Strategic

Management
Case 22
MGM490 Section C

Submitted to: Professor Elie Chrysostome 26th April, 2012

Group: 14 Matt Johnson Ting Zhang Yin Zhang Dan Tracy

Hong Kong Oasis Airline

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History
February 2005, Oasis Hong Kong Airlines was founded October 26, 2006, the first flight, flight O8 700, took off from Hong Kong International Airport after a 24-hour delay June 28, 2007, Oasis offered non-stop service from Hong Kong to London, and began a service to Vancouver

Stephen H. Miller

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History (cont.)
The airline was voted "Worlds Leading New Airline" at the Annual World Travel Awards 2007
April 9th 2008, Oasis's CEO Stephen Miller announced at a press conference that the company would cease operations after suffering an accumulated loss of US$128 million The last flight, flight O8-901, departed from Vancouver at 10:15 am and arrived at Hong Kong at 3:09pm
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The Oasis Model

Oasis Hong Kong Airlines offers low-cost long-haul flights with standard service offered in traditional carriers Offers two classes: economy & business class while other low-cost carrier only offer economy class One way route to London Gatwick (UK) & Vancouver

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Key Strategic Issues

Lack Airline Fleet
Limited route selection

Frequent fluctuation in fuel price results a high fuel cost

Lack of hubs and connections to primary cities Higher operating costs than expected
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External Analysis
General Environment Industry Analysis Competitor Analysis

Hong Kong Oasis Airline Demographic Global Economical

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Technological

General Environment

Political

Socio-cultural

Legal

General Environment
Demographic, Economical, Political, Legal, Socio-cultural, Technological, Global
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Demographic Segment
Oasis Airlines target market focuses on frequent flyers between Hong Kong and major cities worldwide Focuses on economy class passengers as well as business class passengers First low-cost, long-haul carrier service in Asia.
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Economical Segment
Signs of global economical recession since 2007 Rising in oil price since 2006 Hong Kong adopts a capitalist and liberal economic

system

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Political Segment
A stable political environment & high public transparency
Low tax system

Well organized and developed transportation

infrastructure

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Legal Segment
Worldwide deregulation following United States
International air traffics are regulated by bilateral air

service agreement between countries

Different regulations in different countries

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Socio-cultural Segment
Higher rate of expenditure during the holidays
Mixture of Eastern and Western culture

Bilingual in English and Cantonese

Many people send their children to study abroad

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Technological segment
Introduction of newer and more efficient aircraft Converting older models to freighters

Many airline companies planned to replace the

Boeing 747-400s with Airbuss A380, but were forced to hold the 747-400s longer due to an unexpected 22 month delay in the Airbuss A380 programs
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Global Segment
Average air fares dropped by 35%
Major airlines settling on few major hubs as foundation for connecting passenger and cargo traffic to other destinations. Worldwide competitive pressure triggered series of privatization of flag carriers in Europe and Asian countries
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Threat of New
Entrants

Bargaining Power
of Buyer

Rivalry Among Existing Competitors

Bargaining Power of Supplier Threat of Substitutes

Industry Analysis
Threat of new entrants & substitutes; Bargaining power of supplier & buyer
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High barriers to entry due to high startup cost Low

Competitive deal in airfare

Many airlines to

Threat of New Entrants

Bargaining Power of Buyer

choose from High

Rivalry Among Existing Competitors High

Moderate

No other low-cost
long-haul airlines Many airline offer different types of services

Threat of Substitutes

Bargaining Power of Suppliers

High

Fluctuation
in fuel price cause high fuel cost Acquisition price of aircraft is high
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Hong Kong Airline Industry

Hong Kong act as a hub and connection point for air traffic between the eastern and western world
Over 100 airlines operate flights to about 160 locations worldwide, The Hong Kong International Airport handled around 40.7 million passengers and 3.4 million tons of cargo during its first year of operation Hong Kong International Airport ranked 5th busiest airport in the world By 2005, airport authorities had already reported a profit of HK$1.41 billion attributable to equity shareholder. The Board of Directors declared a dividend of HK$1 billion, payable to the HKSAR Government

