Sunday, May 9, 2010

People Express Airlines

People Express Airlines

Fact File:

Founder: Donald Burr.

Distinction: Made air travel affordable.

Primary Products: No-frills, cut-rate airline flights.

Annual Sales: $1 billion at peak.

Number of Employees: 3,500 peaks.

Major Competitors: American Airlines, Continental Airlines, United Airlines.

Headquarters: Newark, N.J.

Year founded : 1981-1986

Before the 1980s, air travel was an expensive luxury. If you absolutely had to haul your family cross-country to visit relatives, you booked the flight and blinked

back the tears. If you really wanted a great vacation, you bought the ticket and hoped that you'd still have money left upon landing. And if you truly needed to fly

to a trade show or sales meeting, you bit the bullet and prayed that enough business would result to justify the airfare.

In 1981, however, all that changed. Suddenly, a

Chicago family of four could visit relatives in Miami for around $350. A vacationer

from New York could travel to London for less than $100. And a businesswoman

in Los Angeles could fly to a San Francisco meeting for as little as $39.

The reason? People Express, a new kind of airline that set up shop in Newark,

N.J., and immediately set the rest of the industry on its ear. Negotiating

previously unchartered terrain as a no-frills cut-rate carrier, People attracted

people who previously could not afford to fly—along with those who now could

justify it more often.

Want to hit Atlanta for the weekend, and don't mind shuffling along with your

lunch as if you're at a bus terminal? People Express could fly you from Newark for

only $69, while the equivalent ride on Greyhound cost $104 and took 19 hours.

Additionally, People advanced its populist ideals through employees who accepted

jobs for much less than competitors paid. Like Internet startups today, the

workforce was motivated by the mission—in this case, bringing reasonably priced

airfare to the masses. Of course, the stake in company ownership, also offered

then didn't hurt.

Not surprisingly, it proved too good a last. Operating on the unstable cusp of the

age of airline deregulation, the company's audacious pricing let to massive

losses. Administrative cost-cutting further eroded its ability to best the

competition, which struck back on its own by also jumping on People's pioneering

discount strategies. Employees saw their stock values plummet, until a despised

rival finally absorbed the remains. And, in just a few short years, People Express

was completely gone from the scene.

As leaders of both their church and Sunday school, Donald Burr's parents had

always hoped that he would someday enter the ministry. The young Burr

developed a taste for commerce instead, and went off to Stanford before earning

an M.D.A. at Harvard. Eventually he parlayed this training into a job with a

different kind of high flier: Frank Lorenzo's Texas International Airlines. There,

Burr quickly grew personally close to his boss—even serving as the best man at

Lorenzo's wedding. He became professionally smitten with the airline business.

Burr was not enamored, though, with Lorenzo's ruthless management style. So,

when the industry was deregulated in 1978, he was among those entrepreneurs

who began developing plans to launch a new airline. Burr's idea was for a startup

that rejected costly amenities in favor of deep discounts that would encourage

average consumers to fly more often. He also envisioned a kinder, gentler

company that would treat its workforce with dignity and respect—while giving it

an unprecedented opportunity to share in any success that ultimately


Burr and more than a dozen other young executives left Lorenzo's employ in

1980, purchased some old Lufthansa planes, and adopted the name People

Express to convey their intended image. With cash of their own bolstered by $24

million raised in the first-ever initial public offering for an airline, they began

flying newly repainted jets out of Newark's dilapidated North Terminal the

following year to long-ignored cities such as Buffalo, Columbus, and Norfolk.

From the start, their daring innovations attracted hordes of appreciative

consumers and enthusiastic employees. It also attracted the wrath of Lorenzo—

who firmly believed that the idea for a discount airline initially was his, and who

greatly resented his one-time friend and protégé for turning it into reality.

Largely because their fixed costs were more or less constrained by expensive

infrastructures and ironclad union contracts, even motivated existing operators

could not at first duplicate Burr's cut-rate approach. Additional newcomers

eventually surfaced with similar concepts, but, like Peoples Express, they soon

discovered that there was a lot more to the business than simply attracting

employees who were willing to work cheap and a public that wanted to fly for

practically nothing. From the time the industry was deregulated through 1986, in

fact, some 150 airlines either filed for bankruptcy or completely ceased

operations. And at the end of that period, People Express would become the

poster child for ways the myriad problems could overrun the vast potential.

