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Market analysis of cathay pacific airlines

Paper Type: Free Essay Subject: Marketing
Wordcount: 3522 words Published: 1st Jan 2015

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Cathay Pacific is the world’s third most profitable (by net profit) airline. It is registered and based in Hong Kong, and currently employs about 20,000 people. The report discusses some concepts of marketing management and applies them for analyzing the marketing strategy of Cathay Pacific.

Segmentation, market targeting and positioning are the important processes of marketing planning. Mass market is divided into smaller segments in which customers share similar set of wants and needs. Marketers identify segments and select the most feasible and profitable segments to target. Cathay Pacific targets business travelers by Preferred Account Program and MICE Promotions. Emphasizing the commitment to Hong Kong is a differentiation positioning strategy of Cathay Pacific. Besides, Cathay Pacific positions itself as an airline offering quality services from heart. “People and Services” is the current brand building campaign for strengthening this position.

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Cathay Pacific handles customer complaints through multiple channels such as comment card, web site and frontline staff because number of complaints is an indicator which can reflect customer satisfaction indirectly. In addition, Cathay Pacific continually carries out customer satisfaction survey proactively. The results of satisfaction indicated that customer is satisfied with Cathay Pacific’s services. Satisfied customers lead to customer loyalty and, in turn, enhance brand equity. But Cathay Pacific still manages two-tiered loyalty program to maintain and enhance customer loyalty.

Besides Customer Relationship Management, Cathay Pacific has put much effort on building long-term relationship with its partners. Oneworld is a global airline alliance initiated by Cathay Pacific. Through Oneworld, Cathay Pacific established a global network with 11 airlines, sharing a larger base of customers. Recently, Cathay Pacific has signed a content agreement with Amadeus offering Amadeus agents access to a comprehensive range of Cathay Pacific and Dragonair fares, schedules and availability because travel agency is still a key sales channel for Cathay Pacific. Long-term relationship with distributor and travel agency is critical for the success of Cathay Pacific.

TABLE OF CONTENTS

1. INTRODUCTION

The purpose of marketing management is to profitably create customer value by managing marketing activities effectively and efficiently. Segmentation, targeting and positioning are important marketing strategies for helping a firm build “the right relationships with the right customers” (Kotler & Armstrong, 2004), so that its customers are satisfied and stay loyal to it, and the firm’s brand equity is enhanced. In this report, the author will discuss the above mentioned marketing concepts and critically analyze the marketing activities and strategic implemented by Cathay Pacific by applying these concepts.

Cathay Pacific (hereafter as CX) is a Hong Kong based airline, offering scheduled passenger and cargo services to 141 destinations. CX has long history with Hong Kong since it was founded in Hong Kong in 1946. It has shown deep commitment to Hong Kong and invested substantially to develop Hong Kong as one of the world’s leading global transportation hubs (Cathay Pacific, 2011a). Together with its subsidiaries, it employs about 20,000 people in Hong Kong in 2010 (Cathay Pacific, 2010b). Despite the fact that airline industry is intensively competitive (Alamdari & Mason, 2006), CX ranks currently as the world’s third most profitable airline by net profit and fourth by operating profit (Cathay Pacific, 2011a). This reflects CX should have done right in marketing management. Analyzing CX’s marketing strategies has academic significance to the understanding of theoretical foundations of marketing management, and practical significance to the understanding of the successful applications of marketing concept by CX.

The report contains sections discussing the three major phases of marketing management: the planning phase involving the decision of segmentation, targeting and positioning; the control and monitoring phase involving the evaluation of customer value, customer satisfaction and loyalty, and brand equity; the implementation phase involving the use of marketing mix to implement relationship marketing.

2. SEGMENTATION, TARGETING AND POSITIONING

Segmentation, market targeting and positioning (STP) are inter-connected steps for planning marketing strategy. Segmentation involves dividing the market into several smaller segments with relatively homogeneous customer wants and needs. Targeting involves a firm’s decision of selecting one or more target segments to serve. Positioning involves the planning of marketing activities in order to position a brand or a market offering in the mind of customers (Kotler & Keller, 2009). The concepts of segmentation, targeting and positioning are discussed. Then the concepts are applied to the context of airline industry in which CX competes.