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Operation Statistic for Hong Kong International Airport

Year Passenger Movements 28,631,000 30,394,000 33,374,000 33,065,000 34,313,000 27,433,000 37,142,000 40,740,000 Airfreight movement (tonners) 1,628,700 1,974,300 2,240,600 2,074,300 1,637,797 2,642,100 3,093,900 3,402,000 Aircraft movement 163,200 167,400 181,900 196,800 206,700 187,500 237,300 263,500

1998 1999 2000 2001 2002 2003 2004 2005

2006
2007 2008

44,443,000
47,783,000 48,582,000

3,580,000
3,742,000 3,627,000

280,000
295,580 301,000
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Competitor Analysis
Cathy Pacific Airways, Air Hong Kong, Hong Kong Dragon Airways
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Type of Carriers
Scheduled Airlines

Commercial Carriers

Feeder Airlines

Charter Airlines

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Major Players

Hong Kong

International

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Cathy Pacific
Carrier type: de facto flag carrier Largest airline in Hong Kong Reputation as best in the industry with regular & frequent updates of seats, entertainment systems, meal options, and other in-flight amenities
Named Airline of the Year by: Skytrax in 2003 & 2005 Air Transport World in 2006

Two loyalty programs: the Marco Polo Club, Asia Miles

Established large number of code-share agreements with major carriers worldwide
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Hong Kong Dragon Airlines

Carrier type: flag carrier Headquartered in Hong Kong Wholly owned subsidiary of Cathy Pacific Had its own loyalty program: Elite
Later merged into Marco Polo Club, Asia Miles

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Air Hong Kong

Operates an express freight network to 12 destinations in nine countries, including China, Japan, Malaysia, Philippines, Republic of China (Taiwan), Singapore, South Korea and Thailand. Headquartered in Hong Kong Subsidiary of joint-venture between Cathy Pacific & DHL

Cargo fleet
Focuses on Asia market
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Internal Analysis
Competitive advantages Tangible and intangible resources Core competences value chain Performance appraisal

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Competitive Advantage
Oasis marketed itself as a long-haul, low-fare carrier that
offered exceptional value with customizable options Oasis would only serve long-haul routes Offered two classes of service, targeting both economy and business-class passengers

Competitors offered only economy

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Competitive Pricing
Hong KongLondon round-trip departing on October 31,2006, and returning on November 10, 2006 (depending on level of travel restrictions)

Airline
Hong Kong - London round-trip economy ($) Hong Kong - London round-trip business ($)

Oasis

Cathay Pacific

British Airways HK$2,250 ~ HK$4,525 HK$21,350

Virgin Atlantic HK$5,532 ~ HK$17,263 HK$44,897 ~ HK$46,813

HK$1,000 HK$5,880 ~ HK$9,550 HK$6,600 HK$44,952

Cathy Pacific was 190 to 380 % more expensive than Oasis

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Aircraft Utilization & Efficiency

It was expected that Oasis could achieve average aircraft utilization in excess of 15 hours per day Low operating unit cost on a per available seat/kilometer basis Spending a large proportion of time in cruise, an aircraft flying long-haul would have fewer takeoffs and landings Lower maintenance costs for the airframe and engines Lower fuel consumption

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Aircraft Utilization & Efficiency (cont.)

Using secondary airports to save on costs Gatwick instead of Heathrow in London Oakland instead of San Francisco in California (initial plan) Milan in Italy and Cologne in Germany under consideration (didn't follow through) Flying into hubs of major low-cost carriers (EasyJet, German Wings, Southwest and JetBlue)

Oasis hoped to receive feeder traffic from them and feed traffic to these carriers
Required interline ticket sales, check-ins, and baggage transfers
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Cargo Hub
Hong Kong was a major air cargo hub for the Asia-Pacific region Demand consistently high for cargo space

Market prices, especially on routes to Europe and North America were very high
Hong Kong Air Cargo Terminals Limited

Oasis appointed Hactl as its cargo terminal operator at the Hong Kong International Airport to provide physical cargo handling service.
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Oasis Value Chain

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Support Activities
Firm Infrastructure, HR Management, Technology, & Procurement

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Firm Infrastructure
The airline operated on two routes, from Hong Kong to
London Gatwick Airport & Vancouver International Airport

Human Resource Management

Chairman: Raymond Lee

Chief Executive: Priscilla Lee

Chief Financial Officer: Francis Wai
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Human Resources (cont.)

