NiCrAlY is utilized as a protective coating for gas turbine components at high temperatures. Enhancing the erosion resistance of NiCrAlY coatings can be achieved by optimizing their mechanical properties. In this study, a NiCrAlY coating containing oxygen was deposited by magnetron sputtering and investigated concerning microstructural evolution at 900° C. Oxygen inclusion does not increase the hardness of the NiCrAlY coating in its initial deposited form. When annealing at 900 °C for 1 h, the NiCrAlYO coating develops into a nanocrystalline structure, where Y2O3 is evenly distributed inside the γ/γ′ matrix. This leads to the phenomenon of age-hardening, causing the hardness to increase to 12.4 GPa. Conversely, the hardness of the O-free NiCrAlY coating sharply declines to 9.3 GPa. Moreover, the wear resistance of the NiCrAlYO coating has been enhanced at a temperature of 700 °C, owing to its exceptional mechanical stability.