Essay, Pages 7 (1591 words)
OASIS HONG KONG AIRLINES LIMITED – WHAT WENT WRONG AND WHAT SHOULD HAVE DONE TO SAVE IT FROM BANKCRUPTCY Table of Content 1. 2. 3. 4. 5. 6. Company Background Liquidation Timeline Causes of Failure Impacts of Oasis’s Case What Should Have Done to Save Oasis from Bankruptcy Conclusion Company Background Oasis Hong Kong Airlines Limited • Long-haul budget airline • Hub at Hong Kong International Airport • Founder Mr. Raymond Lee Ms. Priscilla Lee • Started operation – Oct 26, 2006 Company Background • 2 routes HK – London (Gatwick) HK – Vancouver Company Background Oasis Hong Kong Airlines Limited • Start of business 5 aircrafts – 700 staff Competitive Advantage Lower Cost Differentiation • Marketing strategy – Differentiate product by class, price & service level – Launch promotion as first marketing initiative – Using a Computer Reservation System – handled all inbound customer calls in a basis of seven days a week – partnered with various service agencies Competitive Scope Broad Target Full Service Airline/Oasis Budget Airline Narrow Budget Airline Target Company Background • Business Model punctual and top-notch services • Organizational Structure – 3 key figures Chairman Executive Director Chief Executive Raymond Lee Priscilla Lee Steve Miller
Priscilla Hwang Lee (L) and Raymond C.
Lee, (R) invested in the new long haul airline ‘Hong Kong Oasis,’ with Chief Executive, Steve Miller Liquidation Timeline • Announced Liquidation – April 9, 2008 Oasis Liquidation Timeline Causes of Failure • High cost by High jet fuel prices – Jet-fuel prices – biggest share of airline’s cost – in the past year alone, fuel prices have surged more than 60 percent Escalating fuel prices since 2007 • High cost by Low fares – tickets to Gatwick for as little as HK$1,000 one-way – Compared to Cathay Pacific’s flights to Heathrow: • Economy class – less than 20 % • Business class – one-third of the price Unique promotion – Oasis’s price promise guarantee • 10% of economy class seats on every flight will be available at HK$1,990 oneway for at least one year.
– “buy one get one free” introductory offer on its business class service – Low fares are charming for customer but were insufficient to cover its operating expenses, leading to rapidly accumulating losses Causes of Failure • High Cost By Low capacity – More legroom means less seats In business class, Oasis put up to 60 inches, or 150 centimeters, compared with 38 inches on some budget carriers – In economy class it put 32 inches, compared with 31 inches on many carriers( e. . British Airways and Virgin Atlantic • Enhanced in-flight service and expensive equipments – free meal, snacks and alcoholic drinks – free headphones, blankets and pillows – individual seat-back TV with 6 new Hollywood blockbuster movies and 12 channels of audio – led to higher cost, accumulating losses of about HK$1 billion over two years of operation Figure 7 – Oasis service provision Causes of Failure • High cost buying planes – Oasis’s fleet consisted of 5 roomy Boeing Co. 747s aircrafts which cost over HK$80 billion. – purchased aircrafts instead of renting them, placing a huge strain on the group’s financial resources. Landing expenses – Heavy tolls levied by Hong Kong International Airport, Asia’s third-busiest airport – no second-tier and cheaper airport like those in Europe to let them cut down operating expenses Causes of Failure • Wrong estimation in flying long-haul – Wrongly anticipate flying long-haul can reduce maintenance and fuel costs – Flying long haul sectors burns more fuel and requires similar maintenance to short-haul aircraft in order to ensure airworthiness – suffering losses on almost every long-haul flight it flew. – losing more than HK$1 million a flight – over 400 crew size that placed a heavy burden on airline’s finance. Undue concentration on business class – Allocated 22 percent of its seats to business class and charged as little as a third of Cathay’s prices – But many corporations have contracts with Cathay for their employees – expense-account travelers have tended to prefer Cathay for its frequent flyer plan Causes of Failure • Mistaken pricing – Failure to properly price its product caused it to fail to generate enough revenue to cover its costs – As if providing $1000 service but only $ 10 return, thus loss is getting bigger and bigger until collapse • Stiff competition in designated long-haul route Hong Kong-London route • high number of carriers already operating on the same route • Competitors–Cathay Pacific, British Airways, Qantas, Air New Zealand and Virgin Atlantic • competitors flew into the more convenient and centrally located Heathrow while Oasis was consigned to Gatwick. • Credit crunch due to economic uncertainty – Impossible to obtain a credit facility from financial institutions to carry out fuel-hedging programs – Difficult to borrow money to cover any operating losses Impact of Oasis’s Case • Owners – Used their 60% of company shares to get a personal loan but failure Sued by The Bank of China (Hong Kong) for unjustified in seeking voluntary liquidation – Were declared bankrupt by High Court judge in Hong Kong on 31 August 2009 • Government – The Civil Aviation Department suspended the company operation • Staff – About 700 staff lost their jobs Oasis staff Impact of Oasis’s Case • Customer: – 50,000 travelers who had booked flights were affected – Passengers were forced to buy another ticket from other airlines with a higher price – Experienced travel delay or even cancellation but without any coverage from Travel insurance – Lost their confidence by traveling budget airline
Chaos caused by ceased of Oasis service Impact of Oasis’s Case • Creditors – In a risk of debt recovery – Sued the company for USD21. 67 million • Competitors – Provide discounted air ticket price for the affected – Expand their company’s goodwill • Public – Lack of the confident from budget airlines – Changing of their purchasing behavior from price sensitive to brand loyalty What should have done to save Oasis from bankruptcy • It is an irrevocable fact that Oasis went liquidation • However, the story may be reversed if Oasis followed the right tracks and operated differently
What should have done to save Oasis from bankruptcy 4 common characteristics of the operation model for low cost airlines: a. Streamlined fleet with single aircraft type to minimize the handling, training and maintenance costs; b. Focus on short to medium haul leisure travelers which fly up to 3 to 4 hours; c. Operates direct, point-to-point service with single class operations and simple fare scheme; and d. Streamlined the distribution through online booking. It is obvious that Oasis did not operate in a low cost model!
What should have done to save Oasis from bankruptcy • Oasis’s fleet consisted of two Boeing 747-412 and three Boeing 747-481 aircrafts • Expensive (cost @HK$2 billion), higher fuel consumption and maintenance costs • A large sum of the floating capital had been eaten up • • • • Should have been replaced by Boeing 737 a model which is popularly used by low cost airlines costs only HK$400 million each Even more cost-saving, Oasis should have rented these smaller airliners instead of making purchases so as to stay away from aircraft depreciation
What should have done to save Oasis from bankruptcy • Oasis sought for a niche among travelers who dread very long flights in economy class but have been reluctant to pay $6,300 for a round-trip in business class • The airline operated on two routes, from Hong Kong to London and Vancouver • should have operated with high frequency, short haul service with short turnaround time thus allowed maximum utilization of planes What should have done to save Oasis from bankruptcy Example –Cathay Pacific Vs. Ryanair Web patterned route map of Ryanair
Firework patterned airport affiliations of Cathay Pacific What should have done to save Oasis from bankruptcy Example –Cathay Pacific Vs. Ryanair Web-patterned routing allows higher mobility and flexibility of the fleet because the crew staff can flexibly fly to any destination instead of having to fly back to the hub Cathay Pacific Total Planeload of Fleet Utility Rate in 2005 26,860 pax 15. 44 million passengers Ryanair 20,223 pax 36. 88 million passengers 3 times utility What should have done to save Oasis from bankruptcy Oasis allocated 22% of its seats to business class but resulted in low occupancy • Offered larger seats, lots of legroom, free meal provision, topnotch service at discount prices which made Oasis’s business model especially vulnerable to the escalating fuel prices • should have operated in single passenger class, and “pack more seats and more passengers into their aircraft” • provide no in-flight catering and other complimentary services during the flight but the services are replaced by optional paidfor in-flight food and drink
What should have done to save Oasis from bankruptcy • Oasis offered low fares but were insufficient to cover its operating expenses, leading to rapidly accumulating losses • Four fare classes for economy class which became uncompetitive with premium airlines offering full service and more convenient destination for a similar price • should have offered single class operation with simple, no frills services which would allow Oasis to lower the operating costs and be able to simplify its fare scheme to become more competitive and sustainable
Conclusion • Successful budget carrier, 2 following characteristics must be obtained: a clear business strategy, a healthy financial condition which is not easy affected by external factors or macroeconomic a prudent development plan The main theme is about maximizing revenue and cost control