CEO: Stephen H. Miller Miller began Hong Kongs Dragonair and served as the airlines CEO until he left when the Swire Group bought into Dragonair in 1990. If we bought aircraft at the right price and the market stayed strong, then I was sure it could work. You have to have a feel for the business. -Miller

Had roughly 700 crew members in total by 2008

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Hong Kong Oasis Airline

Raymond Lee & Priscilla Lee

Stephen Miller
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Technology
2 Boeing 747-412
3 Boeing 747-481 Max cruising speed: 939 km/hr

Cargo hold: 170.5 m3

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Procurement
First two aircrafts previously owned by Singapore Airlines, delivered September 19, 2006 and November 24, 2006.

All Nippon Airways announced on 6 March 2007 that it

has successfully sold three Boeing 747-400s to Oasis

Growth Income and Investments Limited, for operation

by Oasis Hong Kong Airlines.
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Market Value of a Boeing 747-400

(in US$ millions)
Value (Market)
Vintage 1989 1991 1993 1995 1997 1999 2001 2003 2005 33.9 45.5 56.9 68.4 79.9 91.4 103.0 114.5 *Oasis fleet

Future Value
2009 19.5 26.5 33.9 41.7 50.0 59.1 68.1 76.1 2012 13.7 18.9 24.5 30.5 37.1 44.6 52.5 60.2

First two aircrafts: Vintage 1989, purchased in 2006 Next three aircrafts: Vintage 1999-2000, purchased in 2007
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Primary Activities
Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales, Service

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Inbound Logistics
Two hot meals and soft drinks were served free on both long haul routes in all classes. Snacks and alcoholic drinks free for business class passengers and available to be ordered in economy. Free headphones, blankets and pillows distributed in all classes, while passengers could purchase noise-canceling headphones and amenity kits onboard. Each passenger had their own seat-back TV which had at least 16 channels available, in addition of up to 12 channels of audio, although these were not on demand.

The 747-400 cabins were configured for 81business and 278 economy passengers
Seat pitch of economy Oasis was 32 Seat pitch of business Oasis was 60
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Operations
Oasis offered daily service to London and six flights a week to Vancouver

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Outbound Logistics
Oasis adopted the traditional carriers model and relied on brick-and-mortar travel agents to sell tickets

Passengers also able to buy tickets directly on company

web site or through a call center

Four fare classes to select from

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Fare Types

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Flexi Fare

Available year round Reservation held for 72 hours before payment Unlimited free changes to flight and date Changes to passenger name allowed on payment of change penalty plus fare difference Refundable subject to cancellation penalty

Advance Purchase Fare Value Fare

Booked 45, 21, or 14 days in advance Payment must be made at time of flight confirmation Changes to flight, date, & passenger name allowed with penalty and fare difference Refundable subject to cancellation penalty

Semi Flexible fare available year round Payment must be made at time of flight confirmation Changes to flight, date, & passenger name allowed with penalty & fare difference Refundable subject to cancellation policy

Hot Deal

Discount value fare Payment must be made at the time of flight Changes to flight date, and passenger name not permitted Non refundable

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Marketing and Sales

October of 2006 online promotion: Be The First To Fly
100 free flights between London & Hong Kong

Permitting agents to register on the firms site to vend tickets Focus groups Email feedback and response

http://www.youtube.com/watch?v=m DnEXE0L8AM

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Marketing and Sales

Oasis signed an agreement with Galileo GDS (a global
travel distribution system) Allowed Oasis' fares and inventory to be added to the Galileo GDS to supply a platform that permits the airline to examine online and offline total travel distribution.

