1 Sheffield Business School
BSc (Honours) Tourism Management Title Oasis Hong Kong Airlines: Reasons for its failure Name AU YEUNG WING KIN Student No 91206686 Month Year April 2011 2 Sheffield Hallam University Sheffield Business School Title Oasis Hong Kong Airlines: Reasons for its failure FULL NAME AU YEUNG WING KIN STUDENT No 91206686 Supervisor: Dr. Connie Mok In partial fulfilment of the requirements for the degree of Bachelor of Science in Tourism Management. Month Year April 2011 3 Acknowledgements
I would like to thank my supervisor, Dr. Connie Mok, for her guidance and
support in completing this dissertation. Without her guidance, this report might
have gone in the wrong direction.
Then, thanks must go to Stanley Wong and which is my best friend, for helping
me to overcome difficulties for this dissertation. His support and motivation
inspired me to complete this dissertation. Moreover, I am thankful to my family
and friends, Ray Hau, Jeff Wong and Yedda Tsang, for their patience and love.
4 Contents
Acknowledgements……………………………………………………..…….…..1 Contents……………………………………………………………………...….…..2 List of Figures………………………………………………………………....……4
List of Tables………………………………………………………………...….…..5
SECTION ONE: EXECUTIVE SUMMARY...………...…………………………...6
1.1 Executive Summary…………………………………………………………….7
SECTION TWO: INTRODUCTION: CONTEXT AND OBJECTIVES…………9
2.1 General Background………………….………………………………………...9
2.2 Definition Airlines Failure………………………………………….…………..10
2.3 Aim and Objectives………………………………………………….…………11
2.4 The History of Oasis Hong Kong Airlines…………………….…….………..11
2.5 Mission Statement of Oasis Hong Kong Airlines……….….……………….12
2.6 Core Value……………………………………………………………………...12
SECTION THREE: INSTRUMENTAL LITERATURE REVIEW…………….…13
3.1 Introduction……………………………………………………………………..13
3.2 Types of Carriers……………………………………………………………….13
3.3 Traditional Carriers and Low Cost Carriers…………………………………13
3.3.1 Traditional Carriers…………………………………………………………..14
3.3.2 Low Cost Carriers……………………………………………………………17
3.4 Airline Economics……………………………………………………………...21
3.5 Airline Cost Structure………………………………………………………….21
3.6 Low Cost Long Haul Carrier………...........................................................22
3.7 Definition of Airline’s suppliers………………………………………......…..23
SECTION FOUR: METHOD OF INVESTIGATION….…………………………27
4.1 Introduction……………………………………………………………………..27
4.2 Secondary Research………………………………………………………….28
4.3 Advantages……………………………………………………………………..30
4.4 Limitation………………………………………………………………...……..30
SECTION FIVE: FINDINGS AND ANALYSIS................................................32
5.1 Introduction………………………………………………………………….....32
5.2 Difference between Low Cost Model in Europe and Oasis Model……….32
5.3 Reasons for Oasis Airline’s failure…………………………………………..35
5.3.1 Management team…………………………………………………………..35
5.3.2 Underestimate the competitors…………………………………………….36
5.3.3 Purchase old aircraft………………………………………………………...37
5 5.3.4 Lack of aircraft……………………………………………………………….38
5.3.5 Add frills………………………………………………………………………38
5.3.6 Lower productivity on long-haul……………………………………………39
5.3.7 Passenger load factor……………………………………………………….40
5.3.8 Lower input prices…………………………………………………………...40
5.3.9 No cargo carried……………………………………………………………..42
5.3.10 High fuel price………………………………………………………………42
SECTION SIX: CONCLUSIONS…………………………………..……..………44
6.1 Introduction……………………………………………………………………..44
6.2 Conclusion……………………………………………………………………...44
6.3 Recommendation……………………………………………………………...46
References………………………………………………………………………...49
6 List of Figures
Figure 1.1: Low-cost carrier operation model……………………………………19
Figure 1.2: How come cheap airlines are so cheap…………………………….19
Figure 1.3: The costs incurred in the provision of air services…………………23
Figure 1.4: The factors for Oasis Airline’s failure……………………………….35
Figure 1.5: Recommendation for Oasis………………………………………….46
7 List of Tables
Table 1.1: Comparison of Southwest and Oasis Hong Kong Airlines……….34
8 SECTION ONE: EXECUTIVE SUMMARY
The purpose of the study is to analyze the reasons why oasis failed and the
difficulties involved in running a new airline. In this case study, the author is
going to discuss the differences between Traditional Carriers and Low cost
carriers; to examine the relationship between airlines and their suppliers; to
compare the differences between low cost carriers and Oasis Airlines; and to
find out the reasons for Oasis Airline’s failure.
Oasis Hong Kong Airlines was founded by ex-Dragonair CEO Stephen Miller,
with principal investment from the Rev. Raymond Lee and his wife, Priscilla
Lee, Oasis had a definitive positioning as the only longhaul, low-fare airline
operating out of Hong Kong.
In the literature review section, the literature of the types of carriers, traditional
carriers, low-cost carriers, low-cost long haul carriers and the definition of
airlines’ suppliers will be defined and discussed.
The qualitative research method was used in this study. This method was used
9 as there were difficulties in getting primary information, since the operation of
Oasis Hong Kong Airlines had stopped. Therefore, qualitative study method is
used in this case study. The information will be collected from secondary data
including books, journals, websites and other sources.
Case study research excels at bringing us an understanding of a complicated
issue or object, can extend experience or improve what is already known
through previous research. Case studies emphasize on detailed contextual
analysis of a limited number of events or conditions and their relationships.
