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
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
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
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
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
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
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
Stephen Miller
Raymond
Lee &
Priscilla Lee
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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’
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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
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?