Cathay Pacifics Brand Equity - Case Study Example

Cathay Pacific: A Marketing Report Table of Contents Executive Summary 1. Introduction a. Organization b. Product c. Brand Overview 2. Identification of Relevant Theory/ Concept a. Service Quality and Customer Satisfaction b. Brand Management 3. Recommendations 4. Conclusion Works Cited Executive Summary Cathay Pacific is one of the oldest airlines company in the world. It is one of the few surviving full service carriers from the Asia Pacific region, where a number of low cost carriers has quickly captured the market. However, Cathay Pacific has held fort by offering superior service quality and customer focus which is very important in a service industry like the airlines. While most other airlines from the region cater to destinations within the region, Cathay Pacific is a global carrier with headquarters in Hong Kong. As a result, the airline has become almost synonymous with Hong Kong Airport, where it is centered and where it has several lounges and ticketing offices. Service quality is the tangible and inimitable brand equity for Cathay Pacific. It is also expanding the service quality with new cabin designs of its aircrafts and more in-flight entertainment facilities. However, of late, the company is finding it difficult to sustain the competition, more because of the global recession, as a result of which it has had to reduce fares. It is recommended that the company uses a judicious mix of service quality and pricing. The company has an aggressive marketing strategy but it is recommended that, rather than standardizing the marketing campaigns, it localizes the tone of the language according to the culture of the target market. 1. Introduction a. Organization Cathay Pacific is one of the oldest airline companies in the world, having been established in 1946 in Hong Kong. Although the company now services all countries, it remains loyal to its home base, Hong Kong which to date is its corporate headquarters. In 2006, Cathay Pacific took over Hong Kong Dragon Airlines and entered into a cross shareholding with Air China. The company, along with its subsidiaries, employs over 20,000 people and is member of oneworld network, which services 700 destinations. Although the company increased passenger traffic by 7 percent over the previous year despite spiraling of fuel prices, the latter half of the year saw the global airline industry into doldrums with the financial meltdown. The group had to dispose five Boeing aircrafts and one Airbus because of the recession. The company also rolled back its plan for construction of a cargo terminal at the Hong Kong airport. (Company annual report, 2008). The aviation industry of south east Asia has turned particularly competitive since the 1990s as a result of deregulation and entry of many new airlines. Till the 1980s, air transportation companies mainly operated in the domestic market, with some charter operators being allowed to fly international routes. Cathay Pacific has been one of the major legacy carriers from the region. In the 1990s, international air transportation was liberalized in most south east Asian countries as a result of which there were many new private players. Competition came in especially from the newly industrialized countries in south east Asia, like South Korea, Taiwan, Hong Kong, the Philippines, Thailand, Malaysia, Singapore, and Indonesia. State-owned aviation companies were privatized, new carriers allowed to enter the industry, government control over equipment purchases and fares and route selection relaxed (Bowen and Leinbach, 1995). Global domestic and international passengers is expected to grow by only 2.9 percent in 2009, against a previous forecast of 4.5 percent while capacity has grown by 2.2 percent over the year. In the Asia Pacific, traffic growth is expected to be 3.9 percent while capacity growth has been 4.3 percent. This area is also slated to take delivery of a large number of aircrafts over the next year, putting even more pressure on earnings (travelbizmonitor). In this scenario, service quality is extremely crucial for an airline to survive in the competition. b. Product The airline industry is now divided in two distinct segments: low cost carriers (LCCs) and full service carriers (FSCs) or legacy carriers. The emergence of low cost airlines since the 1990s have provided stiff competition to full service carriers like Cathay Pacific, which has customer service as the unique selling proposition. The LCCs survive and flourish on the single-most branding of low and simple fare structure while FSCs brands are based on service quality which is supported by higher and a complex fare structure that has to be supported by management. In order to maintain the low fares, the LCCs innovate various strategies to minimize costs. The most important is the direct distribution mechanism, with paperless and direct ticketing, mostly through the Internet. The FSCs, on the other hand, have an elaborate ticketing system, with travel agents and paper tickets. Check-in, too, is ticketless