2.1 SEGMENTATION

It is supposed that mass marketing is one of the key to operational efficiency because it leads to lowest costs by creating the largest potential market (Kotler & Keller, 2009). Fords and Coca Cola had successfully practiced mass marketing by offering only one kind of market offering. Customer preferences are increasingly diversified. Mass marketing has been no longer effective. For example, we can find various kinds of Coke such as Classic, Diet, and Zero at various packages at supermarkets.

Mass market consists of customers with heterogonous needs and wants. They cannot be satisfied by a standardized product or service. It should be divided into smaller segment in which customers share a similar set of needs and wants, so that market offerings are better designed to serve these customers.

Researchers and marketers usually use two sets of characteristics for segmenting markets: descriptive characteristics and behavioral characteristics. Descriptive characteristics include geographic, demographic, and psychographic. Behavioral segmentation used behavioral variables such as occasions, benefits, user status, usage rate, buyer-readiness stage, loyalty status, and attitude to segment markets (Kotler & Keller, 2009).

The choice of segmentation basis should address the different contexts of the industries under studied. Traditionally, airlines use transportation class to segment their customers into business and economy passengers. As a result, they design flexible products and services for business passengers and low-priced for economy passengers. Another consideration in segmenting market is whether the segmentation scheme is useful. Five criteria are used to evaluate the effectiveness of the segmentation scheme: measurable, substantial, accessible, differentiable, and actionable.

2.2 MARKET TARGETING AND POSITIONING

The task of marketers is to identify the segments and decide which segment or segments to target. A firm may concentrate on a single segment (single-segment concentration) or select several segments in which customers have similar needs (market specialization) or served by a certain product (product specialization). Some firms may select a number of attractive and appropriate segments (selective specialization) or serve all customer groups (full market coverage). In summary, there are five patterns of target market selection: single-segment concentration, selective specialization, market specialization, product specialization, and full market coverage (Kotler & Keller, 2009).

Kotler and Keller (2009: 288) define positioning as “the act of designing the company’s offering and image to occupy a distinctive place in the mind of the target market”. The actions require the marketers to create Point-of-difference (PODs) and Point-of parity (POPs) with respect to the competitive frame of reference. PODs are strong, favourable and unique benefits or attributes associated with a brand. POPs are attributes that consumers view to essential within a certain product or service category. Therefore, brand positioning needs differentiation while convincing consumers it belongs to a product or service category.

2.3 APPLYING STP STRATEGY TO CATHAY PACIFIC

CX has four types of seating: first class, business class (main deck), business class (upper deck), and economy class. It seems to suit the traditional dichotomous business/economy segmentation. In addition to the travelling reason, there are four segments identified (Table 1):

Business class/business reason

Business class/leisure reason

Economy class/business reason

Economy class/leisure reason

Table 1: Traditional Airline Segmentation

Travelling Reason

Business

Leisure

Seating Class

Business

1. Business class/ Business reason

2. Business class / Leisure reason

Economy

3. Economy class / Business reason

4. Economy class / Leisure reason

However, Teichert, Shehu and Warburg (2008) argue that the segmentation does not adequately reflect the heterogeneity in customers’ preference patterns. They suggest an alternative segmentation approach that is better suit the highly competitive market and the changing customer preferences. Five segments are identified according to preferences for different product features and profile the segments using additional attitudinal and socio-demographic variables:

Efficiency/punctuality

Comfort

Price

Price/performance

Catch all/flexibility

The product attributes included in this study are flight schedule, total fare, flexibility, frequent-flyer program, punctuality, catering, and ground services.

However, CX seems to use behavioral variable, occasion, as its segmentation basis. There are three segments identified and targeted by CX: corporate business travelers; MICE (meetings, incentive travel, conventions or exhibitions); holiday travelers. Preferred Account Program (PAP) is the marketing campaign for targeting the business travelers supported by their company (Cathay Pacific, 2011b). MICE Promotions is the marketing campaign to meet the needs of MICE travelers (Cathay Pacific, 2011c). Cathay Pacific Holidays is a strategic business unit for serving leisure travelers (Cathay Pacific Holidays, 2011). CX adopts the selective specialization as its market targeting strategy. This multi-segment strategy has the advantage of diversifying the business risk of CX.