None of that was apparent in 1981, however, when the not-yet 40-year-old Burr

turned People Express upon the world. Consumers were more than willing to pack

their own meals, sit on cold linoleum floors at Newark International Airport, and

negotiate endless lines and continuous delays for the chance to fly cross-country

for less than $100. Likewise, employees were more than willing to give up

standard industry benefits along with a substantial portion of the wages earned

by competitors to work in an exciting start-up environment where their opinions

were valued and their stock options looked promising.

People's initial bottom-line results appeared quite promising as well. With annual

wages only one-half to two-thirds of the industry average, and everyone from

baggage handlers to pilots required to perform multiple duties, rock-bottom

overhead translated into rock-bottom fares. These helped People fill almost 80

percent of its seats, a remarkably high "load factor" that was markedly better

than any of its competitors. More and more cities were added to the schedule as

revenues rose, and the once-spotty People Express route map was soon

peppered with more than 100 destinations. Among them now were major

domestic hubs such as Denver and Chicago, along with popular international

locales such as London and Brussels. Additionally, Burr purchased several

existing airlines to fuel even more rapid growth. These included Provincetown-

Boston, Britt, and Frontier—the latter of which also was coveted by his nemesis,

Frank Lorenzo.

As Burr and his lieutenants quickly discovered, however, big-time growth brought

big-time problems. When People supplemented its original short-haul flights to

under-served airports with discount offerings along already popular routes,

entrenched carriers suddenly felt-compelled to flight fire with fire. And with rapid

route extension necessitating rapid workforce expansion, the cautious hiring

practices used from the outset—which carefully screened potential employees to

make sure their abilities and temperaments matched those of the company—were

tossed aside to simply ensure that enough bodies were available to fill all

required jobs.

The result wreaked havoc with an already shaky bottom line. While revenue

climbed from $287 million in 1983 to nearly $1 billion in 1985, a $10 million

annual profit degenerated into a $28 million annual loss. Consequently, the

corporate stock that had been so critical in attracting dedicated workers fell from

more than $22 a share to just over 3 dollars. So, ever as People joined the lofty

ranks of the world's largest airlines, the fate of the spunky upstart was

incontrovertibly sealed.

The insurgent's rapid growth had masked serious underlying problems that could

no longer be paved over with new routes or bought off with new acquisitions.

People Express never cultivated affiliations with travel agencies or implemented a

frequent flyer program. These and many other gaps proved disastrous as

increasingly aggressive competitors exploited every angle in their efforts to bring

it down. Ever more critical, Burr's cost-cutting had caused People to eschew a

state-of-the-art computer network. This now prevented it from operating a

sophisticated central reservation system that travel agents could tap into if they

desired. It also kept People from adopting two-tiered or "yield" pricing, which

competitors employed to match its low fares on empty seats while selling most of

their space at much higher (and much more profitable) rates.

The fare wars might have been People's biggest immediate obstacle, as dramatic

price cuts throughout the industry abruptly took away its biggest selling point.

But other problems hurt just as badly. Perhaps the most painful was fallout from

the Frontier acquisition, which initially had sparked great excitement among the

ran-and-file. It soon proved a major debacle, though, as serious labor problems

and the departure of top executives left the new Denver-based affiliate in a

shambles. Less than nine months after Burr bought it for $300 million, Frontier

filed for bankruptcy.

As resources dried up and hot spots flared, service deteriorated across the board

and losses grew larger. The airline countered by eliminating flights to various

destinations, and even leasing a number of its jetliners to other carriers. But the

hemorrhaging would not cease, and in 1986 Burr was forced to face the

inevitable when he received a takeover bid from his one-time mentor. In

September of that year, he found himself seated across a conference table from

Lorenzo in a Manhattan hotel. When the meeting concluded, Lorenzo's company

had made an offer to purchase Burr's for a bargain-basement $125 million.

The ending may have arrived somewhat ignobly, and most of those who suffered

through its problematic telephone reservation system—or waited uncomfortably

in Newark for a late-arriving flight—probably did not lament its passing for very

long. But People Express forever altered the way airline fares were drawn up and

sold. And it turned an entire generation on to the possibilities of air travel,

changing what was once an expensive luxury into a commodity now enjoyed by


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