People Express Airlines, Inc.

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People Express Airlines, Inc.

Former Address: Terminal C
Newark International Airport
Newark, New Jersey 07714
U.S.A.
(201) 961-2935

Absorbed by Continental Airlines
Incorporated: 1980
Employees: 7,500
Sales: $586 million
Market value: $192.5 million (Prior to acquisition by Texas Air)

People Express Airlines was a result of the 1978 Airline Deregulation Act. With innovative management and rapid but careful growth, People Express successfully competed with established airlines in regional markets. Until recently it usually won that competition. The airline had a no-frills reputation which made it very attractive to a certain type of customer. People Express was primarily a passenger air carrier serving about forty airports, mostly in the Northeast, and offering cut-rate transatlantic service to London.

The principal founder, Don Burr, has had a life-long fascination with aviation. As a boy he used to coax his parents into taking him to Bradley Field outside of Hartford, Connecticut in order to watch the airplanes. Burr quickly became involved in the airline industry after receiving his MBA from Harvard. His first job was working as a securities analyst with National Aviation, a Wall Street firm specializing in the aerospace industry. In six years he ascended to the presidency of the firm. In 1973, at the age of 30, he moved to Texas International Airlines, a struggling regional carrier. It was Burr’s idea to introduce the “peanut” fares at his new company in an attempt to increase passenger volume. The scheme was very successful in raising the company’s net income from $2.5 million in 1976 (when he was named chief operating officer) to $41.4 million in 1979.

Burr may have continued at Texas International, but chose instead to take advantage of the opportunities created by deregulation. Conditions were ideal for the entry of new low-cost airline companies capable of quickly acquiring a significant share of the market. In 1980 Burr and twelve others resigned their positions at Texas International in order to start such an airline in Newark, New Jersey, the site of the proposed “hub,” or traffic center. In July of that year People Express became the first airline to apply for certification after passage of the Airline Deregulation Act. People Express began operation on April 30, 1981 with three Boeing 737s.

Deregulation significantly changed the character of the airline industry. Either in an attempt to prepare for it or as a result of it, many established airlines avoided possible competition by reducing their operations. Scaling down their operations meant selling a number of airplanes, which created a buyer’s market for inexpensive aircraft. People Express seized every opportunity to expand and purchased 17 more 737s, in addition to 727s and 747s.

People Express originally flew to Buffalo, New York, Columbus, Ohio and Norfolk, Virginia from Newark, but the PATCO air traffic controllers strike in 1981 temporarily halted expansion plans and crippled the existing network. To prevent their jets from remaining idle, People Express introduced flights to Florida from its northern markets. These new routes brought a profit of $500,000 on revenues of $8 million, helping the airline to financial success only seven months after its inception despite the PATCO strike.

In January of 1982 the company reported its one millionth customer; this was evidence of a very large volume after only nine months of operation. In May of 1983 People Express inaugurated a service to London, confident of filling the opening left by the failure of Freddie Laker’s Skytrain. However, today’s temperamental airline industry is highly “leveraged,” or debt-ridden. This means that even minor swings into profit or loss columns can have a major impact on a company’s viability. This is no less true of what happened to People Express.

Late in 1984 the company’s meteoric rise came to an abrupt end. Plagued by a persistent overcapacity (too many empty seats) despite consistent growth in passenger traffic, and also faced with the unionization of its flight managers, the airline suffered a $14.2 million operating loss for the final quarter of 1984. This disappointing performance came after seven straight profitable quarters. Employee benefits were sharply reduced and the company’s stock value fell by 50%.

Burr responded to the crisis by freezing salaries, curtailing expansion, and limiting expenses. Rather unexpectedly Burr fired his managing officer, Lori Dubose, who was largely responsible for the company’s initially successful “humanistic” worker-involved labor/management policy. This heavy-handed response seems to have worked as People Express returned to profitability in the second quarter of 1985. However, Burr’s authoritarian management style estranged a number of the company’s co-founders. Some of them defected to competing airlines. Most conspicuously, Harold J. Paretti, the president of People Express, and about a dozen other managers left the company to form their own company called Presidential Airlines in January of 1985.

Over the years, Burr acquired a healthy disrespect for bureaucratic and typical corporate management. Instead of a highly structured hierarchical organization, People Express established only three management levels. There were no vice presidents or secretaries. Employees were expected to share the responsibility of helping the company to run smoothly and efficiently. This required them to perform many different tasks. For example, pilots double as schedule drafters, cargo specialists and inventory managers. To maintain uniformity managing officers rotated positions. Other jobs such as aircraft maintenance, baggage handling and telephone reservations were subcontracted.

