The Employee Ownership Update
June 7, 1995
Kiwi International Struggles to Overcome ProblemsKiwi International Airlines is the only major airline started as an employee-owned firm. With all the recent publicity about employee ownership at United Airlines and Northwest Airlines, where employee ownership seems to be working well so far, and at TWA and USAir, where employee ownership is being used or proposed to stave off bankruptcy, it's not surprising that the press would turn its attention to Kiwi. The airline was started in the late 1980's by former Eastern Airlines pilots, who invested $50,000 each to help get the company underway. Now new hires must buy at least $5,000 of Kiwi stock each. Kiwi is not an ESOP; instead, most of its stock is owned directly by employees through after-tax purchases.
Flying out of Newark with low fares and full service, Kiwi did well at first. But a series of problems, culminating in the 1994 voluntary grounding of the airline for failure to maintain proper safety records, raised doubts about the company's ability to succeed. It had grown from 200 to 1,000 employees, but faced serious management problems. Its first CEO, Kenneth Iverson, a former Eastern pilot, was forced out in 1994 and its next CEO lasted only three months. Iverson said the biggest mistake he ever made was calling the employees owners. Iverson and other managers believed employees wanted too much say in the operations of the company; employees contended that since they were shareholders, they had a right to a say. In fact, employee control rights were very limited, much more limited than at the ESOPs at the other major airlines.
A spate of recent stories has covered Kiwi's problems, but the company has made money recently. It is currently looking for a major investor to help it grow, but wants to retain majority employee ownership. So far, the investment community has been skeptical.
More Data on Employee Ownership Through 401(k) PlansA new survey by IOMA, a newsletter on defined contribution and pension plans, finds that 40% of the allocations in the largest defined contribution plans are in company stock. Looking at companies with defined contribution plan assets of at least $200 million (355 firms), IOMA found that 70% of the companies sponsoring the plans have at least one defined contribution plan offering company stock as an investment option. Employees at these companies have $255 billion invested in employer stock through these plans. This number includes all defined contribution plans, so ESOPs and profit sharing plans would also be in the survey, but much of it would be in 401(k) plans.
IOMA then looked at the return on these investments. The 1994 performance of employer stock (+13.5%) was comparable to the Russell 3000 index (+13.9%), but lagged behind the S&P (+15.6%). The results would be appear worse, however, if adjusted for diversity risk. While some employer stock investments did extremely well, some did very poorly; a diversified investor would have had a much more predictable return.