Researchers have used the case study research method for many years
across a variety of disciplines. Social scientists, in particular, have made wide
use of this qualitative research method to examine contemporary real-life
situations and provide the basis for the application of ideas and extension of
methods.
The major advantage of the analysis of secondary data was that it has very
rich insight for the research focus. Also, the resources contain large number of
valuable information.
10 However, the research still has few limitations. Oasis Hong Kong Airlines
official website was switch those information off since the company goes into
the liquidation. It will lead the researcher hard to find the official information
such as management team, fare type and the company’s mission and vision.
Finally, the author hoped that the analysis and recommendations can be a
useful reference for newly established airline companies, which can help them
to avoid making wrong decisions, reduce cost and maximize the profit.
11 SECTION TWO: INTRODUCTION: CONTEXT AND OBJECTIVES
2.1 General Background
Airline industry is a fast growing industry. It is because the airline industry is an
industry which is constantly changed by new developments and constraints
like regulations. In recent years, low-cost and no-frills carriers are some of the
crucial developments affecting the airline business. These changes in turn
have required airlines to develop new policies and strategies for the
twenty-first century (Doganis, 2001).
Although Oasis Airline was the first budget airline in Hong Kong, owing to
several reasons, it just has a life-span of eighteen months and went into
bankruptcy.
There is a very interesting issue that how a new airline was created in the
almost saturated market in Hong Kong. It is because there are nearly full
international routings and different strong competitors such as Cathay Pacific
Airways in the aviation industry in Hong Kong.
In order to let Hong Kong people not to give up the Business and travelling
12 opportunities because of the high ticket fees, Rev. Raymond C. Lee establishes
Oasis Hong Kong Airlines. Afterwards, in 2007, Oasis Hong Kong got the vote
on "World’s Leading New Airline" and "Asia's Leading Budget/No Frills Airline"
at the Annual World Travel Awards 2007. It was also named "New Airline of the
Year" by the Centre for Asia Pacific Aviation of Australia. Nevertheless, Oasis
Hong Kong went into bankruptcy after it operated for eighteen months only.
According to the official closure reasons, which are: money spent on buying
modes for operation of the aircraft; Skyrocket oil prices; Companies cannot
recruit enough local staff in Hong Kong so it can only hire foreign workers and
fail to find new investor shares the investments. Even so, the fatal reason of
the failure that maybe Oasis confuses to identify the role between budget
airlines and low cost carriers (Lee, 2008).
Therefore, the project will go to discuss the reason for final failure of the Oasis
Hong Kong Airlines.
2.2 Definition of Airline’s Failure
If one airline goes into liquidation with cancels all flights and to halt the
13 operations, it means airline failure (Civil Aviation Authority, 2011).
2.3 Aim and Objectives
The aim of this project is to find out the reasons why oasis failed and the
difficulties involved in running a new airline. More specifically, this study aims
to achieve the following objectives:
1) To discuss the differences between Traditional Carriers and Low cost
carriers;
2) To examine the relationship between airlines and its suppliers;
3) To compare the differences between low cost carriers and Oasis Airlines;
and
4) To find out the reasons for Oasis Airline’s failure.
2.4 The History of Oasis Hong Kong Airlines
Oasis Hong Kong Airlines was founded by ex-Dragonair CEO Stephen Miller,
with principal investment from the Rev. Raymond Lee and his wife, Priscilla
Lee, Oasis had a definitive positioning as the only longhaul, low-fare airline
operating out of Hong Kong. As a property developer, Lee had made his
fortune in the US from property development by founding Oasis Development
14 Enterprises. It was Miller who came up with the idea of a long-haul, low-fare
carrier. He took his business proposal to Lee, who was initially sceptical but
was later convinced after his many questions about the business plan were
satisfactorily answered by Miller. The majority of the seed funding was the
Lees’ own investment, which was supplemented by additional investments
from Allan Wong, chairman and CEO of VTech Holdings (a multinational
corporation), and Richard K. Lee, founder of Trinity Textiles (Asia Travel Tips,
2006).
2.5 Mission Statement of Oasis Hong Kong Airlines
We are not just to set up a successful airline, but to harness it as a force for
social good (Mission of Oasis Hong Kong Airlines, No Date).
2.6 Core Value
Contemplate a company whose business plan states the desire to operate on
faith-based morals and with deep regard for its customers.
Visualize the concept underlying the operation of Oasis Hong Kong. Founder
Reverend Dr. Raymond C. Lee wants to make long-distance international
travel available and affordable.
15 SECTION THREE: INSTRUMENTAL LITERATURE REVIEW
3.1 Introduction
In this chapter, the literature of the types of carriers, traditional carriers,
low-cost carriers, low-cost long haul carrier and the definition of airlines’
suppliers will be defined and discussed.
3.2 Types of Carriers
Commercial carriers could be categorized into three primary types: scheduled
airlines, charter airlines and feeder airlines (Subramanian et al, 2008).
3.3 Traditional Carriers and Low Cost Carriers
Subramanian (2008) also state that most commonly known airlines in 2006
such as United Airlines, British Airways, Cathay Pacific Airways and Singapore
Airlines were regarded as traditional carriers. In the late 1990s and early 2000s,
proliferation of low-cost carriers in almost every part of the world was observed.
