Kiwi International Airlines Inc.

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Kiwi International Airlines Inc.

One Hemisphere Center
Newark, New Jersey 07114-0006
U.S.A.
(201) 645-8445
Fax: (210)624-0537

Private Company
Incorporated: 1992
Employees: 550
Sales: $170.3 million (1995)
SICs: 4512 Air Transportation—Scheduled

Kiwi International Airlines Inc. was created from the ashes of Midway Airlines, Eastern Airlines, Pan Am, and other carriers which folded in the early 1990s. These closings left a slew of experienced and unemployed personnel in their wake, and put plenty of used equipment on the market. The New Jersey airline was named after the flightless bird from New Zealand which symbolized how the grounded flight crews felt after losing their wings. (The appropriation of the national symbol did result in both some ruffled feathers and some confusion later on.)

Taking Off in the Early 1990s

Employees started out by investing up to $50,000 each in the airline (at around $5 per share), making it employee-owned in a unique sense. Bob Iverson, formerly a pilot at Eastern Airlines, served as the company’s first chief executive officer. Dave Bell, who also flew for Eastern, served as vice-president of strategic planning. His brother Codie, an Arthur Andersen consultant, helped plan the start-up and served as chief financial officer. The company’s unique ownership joined the Airline Transport Association, the lobbying group that represents airline owners and sometimes takes a different regulatory stance than pilots’ unions.

Iverson and the four other pilots who would control the company had originally set out to acquire an airline. However,the investment community proved too sluggish to accommodate them. They turned to displaced employees to raise $10 million to start a new airline: pilots invested $50,000 each, other types of employees $5,000.

Employee ownership benefited the airline with drastically lower labor costs as well as lower start-up capital. The maximum salary pilots and executives at Kiwi could command was $60,000, roughly half what other carriers allowed their most experienced pilots. It allowed pilots to retain their seniority, unlike the rest of the industry. The company started its flight attendants at $28,000 per year, nearly double the average.

Employees seemed to take a proprietary interest in their duties that resulted in high standards of service. Morale was high as the employees, who felt they had been treated as a burden by the owners of the airlines they had previously served, now felt they had a chance to demonstrate their value. The egalitarian spirit was represented in the newsroom-type layout of the company’s headquarters, where all 200 administrative employees shared a large open office. In addition, employees were encouraged to help wherever needed when they could spare a moment, from helping load planes to volunteering in an auxiliary sales force.

Employee ownership was a popular trend in the airline industry at the time Kiwi International started. However, while Kiwi’s employees provided the company’s start-up capital, workers at other companies were granted shares either as a benefit or a concession for lower wages.

To much fanfare, Kiwi made its first flight from Newark International Airport to Midway Airport in Chicago. At the time, the company operated only two aircraft, Boeing 727-200s, which were relatively economical to purchase but were also less fuel efficient. Eventually, these older aircraft had to be upgraded to meet federal noise limitations.

The company’s strategy was to offer low prices without the restrictions usually associated with discount fares, and superior amenities and levels of service. Its food costs, for example, were said to be twice ($6 per meal) the industry average. Lavatories were decorated with flowers. However, its costs permile (6 cents) were well below the industry average of 9.5 cents. It could make a profit off half-empty airliners, which was fortunate, since the carrier always had some difficulty filling airplanes. Rather than operate on a hub system, the carrier offered simple nonstop flights, maintaining its flexibility. Travel agents fawned over Kiwi’s attentive service. Kiwi’s routes, which focused on major metropolitan areas, were typically boarded from smaller airports, which were often more convenient for travelers. In spite of the warm reception, Kiwi lost $6 million during its first year of operations.

In late 1994, Kiwi preemptively grounded its fleet of 13 leased planes in response to FA A scrutiny of its pilot training documentation procedures. The issue was quickly resolved, however. To placate potentially anxious passengers, the company touted its outstanding safety record, never having even “scratched a plane in 23,000 flights.” Nevertheless, the grounding was estimated to have cost the company $2 million. Although the company initiated a new small package service in June and made $114.3 million in revenues in 1994, it failed to turn a profit as expected, instead losing $25 million.

Two Years of Travail: 1995-96

According to Bob Iverson, who lost his executive position in February 1995, the company’s chief liability was its raison d’etre, its employee owners. He blamed the concept for a lack of discipline in spending and an atmosphere that paralyzed decision making. The resistance to centralized authority was endemic throughout the organization, including among the vice-presidents. Deals were lost as a result, and planning was futile in an organization more focused inside itself than on the market.

Other observers stated that employees had very little sway at the airline. They had no voting rights, which instead were reverted to a panel of five pilots. Its employees paid for stock after taxes. As the company did not have a formal employee stock ownership plan (ESOP), it did not make the same type of financial reporting to its shareholders, who bristled at subsequent cost-cutting measures. Some characterized the company’s leaders as business novices in spite of their piloting experience. In addition, they criticized the abnormally high rate of pay some positions received in relation to industry norms; future CEO Jerry Murphy lamented “make-work” positions that overstaffed the airline.

