The story of an ailing employee-owned airline pulled together with unemployed personnel from other airlines.
Upstart Kiwi International Air Lines once soared on the happy illusion that employee owners ran the company -- and when the airline took a dive, employee ownership got the blame. Are there lessons in Kiwi's travail? Yes, but they're not the ones its founding CEO is peddling
If this decade's most widely acclaimed experiment in employee ownership ultimately fails, there will be a simple explanation for it.
Bob Iverson, the former and founding CEO of Kiwi International Air Lines, has already told anyone who will listen where to lay the blame for the tide of red ink that threatens to drown the three-year-old venture. "One of the stupidest things I ever did was call everybody owners," a rueful Iverson told the New York Times in an interview last March. Employee owners were insubordinate and meddling, he alleged. Decision making was belabored, financial discipline impossible. Iverson has even written a book recounting the perils of employee ownership, called Kiwi International Air Lines: An ESOP Fable.
The real fable is the one that makes Kiwi, based in Newark, N.J., out to have anything resembling an employee stock ownership plan (which it does not) or to be anything but a bizarre caricature of egalitarian management. While it is a fact that Kiwi is owned by its employees and that right now the airline could use a flotation device made of cash, the ownership structure is not the problem at Kiwi -- where employees are perhaps the most powerless "owners" ever created by a certificate of stock.
Rising on a gust of righteous rage over the way airline managers had mistreated them, Iverson and the other unemployed survivors of Eastern Airlines and Pan Am rejected the caste system of traditional management. When they founded Kiwi, in 1992, they envisioned a company of equals that would be happily, communally owned.
"It was the dream of unemployed people coming together, pooling their money, and starting their own company," says Jack Tucker, a company spokesman. "Kiwi was the American dream, really."
Not for long. Hardly a crisis has spared Kiwi, which serves seven cities and employs 1,100. According to unaudited Securities and Exchange Commission filings, the airline lost $24 million last year on revenues of $114 million, pushing its cumulative operating losses to nearly $40 million. To keep the company afloat past this year's third quarter, an infusion of at least $15 million is desperately needed. And in recent months Kiwi has stopped or rescheduled payments on at least $6 million in debt. In addition to unpaid creditors, it has a $3-million problem with the Internal Revenue Service -- the result of unpaid excise taxes. The Federal Aviation Administration has been closely policing Kiwi ever since it temporarily grounded the airline for training infractions last December. Three chief executives, including Iverson, were fired in a six-month period this year. At press time, the search was on for a fourth. Stock sales to employees have been "temporarily suspended," according to Tucker. And Arthur Andersen, the company's auditor, expressed in its most recent auditor's report "substantial doubt about the company's ability to continue as a going concern."
In Kiwi's tale of woe lies a truth about employee-owned companies. But it's not, as Iverson contends, that they simply don't work.
Why, then, is Kiwi, which Consumer Reports ranked in June as the nation's third-best airline, on the brink of bankruptcy? The answer goes back to its founders, who built the business on a single article of faith: there would be no management elite at Kiwi, no coach and first class. It was a worthy principle -- and a poisonous practice.
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The Investors
Buying revenge, share by share
Employees, who hold 53% of the company, invested anywhere from a few thousand dollars to more than $50,000 each, providing just a little more than $9 million of $17 million in paid-in capital. People tapped savings or dunned paychecks to finance the upstart airline. "There were guys I flew with at Eastern who were driving limos," says pilot Fran McBride. "We were just a lot of guys anxious to get back into the cockpit."
Nearly everybody at Kiwi felt that way. "No other carrier welcomes 20-year captains as captains," says Iverson, a former pilot. At Kiwi they'd trade in their customary six-figure salaries but keep their stripes.
Raising lots of small investments from lots of individual investors was as systematic as selling raffle tickets. The odds of winning, in an industry littered with bankrupt upstarts, were lottery-long. But hundreds bought a chance. They bought a chance at resurrecting careers cut short. They bought a chance at proving something to all the arrogant suits in airline management, who viewed veteran employees as a cost to be renegotiated at contract time, and who thought of pilots as glorified bus drivers.
Ramp-services manager Doug Davis and his wife, Deb, a Kiwi flight attendant, scraped together their $10,000 share after being unemployed for almost two years during the Eastern strike and liquidation. McBride remortgaged his home and borrowed against his retirement savings to come up with $50,000. "Hey -- thanks a million, I can make another mortgage payment," he likes to tell passengers as they depart. In addition to the equity that hundreds of employees ponied up, 28 pilots later lent another $1.2 million in unsecured debt.