By 2006, examples of low-cost carriers could be found in all major regions of
the world: Southwest and JetBlue in North America; Ryanair and easyJet in
Europe; Kingfisher and Air Deccan in India; Tiger Airways, Jetstar Asia and
Valuair in Singapore; Air Asia in Malaysia; and Jetstar and Virgin Blue in
16 Australia.
3.3.1 Traditional Carriers
Traditional carriers tended to provide a full complement of options and services
throughout the entire passenger experience, from the point when a booking
was made to the end of the return flight. They allowed passengers to book
tickets through various means, including travel agents (usually via one or more
global computer reservation systems) and directly through the airline (which
could be by phone, in person or online), and provided a choice of up to four
classes of cabin service. Upon check-in, using the International Air Transport
Association (“IATA”) interline system, a traditional airline could check
passengers and their baggage through to connecting flights on other airlines
and issue onward boarding passes.
For premium-class passengers or members of loyalty clubs, a comfortable
waiting lounge would be provided with complimentary food and beverages, as
well as other services. Once on board, passengers would be provided with
various in-flight amenities, reading materials, in-flight audio and video
programmes (on a broadcast or on-demand basis via personal TVs or big
17 screens), and hot meals and beverages. For some overnight flights, lounges
would also be available for select passengers to freshen up upon arrival.
To assist passengers with connecting flights, service agents would be present
at arrival gates. Most traditional carriers provided these services at no
additional cost to passengers.
Operating on a scheduled basis with a hub-and-spoke model, traditional
carriers had multiple origins of sales and multiple destinations.
Most traditional carriers served a variety of long, medium and short-haul
destinations with a variety of aircraft types. British Airways, for instance,
served destinations from its bases in the UK, ranging from other points in the
UK, which would take less than one hour, to New York in North America, which
would take around 8 hours, and to Hong Kong in the Far East, which could
take around 14 hours. To serve such a broad range of destinations, British
Airways’ fleet consisted of a wide variety of aircraft types: Boeing 737s, 747s,
757s, 767s and 777s; Airbus A319s, A320s and A321s; and a few other
smaller aircraft types.
Traditional carriers often used expensive primary airports as bases and hubs.
The major advantage of this model was that airlines could schedule effectively
18 and transport passengers from more origins to more destinations through the
hubs. This additional revenue generation allowed carriers to operate flights
between cities where point-to-point demand alone would not have justified the
operation economically. By dominating a hub, airlines might also be able to
limit competition on certain routes because the supply of slots at leading
airports was extremely limited. Nevertheless, any flight irregularities occurring
at the hub could wreak havoc on an airline’s entire network.
Traditional carriers usually offered loyalty clubs or frequent-flyer programmes,
which rewarded frequent travelers with such privileges as lounge access,
upgrades and free tickets. Rewards were primarily based on mileage flown,
though mileage could also be earned by patronizing partnering companies or
using airline-branded credit cards. To strengthen and expand their
hub-and-spoke networks, traditional airlines had joined forces to form alliances.
These alliances not only linked the networks of their various member airlines,
but also offered alliance-wide loyalty clubs that afforded passengers privileges
throughout an alliance’s enlarged network. The world’s three largest alliances
were Star Alliance, Sky Team and Oneworld (Subramanian et al, 2008).
19 3.3.2 Low Cost Carriers
The term “low-cost carriers” is commonly referred to airlines that offered low
ticket prices and limited services, though this term was first used to refer
specifically to carriers with lower operating-cost structures than traditional
carriers. As competition and the overall business environment toughened,
most airlines, traditional or otherwise, lowered their operating costs
significantly. It was for this reason that low-cost carriers were later
distinguished from traditional carriers by ticket prices and services rather than
by cost structures.
Unlike traditional carriers, low-cost carriers tended not to use travel agents or
computer reservation systems. Instead, they preferred to sell directly and tried
to limit their use of travel agents. Low-cost carriers usually provided a single
class cabin and very basic complimentary services such as soft drinks and
peanuts in Southwest Airlines.
Low-cost carriers typically did not adopt the hub-and-spoke network model.
Instead, their networks consisted of city pairs that supported direct service, or
point-to-point traffic. Many low-cost carriers cited that direct service was
20 cheaper than the hub-and-spoke model. One industry observer even
suggested that the cost of handling passengers in a hub-and-spoke system
was as much as 45% higher than in a point-to-point system. With a simpler
network, low-cost carriers also tended to have much simpler pricing systems
and fewer fare classes than their traditional counterparts. To keep their costs
low, low-cost carriers also flew to secondary airports.
Most low-cost carriers focused on short-haul services. Because the type of
operations of all the different flights was very similar, low-cost carriers also
tended to fly just one type of aircraft. The commonality among the aircraft
minimized the cost of both the spares inventory and the training of pilots, flight
attendants and maintenance personnel, and also facilitated quick turnarounds.
Low-cost airlines were unlikely to be members of the IATA and did not care
much about getting feeder traffic or feeding traffic to other airlines. As such,
they would not do interline check-ins or baggage transfers, nor would they be
members of any alliance. Although typical low-cost carriers mainly kept to
themselves and would not work with other airlines, some had started to deviate
from this model. In 2005, Southwest Airlines announced a code sharing
agreement with ATA Airlines, allowing customers to book flights on ATA to fly
21 to such destinations as Hawaii. Some low-cost carriers also offered a simpler
version of frequent-flyer programmes. For example, Southwest Airlines ran
Figure 1.1: Low-cost carrier operation model
In general, a low-cost carrier operates in the following business model:
(a) offering a single passenger class;
(b) using a single type of airplanes to reduce training and servicing costs;
(c) providing a minimum set of optional equipment on its airplanes to
reduce acquisition and maintenance costs;
(d) offering a simple fare scheme such as charging one-way tickets half
the fare of round-trip tickets;
(e) allowing unreserved seating;
(f) flying to cheaper, less congested secondary airports;
(g) flying during non-peak hours to avoid air traffic delays and taking the
advantage of lower landing fees;
(h) maximizing utilization of aircraft by means of fast turnaround times;
(i) offering simplified routes and emphasizing point-to-point transit
instead of transfers at hubs;
(j) generating ancillary revenue from a variety of activities such as a
la carte features and commission-based products;
(k) emphasizing direct sales of tickets, especially over the Internet to
avoid fees and commissions paid to travel agents and computer
reservations systems;
(l) flight attendants working in multiple roles to reduce personnel costs;
(m) providing limited special services to passengers such as placing a
higher age limit on unaccompanied minors; and
(n) maintaining aggressive fuel hedging programmes.