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Studies found that service quality is central to the choice of airlines for both business and leisure travelers (Aksoy, Atilgan & Akinic, 2003; Chang & Yeh, 2002; Gilbert & Wong, 2003). IATA carried out research in 1997 in North America, Europe and Asia, and found that passengers favoured punctuality and scheduling over price (Collis, 1998). Therefore, Superior service quality could be regard as the POP for benchmarking competitors in airline industry.

CX has differentiated itself from other airlines by positioning CX as the Hong Kong based airlines and its passionate staff. CX has never given up any chance to reiterate it is an international airline registered and based in Hong Kong (Cathay Pacific, 2010a; 2010b). In 2004, CX launched a comprehensive integrated media plan for a new branding campaign called “People & Service” (Lloyd, 2005). The campaign highlights CX’s continuing dedication to providing all of its passengers with outstanding service by focusing on the personalities and philosophies of individual members of staff (Johnson, 2010).

3. BENEFITS OF STP STRATEGY

The marketing benefits of STP strategy are customer value, customer satisfaction and loyalty, and brand equity. These concepts are discussed and CX’s performances in terms of these concepts are examined.

3.1 CUSTOMER VALUE

Customer value is the difference between the customer’s evaluation of all the benefits and all the costs of an offering. Benefits include economic, functional and psychological benefits. Costs include monetary, time, energy and psychic costs. Therefore, customers evaluate not only the monetary costs incurred from using airline service when they are selecting airlines. Although low-cost carriers have entered the airline market and changed the competitive landscape, superior service quality is continually the major source of competitive advantage for competing in the industry. Gilbert and Wong (2003) found that on-time performance of flights and safety are the first priority for passengers. Airlines that fail to deliver punctuality and safety confidence to passengers will cost travelers more than the ticketing cost substantially.

The ticketing costs of CX are not cheap. But passengers are compensated by the superior service quality including on-time performances of flights, scheduling, responsive and courteous staff, and other benefits. The customer values they received are higher than other airlines.

3.2 SATISFACTION AND LOYALTY

Customer satisfaction is the comparison of customer expectations with perceptions regarding a service encounter. Comparing customer expectations with their perceptions is based on the expectancy disconfirmation model. When perceptions exceed expectations, customers are satisfied; when perceptions are less than expectations, customers are dissatisfied (Hoffman & Bateson, 2006).

Customer satisfaction can be measured directly by proactive collection of customer satisfaction data through customer satisfaction surveys. It can be measured indirectly by tracking customer satisfaction through changes in sales, profits, and number of customer complaints registered.

Enhancing customer satisfaction is one of CX’s key objectives. CX measures customer satisfaction through ongoing Reflex Passenger Survey. They collect around 30,000 responses for both Cathay Pacific and Dragonair per month (Cathay Pacific, 2010c). The purpose of the survey is to evaluate what passengers think about the travel experience with CX. The 2009 results showed a significant increase in most areas of customer satisfaction relating to CX services.

Focus group discussions led by an independent party to obtain feedback from a sample of Marco Polo Club members (our most frequent flyers) is another measure for monitoring customer satisfaction. CX has several channels such as comment cards, online complaint system, and frontline staff, for collecting and handling Complaint. Any complaint received is investigated and a reply is made within 14 days.

A highly satisfied customer generally stays loyal longer, communicates positive word-of-month about the company and its products or services, pays less attention to competing brands, is willing to pay premium prices, and costs less to serve than new customers. The above benefits of satisfaction in turn are translated into the company’s profitability (Cronin, Brady & Hult, 2000; Zeithaml, Berry & Parasuraman, 1996). The fact that CX is the world’s third most profitable airline reflects its level of customer satisfaction indirectly.

Loyalty is the result of highly satisfied customers. It is a deeply held commitment to re-buy or re-patronize a preferred product or service. Besides, loyal customers have less switching behavior (Cronin et al., 2000). Loyalty is significant to a firm’s profitability because retaining loyal customer costs less than attracting new customers (Zeithaml et al., 1996). To create and maintain customer loyalty, CX has two loyalty programs: The Marco Polo Club and Asia Miles.

