F.4 economics project History of Cathay Pacific American Roy C Farrell and Australian Sydney H de Kantzow founded Cathay Pacific Airways in Hong Kong on 24 September, 1946. Initially based in Shanghai, the two men eventually moved to Hong Kong and founded Cathay Pacific Airways. Cathay Pacific City Cathay Pacific City, the headquarters of Cathay Pacific located at Hong Kong International Airport, was completed in the middle of 1999. The new complex is another symbol of confidence in the future of Hong Kong. Business ownership Cathay Pacific is a public limited company. It is owned by shareholders. Public limited company can issue shares to the public. Cathay Pacific has the following features, showing that it is a public limited company: Cathay Pacific had issue shares to the public, it is what only a public limited company can do, it’s stock code is 293. It is managed by the board of director, which is selected in the annual general meeting. Recently, Cathay pacific has just hold the AGM on 10-5-2006 It has to disclose its annual report http://downloads.cathaypacific.com/cx/inv estor/2006_Annual_Results_ZH.pdf Published on 7th March 2007 Since Cathay pacific is a limited company, it can enjoy the following advantage: 1. Cathay pacific has a separate legal identity, it is a legal person in law 2. It's liability is limited. The liability is limited to the amount of money invested in the firm. Moreover, its lasting continuity is longer compared with sole proprietorship and partnership The can raise their sources of capital though issuing shares (293) and bonds Principal Activities (What to produce) •Operating scheduled airline services •Airline catering •Aircraft handling •Engineering The factor of production(How to produce) 1. Labour Labor refers to the human effort, both mental and physical, used in production. Airhostess, pilot, etc are human resource of Cathay Pacific. 2. Capital Capital refers to the man-made resource used to assist production. Plane is an example of fixed capital, because it wears out slowly. Gasoline is an example of working capital. Chris Pratt---one of the entrepreneur of CX 3. Entrepreneur Entrepreneur is a person who owns a business. Making major decision was a feature of entrepreneur, but the board of director makes most of the decisions. Shareholder can vote in the annual general meeting. Substantial shareholder list Name Number of % of issued shares share capital interested Swire Pacific 1,572,332,028 40.000 Limited CITIC Pacific 687,895,263 17.500 Limited Air China Limited 399,298,928 10.160 The elasticity of demand and supply of CX Inelastic (It is a necessity for those who go abroad for work or traveling) Price increases % change in P > % change in Qd Total revenue increases. The demand and supply of Cathay Pacific For the supply of Cathay Pacific, it tends to be quite inelastic. As it is quite difficult for an airline company to buy or build an airplane in a short time, they can’t increase the quantity supplied easily. Moreover, each airplane has a fixed capacity, although they can arrange more flights, the quantity supplied is still difficult to be increased. The demand and supply of Cathay Pacific Therefore, the demand-supply diagram of Cathay Pacific will be inelastic. Change of demand for CX During peak seasons (Dec, Aug, Apr), there will be more people traveling to other countries to enjoy their holidays. As a result, the demand of airline services will increase. The price of air ticket and quantity transacted will increase and the total revenue will also increase. Change of demand for CX When a slack season has come (Mar/Nov), demand for airline services will decrease. As a result, if CX has not decreased the price, the quantity supplied is greater than the quantity demanded, a surplus occurs. Competitive environment (Market structure) • The market structure of Cathay Pacific is Oligopoly It is because there is few dominant airlines running the international route. Cathay provides heterogeneous goods which are first class and economy class. Competitive environment (Market structure) There is 9 airline companies in Hong Kong. They are : 1.Cathay Pacific Airways Limited 國泰航空 2.Hong Kong Dragon Airlines Limited 港龍航空 3.Hong Kong Express Airways Limited 港聯航空 4.CR Airways Limited 中富航空 5.Air Hong Kong Limited 香港華民航空 6.Hong Kong Aviation Group 香港航空集團 7.Metrojet limited 香港商用飛機 8.Heliservices (Hong Kong) Limited 直升機服務(香港) 9.Oasis Hong Kong Airlines 香港甘泉航空 SWOT analysis S: Strength 1. Good management e.g. Keep the profit during SARS 2. Perfect routes cover e.g. Cover 104 Destinations in 35 countries and territories 3. Wide scope of production With different companies (Cathay Pacific Catering Services (HK) Limited, Cathay Pacific Holidays Limited, Vogue Laundry Services Limited (雅 潔洗衣) and Hong Kong Airport Services Limited.) providing different services - It helps Cathay Pacific to diversify its business. 4. Successful development in business in the Mainland China After taking over Hong Kong Dragon Airlines Limited, which run the China routes in Hong Kong, CX can develop China market. It also cooperates with Air China Limited to run business in China. 5. International oil price drop in short term Cathay Pacific can enjoy lower cost of gasoline 6. The rise of passenger transport Increase the market size for Cathay Pacific W: Weakness 1. Financial problem In the future, Cathay Pacific need to build up many plants for the Chinese routes and the interest rate increase continuously, Cathay will face financial problem soon 2. Lack of support from China government We all know that Cathay Pacific is owned by Swire group, which is a foreign company. Therefore, the China government may not support Cathay. O: Opportunity 1. Cooperation with Air China China is a great potential market. However, China is still not open her air privilege to foreign company. 2. Taking over of Hong Kong Dragon Airlines Limited After taking over Dragonair, Cathay can run the routes between Hong Kong and China cities. It also cut the cost by increasing the scale of production. 3. Beijing 2008 Olympic Games When 2008 Olympic Games starts in Beijing, the passenger transport to Beijing will increase sharply. As a bridge between western countries and Mainland China, Hong Kong’s airlines can benefit from the Olympic Games. T: Threats 1. International oil price When the price increase, CX’s cost will increase. It leads to drop in profits. 2. Disaster When SARS or bird flu spreads again, the airline industries will be affected and many flights will be cancelled. 3. Cheap airlines Nowadays, many cheap airlines enter Hong Kong’s market, like Oasis Hong Kong Airlines. They provide cheap air ticket between some big cities to Hong Kong. It makes the competitive environment in Hong Kong become more fierce. Suggestion Our suggestion to Cathay Pacific is to improve their service quality. Change its own style to attract the high income group. The competition of cheap airline services is too fierce. Also, Cathay Pacific should develop some renewable fuel for flight. It is because gasoline will exhaust one day, the price of oil will increase continuously. Therefore, developing renewable energy is needed. ~The End~ .