Figure 1.2: How come cheap airlines are so cheap
Fastest growing segment of air travel are low fare airlines (LFAs), sometimes called
low cost companies (LCC). LFAs now constitute 35% of scheduled intra-EU point
to point traffic – and the cheap flights revolution in Europe only started in 1990 by
22 Ryanair. In the USA it was the Southwest Airlines that has led the attack against
high flights prices since 1971. (Managing Airline Operating Costs Conference,
Dublin 7 December, 2005)
a simple frequent-flyer programme where points were accumulated based on
the number of one-way trips, not mileage flown, and a free round-trip would be
rewarded for every 18 points accumulated (Subramanian et al, 2008).
23 Nevertheless, the low-cost business model appears robust and the
expectation must be that the larger and more successful low-cost carriers will
continue to undermine the economics of growing market share and by forcing
the latter to drop their fares. Further liberalization of international air service
will allow low-cost operations to spread into new markets. The threat is serious
and potentially disastrous for some. It is one that all network or charter airlines
with shorter-haul service will have to deal with (Doganis, 2006).
3.4 Airline Economics
Airlines operate like many other businesses that the primary aim was to
generate maximum revenue and incur minimum cost to maximize return on
capital invested. The products were seats and cargo space, which went at a
particular time from one location to another. Both products had a very short
shelf life (from the time the schedule was published to the time the gate closed
for departure) and were perishable by nature (once the aircraft had departed,
any unsold products were “perished”) (Subramanian et al, 2008).
3.5 Airline Cost Structure
The major cost drivers of any airlines included personnel, fuel, capital cost and
24 maintenance cost of assets, selling expenses, and airport and landing fees.
Personnel-related costs were among the highest for major airlines. Airlines
usually employed huge labor forces that included pilots, flight attendants,
engineers, mechanics, airport service agents and support staff. Labor in the
airline industry was well known for being highly unionized (Subramanian et al,
2008).
3.6 Low Cost Long Haul Carrier
Oasis marketed itself as a long-haul, low-fare carrier that offered exceptional
value with customizable options. It offered two classes of service, targeting
both economy- and business class passengers, whereas other low-cost
carriers only offered economy-class service and competed primarily on price.
While all other low-cost carriers served short-haul routes, Oasis would only
serve long-haul routes. The initial network plan of Oasis included Oakland and
Chicago in the US, Berlin and Cologne in Germany, Milan in Italy, and London
Gatwick in the UK, which would be the airline’s launch destination
(Subramanian et al, 2008).
25 3.7 Definition of Airline’s suppliers
According to the Air Transport Association of America, Inc. (ATA) airfares are
normally set at a level that covers unit operating cost. Full-service airlines have
a higher level of fixed and operating costs due to the acquisition and
maintenance of airplanes as well as the provision of quality services. the
provider of these service and equipment are considered as suppliers. There
are labor, fuel, aircraft rents and ownership, professional services, food and
beverage, landing fees, maintenance material, aircraft insurance, non-aircraft
insurance, passenger commissions, communication, advertising & promotion,
utilities & office supplies, transport-related and other operating cost.
Figure 1.3: The costs incurred in the provision of air services
Labor
Wages, employee benefits (e.g., annuity payments, educational, medical,
recreational and retirement programs) and payroll taxes (e.g., FICA, state and
federal unemployment insurance). General management, flight personnel,
maintenance labor, and aircraft and traffic handling personnel are all included in the
calculation of labor costs.
Fuel
Cost of aviation fuel used in flight operations, excluding taxes, transportation,
storage and into-plane expenses.
Aircraft Rents & Ownership
The cost of aircraft rentals, depreciation and amortization of flight equipment,
including airframes and parts, aircraft engine and parts, capital leases and other
flight equipment.
Non-Aircraft Rents & Ownership
26 Principally, the total cost of airport terminal rents. Non-aircraft rents and ownership
also includes the cost of hangars, ground service/support equipment (GSE), storage
and distribution equipment, and communication and meteorological equipment.
Professional Services
The cost of legal fees and expenses (e.g., attorney fees, retainer fees, witness
expenses, legal forms, litigation costs), professional and technical fees and expenses
(e.g., engineering and appraisal fees, consultants, market and traffic surveys,
laboratory costs), as well as general services purchased outside (e.g., aircraft and
general interchange service charges).
Food and Beverage
The cost of purchasing beverages and food, commissary supplies and outside
catering charges.
Landing Fees
The cost of fees paid by the airlines to airports for runway and airport maintenance.
Maintenance Material
The cost of maintaining and purchasing materials for airframes, aircraft engines,
ground property and equipment (excluding labor costs). Also includes the costs of
maintaining a shop and servicing supplies (e.g., automotive, electrical, plumbing,
sheet metal, small tools, glass and glass products, cleaning compounds).
Aircraft Insurance
The cost of flight equipment insurance, sometimes referred to as hull insurance.
Non-Aircraft Insurance
The cost of insurance unrelated to the hull itself. This category is broken down by
two categories: general insurance (i.e., buildings and contents, materials and
supplies, third party liability, passenger baggage and personal property) and traffic
liability insurance (i.e., passenger baggage and personal property, cargo liability and
provisions for self-insurance).
