April 9, 2008 / 11:10 AM / in 10 years

Lone HK budget carrier Oasis halts flights

HONG KONG (Reuters) - Hong Kong-based budget carrier Oasis Hong Kong Airlines said on Wednesday it had halted flights and would go into liquidation after just 17 months in the air as record high fuel prices and stiff competition triggered heavy losses.

Oasis’ decision to pull the plug on operations out of Asia’s third-busiest airport raises fresh questions about the viability of budget airlines, which are struggling with rapidly rising costs and facing a potential slowdown in demand as world economic growth cools.

The carrier, which said in January 2007 that it planned to go public on the Hong Kong stock market by late 2009, is now looking for investors to rescue the embattled firm or buy its assets, executives told reporters.

Speculation abounds that dominant Hong Kong airline Cathay Pacific (0293.HK) might make a pitch to buy Oasis, but Cathay spokeswoman Carolyn Leung said it would not comment on rumors.

Oasis, which flies to London and Vancouver, took off in October 2006. But its maiden flight to London didn’t get off the ground after it failed to secure permission to fly over Russian airspace.

Oasis accumulated losses of about HK$1 billion ($128 million) over two years of operation, local newspapers reported. Executives declined to comment on the scale of the losses.

Sources close to Hainan Airlines Co (600221.SS)(900945.SS) -- China’s No. 4 carrier, partially controlled by billionaire George Soros -- said its parent HNA Group is interested in buying Oasis to muscle into the Hong Kong market, which is seeing strong growth as personal and business travel to and from China booms.

Those sources with knowledge of the matter told Reuters the firm had been in discussions for months to buy control of Oasis, and had approached the city’s government about the deal.

“We are confident that someone will step forward,” CEO Stephen Miller told a hastily arranged news conference.

Passengers were incensed at Oasis’ last minute decision.

“If they know there is clearly a problem in March, why do they still sell tickets on the 31st of March for traveling in July?” a visibly angry customer who booked a ticket last month told a local cable television network.

HELP

Executives said they were looking for a way to help customers affected by the shutdown. A government official on Wednesday told reporters it is negotiating with other airlines that ply Oasis’ routes to get them to provide low-cost tickets to its customers.

“We sympathize with the many passengers...who have been stranded by the Oasis’ decision, and we will do our very best to help them through this difficult and stressful period,” Cathay Chief Executive Tony Tyler said in a statement.

The Hong Kong Economic Times reported the firm had been suffering losses on almost every long-haul flight it flew.

Jet fuel prices -- which often account for the biggest share of airlines’ costs -- have nearly doubled since Oasis began operations to nearly $140 a barrel, putting pressure on carriers to hike fares so they can shore up profits and maintain payments on newly acquired planes.

British budget airline easyJet (EZJ.L) sparked a sell-off in European airline shares last month when it warned record fuel costs would erode profits unless they fell soon.

Budget travel has been booming in Asia, following a similar trend in the United States and Europe, with the launch of low-cost carriers ranging from Malaysia’s AirAsia (AIRA.KL) and Australia’s Virgin Blue VBA.AX to Singapore’s Tiger Airways.

Many of the upstarts are betting the region’s booming economies will make the Asian travel market more resilient than those in the United States and Europe.

A $150 million private equity fund run by Value Partners Group (0806.HK), which manages roughly $6.5 billion of assets, made a $30 million convertible bond investment in Oasis.

“It’s a tough industry,” Value Partners Chairman Cheah Cheng Hye told reporters, adding the firm had been told there was a reasonable chance it would get some of their money back.

Tyler said Oasis underlined the competitive nature of a business facing high fuel prices and economic uncertainty.

But analysts said Oasis’ liquidation did not suggest its rivals were in the same boat.

“It always comes back to the viability of the business model,” said Derek Sadubin, chief operating officer of the Centre for Asia Pacific Aviation. “They faced stiff competition.”

“Oasis had over 22 percent of total seating pitched at the business market,” he said, adding that more established carriers such as Cathay have extensive networks and contracts with companies who pay for executives’ flights.

(US$1=HK$7.8)

Additional reporting by Tony Munroe in HONG KONG; Editing by Edwin Chan & Kim Coghill

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