Price Discrimination Strategy by Cathay Pacific Airways Limited: An Integrative Study

Running head: PRICE DISCRIMINATION STRATEGY BY CATHAY PACIFIC
AIRWAYS LIMITED: AN INTEGRATIVE STUDY.
Price Discrimination Strategy by Cathay Pacific Airways Limited: An Integrative Study
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1PRICE DISCRIMINATION STRATEGY BY CATHAY PACIFIC AIRWAYS LIMITED:
AN INTEGRATIVE STUDY.
Abstract
Hong Kong is mostly regarded to have a free and competitive market economy. There are
however no laws that regulates degree of competition in the economy. The paper analyzes
price discrimination in Hong Kong aviation industry. The specific focus is on price
discrimination strategy of Cathay Pacific Airways Limited. Cathay Pacific is a Hong Kong
based airline company operating a large number of subsidiaries in the aviation industry of
Hong Kong. The company offers a range of services that include ground handling, different
flight classes, special offers for student tickets and domestic helper, catering services and in-
flight entertainment service. Members of macro polo club enjoys additional benefits
depending on their membership in categories like green, gold, silver and diamond. Ticket
fares vary both across cabin classes and travelling distance. The most common form of price
discrimination is the third degree discrimination where market is segregated between elastic
and inelastic demand. The fare prices of Cathay Pacific are compared with its domestic and
international competitors. The success of price discrimination strategy has been evaluated in
terms of revenue and profit trend over time. Because of stay loss in past two years and market
failure of the company due to incomplete information, the company needs to focus on
switching its pricing strategy.
Key words: Competition, regulation, price discrimination, market failure.

2PRICE DISCRIMINATION STRATEGY BY CATHAY PACIFIC AIRWAYS LIMITED:
AN INTEGRATIVE STUDY.
Table of Contents
1.Introduction.............................................................................................................................3
1.1 The company’s product/service portfolio........................................................................3
1.2 The market for this product/service.................................................................................3
2. Case Study Design and Planning...........................................................................................4
2.1 Objectives and research question.....................................................................................4
2.2 Data Collection method....................................................................................................5
2.3 Data Analysis method......................................................................................................6
3. Analysis and discussion.........................................................................................................6
3.1 The price discrimination technique used by the company...............................................6
3.1.1 Different types of seat offered by Cathay Pacific Airways Limited.........................6
3.1.2 Prices of different types of ticket..............................................................................8
3.1.3 Price elasticity of demand for different types of seats............................................14
3.1.4 Technique of price discrimination..........................................................................15
3.2 Comparative analysis of ticket price of Cathay Pacific Airways Limited and its
competitors...........................................................................................................................16
3.3 Performance of the company for the last ten years........................................................19
3.4 Incomplete information and market failure....................................................................20
4. Conclusion and recommendation.........................................................................................21
4.1 Conclusion......................................................................................................................21
4.2 Recommendation............................................................................................................22
5. References............................................................................................................................23

3PRICE DISCRIMINATION STRATEGY BY CATHAY PACIFIC AIRWAYS LIMITED:
AN INTEGRATIVE STUDY.
1.Introduction
Cathay Pacific Airways Limited is a flag carrier of Hong Kong with head office
located at Hong Kong international airport. The parent company and its subsidiary provide
scheduled cargo and passenger services covering 190 destination spread across 60 countries
worldwide. Cathay Pacific operate in a commercial airline industry. Additionally, they are
considered as one of the largest cargo airline in the international market (cathaypacific.com
2018).
1.1 The company’s product/service portfolio
Cathay Pacific Airways Limited along with its subsidiary operates as an airline
providing scheduled passengers and cargo services to nearly 200 destinations in Asia, North
America, Europe, Australia and Africa. Operations of the company are divided into two
segments – airline and non-airline business. Operations of the company are mainly operated
to and from Hong Kong. Ground handling is one of the primary service of the company1.
The company offers different flight classes. These are first class, business class, premium
economy class and economy class2. Other services of the company include in-flight
entertainment service and catering services.
1.2 The market for this product/service
Market power of a company depends on structure of the market in which it operates.
Air industry in most countries an oligopoly market structure such that few large companies
dominate the market (Lam 2000). The main competitors of Cathay Pacific Airways are
Singapore Airlines, Air China, SkyWest, Republic Airways and International Consolidated
Airlines. The industry in which Cathay Pacific operates have the following oligopolistic
1 Ground handling: At the beginning of 2007, Cathay Pacific introduced more methods for flights check in.
Among the various methods launched one was self-check in using a kiosk at the Hong Kong International
Airport and some other selected destination and check in via a cell phone. Cathay Pacific is also known for
launching first boarding pass mobile application and dubbed CX mobile.
2 First class: First class seats have 6 seats in a configuration of 1-1-1. Passengers travelling in first class cabin
can convert their seats to a fully lie flat bed with a measure of 21 inch × 81 inch.
Business class: The company launched a new seat for the category of business class in 2011.The new seat
features a herringbone and has a seat arrangement in configuration of 1-2-1. Like first class seat, business class
seat can be also converted to a fully flat with a width of 21 inch and length of 82 inch
Premium economy class: Cathay Pacific launched its premium economy class in March in 2012. The seat pitch
is six times more time than that of the economy class. The seats are bigger and are wider as compared to
economy class
Economy class: Cathay Pacific introduced its new economy class in March 2012. The economy class seats have
six-inch recline. The seats have 32-inch pitch and 17.5-inch width.

