Suzy Bibko is editor of Families in Business.
Another budget airline has taken to the skies, but this time it's for far-flung destinations rather than the usual puddle jumps across Europe or North America. Oasis Airline's founder Raymond Lee explains why his family firm is here for the long haul
The world is becoming smaller. It's a phrase that might be overused, but there's no denying that it's becoming more accurate by the day. Nowhere does this ring truer than at Oasis Hong Kong Airlines, which just made headlines as the first long-haul budget carrier. Now, not only are once far-flung destinations more easily reached with new flight paths, but they're also more accessible to those with limited budgets.
In this age of "bling on a shoestring", it shouldn't come as a surprise that the "have nots" want – and often expect – everything once only had by the "other half". And while Prada bags (real or fake) are now seen on the arms of both A-list celebrities and working-class mums alike, bargain long-haul airfares couldn't be had by anyone, mainly due to governmental regulations and a fear of questioning convention in an industry controlled by just a few.
However, with prices starting at a mere £75 each way from London to Hong Kong, Oasis has put itself on the map as an airline ready to take on the flyboys and make long-haul travel accessible to all. Raymond Lee, founder of Oasis, a family business he runs with his wife, recognises that the venture might seem risky, but he did his homework before taking off. "We went to numerous conferences, read dozens of books on low-cost carriers and aviation and hundreds of investment banking papers, and we came to the final conclusion that there was a business case for this airline," explains Lee. "And while this model had been shopped around for 20 years with no takers, there was actually a lot of merit to it that the general public may not have realised was there, which really excited us."
While Lee may make it sound like this was a no-brainer, there were some very real challenges that, until recently, basically grounded the concept of a budget long-haul airline. Airlines are heavily regulated for several reasons: safety, noise pollution, avoiding uneconomic overlap, demand. And each country has different levels of regulation and legislation applying to airlines; some countries may restrict their airspace more heavily than others, or may have more stringent laws regarding the number of airlines allowed per route and the like. Startup airlines often have problems serving certain airports because the existing airlines are allotted all the available gate spaces, thus preventing any other airlines from getting a foothold (or winghold as the case may be) into that airport. Therefore, a route would be unavailable to them until an existing airline gave up that route – not something that happens often with popular destinations and the network carriers.
For Oasis, wanting to operate out of Hong Kong didn't make such hurdles any easier. Until 1997, Hong Kong's airspace legislation was extremely rigid and imposed a "one route, one carrier" doctrine. This meant that if one carrier was already flying to a location, another carrier couldn't fly there. Consequently, if one airline already flew from Hong Kong to London (Oasis's present route), another carrier would be banned from flying that same route. However, after the handover of Hong Kong back to China, that legislation began to relax and multiple carriers could finally begin discussions on serving the same route. So, until 1997 (and for several years following), just starting a new airline serving certain routes from Hong Kong wasn't viable – budget or not.
Lee says that there were other obstacles that prevented competitors from pursuing a low-cost long-haul business model – most of which concerned money. "You need wide bodies to fly across the ocean, and these planes require a much larger initial investment [than smaller, short-haul planes]. So, the startup risk is higher," reveals Lee. He also explains that the existing low-cost model has mainly worked at smaller, regional airports, rather than the large, international airports. So, for example in the UK, EasyJet and RyanAir, two of the most successful short-haul budget airlines, do not operate out of London's Heathrow airport, but rather fly from Luton and Stansted – considered to be London airports, but just barely (they are, in fact, some 35 miles outside the city). "The low-cost model has thrived on airports that are cheap," says Lee. "And your cheapest airports are regional. So this is why people didn't think the long-haul model would work. Combine this with the question of how you could cut out a lot of the central services on a long-haul flight [to cut costs] as a lot of short-haul carriers do, like the fact that you don't even get a bag of peanuts, and people couldn't justify the business model."