Oasis was able to sell its tickets more effectively through

Galileo's wide-ranging exposure to agent locations.

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Services
Partnered with various hotels, car rental agencies, apartments and villas for the accommodation of their passengers
Effectively incorporated in their website as one of the many conveniences of travelling with Oasis Hong Kong.

Oasis outsourced contact centre services in 2006 which provided the carrier's customers and travel agents with sales, general enquiries and customer service assistance
Handling all inbound calls between 8:00 am and 8:00 pm each day, seven days a week.

Text after service: Thank you, and concerns?

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Performance Appraisal
Annual World Travel Awards 2007
"Worlds Leading New Airline "Asia's Leading Budget/No Frills Airline"

Centre for Asia Pacific Aviation of Australia

New Airline of the Year

World Low Cost Airline Congress Awards 2007, held in London

"Best New Service "Best Business Class Carrier"
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Soaring cost of fuel and a decision to buy aircraft instead of renting them led to the demise of the budget carrier -R. Lee

Main Problem
Rising operating cost and inability to forecast economic climate

Hong Kong Oasis Airline

Solution 1
Disadvantages:

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Embark on the next phases of expansion with rented aircrafts Advantages: A lease arrangement may be more flexible than purchase of an aircraft. Shorter-term commitments without the risks & responsibilities of aircraft ownership Expense on Income Statement
Vintage 1989-1995 1996-2002

Ownership of an aircraft will generally give you the right to depreciate it for tax purposes (only interest deductible) If possible to sustain, it is more viable to own the aircraft over long -term

Rental Cost per Month (in US$ thousands) 2005 360-490 470-865
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Solution 2
Disadvantages:

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Participate in oil hedging to safeguard against potential fuel price increases Advantages: Maintain the low-cost fares being offered to passengers and sustain business profitability

Unusual divergence in the trends of crude oil and jet fuel make it difficult to predict values
Lack of experience can lead to inaccurate forecasting and methodology Possible request of a premium payment based on the hedging method used
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Reduces the vulnerability to major market fluctuations and may minimize long-term fuel prices during some periods
Potentially eliminate the need to seek supplemental funding due to price fluctuations.

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Solution 3
Disadvantages:

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Better utilization of partner investments and opportunities Advantages:

Expand network and increase capital

Expand into potential market Restructuring and strengthening the organization by having access to partners strategies and technologies

Less control over management decisions and business strategies, Conflict of objective interest among partner that can potentially leads to interruption of business and bad reputation

Dissatisfaction among current staffs

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Relevant Facts
The Hong Kong SAR Government had granted Oasis licenses to operate to cities including San Francisco, Chicago, Cologne, Berlin, Milan and Sydney Oasis secured a USD30 million investment from the Funds under management of Value Partners Limited and its affiliates Hainan Airlines parent HNA Group's rescue bid failed after it discovered that Lee, who held about 60 % of Oasis, had pledged his shares as collateral for a personal loan
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Optimal Solution
Solution 3 Better utilization of partner investments and opportunities Access to: Investment capitals & larger customer network Partners investment which allow expansion into different cities

Partners aircrafts and technology

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Implementation
Short - Term
Accept rescue bid from Hainan Airline and investment from Value Partners Limited
Refinance by selling 2 newer aircraft models and using Invested funds Rent aircrafts for short-term operations

Long - Term
Re-evaluate hedging methodology based on experiences from other successful companies
Implement their five-year plan for expansions into other major cities

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Discussion Questions
1.
2.

Will Oasis be able to re-gain its competitiveness as a low-cost, long-haul operators?

Should Oasis consider adopting different business models other than just the low-cost long-haul?

3.
4.

Did Stephen Millers experience in the industry help the Oasiss business model?
If Oasis had excepted the rescue bid and principle investment offers, could they have prevented liquidation of the company in 2008?
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What was I thinking?

Thats all Folks!

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