Passenger Commissions
The costs paid to passenger travel agencies for services.
Communication
27 The total cost of equipment and intercommunication rental and installation charges,
telephone and teletype equipment, telegraph and cable message charges and
navigation facility charges.
Advertising and Promotion
Includes the cost of producing tariffs, schedules, timetables and other promotional
and publicity expenses (e.g., television, radio, entertainment, photography, and
graphics).
Utilities and Office Supplies
The cost of light, heat, power and water, stationary, printing (e.g., labels, small
signs, ticket stock, paper products, company manuals), shipping and mailing
supplies and other office supplies as well as cleaning compounds, safety, electrical,
engineering, drafting, blue prints and photographic supplies.
Transport-Related Expenses
As defined by DOT, transport-related expenses are expenses incurred for providing
air transportation facilities associated with the performance of service which
emanate from and are incidental to air transportation services performed by the
carrier. Following are some specific examples:




ABC Airlines issues tickets for flights operated by regional partner ABC
Express. It pays ABC Express a fee to fly the code-share routes on its behalf.
ABC Express reports the fee income as passenger revenue, to match the
associated traffic, capacity and operating expenses. ABC Airlines reports the
fare collected as transport-related revenue and reports the fee it paid to ABC
Express as transport-related expense.
ABC Airlines performs maintenance for XYZ airlines. ABC Airlines reports
the cost of labor, parts and materials for this in-sourced maintenance as
transport-related expense.
ABC Airlines sells liquor and food on its flights. The amount that ABC
Airlines paid for the liquor and food is reported as transport-related expense.
ABC Airlines operates a gift shop. The cost of running that gift shop is
considered transport-related expense.
Other Operating Expenses
Includes the cost of miscellaneous expenses such as personnel expense, outside
flight equipment, excess of losses over insurance recoveries, interrupted trips
expense, memberships, corporate and fiscal expenses, uncollectible accounts,
28 clearance customs and duties.
Interest
The total interest paid on long term debt, capital and other interest expenses.
Included in this worksheet is the cost associated with average book debt outstanding
and estimated off-balance sheet debt.
Composite
A weighted average of all components, including interest expense.
Sources: Air Transport Association of America, Inc. (2011)
29 SECTION FOUR: METHOD OF INVESTIGATION
4.1 Introduction
This chapter aims to describe the qualitative research method that was used in
this study. The case study method was used because as there were difficulties
getting primary information since the Oasis Hong Kong Airlines had stopped
operations. This will be a qualitative study using the case study method. The
information will be collected from secondary data including books, journals,
websites and other sources.
Case study research excels at bringing us to an understanding of a complex
issue or object and can extend experience or add strength to what is already
known through previous research. Case studies emphasize detailed
contextual analysis of a limited number of events or conditions and their
relationships. Researchers have used the case study research method for
many years across a variety of disciplines. Social scientists, in particular, have
made wide use of this qualitative research method to examine contemporary
real-life situations and provide the basis for the application of ideas and
extension of methods. Researcher Robert K. Yin defines the case study
research method as an empirical inquiry that investigates a contemporary
phenomenon within its real-life context; when the boundaries between
30 phenomenon and context are not clearly evident; and in which multiple
sources of evidence are used (Yin, 1984, p. 23).
4.2 Secondary Research
Existing primary data was collected by someone else or for a purpose other
than the current one (Girolami, no date). The chosen data were base on data’s
availability, relevantly, reliability and validity. The researcher has reviewed
those relevant documents and literatures to obtain a valuable view points on
Oasis Hong Kong Airlines and it’s management practices. Most of the
secondary were collected by the following sources:
Journals:
Harvard Business Review
Research in Transportation Economics
Journal of Transport Economics and Policy
The US Airline Industry Brown University Department of Economics Paper
Books:
Airline Business 2006
31 Airline Business 2005
Airline Marketing and Management, Sixth edition, Ashgate Pub Co (2007)
Handbook of Low Cost Airlines - Strategies, Business Processes and Market
Environment (2007)
No Frills: The Truth behind the Low Cost Revolution in the Skies (2002)
Magazines:
BBC magazines
Websites:
http://www.oasishongkong.com
http://news.bbc.co.uk
http://www.rcaerosport.com
http://www.altiusdirectory.com/
Databases:
EBSCO Host Research Database
Google Scholar
32 Annual Reports:
British Airways Annual Report and Accounts, 2009-2010
Internal Documents:
Oasis Hong Kong Airlines - Companies Winding-up notice to creditors
4.3 Advantages
The major advantage of the analysis of secondary data was that it has very
rich insight for the research focus. Also, it allowed resources of information
which contain large number of valuable information. The researcher was easily
to find relevant information from different sources such as electronic databases
and international journals. Furthermore, the qualitative research method in
terms of the cost, time, and personal bias.
Finally, the qualitative research method has assisted us to identify further
research needs.
4.4 Limitation
Although carefully done, this research still has few limitations. First, Oasis
Hong Kong Airlines official website was switch those of information off since
33 the company goes into the liquidation. It will lead the researcher hard to find
the official information such as management team, fare type and the
company’s mission and vision. The research tended to be narrow in focusing
on the corporation level and the business level, rather than focus on the
functional level. However, the researcher found that it is the best to focus more
on different levels of business in order to reach more concrete conclusions.
Second, the researcher found that some of the research and discussion
included biases as were filtered through huge number of reference which may
not complete conceptualized. Finally, the available research may be inaccurate,
inappropriate, incorrect or biased. Besides, as there is huge number of
information found from various sources that the researcher was spent much
time to scan and select the relevant information.