for the LSCs while the FSCs have to check in with tickets and in association with the International Airport Traffic Authority. LCC airline operations run through point-to-point airport connection while FSCs interlining code-share and global alliances across airlines. Hence, the LCCs typically fly short hauls and have lower turnaround times than FSCs. LCCs usually have a single type aircraft (O’Connell and Williams, 2005). FSCs are able to segment customers on the basis of class of accommodation, with different spacing and service qualities, which LCCs cannot. Hence, LCC passengers are all accommodated in a single class, often with no specific seating arrangement. FSCs provide in-flight amenities like food, magazine and entertainment which LCCs typically do not. Thus, LCCs emphasize on the core operation – flying – while FSCs focus on service in addition to reliability in flying (O’Connell and Williams, 2005). The wages for employees and unionization among them are higher for FSCs than for LCCs. The LCCs typically use subsidiary city airports, have lower ground turnaround times than FSCs and do not carry cargo (Voorde, 2007). Cathay Pacific has a mix of long, medium and short haul flights but it concentrates mostly on the Asia Pacific, India and Middle East segments. The takeover of DragonAir has provided the opportunity for a seamless travel experience through the Hong Kong hub. New destinations in China and India have been launched over the last two years, by both Cathay Pacific and DragonAir (Company Annual Report, 2008). c. Brand The brand of Cathay Pacific is very strong on comfort and service. The company is further strengthening the brand, even as it faces competition from no-frills LCCs, by developing new cabin designs with 2 or 3 classes and with retrofit. So far, 41 new aircrafts from the middle and long haul fleet operating in the Australian, Middle Eastern and Indian routes have the new designs. The airline has also expanded the in-flight entertainment products, offering 100 movies, 350 television programs, 888 CDs, 22 radio channels and 70 video games. DragonAir flights showed highlights of Beijing Olympics 2008. While LCCs typically share airport lounges and move to paperless ticketing, Cathay Pacific has opened new lounges and ticketing offices in Hong Kong and other airports. Despite being a legacy carrier, Cathay Pacific has adopted characteristics of LCCs for online ticketing. The airline offers online booking and check-in facilities (Company Annual Report, 2008). However, the brand is essentially based on customer service quality. To highlight this brand characteristic, the company has recently launched a micro-site on the Internet in which the customer service employee, like the officer at the airport or the cargo handler or the dispatcher of Cathay Pacific speaks in first person online. Each of the employees represented only write their bios in first person in a communicative language, like “I was a Primary School tutor before I joined Cathay Pacific… May be that’s were I learned to be patient” (simplifying.com). The aim of the communication exercise is to develop individual rapport between customers and service providers. The company has launched an aggressive communication campaign of its new cabin designs through newspaper and magazine advertisements, television commercials, outdoor billboards and online banners. Besides, the company website provides a virtual tour of the entire cabin across all the classes as well as a simulation of all the entertainment facilities. In the print ads, the message is different based on customer segmentation, with the basis message “your need comes first”. First class passengers are told of “just the right amount of personal attention, interaction and privacy”, the Business class passengers of “a cosy retreat where one button takes you to a full flat bed” and the Economy class passengers of “a new shell seat protects your space, with entertainment on demand”. The new TV commercial focuses on the frequent business traveler, the main target segment of Cathay Pacific, as it is of all legacy carriers (Avbuyer, 2009). 2. Identification of Relevant Theory/ Concept a. Service Quality and Customer Satisfaction Over the last twenty-five years or so, the global aviation industry has undergone massive changes. The most significant element of the industry is the liberalization of economic regulations regarding air transport across all sectors. While established American and European airlines have been allowed to enter into bilateral air service agreements entering into new international routes, a hoard of new airlines emerged in many countries, particularly from south east Asia, the home region for Cathay Pacific (Doganis, 2006). As a result, competition has grown tremendously in the global aviation industry. According to the VIRO (Valuable, Rarity, Immitability, Organization) model, developed by Barney (2005), companies are required to maintain strategic competitive advantage through these tangible elements. Service quality is Cathay Pacific’s main tangible competitive