Why was Kiwi Airlines so successful initially?
There were a number of reasons guaranteeing success for Kiwi Airlines at the initial stages of its development. First of all, it is important to point out that with a lack of alternative international service airlines between cities Hamilton and Dunedin, Kiwi Airlines had some type of monopoly on the business in that area. In a similar manner, major carriers Air New Zealand and Qantas provided by Kiwi Airlines also filled a gap in the market since the supply offered by other service airlines did not satisfy the customers’ demand at that point.
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Overall, the major factor is that those were the specific areas of service, in which a small company, such as Kiwi Airlines, was able to provide more targeted service than some of the larger companies. In a similar situation of market competition, it is often easier for a smaller company to notice a niche in the market, a gap that is not filled by the bigger organizations. In the case of Kiwi Airlines, such specific target of their operation was the provision of airline services for the cities that were not connected via other rivals in the market.
Another factor of the company’s success also relied on its low-cost approach. Given the fact that the passenger flights offered by the company were not long-term or transcontinental, the surplus of luxury items aboard was not necessary. Moreover, it was better for the company in terms of the customer appeal to offer tickets for the lower price in spite of lack of luxury service. The customers of Kiwi Airlines who needed to make frequent flights between two cities would probably prefer to disregard the luxury service for the economizing on the ticket price.
Alongside the lack of availability of other airline services between Hamilton and Dunedin, it was a successful strategy used by the company’s founder, Ewan Wilson. On the other hand, in the case of providing flights between other international airports, such strategic positioning of Kiwi Airlines would require consideration for much more variables that define the customers’ behavior and preferences.
What went wrong – why did Kiwi Airlines go out of business so fast?
According to De Bettignies and Duchêne (2015), in the competition between companies that offer services for a lower price and companies of a larger scope, “the value of gaining a cost advantage thus increases with competition, as entrepreneurial effort and the resulting likelihood of a cost reduction are greater in equilibrium” (p. 1851).
Another argument in relation to the failure of Kiwi Airlines is that the company was a newly emerged venture. According to De Bettignies and Duchêne (2015), that was why there was a threshold level of venture risk “such that below that threshold the entrepreneurial incentive advantage of the debt contract more than offsets the disadvantage associated with expected default and liquidation” (p. 1851).
In other words, there are more risks for small companies in attempts to enlarge their businesses since they are regarded as ventures. Also, for a smaller company, such as Kiwi Airlines, all its assets are located in a smaller number of operations, such as passenger flights between Australia and New Zealand.
The so-called concentration-stability view “affirms that the lack of competition permits larger companies to obtain oligopoly premium profits” (Tabak, Fazio, & Cajueiro, 2012, p. 3371). In the situation, where a small company attempts to enter bigger markets, for example, to provide services for more international airports, or include transcontinental flights to the spectrum of its services, it would take more resources of the company than if a large company would try to enter a new market. In such a way, Kiwi Airlines was unable not only to create a sustainable business framework for introducing new services but also it failed to linger enough attention at their successful projects that were the company’s major assets.
So why did Kiwi Airlines fail – why did Qantas and Air New Zealand respond?
Qantas and Air New Zealand are major air companies, which is why they did not risk introducing flights between Hamilton and Dunedin. They already had enough profits from the other services, and the major vectors for the development of both countries did not concern expanding its network to all the provincial cities while they would rather operate in the sector of international flights. Such sector is much more profitable and demands more resources in order to provide for a successful operation than airline services between Australia and New Zealand.
Therefore, when Kiwi Airlines were only concerned with regional flights, the company merely occupied the niche that neither Qantas nor Air New Zealand wanted to occupy. However, in the situation when Kiwi Airlines attempted to enter an international market, i.e. become a considerable rival, both Qantas and Air New Zealand needed to respond. In this situation, the aggression of two major companies was able to suppress the economic efforts of a smaller organization, and the consumers’ appeal was not even considered because given the fact that the price range of Kiwi Airlines was more accessible, it could have provided better services.
De Bettignies, J. E., & Duchêne, A. (2015). Product Market Competition and the Financing of New Ventures. Management Science, 61(8), 1849-1867.
Tabak, B. M., Fazio, D. M., & Cajueiro, D. O. (2012). The relationship between banking market competition and risk-taking: Do size and capitalization matter? Journal of Banking & Finance, 36(12), 3366-3381.