34 SECTION FIVE: FINDINGS AND ANALYSIS
5.1 Introduction
Oasis Hong Kong Airlines was founded by ex-Dragonair CEO Stephen Miller,
with principal investment from the Rev. Raymond Lee and his wife, Priscilla
Lee, Oasis had a definitive positioning as the only long haul, low-fare airline
operating out of Hong Kong. As a property developer, Lee had made his
fortune in the US from property development by founding Oasis Development
Enterprises.
In this chapter, the author will going to use the previous information to analysis
the failure reasons of Oasis.
5.2 Difference between Low Cost Model in Europe and Oasis Model
Most of the European low-cost carriers have adopted and closely followed the
Southwest model. Fares are low, simple, available on a one-way basis and
with no (or minimal) restrictions. Fares may vary between flights on the same
day to the same destination and changes as the departure date approaches.
But at any one time of enquiry, for each flight departure there is only one fare
available. The cheapest fares are on offer well in advance of the travel date
35 and then fares increase gradually as that date approaches or as seats get filled
up. So a day or two before departure, fares for the few seats available may be
several times higher than the initial fares six months earlier. They may even be
higher than the lowest fare available from a network carrier. If demand for a
particular flight fails to meet expectations, fares may actually decrease as the
departure date approaches (Doganis, 2006).
However, Oasis Hong Kong Airlines use the specific model in their business
model. It is between low cost model and traditional model. Therefore, we call
“Oasis Model”. In the Oasis Model, Oasis marketed itself as a long-haul,
low-fare carrier that offered exceptional value with customizable options. It
offered two classes of service, targeting both economy- and business class
passengers, whereas other low-cost carriers only offered economy-class
service and competed primarily on price. While all other low-cost carriers
served short-haul routes, Oasis would only serve long-haul routes
(Subramanian et al. 2008). It is completely reverse the traditional low cost
carriers’ operational model. We can use the table to analysis the difference
between Southwest Airlines low-cost, no-frills model in European and Oasis
Hong Kong Airlines.
36 Table 1.1: Comparison of Southwest and Oasis Hong Kong Airlines
Fares
Distribution
Southwest Airlines
Oasis Airlines
-Low
-Low
-Simple, unrestricted
-Simple
-Point-to-point
-Point-to-point
-No interlining
-HKD1000 for Economy Class
-Travel agents (16% in 2003)
-Require interline ticket sales
and direct sales (84%)
-Relied on brick-and mortar travel
-Ticketless
agents
-Traditional paper ticket
In-flight
-Single-class, high-density
-Standard complimentary hot meals
-No seat assignment
for Economy-Class
-No meals
-Standard upgraded meals with
-Snacks and light beverages
complimentary drinks for
only
Business-Class
-In-flight entertainment
such as video and audio
programmes with personal TVs and
magazines
Frequency
-High
-Low
Punctuality
-Very good
-No good during the old aircraft and the
freedom of air permission
-Operation
Aircraft
-Single type (Boeing 737) –
-Single type (Boeing 747 - 400)
three variants
two variants
-High utilization (over 11
-High utilization (over 15 hours/day)
hours/day)
Sectors
-Short – but growing
-Short
(1994 average:394 miles,
2003 average: 566 miles)
Airports
Growth
-Secondary or uncongested
-Secondary or uncongested
15-20 minute turn-rounds
-Gatwick instead of Heathrow
-Target 10 per cent per
-NIL
annum
-Maximum 15 per cent
Staff
-Competitive wages
-Profit-sharing since 1973
-High productivity
-Competitive wages
37 5.3 Reasons for Oasis Airline’s failure
Figure 1.4: The factors for Oasis Airline’s failure
5.3.1 Management team
Shortage of funds, Oasis Airlines lobbied Dr. Lee to establish the seedlings
Norris, he came from the United Kingdom. In 1972, he was the president of
Cargolux as Asia Pacific region. In 1983, he turned to the Irish aircraft leasing
company, Guinness Peat Aviation (GPA Group), as Executive Officer of Asia.
In 1985, he persuaded the businessmen Mr. Cao Guang biao to provide
financial support for him to establish Dragonair. Therefore, he became the
Dragonair Chief Executive Officer naturally and left after three years. In 1993
38 to 1997, he worked in the Acting Vietnam Airlines flight operations agent and
responsible for management and Morning Star Travel Service. Oasis is simply
a replica of Dragonair, also sponsored by the Tony Norris. The difference
between Oasis and Dragonair is Dragonair has powerful Mr. Pao Yue Kong,
Henry Fok, and supported by China Merchants. On the other hand, the Oasis
of the largest shareholders, Raymond Cho Min will not have such financial
power.
Oasis first flight to Russia was failed due to the failure in the application of the
permit. It reflected the problem of the management team (Law, 2008).
5.3.2 Underestimate the competitors
Due to no local market in Hong Kong, the operating costs are high. In addition,
the international routes have saturated, which make Hong Kong difficult to
open a new airline to join the competition.
At the beginning of Oasis operation, there were a number of airlines such
as Cathay Pacific and Viva Macau Airlines sued the Oasis operating for
without a license (AOC) before the application for the Air Transport
Licensing (ATLA). This is contrary to the usual procedural requirements.
39 Traditionally, Hong Kong to London round-trip ticket price is at least HKD
5,000 on weekdays. However, in order to fight against the oasis airlines
competition, Cathay Pacific has launched HKD 3,620 round-trip tickets to
London. British Airways, Qantas and Virgin Atlantic were also introduced a
round trip ticket price of HKD 3280 for London to Hong Kong. The lowest
round trip fare was HKD 2950 and introduced by Singapore Airlines.