advantage which has been proved to be value, rare and unimitable in the industry although, being a legacy carrier that offers full service, it cannot compare on prices as low cost airlines. Typically, a company develops its value through its resources that include assets, skills and capabilities. Cathay Pacific has developed its value through higher service quality. Since customers are the core constituents of an airline, customer satisfaction is crucial in order to gain competitive advantage. In the service industry, the quality of service is of prime importance for corporate image and value that drives future consumer behavior. High level of service results in cost saving as well as higher profits and market share (Park et al, 2006). In similar offerings by many companies, as it is in the case of airlines, service quality may provide a company the crucial product differentiation. Hence, it has been seen that companies that focus on customer-centric service are more successful than others. Customer satisfaction is what that determines the marketing strength of a service company. Higher customer satisfaction leads to higher purchase intention for the future as well as word-of-mouth communication that reduces the requirement for marketing expenditure for the company (Reichheld, 1990, cited in Park et al, 2006). Service quality has been defined as “the relationship between what customers desire from a service and what they perceive that they receive” (Mackay and Crompton, 1990, cited in Prabaharan, n.d). Although quality management has been a crucial issue in manufacturing industries, it has been more or less in the theoretical literature for service industries. While manufacturing quality can be easily measured in terms of defects, it is difficult to measure service quality (Crosby, 1979, cited in Prabaharan, n.d). Among the few studies on quality that have been done on the service industry, Carson et al (1997) attempted to explain how service organization, service provider and customer interrelationships influence service quality. However, there have been various attempts to quantify the parameters of service quality, which are essentially intangible in nature and hence defying measurement posing a problem for marketing managers. The SERVQUAL model with 22 parameters based on five dimensions – reliability, tangibles, responsiveness, assurances and empathy – have been used by numerous models. However, this model has also been criticized as been centered around performance and hence ignoring expectations (Carman, 1990, Cronin & Taylor, 1992, cited in Prabaharan, n.d). Alternatively, service quality has been analyzed in a hierarchical model in three phases – 1) perception of service quality, 2) five dimensions including physical aspect, reliability, personal interaction, problem solving, and policy and 3) derivative of the second dimension (Dabholkar et al, 1996 cited in Prabaharan, n.d). Colier and Bienstock (2006) expanded the service quality model to include e-commerce and web interaction (Prabaharan, n.d). The global aviation industry is going through a period of over-supply, with a large number of recent entrants (travelbizmonitor). Global domestic and international passengers is expected to grow by only 2.9 percent in 2009, against a previous forecast of 4.5 percent while capacity has grown by 2.2 percent over the year. In the Asia Pacific, traffic growth is expected to be 3.9 percent while capacity growth has been 4.3 percent. This area is also slated to take delivery of a large number of aircrafts over the next year, putting even more pressure on earnings (Travel Biz Monitor, 2008). In this scenario, service quality is extremely crucial for an airline to survive in the competition. Therefore, high-quality service is a marketing strategy for a successful airline since it drives passenger satisfaction and loyalty as well as choice for the future (Alotaibi, 1992; Etherington & Var, 1984; Ostrowski, O'Brien, & Gordon, 1993; Ritchie, Johnston, & Jones, 1980; Young, Lawrence, & Lee, 1994; Wells & Richey, 1996, all cited in Park et al, 2006). For an airline, price and service quality are considered to affect perceived value, passenger satisfaction and airline image, which in turn affect future customer behavioral intentions (Park, Robertson and Wu, 2006). Service quality factors include in-flight service, reservation and ticketing, airport service, reliability and employee service. In the Gronroos model, expanding on the SERVQUAL model, service quality for an airline is measured by seven factors - tangibles, assurance, responsiveness, reliability, empathy, image and technical quality (Bozorgi, 2007). Service quality provides an airline critical competitive advantage, which in turns gives it increased market share (Morash & Ozment, 1994, cited in Park, Robertson and Wu, 2006). However, as Alotaibi, 1992 (cited in Park, Robertson and Wu, 2006) shows, competitive advantage through improvement in service quality is difficult for an airline to sustain because of three reasons: 1) as airlines improve service quality in