.
- Recommendation
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Capacity cut-off – Airlines facing falling revenues from less air travel and the increased cost of purchasing aircraft due to commodity prices with the possibility remaining that some airlines may lay up aircraft due to the current state of the air travel and cargo industries. Cutting off the capacity is one of the good ways to reduce the operation cost as the parking charge will be taken if the aircraft park in the airfield.
Although laid-up the aircraft is not a new concept to reduce the cost, it is efficient which can minimize the operation cost if the economic environment is not fully recovered. For example, Cathay can lay-up the aircraft fleet in the desert in where the environment is suitable for parking the aircraft.
It is also recommended that Cathay can sell some old and obsolete aircrafts especially for the cargo plane. This can reduce the operation cost especially the maintenance cost, and also can increase the income due to the selling. It is very effective as the demand nowadays is not in a former level, Cathay can take this chance to sell all inefficient aircraft and buy more efficient aircraft for the operation in the future.
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Cost control – It is a vital element for airline industry nowadays, it is recommended that Cathay can be more active to implement the code-sharing policy. The coverage of service can be wider; the operation cost can also be reduced by jointing the venture with other agreed airline companies. For example, share the code with Dragon-air in China market, share with Air Pacific on new Hong Kong-Fiji service.
It is also recommended that to reduce the fuel expenses by reducing the speed. Even though the fuel consumption is not very high in the cruising way, it is still efficient, as the fuel expenditure is a large part of operation cost, while traveling with lower speed in high altitude and colder outside air temperature.
Reducing the salary expense can also be helpful, offering cabin crew and cockpit crew the opportunity to take voluntary unpaid leave can reduce the operation cost when the demand of air flight is not very high.
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Better co-operation – There are various strategic options available for Cathay Pacific Airways, for example, tie up with various local airline companies to expand the market share, co-operate with major competitors to form a strong alliance in airline industry.
Dragon-air is a good example that a tie-up or merger with various local airline companies offers tremendous benefits in terms of access to their public relations management policies, infrastructure and even their resources. Nowadays, Cathay can enjoy this benefit to operating in China, where is a emerging market.
A co-operation of Cathay Pacific Airways with other airways, such as British airways, and Air-China, is a good suggestion to strengthen the market position which can provide a better service to customer. One way to form this collaboration is code-sharing.
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Improvement of service – Cathay Pacific has identified its competency on the its staff therefore managers at Cathay Pacific are encouraged to help employees think creatively, helping them to focus on what results are wanted rather than how to achieve them or the difficulties in achieving them.
In addition, employees also are encouraged to form more specific objectives from the overall picture of what is wanted. The company feels that a few key attainable objectives might make employees more enthusiastic, rather than a standard list.
Moreover, product development and information technology of Cathay Pacific is also encouraged for the advantage of the company for the future operations. High end in technology gives the company an edge to competition.
- Conclusion
In the future, the company is planning to build and operate on their own cargo terminal at Hong Kong International Airport with an eventual planned annual capacity of five million tonnes. This will enable the company to pursue aggressive cargo growth plans, make significant cost savings, introduce product innovation and strengthen Hong Kong’s position as a global logistics hub.
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