Case Study Analysis of Kiwi Airlines Entry Strategy

Kiwi Airline Case Study

This is an important case for learning about successful and unsuccessful entry strategies.

The Kiwi Case Study was provided:Kiwi Airlines CS

The analysis is here:Chapter 12

On to Kodak Takes on Polaroid (Chapter 13 in Competition Demystified).

5 responses to “Case Study Analysis of Kiwi Airlines Entry Strategy

  1. John,

    Thanks for your analysis. I think it’s right on point.

    I just wanted to highlight a few things that seem to be operating below the surface with respect to Kiwi and the airline industry in general. Please correct me if you disagree. I would love to discuss more.

    It seems that the airline industry has three elements that combined created an environment that was suspectable to value distruction.

    First, airlines have massive operating leverage–most costs are fixed (labor, fuel). In other words, there is almost no variable cost associated with each incremental customer.

    Second, while high fixed costs can create barriers to entry, (because it leads to lower per unit pricing for incumbents who can spread those fixed costs across a larger base or because of the massive upfront cost that many upstarts cannot handle) with airlines, there are low barriers to entry despite these fixed costs because of the ability to lease airplanes and get access to terminals, etc. [This is an interesting aspect of the industry that I would like to investigate further.]

    Finally, airlines provide a virtual commodity product; a ride with one carrier isn’t different than a ride with another (despite attempts to create customer loyalty through frequent flier miles, etc).

    Thus, it seems to me that when those elements are combined there is potential for an unprofitable industry and company. A small decline in pricing, for example, will flow directly to bottom line bc of operating leverage. That decline in prices is more likely because the product is a commodity, thus there is little ability to price at a premium. There are also few barriers to entry, so with new entrants coming in there will be pricing pressure.

    Feel free to disagree and pick apart the analysis. I know I took a bit of a tangent off Kiwi but I thought this was relevant. Thanks!

    • Dear Mike:

      I agree completely. Now you have the secret to outperforming the S&P 500 over a thirty year period. Invest in every company EXCEPT the airlines. Now you are in the top 10% of all money managers phoning in your order off Bill Miller’s
      $200 million Yacht, The “Outrageious.”

  2. In the case analysis, it states that Kiwi began to grow outside its area of competitive advantage and thus into losses.

    Did Kiwi have any competitive advantages to begin with? Did it really have economies of scale? My understanding of EOS is that fixed costs per unit decline as volume increases. Also, EOS tend to be local in nature. Should we be thinking about the fixed costs for Kiwi based on its niche route structure?

    Could the major airlines have taken Kiwi out immediately without letting it survive, even if that meant sacrificing short-term profits?

    John, if you were running Continental at the time and you saw Kiwi enter, what would you have done and why?

    • Dear Logan:

      No KIWI did NOT have competitive advantages to begin with (the case doesn’t provide financial numbers for KIWI) but probably KIWI could earn the FAIR return on its asset WITHIN its niche slot. Any excess capital it should have used to pay down debt, return capital to shareholders, etc and NOT grow. Its advantages were equal within its niche to the incumbents–which lacked true competitive advantages or else you would see greater profitability in the industry as a whole. So don’t confuse successful entry (when it stayed small and unatrusive) with competitive advantage.

      Perhaps the majors could have crushed KIWI, but they would have had to view it as a serious threat. Knowing instutional imperative, they probably thought KIWI was a joke at first–a bunch of crazy pilots gointo debt to have a job. Also, Kiwi, at firest, was taking a few crumbs so the majors probably viewed retaliation as not worth the effort.

      If I ran Continental, I would try to focus on efficiencies and move my prices lower. But an outright price war might be shooting myself in the foot since my prices being lowered against Kiwi’s small number of lfights would cause me much greater losses. The industry has easy entry and exit but strengthening a hub (which is local dominance) would allow for some strengthening of operations because of better load factors. However, the most you can hope for is a fiar return unless you are by far the lowest cost supplier like Southwest Airlines. Let’s pray I would not be in such a tough industry without a niche. If I were the CEO, I would try to find a niche of super low cost or specific service that I could defend, but that would probably mean being very small and thus returning capital. What CEO would announce that his goal is to become 10 times more profitabile but 100 times smaller.

  3. Thank you for the reply John. What do you consider a fair return on capital, a poor return on capital, and an extraordinary return on capital?

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