Ordinary Gweilo

The Standard is still following up on the collapse of Oasis.  As I mentioned last week, it does appear that the directors of the company had some serious disagreements (Feud not fuel downed Oasis):

Quarrelling between various investors led to the collapse of Oasis Hong Kong Airlines not high oil prices or a flawed business model as previously thought, sources told The Standard.

The likely demise of the start-up carrier was triggered by a fallout between the partners in the company, people familiar with the situation said. Chairman Raymond Lee Cho-min wanted to keep Oasis in business, but other investors were unwilling to pour in more money after additional cash injections and wanted to pull out following repeated disagreements, the sources said.

The revelation left open a brighter glimmer of hope that the citys only long-haul budget airline could be resurrected, and flights could take off again, if the shareholders quarrel is resolved. A source close to one investor said there may be progress on finding a white knight in about a week.

Budget airline?  I think not.  Anyway, the story goes on to say that the other directors were unhappy with Raymond Lee because he had not made any further investment in the company.  However it does appear that he did take out a loan:

Unable to raise more funding from existing investors, chairman Lee is believed to have pledged his stake in the company as collateral to take out a US$10 million personal loan from Cheung Kong Group.

Despite fighting amongst the company’s partners, sources close to the bank creditors of Oasis Airlines said they were comfortable with the company’s financial situation after Raymond Lee’s US$10 million injection and had not triggered the provisional liquidation.

The irony being that this loan appears to have prevented the rescue of the company that was being discussed early last week (because Lee’s shares were pledged as collateral).  I think we can safely conclude that the other directors would have been happy to sell out to a new investor, whereas Lee felt that the company could survive, and so he took out the loan to try to keep it going.  Maybe he would have been successful if the other directors had agreed – or maybe the other directors were correct that the best strategy was to sell out.  Since they couldn’t agree, the company went into liquidation. 

The latest rumour is that either Cheung Kong or Victor Li plan to acquire Oasis.  This has some logic to it, given that Li had previously bid for Air Canada, but Cheung Kong have issued a fairly comprehensive denial.  The problem with reviving Oasis is that the new company would need to offer a very comprehensive guarantee to cover tickets that were issued, and that would presumably have a major impact on cash flow.  I suppose the other question is whether anyone has a workable business plan.

I think everyone agrees that Oasis had a flawed business plan, but not on what was wrong with it.  Here’s one view (Flawed model led to airline’s demise):

The demise of Oasis stemmed from a flawed business model allocating too many seats for the premium class, according to the Centre for Asia Pacific Aviation.

Oasis marked out 22 percent of its total seating capacity to 81 business seats in a generous layout, whereas Malaysia’s AirAsia X will only set aside 7 percent or 28 seats in its new planes and Australia’s Jetstar allocates 12.5 percent to business-class seating.

“The Oasis example reinforces our view that a sustainable low-cost, long-haul airline model must stick to core principles of high aircraft utilization and high seat density to achieve a sustainable cost position,” said AirAsia X chief executive Azran Osman- Rani.

I don’t agree that it was a mistake to have a large business class cabin.  If Oasis could sell all 81 seats at HK$10,000 (one-way), that is HK$810,000 of revenue.  Selling the remaining 368 economy-class seats at HK$1,800 that would only generate HK$662,000.  Reducing the number of business class seats would not have increased income. 

It’s well-known that business class is more profitable than economy, and “premium economy” can also be very profitable for those airlines that offer it.  The way that budget airlines make economy pay is to pack in as many seats as possible and maximise the number of flights every day, neither of which are feasible if you are operating from Hong Kong to London and Vancouver.  So Oasis needed to do something else, and a cut-price business class was as good as anything else.   

Both the SCMP and The Standard have the collapse of Oasis on their front pages – with much more coverage inside. It’s also the lead story on the TV news, where the main focus is the stranded passengers.  Bizarrely, it still seems to be compulsory to refer to Oasis as a "budget airline", even though it wasn’t one.

A particularly splendid explain of this nonsense comes in the leader article in today’s SCMP, which starts off down that blind alley only to come to its senses in the third paragraph:

Our city’s first budget airline, Oasis Hong Kong, got off to a shaky start 18 months ago. Since then it has attracted thousands of customers and won an international award. But the story had a sad ending yesterday, when the airline voluntarily filed for insolvency and told the government of its demise.

The company’s collapse does not bode well for the future of budget air travel in Hong Kong. This is despite the sizeable market for Oasis’ discounted long-haul flights to cities such as London and Vancouver. Tens of thousands of Hong Kong students, for example, study in these cities and were attracted by the cut-price fares Oasis offered. The demise is all the more depressing in that Oasis was voted the world’s best new airline only last year by travel professionals worldwide. Its safety record was impeccable. In short, it was a bold venture that could have made the city proud. In its short lifespan, Oasis sold more than 360,000 tickets and employed about 700 staff. Unfortunately, those who bought tickets for flights which will not now take off look likely to lose their money. We can only hope that the airline’s failure will not deter other ambitious entrepreneurs from investing in budget airlines.