The point about peanuts, or lack thereof, couldn't be truer. Most of the budget airlines offer few "amenities"; some don't even assign you a seat (which often results in a cattle stampede once the gate opens). So much for the romantic days where flying was a luxury. In fact, the lack of some seemingly inexpensive services (such as beverages) has led people to wonder how far cost-cutting actually goes, and whether safety is ever compromised to meet the demand of cheap seats. "When a lot of people think of a low-cost carrier, they automatically think cutting costs," agrees Lee. "So for the long haul, people are concerned that safety is being cut out and things like that. But I think that reflects a fundamental misunderstanding about what the whole strategy is about."
Indeed, the strategy is not about cutting costs, but about revenue maximisation. "Through asset realisation, you maximise revenue," emphasises Lee. "So, for an office building, if there is only 50% occupancy, I [as owner] don't make much money. But at 95% occupancy, then the cash flow is extremely strong. When marginal revenue greatly outstrips marginal cost, you need to spend only thirty cents to make another dollar of profit because a lot of the fixed costs are already being paid for. For an airline, the most expensive assets are the aircraft and its human resources. Whether you use the aircraft eight hours a day or 16 hours a day, you pay the same rental fee or depreciation cost on the aircraft. We found that with high aircraft realisation, you are able to bring in 1.5 to 1.8 times more passengers than the traditional carriers bring in, revenue-paying passengers, because the local low-cost aircraft strategy turns on having a rapid turnaround time, meaning they can keep their plane in the air longer. We are similar to the low-cost aircraft carriers [in that approach] because we have a point-to-point model, but we have even greater traction because we can fly each day and realise the asset even more than the short-haul model. We find this an extremely exciting model because we have evidence that you can spread a lot of the cost around 16–17 hours [per day] a lot more efficiently than you can for eight or nine hours [what the network carriers do per day]."
Despite a bit of turbulence on the company's first day of flying (when Russia denied Oasis's aircraft permission to fly over Russian airspace at the last minute; Russia has since granted Oasis permission, which cuts flight time by nearly two hours from Hong Kong to London), initial figures look positive for Oasis. Since the company's launch in October 2006, nearly 40,000 customers have booked flights with the airline. Flights operated at a 73% average passenger load in November, the first full month of operation. Plans are already under way for expansion of both routes and aircraft. A second Boeing 747 has already been purchased, and Oasis is actively seeking to acquire up to five aircraft a year, expanding its fleet to 25 planes by 2010. These planes will be used on new routes to Oakland, California (in the first half of 2007), and other European and North American cities, including Cologne/Bonn, Milan, Berlin and Chicago.
But aren't these routes already provided by other carriers? Yes, but not always as direct flights with a low price tag. Lee is stupefied by the conventional model of direct flights always costing more than indirect flights. "If you want direct flights, then you have to pay almost double for it," says Lee of the network carrier fee structure. "We challenge that because the cost structure for a direct flight is by no means any more expensive than an indirect flight, and quite often it should be the other way. It should be cheaper on a cost structure basis, but instead they are charging twice as much as the indirect flights, and the only reason is so that they can limit service and essentially create a cartel. The aviation field I see 10 to 20 years from now is where this cartel is broken and where direct flights will cost no more and no less. We will charge a reasonable mark-up, but we will not find it justifiable to charge double what the indirect flight would cost right now."
Network carriers may brush off Lee's business model as one built on naivete and idealism. After all, his background is property, not planes. He's an outsider to an industry few newcomers succeed in. But Lee isn't afraid to play with the big boys. "Its been a steep learning curve for me," admits Lee. "I've had to burn the midnight oil as I read up on hundreds of articles, dozens of books and attended conferences, but I found that stimulating and quite an enriching experience. I think the advantage I have is being able to look at things from a fresh perspective. My family business has been in property, so I was pretty much an outsider, but I found that a fresh perspective is also what the founder of SouthWest Airlines brought to the business, and WestJet was started by a property developer, too. An outsider's view may not be such a bad thing. It actually affords a crisper and fresher perspective rather than being boxed in for years saying that's the only way to do it."