The Marco Polo Club is a loyalty program that that offers a range of privileges to CX most frequent flyers. The privileges include 24 hours toll-free service line and priority check-in and boarding. Asia Miles is a frequent flyer reward program which becomes a necessity for all airlines. But Asia Miles has been named as the “Best Frequent Flyer Program” in the 2009 and has consequently won this award for five years. There were roughly 3.6 million Asia Miles members and 500,000 Marco Polo members in 2010 (Wikipedia, 2011).

Almost all airlines run a Frequent Flyer program and it can become financial burden. CX manages a more efficient Frequent Flyer program by developing a tired program. Asia Miles offer frequent-flier miles for every passengers including the occasional travelers. Membership of the Marco Polo Club is awarded to the top customers. Even the membership is divided into four tiers, Green (entry level), Silver, Gold and Diamond, based on the member’s past travel. Each tier enjoy different sets of benefits.

3.3 BRAND EQUITY

Brand equity is the added value endowed to products and services. It is important intangible asset that has psychological and financial value to a firm (Kotler & Keller, 2009). Brand equity can be viewed from customer’s perspective. It can be viewed as the differential effect that brand knowledge has on customer response to the marketing of that brand. There are a number of brand equity models such as brand asset valuator, AAKER model, BRANDZ, and brand resonance pyramid. For example, BRANDZ model suggests brand building involves a sequential series of steps:

Presence. Do I know it?

Relevance. Does it offer me something?

Performance. Can it deliver?

Advantage. Does it offer something better than others?

Bonding. Nothing else beats it.

If you use this model to evaluate CX customers’ perception of its brand equity, most of them may be found at the fourth level (Advantage).

4. BUILDING LONG-TERM RELATIONSHIPS

Long-term relationships with business partners can be sources of competitive advantage. The policy that CX builds long-term relationships with its channels, dealers and agencies is examined in this section.

4.1 CRM VERSUS PRM

Customer Relationship Management (CRM) is “the process of managing detailed information about individual customers and carefully managing all customer touch points to maximize customer loyalty” (Kotler & Keller, 2009: 144). Besides loyal customers, many companies have discovered they need strategic partners if they want to be effective. Partnership Relationship Management is the process of deepening the partnering arrangements with key suppliers and channel members, thinking them not as customers but as partners in delivering value to final customers (Kotler & Keller, 2009).

4.2 PARTNERSHIP PROGRAMS WITH CHANNEL MEMBERS

Internet is a common distribution channel for airlines. Individual customers can book their flights online. However, travel agency is still key sales channel for airlines. Alliance with other airlines is another way to improve an airline’s load factor.

CX is the founding member of Oneworld. Oneworld is a global airline alliance with 11 members, offering a wider range of alliance fare and sales products. With Oneworld, passengers can plan their trip more flexibly because the members can offer a wide range of schedules, routes and destinations. On the other hand, the partnerships share a larger customer base.

CX needs to share fares, schedules and availability to travel agencies so that they can sell its products and services to final customers. In 2009, CX introduced a new, more sophisticated Internet booking system with features such as a fare calendar to all countries in which CX operates (Cathay Pacific, 2010a).

The agreement signed with Amadeus is another example of CX’s effort to develop partnership with travel agencies. Amadeus is a leading travel technology partner and transaction processor for the global travel and tourism industry. CX signed an extensive long-term Content Agreement with Amadeus in 2010. The agreement offers Amadeus agents access to a comprehensive range of CX and Dragonair, its subsidiary, fares, schedules and availability. Amadeus as a distribution partner of CX, with the new agreement, can distribute CX’s content to more than 90,000 travel agency points of sales worldwide. The long-term relationship could be mutually benefited (Amadeus, 2010).

5. CONCLUSION

CX positions itself to be a Hong Kong based airlines and is eager to offer superior service from heart. It differentiates its brand by passionate staff and services and offers promotions such as MICE and PAP to target more profitable business traveler segment. With their excellent loyalty programs, CX enhances its profitability through satisfied and loyal customers. Deeply cultivating long-term relationships with partners is another source of its competitive advantage.

 

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