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 Cathay's second largest shareholder. CITIC HK was a leading red chip company (the popular terminology for a company with strong ties to China) controlled by Beijing's China International Trust and Investment Corporation.

* 1990. Cathay and Swire acquired 30% and 5% respectively of Dragonair's 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.

o Dragonair's 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.

* 1995.

o 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%.

* 1996. The following shareholder changes were occurred:

o CITIC Pacific increased its holdings in Cathay to 25%

o Swire Pacific's was diluted from 52.6% to 43.9%.

o Dragonair's stakeholders:

 CNAC group 35.86%

 CITIC Pacific 28.49%

 Cathay Pacific 17.79%

 Swire Pacific 7.71%

 Chao family 5.02%

Shortly after the deal, Dragonair's 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. Cathay's 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?

II. Objective:

a. Long-term: To be the world's best airline.

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

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. There's 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