Analysts also surmised that the company simply did not have the cash to make its low-cost/high-quality approach work. Quality invariably suffered; the airline reported on time performance of 65 percent in 1995. At the time, the company was leasing 16 planes and employing 1,000 workers.

The company’s cashflow needs and the incident with the FA A prompted Iverson’s dismissal, according to company sources. Iverson maintained that $7.5 million in financing he was attempting to secure was perceived as a threat to the directors’ control of the company. He was initially replaced as chairman by Byron Hogue, one of the founders of Federal Express. Danny Wright, an aviation consultant, was named president. During this crisis period, employees’ pay was cut by 17 percent. In May 1995, the company reported it owed $3 million to the Internal Revenue Service and $1 million (laterreduced) to the Port Authority of New York and New Jersey. In June 1995, Jerry Murphy, formerly co-president of the defunct MGM Grand Air, became the company’s fourth CEO and Russell Thayer, formerly CEO at Braniff Airways, became its new chairman. His team implemented the company’s first business plan early in 1996.

In August 1995, the airline began a marketing agreement with Air South, a discount airline based in Columbia, South Carolina. Nevertheless, marketing and sales efforts proved insufficient, and load factors (the percentage of seats booked on flights) were insupportably low, even for Kiwi. Ironically, in June 1995 Consumer Reports rated the carrier the third best airline in the United States. Conde Nast Traveler had rated it the best domestic airline in November 1994.

FAA scrutiny of its pilot training again interrupted the carrier’s operations in mid-1996, when it grounded four of its 15 planes. The agency determined just over a tenth of Kiwi’s 277 pilots were not sufficiently trained. Kiwi officials characterized the FAA’s actions, which came after the disastrous May 1996 crash of a ValuJet airliner, as an overreaction, and took the unique step of touting their “perfect safety record” in advertising (specific safety claims are rare in airline advertising) rather than their low fares. Kiwi managed to hold on to a profit during this time, but not without pay cuts and layoffs.

Hope for Renewal in 1996-97?

Airlines typically do not advertise following catastrophes such as the explosion of TWA fight 800 in July 1996. However, Kiwi did so; as one executive told Advertising Age, ”we can’t afford to have consumers afraid of flying.” The airline was also able to obtain time on the Megavision screens at the Summer Olympics in Atlanta, site of the company’s largest hub, due to the withdrawal of ValuJet.

In July 1996 Recovery Equity Investors of San Mateo, California, provided the company with $4 million to offset its constant cashflow problems. Ironically, concern over the safety of discount airlines following the ValuJet Everglades crash diluted the resolve of Kiwi’s backers. Kiwi had proved perfectly safe throughout its four-year existence: no accidents, no injuries. Nevertheless, though the company’s operating statistics showed a little improvement over the previous year, Recovery Equity Investors subsequently postponed a planned additional $6 million payment.

With liabilities totaling $55 million, Kiwi, valued at $35 million, entered Chapter 11 bankruptcy proceedings on September 30, 1996. (Oddly enough, Kiwi International Airlines of New Zealand—a younger, entirely separate company—had announced it was folding on September 9.) A couple of weeks later, on October 15, it suspended all scheduled flights, but continued to operate charter flights as it sought creditor backing. It resumed limited scheduled operations on January 20, 1997, recalling about half of its 1100-strong prior work force. These flights linked Newark, Chicago, Atlanta, and West Palm Beach with unrestricted one-way fares of $99 or less.

The Wall Street Journal reported that for the first time in history, a crash (ValuJet) had jeopardized the survival of an entire segment of the industry. Besides Kiwi’s Chapter 11 filing,, several other carriers reported bleak news. JetTrain Corp., a new Pennsylvania airline, folded after less than a year. As reservations from cautious customers dwindled, others posted losses for the last quarter of 1996: Frontier Airlines, Western Pacific, Vanguard Airlines, AirTran, and ValuJet itself.

Dr. Charles Edwards, who had already invested more than $10 million in Kiwi, stepped up to provide further support in June 1997. Edwards-Wasatch Enterprises LLC (an affiliate of Wasatch International), led by Dr. Edwards, offered $16.5 million to buy the carrier, allowing the investment group more management control. Bankruptcy proceedings were expected to end in July 1997.

Kiwi International Airlines delighted many with its attention to detail and attempts to give customers more for less. Unfortunately, competitive pressures, untoward circumstances, and, some would say, an inherent flaw in its unique ownership and management structure, all threatened to keep this carrier on the ground. If Kiwi can learn to please investors as well as it has its customers in the past, it should find its most difficult flights behind it.