order to remain competitive, passenger expectation rises and the minimum level of service that passengers demand also rises, 2) monitoring of performance improvement becomes difficult for the carrier and 3) airlines are forced to improve service quality as a result of improvements in logistics management. Suzuki and Novak (2001) showed that the interaction of airline service quality and market share makes the airline demand curve non-smooth than the conventional demand curve. b. Brand Management and Marketing Style There is a substantial academic literature on the strategies used by companies to develop the brand image. Brand strategy is key to the growth strategy of a company, particularly in the service industry like airlines. However, there is no uniform stream in the academic literature that defines brand management tasks. Instead, successful brands have been analyzed in the context of their strengths (Kay, 2006). For the purpose of internal brand building, organizational leadership is crucial (Vallastor and de Chernatony, 2006). However, a company may or may not have a corporate identity, as found by Melewar and Karaosmanoglu (2003) through interviews of marketers. The emotional and functional values of the product are encoded in the mind of the consumers through the brand, which differentiate the product from that of a competitor’s (Franzen and Bouwman, 2001, cited in Martinez and de Chertanoy, 2008). This encoding function is the key to the brand, which Keller (1993, quoted in Martinez and de Chertanoy, 2008) defines as “perceptions about a brand as reflected by the brand associations held in consumer memory”. Hence, through these associations, which refer to any part of the consumer’s memory, match the wavelength of the consumer’s personality and the perception of that of the brands. Hence, the purpose of the brand is to create this association-relationship chain. Brands can relate to a single or a multi-dimensional association, when they concern a single product like air transport. The challenge to the marketer then is to discover the particular association with the brand. In the case of the airline brand, the association may relate to comfort and reliability as well as to service quality and friendliness. Marketing style is closely related with the culture of the target customer set. As Hofstede (2001) notes, most countries fall between a continuum of cultural dimensions, which he categorizes in four groups: 1) Individualism vs Collectivism, 2) Power distance, 3) Masculinity vs femininity and 4) Uncertainty avoidance. In international marketing, a major concern in the present times is whether to design advertising campaigns by keeping in mind a homogenous set of customers across cultures or to incorporate the cultural elements of the society that the product is marketing in. Internet has become a channel of communication, like television, radio or print advertising, hence the cultural attitude towards Internet consumption greatly affects marketing strategies (Hermeking). In early 2000, Internet use was far higher in North America, followed by Europe and then Asia Pacific. The diffusion of Internet depends on both technology access as well as economic development. However, even in highly developed countries like France and Japan, Internet use has been found to be moderate, which can be explained only by cultural differences. Hermeking finds a strong correlation between Hermestde’s cultural dimension of Individualism and Uncertainty Avoidance with internet use. At the same time, there is negative correlation of internet use with the other dimensions, power distance and masculinity. Hence, in countries where the cultural values are towards collectivism, less uncertainty avoidance, more power distance and femininity, internet use was found to be lower. Marketing styles and advertising campaigns are also considerably different across cultures. In the “high-context” cultures like France and Japan, advertisers usually create psychological triggers through pictures and entertainment while direct and rational messages are preferred in “low context” cultures like the USA and Germany. The preferred medium of advertising is also widely different across cultures, based on consumption of different media. However, there are also differences in media consumption – print, television and new media – within each culture. While consumption of print media is higher in western Europe and Asia, that of television is higher in the US. 3. Recommendations Cathay Pacific’s unique selling proposition is its service quality. However, in the times of recession, it is finding it difficult to maintain its margins on higher prices relative to LCCs. Hence, the airline has had to reduce fares, dispose several carriers and postpone plans of building cargo terminals and airport lounges. Hence, it recommended that the company undertakes a ‘brand check’ in order to derive value from the marketing and branding strategies. 1) The company must continue with its clear focus of service brand and develop the customer-centric focus, which has already developed a value over the years. 