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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

12-4-26

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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Hong Kong Oasis Airline

12-4-26

History (cont.)
 The airline was voted "World’s 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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Hong Kong Oasis Airline

12-4-26

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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Hong Kong Oasis Airline

12-4-26

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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Hong Kong Oasis Airline 12-4-26 External Analysis • General Environment • Industry Analysis • Competitor Analysis 5 .

Economical. Global 6 . Political.Hong Kong Oasis Airline Demographic Global Economical 12-4-26 Technological General Environment Political Socio-cultural Legal General Environment Demographic. Technological. Legal. Socio-cultural.

7 . long-haul carrier service in Asia.Hong Kong Oasis Airline 12-4-26 Demographic Segment  Oasis Airline’s 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.

Hong Kong Oasis Airline 12-4-26 Economical Segment  Signs of global economical recession since 2007  Rising in oil price since 2006  Hong Kong adopts a capitalist and liberal economic system 8 .

Hong Kong Oasis Airline 12-4-26 Political Segment  A stable political environment & high public transparency  Low tax system  Well organized and developed transportation infrastructure 9 .

Hong Kong Oasis Airline 12-4-26 Legal Segment  Worldwide deregulation following United States  International air traffics are regulated by bilateral air service agreement between countries  Different regulations in different countries 10 .

Hong Kong Oasis Airline 12-4-26 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 11 .

Hong Kong Oasis Airline 12-4-26 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 Airbus’s A380. but were forced to hold the 747-400s longer due to an unexpected 22 month delay in the Airbus’s A380 programs 12 .

Hong Kong Oasis Airline 12-4-26 13 .

Hong Kong Oasis Airline 12-4-26 14 .

 Worldwide competitive pressure triggered series of privatization of flag carriers in Europe and Asian countries 15 .Hong Kong Oasis Airline 12-4-26 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.

Hong Kong Oasis Airline 12-4-26 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 16 .

Hong Kong Oasis Airline 12-4-26 •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 17 .

The Board of Directors declared a dividend of HK$1 billion.Hong Kong Oasis Airline 12-4-26 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 40.41 billion attributable to equity shareholder. payable to the HKSAR Government 18 .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.

093.374.740.000 34.433.300 1.400 181.000 33.000 19 .000 3.000 280.000 Airfreight movement (tonners) 1.300 263.Hong Kong Oasis Airline 12-4-26 Operation Statistic for Hong Kong International Airport Year Passenger Movements 28.600 2.000 3.800 206.000 33.100 3.313.402.000 295.142.582.700 187.000 40.200 167.240.000 48.074.443.700 1.000 37.000 47.627.974.580 301.900 3.642.580.797 2.000 27.783.900 196.631.637.065.300 2.000 30.394.500 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 44.742.628.000 3.000 Aircraft movement 163.500 237.

Air Hong Kong. Hong Kong Dragon Airways 20 .Hong Kong Oasis Airline 12-4-26 Competitor Analysis Cathy Pacific Airways.

Hong Kong Oasis Airline 12-4-26 Type of Carriers Scheduled Airlines Commercial Carriers Feeder Airlines Charter Airlines 21 .

Hong Kong Oasis Airline 12-4-26 Major Players Hong Kong International 22 .

entertainment systems. Asia Miles  Established large number of code-share agreements with major carriers worldwide 23 . 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.Hong Kong Oasis Airline 12-4-26 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. meal options.

Hong Kong Oasis Airline 12-4-26 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 24 .

South Korea and Thailand. Philippines. Singapore. including China. Republic of China (Taiwan).  Headquartered in Hong Kong  Subsidiary of joint-venture between Cathy Pacific & DHL  Cargo fleet  Focuses on Asia market 25 . Malaysia. Japan.Hong Kong Oasis Airline 12-4-26 Air Hong Kong  Operates an express freight network to 12 destinations in nine countries.

Hong Kong Oasis Airline 12-4-26 Internal Analysis • Competitive advantages • Tangible and intangible resources • Core competences – value chain • Performance appraisal 26 .

targeting both economy and business-class passengers  Competitors offered only economy 27 . low-fare carrier that offered exceptional value with customizable options  Oasis would only serve long-haul routes  Offered two classes of service.Hong Kong Oasis Airline 12-4-26 Competitive Advantage  Oasis marketed itself as a long-haul.

350 Virgin Atlantic HK$5.813 HK$1.263 HK$44.250 ~ HK$4.Hong Kong Oasis Airline 12-4-26 Competitive Pricing Hong Kong—London round-trip departing on October 31. 2006 (depending on level of travel restrictions) Airline Hong Kong .952 Cathy Pacific was 190 to 380 % more expensive than Oasis 28 .2006.600 HK$44.London round-trip economy ($) Hong Kong .550 HK$6.880 ~ HK$9.London round-trip business ($) Oasis Cathay Pacific British Airways HK$2.897 ~ HK$46.000 HK$5.525 HK$21. and returning on November 10.532 ~ HK$17.

an aircraft flying long-haul would have fewer takeoffs and landings  Lower maintenance costs for the airframe and engines  Lower fuel consumption 29 .Hong Kong Oasis Airline 12-4-26 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.

check-ins. and baggage transfers 30 .Hong Kong Oasis Airline 12-4-26 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.

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. 31 .Hong Kong Oasis Airline 12-4-26 Cargo Hub  Hong Kong was a major air cargo hub for the Asia-Pacific region  Demand consistently high for cargo space  Market prices.

Hong Kong Oasis Airline 12-4-26 Oasis Value Chain .