5.3.3 Purchase old aircraft
Owing to the outcome of the proceedings, the Oasis’s license application time
for ATLA was dragged for six months. It resulted in the failure of signing the
leasing aircraft agreement by Mr. Raymond Lee. Therefore, the fate of the
plane was rented to other airlines and the leasing aircraft planning was needed
to be canceled. In the aircraft leasing market, especially for the Boeing seven
hundred forty-seven aircraft, are very difficult to find. Therefore, Oasis had to
spend USD 1billion to Singapore Airlines to buy two secondhand Boeing
aircraft. Afterwards, to run the Vancouver route, Oasis also spent three
hundred million US dollars to buy three, seven-aged Boeing 747-400 aircraft. It
turned Oasis into a tight financial situation because the amount of money
40 spent for a month was already over two million HK dollars. Lee (2006)
previously mentioned “start to open Hong Kong to London route alone, no
profit”. It is because the two flights cannot enjoy economies of scale. If Oasis
wants to earn money, it has to open four routes to different destinations.
5.3.4 Lack of aircraft
Because of the only four Boeing 747-400 fleet, once a failure, it could not have
enough aircraft to do the rearrangement. The company is also very difficult
to control the cost of the expected results (Law, 2008).
5.3.5 Add frills
Traditionally, low-cost airlines do not provide food, drinks, entertainment; do
not take place in delivery of the meal to reduce the crew employed. But Oasis
provided two hot meals and soft drinks in both long haul routes in all classes.
Snacks and alcoholic drinks were also free for business class passengers and
available to be ordered in economy class. Free headphones, blankets and
pillows were also distributed in all classes without any charges, while
passengers could purchase noise-canceling headphones and amenity kits
onboard. This is never seen in the low cost carrier (Oasis, no date).
41 5.3.6 Lower productivity on long-haul
On short-hauls, LCCs try to get the maximum amount of revenue per aircraft
by keeping aircraft flying as much as possible during the 6am to 11pm
operating day. This means short turnaround times which also means no seat
assignment, completing cabin cleaning before landing to avoid these ground
handling services and no connecting bags or passengers. On long-hauls, time
zones, night curfews and flying time would limit the number of daily rotations
that one aircraft made. This reduces the need for such simplicity of product,
although many of the simple attributes might be retained for cost or ancillary
revenue reasons. For example, the inspiration for many of today’s LCCs,
Southwest Airlines, is now actively seeking cross-border code share and
interline partners, signaling a change of emphasis over its still short-haul
network (Ranson, 2008). However, Oasis Hong Kong Airlines is a long-haul
airline to provide Hong Kong to London long trip. It flew from the Eastern
Hemisphere to Western Hemisphere, almost surrounded by half the globe, it
take the aircraft fuel consumption significantly, each landing and takeoff need
around the 24 o’clock, therefore, the fleet cannot carry too many passengers.
It takes a high risk to the operation. (Law, 2008)
42 5.3.7 Passenger load factor
The successful operation of foreign budget airlines was just flying a
short-range trip and through the online ticket sales however Oasis is operating
a long distance services and to help ticket sales through travel agencies.
Therefore, the economic benefit cannot higher than foreign LCC. In addition,
the failures to use the code share network to utilization of use of resources
also decrease the airline’s flexibility.
Although some travel agents express that the future will certainly use the
Oasis tickets in their tour package to increase customer choice. However, the
European tour schedule, mostly out of the UK into Europe, or out
of Europe into the UK, it temporarily difficult to use the flight by Oasis.
Therefore, cannot invite tour operator try to use the Oasis also is the failure
reason. (Morrell, 2008)
5.3.8 Lower input prices
Although the secondary airport can offer a small potential for reduced costs:
First the share of these in total airport and handling charges costs would be
much lower (Hooper, 2005); Second, although secondary airports might allow
43 lower landing charges and passenger fees, handling would be more expensive
since there would be few flights per day over which to spread the fixed costs.
Selecting a LCC base at one end of the route would give some advantages,
but still small in relation to total operating costs. On the other hands,
many long-haul passengers often need to transfer to other places.
Therefore, it will reduce the attractiveness of secondary airports.
One factor that Binggeli & Pompeo (2002) did not address was aircraft costs
(eg depreciation, interest and leasing). Initially a start-up long-haul LCC would
have a higher cost of capital and no opportunity to get low aircraft prices from
large orders. This may be mitigated by timing their start to coincide with a
major industry downturn when lease rates are low, although they would only
lock in low rates for a few years at best. Some of the established LCCs such as
Ryanair and easyJet subsequently placed very large orders with aircraft
manufacturers at substantial discounts on the list price. It would be difficult to
replicate this on long-haul although the acquisition of cheap aircraft appears
crucial to Ryanair’s plans for starting such services.
44 5.3.9 No cargo carried
Morrell (2008) state that Cargo carried in the lower deck makes a valuable
contribution to the economics of long-haul flights, and Virgin Atlantic generated
£179m in revenue from this source in 2006/07, compared to an operating profit
of only £15m. This revenue came from an average of 10 tons of cargo per flight.
This could also be achieved by an LCC, but an all-economy configuration may
inflate the number of passenger bags in the lower deck at the expense of some
cargo capacity. If the airline had introduced a charge for checked baggage, its
level would have to be high enough to displace cargo. No cargo carrying is
also a big revenue problem of the operation of Oasis.
5.3.10 High fuel price
In 2006, fuel accounted for only one-third of the operating costs of airlines.
However, fuel price rising up to the half of the airlines’ operating cost.
Therefore, small companies cannot purchase fuel by large scale and thus be
exposed to a greater impact.