People Express was founded on the principle that employees should have a financial stake in the company; the logic behind this is that if all workers were owners, this commitment would make them more productive. In fact, when they were hired, employees were required to purchase 100 shares of the company’s stock (made available to them at a 70% discount). This unique relationship between the employees and the company resulted in lower labor costs and higher productivity. These conditions allowed the airline to begin operations and maintain a competitive edge until it became firmly established.

Passengers were also required to bear the burden of reduced costs. Many services once taken for granted were made optional. For example, the airline charged three dollars to check a piece of luggage, offered sandwiches for one dollar, and coffee for 50 cents. Other features, such as hot meals, baggage transfer to other airlines, and ticket desks in terminals were entirely eliminated. Due to these options and lower prices, People Express was successful in winning passengers over from other airlines, railroads and bus lines (and even out of their own automobiles).

Much of the airline’s success resulted from being prepared, indeed, even designed for deregulation. It maintained the lowest costs in the industry largely because of the way its airline fleet was employed. People Express flew its aircraft an average of ten or eleven hours a day, about three hours more than the industry average. By doing this the airline more than doubled aircraft productivity without increasing capital costs or compromising safety standards. For years People Express saved money by using a dilapidated low-rent wing of Newark airport’s north terminal as a headquarters. It was financially secure enough at one point to renovate and improve the facility to make it larger, more efficient and attractive. These measures were essential to facilitate the airline’s growth.

Deregulation has allowed regional carriers like People Express to enter new markets without prior government approval. As a result, many airlines are no longer exclusively regional. The Civil Aeronautics Board has reclassified these companies as “large/trunk” carriers, serving a geographically diverse number of destinations. As these companies struggle to grow in the shadow of the larger airline companies, they must establish secondary hubs.

People Express acquired Britt Airways and Province-town-Boston Airlines, two small “feeder” lines, in late 1985. In October the company purchased Frontier Airlines for $300 million. As part of the acquisition the company gained 56 more airplanes and numerous destinations, including a second hub in Denver.

The impetus for large/trunk airlines to expand comes from a threat by the larger airlines to “cross subsidize” flights in certain competing markets. This practice involves devoting capital from more profitable routes to subsidizing a price war with a competitor until the weaker airline surrenders its share of the market. The larger established airlines usually win. American Airlines successfully employed this technique with their “ultra super savers” in early 1985, but was forced to discontinue the practice when competitors alerted the CAB.

1986 was the beginning of a new era for People Express. The company announced its intention to convert into a full service airline in order to attract the business traveler. Faced with the enormous task of first changing their image from a no-frills to a full service airline, analysts gave People Express an expiration date rather than a chance for survival. The airline’s infrastructure was not prepared for the new marketing strategy. Flight delays, maintenance problems, overbooking and lost luggage resulted in successive quarters of financial loss for People Express.

Burr responded to the crisis by selling the company’s excess airplanes and by placing Frontier Airlines up for sale. United Airlines offered to buy Frontier for $146 million, and the deal would have been finalized if the United Airlines pilot’s union hadn’t rejected the proposal for absorbing the Frontier Airline pilots.

In the end, the board of directors at People Express was reported to have taken away a large degree of Don Burr’s power. By August of 1986 Frontier closed down and filed for bankruptcy. Soon afterwards People Express was secretly put up for sale. At that time Texas Air publicly offered to purchase the company and all its subsidiaries for $301 million in stock reciprocation and cash.

People Express, “hardly a Procter & Gamble” when it comes to effective management, was expected to survive under the “savvy” and well-disciplined direction of Texas Air. With the acquisition of People Express and Frontier, Texas Air became the largest airline system in the United States and second in the world only to the Soviet airline Aeroflot. Texas Air is merely a holding company, but with its other subsidiaries, including New York Air, Continental and Eastern Airlines, it held over 20% of the domestic airline market, and dominated hubs in New York, Miami, Denver and Houston.

The reorganization in the industry which was expected to take place soon after deregulation has finally materialized. At present there are only a fraction of the independent airline managements that existed in 1980. People Express, the nation’s first company to search for success in the deregulated airline market, has unfortunately become a victim of that deregulation. In January 1987 it was announced that People Express would be absorbed by its fellow Texas Air subsidiary, Continental Airlines. Since there was no consumer loyalty left to exploit, People Express was completely dissolved the following February.