The problem with Oasis was the high operational costs required to fly long-haul flights, especially at a time of soaring fuel prices. Though often billed as a budget airline, it was more accurately described as a value airline. Its tickets were offered at a discount, but some of them were by no means cheap. For example, it ran a fully fledged business-class section. And unlike most budget airlines, Oasis provided full services for economy-class passengers such as booking, ticketing, meals and baggage handling. Most budget airlines make passengers pay extra. The add-on services made Oasis attractive, and helped it gain market share in a short time. But they also incurred costs that made them unsustainable.

Good grief. If Oasis wasn’t a budget airline, then its collapse can’t tell us anything about "the future of budget air travel in Hong Kong", can it? So the whole of the second paragraph is nonsense. Of course people were happy to pay less for a flight to London or Vancouver, especially as they didn’t need to sacrifice comfort in order to do so. However, it must also be clear that not enough people flew with Oasis for it to survive as a "value airline" (whatever that might be).

It seems to me that there are two reasons why budget airlines are unlikely to prosper on routes out of Hong Kong. The first is that Chek Lap Kop is an expensive airport, and the second is that most routes are already very competitive – with fares to match. The way that budget airlines have prospered is to identify routes with minimal competition (and high fares) or to start new routes using secondary airports, not to fly on a route on already has five carriers competing. Or at least fly from Macau to Stanstead – not Hong Kong to Gatwick. 

Yes, there is Jetstar flying from Hong Kong to Singapore, but their cheapest return fare is around HK$1,600 (if you book in advance), which is quite attractive but not in the same league as some of the savings that Ryanair and Easyjet offered when they started competing with the established airlines in Europe.

The SCMP leads with the rumour that the rescue of Oasis failed because the chairman of the company "had pledged his shares in the carrier as collateral for a personal loan". Which doesn’t exactly make sense, but what is clear is that shareholders of Oasis seem to have fallen out in a big way, and are now trying to blame each other for what has happened.

Shocking, but perhaps not surprising news (Hong Kong budget carrier to stop flying):

HONG KONG: Oasis Hong Kong Airlines, a 17- month-old budget carrier, said it will stop flying, becoming at least the fourth airline worldwide to halt operations in less than two weeks amid surging fuel costs.

The carrier has applied for a voluntary liquidator, Stephen Miller, the chief executive officer of Oasis, said at a Hong Kong press conference Wednesday.

The closely held airline has accumulated losses of as much as $1 billion Hong Kong dollars, or $128 million, The Hong Kong Economic Times said, adding that the airline is losing more than $1 million per flight. The price of fuel has surged 73 percent in the past year.

“If Oasis is in trouble, then others surely will follow,” said Martin Marnick, head of equity trading at Helmsman Global Trading in Hong Kong. “It does go to prove what a high-cost, low-margin business this is.”

Oasis began flying to London in October 2006 and added services to Vancouver a year ago in a bid to challenge Cathay Pacific Airways, which is also based in Hong Kong. It initially offered tickets to London Gatwick Airport for as little as $1,000 each way, less than 20 percent the price then charged by Cathay for flights to Heathrow.

Of course that’s rubbish.  Cathay were not charging HK$10,000 for a return economy class ticket to London (as this would imply).  In fact, if you include the surcharges and taxes, the Oasis fare was only a little less than BA/Virgin/Cathay were charging (if you booked in advance).  Why fly with Oasis when you can choose an established airline for only a little more? 

The truth is that Oasis have never really been a budget airline.  Instead they operated as a normal airline, offering a slightly inferior product at a slightly lower price.  Which is a very long way from Ryanair and Easyjet, and a tough sell – especially on a route as competitive as London to Hong Kong. 

Cathay could easily afford to offer special lower fares on the route whilst offering a superior service, which they duly did.  This seems to have prompted Oasis to try to go upmarket and increase their fares, which a very strange way for a so-called budget airline to respond.  Except that, of course, they weren’t a budget airline. Did I mention that?

It’s interesting to consider what might have happened if Oasis had really been a budget airline – Cathay might have been forced to respond by cutting fares and trimming their service.  Instead they have invested in a new economy class (as well as the inevitable new business class) in the belief that they can charge more for a premium product.

I thought that low-cost business class might have been what saved Oasis, but once again they lost their nerve by improving the quality of the product and increasing the price.  Which begs the question – why would I pay HK$20,000 for a ticket on Oasis when Cathay offer some tickets for HK$23,000 and have a flat-seat in their new business class? 

I still think that there’s a gap in the market for an airline offering a lower priced all-business service – but given that Maxjet recently went bust trying to do that between London and New York it might well be another way to lose money.