Oasis opening is by the end of 2006, during the period, crude oil prices have
rising up very shortly, from that time about USD 56 per barrel, rising to USD
100. As airlines try to control costs, the general method will use of the oil
45 futures to against the risk of rising oil prices. Assuming that airlines purchased
USD 80 in exchange of oil contracts, when oil prices rose to USD 110 a barrel,
the airline will earn 30 dollars in revenue, to compensate for the increase in
fuel costs when due loss. On the other hand, the airline also agreed to supply
under the contract similar to futures contracts, to lock the price of jet fuel.
Unfortunately, Oasis Hong Kong Airlines has no more capital to buy a large
scale of futures oil to against the risk of oil prices because of the small capital
and lack of aircraft.
46 SECTION SIX: CONCLUSIONS
6.1 Introduction
In this project, a lot of information and evidences have been found that Oasis
Hong Kong Airlines was not a low cost carrier. According to the previous
analysis, the reasons for Oasis Airlines’ failure are management team problem,
underestimate the competitors, purchase old aircraft, lack of aircraft, add frills,
low productivity on long-haul, passenger load factor, low input prices, no cargo
carried and high fuel price. However, in fact, the main reason for Oasis failure
is the poor financial power of Founder Raymond Cho Min.
6.2 Conclusion
Raymond Cho Min, who was the founder of Oasis, was a layman of aviation
industry. In such a high-risk industry, a large consortium is indispensable as it
provides good financial support for the company to maintain the business.
Raymond Cho Min and those shareholders were powerless in this situation.
Since Raymond Cho Min did not want to give up the Oasis, he found Cheung
Kong Holdings for private loans and borrows ten million U.S. dollars.
However, their own property in the United States and the shares of Oasis as
collateral to borrow money, one of the additional protocols that is entitled to
47 appoint directors of Cheung Kong Holdings into the board of Oasis
Management team (Lee, 2008).
On the other hands, Raymond Cho Min negotiated with Hainan Airlines about
the shares; it is because the Hainan Airlines has shares of Hong Kong
Airlines and Hong Kong Express already. However, it has flight to the
mainland and the two neighboring countries in Asia only, which has not
been going out of Asia. Hence, if the negotiation of Oasis and Hainan Airlines
was successfully, there would be a sudden expansion in service area to the
United Kingdom and Canada. It can help Hainan Airlines to enhance the
competitiveness to against the raging of the three domestic aviation groups
such as Air China, China Eastern Airlines and China Southern Airlines.
However, the largest shareholder of Hainan Airlines found that, Oasis has
been pledged to Cheung Kong Holdings. In addition, Cheung Kong Holdings
has the right to refuse a new shareholder to join Oasis (Right of first refusal)
according to the lending term set buy it. Consequently, the negotiation with
Hainan Airline was failed due to the trouble situation of Oasis airline.
48 6.3 Recommendation
The previous findings and analysis have indicated that the main failure
reasons of Oasis Hong Kong Airlines are lack of funds and high fuel prices.
Hence, the following four different ways suggested may change the bad
operating situation of Oasis and achieve sustainable business. They are rent
aircraft, no frills, provide cargo service and work closely to travel agency.
Figure 1.5: Recommendation for Oasis
Firstly, insisting on using the rent aircraft rather than buying old aircraft would
improve the situation. As the previous findings mentioned before, Oasis want
to use the rental method to solve the fleet problem in the initial period.
Unfortunately, due to the dragged license application time for ATLA for six
months, this resulted in the failure of signing the leasing aircraft agreement by
49 Mr. Raymond Lee. Therefore, the fate of the plane was rented to other airlines
and the leasing aircraft planning was needed to be canceled. It is also
suggested that the director of Oasis can postpone the first flight day until the
ATLA license has received. He does not have to rush into the completion
of first flight because buy aircraft directly is a very high risk activities for the first
established airlines. A very tight financial situation make Oasis cannot put
effort on any other things such as establishment of new destination.
Secondly, Oasis should insist on using no-frills model to run the airlines
business. Low-cost airlines do not provide food, drinks, entertainment; do
not take place in delivery of the meal to reduce the crew employed. However,
Oasis provided two hot meals and soft drinks in both long haul routes in all
classes. Snacks and alcoholic drinks were also free for business class
passengers and available to be ordered in economy class. It is much costly to
the low cost carrier. Therefore, Oasis should not provide the extra meal and
entertainment to the passenger in order to reduce the cost.
Thirdly, is to provide cargo service. In the official information of Oasis, there
was no any cargo service provided by Oasis Hong Kong Airlines. Morrell (2008)
50 state that Cargo carried in the lower deck makes a valuable contribution to the
economics of long-haul flights, and Virgin Atlantic generated £179m in revenue
from this source in 2006/07. In reality, a lot of low cost carriers such as Air Asia
in Asia Pacific, they always carried many cargos in order to make use of cargo
space completely on their fleet. It is because every flight is very highly
perishable. The airlines should maximize the profit rather than blank the space.
Fourthly, Oasis has to work closely to travel agency. Owing to the
European tour schedule, most of the trips were from UK to Europe, and vice
versa. Therefore, the demand for a route from Hong Kong to Europe is low and
non-profitable. In the tourism industry, transportation and accommodation are
the key elements of the tour package. Travel agency often need to reserve
a large number of tickets, thus, they will purchase a lot of seats from the airline.
They will also have the bulk purchase discount from the customer airlines,
which is a win-win situation. Therefore, it is strongly recommended that Oasis
should work closely with the local travel agency. Finally, it is hoped that the
analysis and recommendations above can be a useful reference for newly
established airline companies, which can help them to avoid making wrong
decisions, reduce cost and maximize the profit.
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