AsiaÆs first long-haul low-cost airline turns one

Steve Miller, the chief executive officer of Oasis Hong Kong Airlines, discusses what it takes to stay airborne.
The business plan for Oasis Hong Kong Airlines û now just over one-year old - was conceived by its joint founder and CEO Steve Miller during a stint as representative for airports such as Frankfurt and Amsterdam. Part of his work involved monitoring passenger flows between Hong Kong and Europe.

Miller says, that over a period of three or four years, he noticed a huge increase in the number of third-country carriers operating into Hong Kong û airlines from Singapore, Malaysia, Thailand all taking passengers via their own hubs to Europe. He calculated these passengers amounted to about 20% of the total volume û some 200,000 passengers a year. The same thing was happening with carriers from Taiwan, Japan and Korea on the North American route.

ôI then took the fares that these airlines were charging and plugged them into a non-stop service with a 747-400 and found, that if you could keep the costs relatively under control, you could make reasonable money. And that was the original business model for Oasis.ö

Having a plan was one thing; finding backers were another, particularly just after the Sars crisis in 2003. However Miller found his main backer, Raymond Lee, in û of all places û a cinema queue. ôHe was standing behind me in the queue to see Mel GibsonÆs Last Passion of Christ. We got talking and I decided to approach him. I didnÆt need to approach anybody else.ö

Other shareholders included Allan Wong, chairman of VTech Holdings, and Richard Lee, the founder of Trinity Textiles.

The shareholders initially put in $100 million but this had to be increased because, in the six months it took the air transport licensing authority to overturn objections from Cathay Pacific, the market for leased aircraft tightened dramatically forcing Oasis to buy its first two aircraft.

Oasis operates daily flights to London and Vancouver and, over the summer, load factors averaged 95%. Oasis needs an average load factor of about 75% to break even. While it is not making a profit, Miller says the airline is on budget. He says it was four-to-five years before Dragonair, which he also founded, flew profitably, but he expects Oasis to break even in the first half of next year. HeÆs even got his eye on an IPO which he expects to happen around the end of 2009 or early 2010.

So what does it take to run a profitable airline? Although its business class is some 50% cheaper than Cathay and economy is 20% cheaper, Miller categorises Oasis as a value airline, arguing that it is not the same as a short-haul, low-cost airline. ôThere is a huge difference. We take the best of a low-cost model, which is applicable to long haul.ö

The key area is high productivity. In the old days short-haul airlines within Europe used to operate seven-to-eight hours a day. In Europe and the US the likes of Ryanair and easyJet were able to operate a much higher-level of flights during the day with much quicker turnaround times. Instead of 60-90 minutes for a turnaround, they did it in 20-25 minutes, which Miller says can be done safely. Refuelling is the biggest factor influencing turnaround times. Using this model, easyJet now flies 12 hours a day instead of the usual 7-8 flying hours.

However, with Oasis operating long-haul flights, its parameters differ. Cathay, British Airways and Virgin operate with a fleet utilisation of about 12 hours a day whereas Oasis utilises its aircraft an average of 15.5 hours a day by operating on a very tight schedule.

ôOne 747-400 can actually do 4.5 round trips to London a week. So we have three aircraft doing a daily round trip to London and six a week to Vancouver. ThatÆs a good utilisation, much better than the others but also leaves ample time for maintenance.ö

While high productivity is a key driver, Miller says that being able to start with a ôclean sheetö makes a lot of difference. So while it has a staff association the management does not have to deal with entrenched union practices that have bedevilled other airlines. Its pilots are mostly based in the UK so it isnÆt embroiled with the costs of expatriation. On salaries, Miller says that Oasis pay around 15% below the industry average, but with bonuses and incentive the aim is that all its staff û not just the pilots û will end up earning about 15% above the industry average. There are also big savings to be made in outsourcing.

Oasis is planning to operate eight aircraft by the end of 2008. Some will be leased as it gives the airline more flexibility: in that leased planes can sub-leased should the airline want to buy a more suitable plane that comes onto the market. At present the airline employs 500 people of whom 120 are pilots, 280 are cabin crew and 100 are office staff.

Oasis has an unusually large business class of 81 seats. This is because it is targeting the small businessmen who are paying for themselves but want a good seat and somewhere to work and sleep comfortably.

Miller is conscious that, to compete, Oasis has to provide good service. One way he monitors this is by inviting passengers to email him with their comments on the flight. He gets about 50 a day and spends the first 45 minutes of his day answering them.

ôChicken or duck is not much of a choice,ö says one email.

Miller responds, ôYouÆre right it is not much of an option, IÆll look into it.ö

A few weeks later the same man emails, ôHi Steve, enjoyed the flight. Appreciate the fish option.ö

Others write, ôIs it really you?ö

ôYou can do this when you are small, and itÆs a great way of finding out what passengers feel about what is going on in the cabin,ö says Miller.

But how does Miller assess the first year of operation? ôI am delighted that the business model seems to be accepted by the market. ThatÆs very exciting. The businessmen and the leisure traveller who wants to travel in comfort are all biting and saying this is what we have been waiting for.ö

A version of this story first appeared in the October issue of FinanceAsia magazine.
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