4PRICE DISCRIMINATION STRATEGY BY CATHAY PACIFIC AIRWAYS LIMITED:
AN INTEGRATIVE STUDY.
features. Product differentiation3 is one of the key features of the market. Other
characteristics of oligopoly market include high entry barriers and limited competition from
Hong Kong4.
Rest of the paper is designed as follows. Section 2, briefly summarizes design and
planning of the case study. Section 3, provides analysis and discussion of price discrimination
strategy of Cathay Pacific. Finally, section 4 draws conclusion depending on discussion in the
three previous sections and recommendation are given for future marketing strategy of the
company.
2. Case Study Design and Planning
This section provides a brief outline for detailed research analysis. The first important
thing for the research analysis is to clearly specify the research objectives. Depending on the
research objectives the research questions are framed to address the research goals. The next
thing is to determine the data collection method. The last and most import thing that this
section summarizes is the technique of data analysis.
2.1 Objectives and research question
The research paper aims to evaluate price discrimination technique used by Cathay
Pacific Airways Limited. More specifically the objective is to evaluates success of price
discrimination techniques of the company. Objective of the paper is as follows.
 To find out how elasticity for different seats varies among different consumers
 To find out the technique of price discrimination
 To find out how ticket price of Cathay Pacific differs from that of its competitors
 To find out trend in revenue and profit over the last ten years
 To find out how incomplete information leads to market failure
3 Product differentiation: All the competing companies in the industry operates in the similar international
routes. As the competing firms offer similar services at the similar prices there is some degree of differentiation.
Products are differed in terms of design of seats and offered amenities.
4 High Barriers to entry
There are high entry barriers in the industry. This indicates the industry operates in an oligopoly
market. The entry restrictions are not only in the form of government intervention but also in there is high cost
for huge capital requirement and other operating expenses that are required to a business in the industry.
Limited competition from Hong Kong
There are although similar airlines such as AirAsia offering services to the same route but they do not
operate directly from Hong Kong and hence, cannot capture the majority of Hong Kong Market. Cathay Pacific
provides flight services across Asia that are in high demand due to reputation of brands and customer loyalty.

5PRICE DISCRIMINATION STRATEGY BY CATHAY PACIFIC AIRWAYS LIMITED:
AN INTEGRATIVE STUDY.
Based on the research objectives, following research questions are framed
 How ticket prices vary among different classes?
 How elasticities of demand vary for different types of seat and for different
consumers?
 What is the technique of price discrimination of the company?
 How ticket price of Cathay Pacific is different to that of its competitor?
 What is the trend of revenue and profit of the company for the last ten years?
 How incomplete information leads to market failure for the company?
2.2 Data Collection method
Data is considered as the fundamental need for certifying the success in the research
study. The collection of appropriate data depends on the nature of the study and the targeted
result to be obtained. In this connection, data are classified into two categories based on
technique of data collection – primary data and secondary data. Primary data refers to the
data collected by the researcher following the process of sample survey or interview.
Secondary data in contrast are collected from secondary sources such as books, Journals and
official websites in order to understand the speculative condition and historical presentation.
This helps to analyze the current trend in the identified research issues (Dul and Hak 2007).
Researchers mostly rely on secondary data sources because of their easy availability from
different online and offline sources. The primary data are considered as more reliable than
secondary data as they are directly collected by the researchers. For purpose of the current
study secondary data has been collected.
Data are again of two types based on their nature – quantitative data and qualitative
data. Qualitative data represents specific attribute of the chosen variable. While quantitative
data refers of fragmented information that can be evaluated to deduce required information to
obtain targeted research result. The quantitative data offers information on subject of
inclination towards human perception considering specific study information (Hofisi, Hofisi
and Mago 2014). The paper collets secondary data on fares of different types of seats has
been collected from official website of Cathay Pacific Airways Limited and from the website
of Hong Kong airlines websites. The data on company’s profit for ten years has been
collected from annual reports of the company that are available in the company’s site. The
collected data are then analyzed following particular data analysis technique that has been
discussed in the following subsection.