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Page 1: Oasis Hong Kong Case Final

Submitted to: Professor Elie Chrysostome

26th April, 2012

MGM490 Section C

Group: 14

Matt Johnson

Ting Zhang

Yin Zhang

Dan Tracy

Strategic

Management

Case 22

Page 2: Oasis Hong Kong Case Final

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

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Stephen H. Miller

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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 3

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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

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General EnvironmentDemographic, Economical, Political, Legal, Socio-cultural, Technological, Global

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General Environme

nt

Demographic

Economical

Political

LegalSocio-

cultural

Technological

Global

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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, 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 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

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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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Industry AnalysisThreat of new entrants & substitutes; Bargaining power of supplier & buyer

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Threat of New Entrants

Bargaining Power of Buyer

Bargaining Power of Supplier

Threat of Substitutes

Rivalry Among Existing

Competitors

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• High

• Fluctuation

in fuel price cause

high fuel cost

• Acquisition price

of aircraft is high

• Moderate

• No other low-cost

long-haul airlines

• Many airline offer

different types of

services

•Competitive deal in

airfare

•Many airlines to

choose from

•High

•High barriers to

entry due to high

startup cost

•LowThreat of

New Entrants

Bargaining Power of Buyer

Bargaining Power

of Suppliers

Threat of Substitut

es

Rivalry Among Existing

Competitors 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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Year Passenger Movements

Airfreight movement (tonners)

Aircraft movement

1998 28,631,000 1,628,700 163,200

1999 30,394,000 1,974,300 167,400

2000 33,374,000 2,240,600 181,900

2001 33,065,000 2,074,300 196,800

2002 34,313,000 1,637,797 206,700

2003 27,433,000 2,642,100 187,500

2004 37,142,000 3,093,900 237,300

2005 40,740,000 3,402,000 263,500

2006 44,443,000 3,580,000 280,000

2007 47,783,000 3,742,000 295,580

2008 48,582,000 3,627,000 301,000

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Operation Statistic for Hong Kong International Airport

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Competitor AnalysisCathy Pacific Airways, Air Hong Kong, Hong Kong Dragon Airways

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Type of Carriers

Commercial Carriers

Scheduled Airlines

Charter Airlines

Feeder Airlines

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Major Players

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Hong Kong Internationa

l

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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 & 2005Air 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

Airline Oasis Cathay Pacific

British Airways

Virgin Atlantic

Hong Kong - London round-trip economy ($)

HK$1,000

HK$5,880 ~ HK$9,550

HK$2,250 ~ HK$4,525

HK$5,532 ~ HK$17,263

Hong Kong - London round-trip business ($)

HK$6,600

HK$44,952 HK$21,350 HK$44,897 ~ HK$46,813

Hong Kong—London round-trip departing on October 31,2006, and returning on November 10, 2006 (depending on level of travel

restrictions)

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 ActivitiesFirm 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

AirportHuman 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 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, then I was sure it could work.

You have to have a feel for the business.” -Miller

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Had roughly 700 crew members in total

by 2008

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Stephen Miller

Raymond

Lee &

Priscilla Lee

Hong Kong Oasis Airline

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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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Value (Market)

Future Value

Vintage 2005 2009 2012

1989 33.9 19.5 13.7

1991 45.5 26.5 18.9

1993 56.9 33.9 24.5

1995 68.4 41.7 30.5

1997 79.9 50.0 37.1

1999 91.4 59.1 44.6

2001 103.0 68.1 52.5

2003 114.5 76.1 60.2*Oasis fleet

First two aircrafts: Vintage 1989, purchased in 2006Next three aircrafts: Vintage 1999-2000, purchased in

2007

Market Value of a Boeing 747-400 (in US$ millions)

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Primary ActivitiesInbound 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 for81business and 278 economy passengers Seat pitch of economy Oasis was 32“ Seat pitch of business Oasis was 60’

Hong Kong Oasis Airline

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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• 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

Flexi 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

Advance Purchase

Fare

• 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

Value Fare

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

Hot Deal

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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 firm’s site to vend tickets

Focus groups

Email feedback and response

http://www.youtube.com/watch?v=mDnEXE0L8AM

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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

"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, held in London

"Best New Service”

"Best Business Class Carrier"

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Main Problem

Rising operating cost and inability to forecast economic climate

“Soaring cost of fuel and a decision to buy aircraft instead of renting them led

to the demise of the budget carrier”-R. Lee

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Embark on the next phases of expansion with rented aircrafts

Vintage 2005

1989-1995 360-490

1996-2002 470-865

Rental Cost per Month (in US$ thousands)

Solution 1

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

Disadvantages:

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

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Participate in oil hedging to safeguard against potential fuel price increases

Solution 2

Advantages:

Maintain the low-cost fares being offered to passengers and sustain business profitability

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.

Disadvantages:

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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Better utilization of partner investments and opportunities

Solution 3

Advantages:

Expand network and increase capital

Expand into potential market

Restructuring and strengthening the organization by having access to partners strategies and technologies

Disadvantages:

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

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Access to:

Investment capitals & larger customer network

Partner’s investment which allow expansion into different cities

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

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

3. Did Stephen Miller’s experience in the industry help the Oasis’s business model?

4. 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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That’s all Folks!

What was I thinking?


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