& Procurement 33 . HR Management. Technology.Hong Kong Oasis Airline 12-4-26 Support Activities Firm Infrastructure.

Hong Kong Oasis Airline 12-4-26 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 34 .

Miller  Miller began Hong Kong‘s Dragonair and served as the airline‘s 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.)  CEO: Stephen H.Hong Kong Oasis Airline 12-4-26 Human Resources (cont. You have to have a feel for the business. then I was sure it could work.” -Miller  Had roughly 700 crew members in total by 2008 35 .

Hong Kong Oasis Airline Raymond Lee & Priscilla Lee Stephen Miller 36 .

5 m3 37 .Hong Kong Oasis Airline 12-4-26 Technology  2 Boeing 747-412  3 Boeing 747-481  Max cruising speed: 939 km/hr  Cargo hold: 170.

2006 and November 24. for operation by Oasis Hong Kong Airlines. delivered September 19.Hong Kong Oasis Airline 12-4-26 Procurement  First two aircrafts previously owned by Singapore Airlines. 38 .  All Nippon Airways announced on 6 March 2007 that it has successfully sold three Boeing 747-400s to Oasis Growth Income and Investments Limited. 2006.

2 First two aircrafts: Vintage 1989.4 103. purchased in 2007 39 .7 50.1 2012 13.9 24.1 44.1 68.1 76.9 45.5 33.6 52.9 91.5 30.5 *Oasis fleet Future Value 2009 19.5 56.0 59.9 68.7 18. purchased in 2006 Next three aircrafts: Vintage 1999-2000.Hong Kong Oasis Airline 12-4-26 Market Value of a Boeing 747-400 (in US$ millions) Value (Market) Vintage 1989 1991 1993 1995 1997 1999 2001 2003 2005 33.5 26.5 60.4 79.5 37.0 114.9 41.

Operations. Marketing & Sales.Hong Kong Oasis Airline 12-4-26 Primary Activities Inbound Logistics. Service 40 . Outbound Logistics.

 Each passenger had their own seat-back TV which had at least 16 channels available. in addition of up to 12 channels of audio.  Snacks and alcoholic drinks free for business class passengers and available to be ordered in economy.Hong Kong Oasis Airline Inbound Logistics  Two hot meals and soft drinks were served free on both long haul routes in all classes. while passengers could purchase noise-canceling headphones and amenity kits onboard. blankets and pillows distributed in all classes.  Free headphones. 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‘ 41 .

Hong Kong Oasis Airline 12-4-26 Operations  Oasis offered daily service to London and six flights a week to Vancouver 42 .

Hong Kong Oasis Airline 12-4-26 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 43 .

& 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. 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. or 14 days in advance • Payment must be made at time of flight confirmation • Changes to flight. 21.Hong Kong Oasis Airline Fare Types 12-4-26 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. and passenger name not permitted • Non refundable .

youtube.Hong Kong Oasis Airline 12-4-26 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 firm‘s site to vend tickets  Focus groups  Email feedback and response http://www.com/watch?v=m DnEXE0L8AM 45 .

 Oasis was able to sell its tickets more effectively through Galileo's wide-ranging exposure to agent locations. 46 .Hong Kong Oasis Airline 12-4-26 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.

seven days a week.  Text after service: “Thank you.Hong Kong Oasis Airline 12-4-26 Services  Partnered with various hotels. general enquiries and customer service assistance  Handling all inbound calls between 8:00 am and 8:00 pm each day. car rental agencies.  Oasis outsourced contact centre services in 2006 which provided the carrier's customers and travel agents with sales. 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. and concerns?” 47 .

held in London  "Best New Service‖  "Best Business Class Carrier" 48 .Hong Kong Oasis Airline 12-4-26 Performance Appraisal  Annual World Travel Awards 2007  "World‘s 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.

Hong Kong Oasis Airline 12-4-26 “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: 12-4-26 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 50 .

Hong Kong Oasis Airline Solution 2 Disadvantages: 12-4-26 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 51  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. .

 Conflict of objective interest among partner that can potentially leads to interruption of business and bad reputation  Dissatisfaction among current staffs 52 .Hong Kong Oasis Airline Solution 3 Disadvantages: 12-4-26 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.

who held about 60 % of Oasis. Chicago.Hong Kong Oasis Airline 12-4-26 Relevant Facts  The Hong Kong SAR Government had granted Oasis licenses to operate to cities including San Francisco. Berlin. had pledged his shares as collateral for a personal loan 53 . 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. Cologne.

Hong Kong Oasis Airline 12-4-26 Optimal Solution Solution 3 Better utilization of partner investments and opportunities Access to:  Investment capitals & larger customer network  Partner’s investment which allow expansion into different cities  Partner’s aircrafts and technology 54 .

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 .Hong Kong Oasis Airline 12-4-26 Implementation Short .Term  Re-evaluate hedging methodology based on experiences from other successful companies  Implement their five-year plan for expansions into other major cities 55 .

Hong Kong Oasis Airline 12-4-26 Discussion Questions 1. Did Stephen Miller‘s experience in the industry help the Oasis‘s business model? If Oasis had excepted the rescue bid and principle investment offers. Will Oasis be able to re-gain its competitiveness as a low-cost. 4. 2. long-haul operators? Should Oasis consider adopting different business models other than just the low-cost long-haul? 3. could they have prevented liquidation of the company in 2008? 56 .

Hong Kong Oasis Airline 12-4-26 What was I thinking? That‘s all Folks! 57 .