An all-oxide composite consisting of alumina fiber, alumina matrix, and barium zirconate interphase has been investigated. The barium zirconate interphase was applied on alumina fibers through coating via a sol-gel route. The incorporation of the coatings did not significantly influence the densification behavior of the composite under hot-pressing conditions. During the processing of the composite, the barium zirconate reacted in situ with alumina fiber and alumina matrix to form Ba-β-alumina platelets with an elongated morphology, which is propitious for crack deflection and thus toughness enhancement. The results reveal that it is possible to reduce fiber strength degradation by controlling the coating and densification processes.