2) For the survival of an airline brand, the destinations it serve are of crucial importance. It is recommended that the routes, particularly the medium haul routes, are focused as these provide it the maximum traffic. Especially since the LCCs from Asia Pacific typically are concentrated within the region, including Australia and New Zealand, Cathay Pacific’s focus on India and the Middle East will be valuable. 3) It has been found from empirical studies that it is difficult to develop a brand only on service quality since customer expectations of service continuously increases. Hence, there should be a prudent mix of service and cost saving, especially in times of global recession and reduced passenger traffic. Even business travelers, the main customer segment for Cathay Pacific, save air travel costs in times of economic slowdown. Besides, the airline can differentiate service quality according to the various sectors, like short haul, medium haul and long haul, with food, entertainment and cabin décor varying according to convenience requirement and time of travel. 4) Since Cathay Pacific caters to a multitude of countries and hence cultures, it is recommended that it develops different marketing campaigns based on culture. The tone of communication in all the marketing campaigns of the airline is focused on the Chinese hospitality quality, which though appreciated worldwide, may be different from the norms in India or the Middle East, the growing markets for the airline. 4. Conclusion Cathay Pacific’s main brand equity is its service quality and customer focus, which differentiates it from low cost carriers as well as other legacy carriers. Over the recent years, the airline has adopted a strategy to differentiate its service quality by introducing new cabin designs, offering more variety in service elements like entertainment. It has also engaged in high-voltage marketing campaign to highlight these elements. However, as the airline industry has been hit hard by the global financial meltdown, it is increasingly becoming difficult to maintain the service quality. Hence, it is recommended that it makes a prudent choice between service and prices. Works Cited AVBuyer (2008), Worldwide marketing campaign throws spotlight on Cathay Pacific's new cabin designs, http://www.avbuyer.com.cn/e/2008/24607.html Barney, Jay B. (2001) Gaining Sustainable Competitive Advantage, 2nd Edition, Prentice Hall; 2nd edition Carson, P.P (1997) et al, Balance Theory Applied to Service Quality: A Focus on the Organization, Provider, and Consumer Triad, Journal of Business Psychology, Vol 12, No 2 Doganis, Riga (2006) The Airlines Business, Routledge Galpin, Timothy J (1997) Making Strategy Work: Building Sustainable Growth Capability, Jossey-Bass, October 17 Haig, Matt (2004) Brand Royalty: How the World’s Top 100 Brands Thrive and Survive, evrary Inc Hermeking, Marc, Culture and Internet Consumption: Contributions from Cross-Cultural Marketing and Advertising Research, http://jcmc.indiana.edu/vol11/issue1/hermeking.html Hofstede, Geert (2001). Culture's Consequences: comparing values, behaviors, institutions, and organizations across nations, Sage Publications, 2nd edition Martinez, E., Y. Polo and L. de Chernatony (2008) Effect of brand extension strategy on brand image : a comparative study of the UK and Spanish markets.  International Marketing Review  Vol.25, No.1, pp.107-137. Mazzeo, Michael J (2003) Competition and Service Quality in the US Airline Industry, Review of Industrial Organization, 22 Mehdi Bozorgi, Mohammad (n.d) Measuring service quality in the airline using SERVQUAL model: case of IAA Melewar, T. C., Karaosmanoglu, E., Douglas, P. (2003). "Resolving the Corporate Identity Conundrum: An Exploratory Study of the Concept and Its Contribution", Communicating with Customers: Trends and Developments, Veloutsou, C. (ed.), Athens Institute of Education and Research (ATINER), Athens: Greece Park, Jin-Woo et al (2006), The effects of individual dimensions of airline service quality: findings from Australian domestic air passengers, Journal of Hospitality and Tourism Management, August 1 Prabaharan, B et al (n.d) Service Quality on Tourism: Application of Structural Equation Modeling, http://dspace.iimk.ac.in/bitstream/2259/550/1/143-150+prabhaharan.pdf Simplifying (2009), Cathay Pacific reveals the faces behind the brand, in an interactive way http://simpliflying.com/2009/cathay-pacific-reveals-the-faces-behind-the-brand-in-an-interactive-way/ Suzuki, Yoshinori et al (2001) Airline market share and customer service quality: a reference-dependent model, Transportation research. Part A, Policy and practice Travelbizmonitor (2008) Aviation industry in Asia Pacific region to recover by 2009 : IATA, September 13, http://www.travelbizmonitor.com/aviation-industry-in-asia-pacific-region-to-recover-by-2009--iata-3642 Vallaster, C and L de Chernatony (2006) Internal brand building and structuration : the role of leadership . European Journal of Marketing, Vol.40, No.7/8, pp.761-784 Read More