High Oil Prices Hit Low-Fare Carriers Hard Oasis Hong-Kong is 4th Carrier to Fail

High Oil Prices Hit Low-Fare Carriers Hard Oasis Hong-Kong is 4th Carrier to Fail
Posted on: Thursday, 10 April 2008, 06:00 CDT

By Keith Bradsher

Oasis Hong Kong Airlines, a long-distance budget carrier that tried to offer premium service and spacious seats at low prices, suddenly went into liquidation Wednesday and canceled all flights, the fourth budget carrier to halt operations in the past week and a half.

The bankruptcy filing by Oasis stranded thousands of passengers in Hong Kong, London and Vancouver, British Columbia. Many of the would-be passengers stuck in Hong Kong are children trying to return to British boarding schools after going home for the spring break.

High jet fuel prices have taken a heavy toll on the airline industry and particularly on budget carriers trying to compete on price with low profit margins. The other three to shut down since March 31, all in the United States, are Aloha Airgroup, ATA Airlines and Skybus Airlines.

The spate of bankruptcies threatens to undermine travelers' confidence in budget carriers. But airline industry experts say that Oasis's business model of punctual, top-notch service and lots of legroom at discount prices made it especially vulnerable to high oil prices.

For other budget carriers, the lesson of Oasis's demise is that, "they have to pack more seats and more passengers into their aircraft," said Derek Sadubin, the chief operating officer of the Center for Asia Pacific Aviation, a consulting company in Sydney.

While established airlines are also feeling the brunt of high fuel prices, budget carrier start-ups have proved more vulnerable because they must struggle during the current international credit crunch to borrow money to cover any operating losses.

The shutdown of Oasis "does remind us that it is an extremely precarious business when there are so many external factors outside the control of airline management, one being jet fuel prices and another being the credit crunch," said Martin Craigs, the president of the Aerospace Forum Asia, a trade association in Hong Kong representing aviation equipment suppliers, including Airbus and Boeing.

Yet another problem for start-ups like Oasis is that the cost of leasing or buying planes has stayed high, even as economic weakness in the United States and elsewhere has started to hurt demand for air travel. Asian and Mideast carriers are actively expanding and ordering hundreds of planes, leaving Boeing and Airbus with long backlogs of orders.

Stephen Miller, the chief executive of Oasis, said at a brief news conference Wednesday that the carrier still hoped to find an investor to buy its operations. But Eva Cheng, the Hong Kong secretary for transport and housing, said that the company had made a voluntary filing for liquidation Wednesday only after lengthy negotiations with a possible investor broke down Tuesday.

Cheng said that the cessation of service by Oasis was particularly troubling because it came at a time when many flights on other carriers are already fully booked - including for children, some traveling without adults, who are trying to return to school in Britain.

Cheng urged other carriers to give priority on nonstop flights to children holding Oasis tickets. An estimated 40,000 young people from Hong Kong, a former British colony, attend schools in Britain, the bulk of them in elementary schools, junior high and high school, but some in university as well.

Virtually all civil servants in Hong Kong, regardless of national heritage, are still eligible for a taxable government allowance that covers more than half the cost of sending children to boarding school in Britain.

Cathay Pacific Airways, the dominant airline in Hong Kong with at least a third of the market, announced Wednesday that it would add an extra flight to London on Friday and another Sunday with priority for schoolchildren. The airline also said that holders of tickets for Oasis flights in the next two weeks would be eligible to buy one- way economy class tickets from Hong Kong to London or Vancouver - the two routes formerly operated by Oasis - for 2,500 Hong Kong dollars, or $320.

Raymond and Priscilla Lee, a wealthy Hong Kong real estate couple also active in philanthropic causes, started Oasis in October, 2006. The private equity arm of Value Partners Group, a large Hong Kong asset management company with $6 billion under management, bought $30 million in convertible bonds from Oasis to help finance its growth.

Cheah Cheng Hye, the chairman and chief investment officer of Value Partners, said Wednesday that the company had several layers of guarantees on the bonds and had a "very reasonable chance" of recovering its money, and that the company's well-known funds would not be affected because they did not hold stakes in the private equity unit.

Value Partners' risk from the Oasis investment is insignificant to the overall company because its investments are diverse, Cheah added in an interview, explaining that, "it's like running a hotel with 100 or 200 rooms - sometimes a guest will check out without paying the bill."

The High Court in Hong Kong appointed KPMG as the provisional liquidators of Oasis. The airline's ticket holders will be among its creditors.

Oasis had superb on-time performance - it boasted that every flight to and from London was on time in February. It also offered more legroom in economy and business class than other budget carriers and even some premium carriers.

In business class, Oasis put up to 60 inches, or 150 centimeters, between each seatback, compared with 38 inches on some budget carriers, and in economy class it put 32 inches, compared with 31 inches on many carriers.

Oasis operated roomy four Boeing 747-400s with twin aisles on its nearly 13-hour flights from Hong Kong to London and Vancouver. But the planes also have four engines, which gulped fuel at a time when crude oil is over $100 a barrel.

Oasis was an unusual hybrid of the new all-business class airlines now appearing over the Atlantic and the very inexpensive economy class carriers now spreading around the world. Oasis allocated 22 percent of its seats to business class and charged as little as a third of Cathay's prices, seeking 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.

But many corporations have contracts with Cathay for their employees, while expense-account travelers have tended to prefer Cathay for its frequent flyer plan, Sadubin said. On an Oasis flight from London to Hong Kong last Friday, economy class was full but there were just two passengers in one of the aircraft's three sections of business class.

Originally published by The New York Times Media Group.

(c) 2008 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.



Source: International Herald Tribune