People Express May Sell All or Part of Firm : Low-Fare Carrier Feeling Strain From Aggressive Expansion, Analysts Say

NEW YORK —  People Express, the low-fare airline financially strained by an aggressive expansion strategy, said Monday that it is considering selling part or all of the company.

The Newark, N.J., company, which used its cost-cutting strategy to become the nation’s fifth-largest carrier, said that with the help of the investment banking firm of Morgan Stanley, it is exploring the possible sale of assets or other moves to raise revenue or reduce costs.

In a terse announcement, the airline said it “has sufficient resources to meet current obligations.” It predicted that its recently announced fare reductions will give it a positive cash flow for the rest of the summer.

Heavy Trading in Stock

The 5-year-old company said the announcement was made in response to rumors about its financial problems and to a surge in the trading of its stock. The stock closed Monday down 50 cents at $5.50 on volume of 3.5 million shares, making it the day’s volume leader in over-the-counter trading.

People Express, whose officials would make no further comment, lost $38 million in the fourth quarter of 1985 and $58 million in the first quarter of 1986. In the view of many analysts, it is headed toward another big loss for the second quarter as well. People Express is a holding company that owns People Express Airlines and three other recently purchased air carriers.

On average, the company has filled only 53% of its airliners’ seats recently, compared to its load factors in the 60% range last year, analysts noted.

“We knew it was bad. Still, this shocked me,” said Anthony Hatch, an analyst with Argus Research in New York.

The future of company founder Donald Burr is also unclear, analysts said.

People Express helped set off a revolution in airline ticket pricing when it was formed in 1981. But bigger airlines have recently met many of its low fares while offering service that some analysts say is superior to People’s. The company’s financial problems have been worsened by an acquisition program that was intended to feed passengers to its Newark hub, consolidate its position as a national carrier and give it a larger share of the business travel market.

Since last October, People has purchased Denver-based Frontier Airlines for $300 million and also acquired two commuter airlines--Britt Airways in the Midwest and Provincetown-Boston Airline on the East Coast. With its purchase of Frontier, the company quickly became locked in a fare war with Continental and United, larger airlines that have aggressively dropped prices to preserve or enlarge their shares of the key Denver market. Frontier was forced to drop fares systemwide by 50% but has recently increased them somewhat. Simultaneously, it tried to reduce costs to balance its revenue losses.

People Express “bought a weak No. 3 carrier (Frontier) in a competitive market, and they did it without financial or marketing strength,” a West Coast institutional analyst said Monday. “It’s like the haphazard acquisition strategy of Braniff in the late ‘70s; that, combined with a weak balance sheet and a soggy economy, have brought this on.”

Others noted that People Express was among the airlines hurt when a weak dollar and the fear of terrorism reduced air travel to Europe this year.

Several analysts said they do not expect that the company will be forced to turn to bankruptcy court reorganization. David Sylvester, an analyst with Montgomery Securities, predicted that the company will sell Frontier to raise enough cash to retrench around its Newark hub.

He said that Frontier alone lost $24 million in the first quarter of this year and predicted that it will lose $25 million in the second quarter. The company’s units combined will lose $39 million in the second quarter, he predicted.

People Express’ underwriters, Morgan Stanley and Hambrecht & Quist, each have one representative on the company’s board. Some analysts suggested that those board members may be urging a sale of the company or some other major step to protect investors.

However, some analysts were skeptical that other carriers would be interested in buying People Express, whose strategy has nettled them for years. “They’d really just like to see it go out of business,” said Karen Jacobs, analyst with Donaldson, Lufkin & Jenrette Securities.

In an abrupt change of strategy early last month, People Express announced that it would try to lure the business traveler in several ways, introducing the kind of frequent-flyer program it had long spurned, setting aside first-class sections and offering reduced fares for those who reserved in advance.

When top company officials met with analysts in New York, “it sounded to me like they believed that could turn their problems around,” Argus’ Hatch recalled. “That’s why this is such a surprise.”

Montgomery’s Sylvester said the airline’s abrupt announcement Monday “is pretty alarming by itself; it suggests management isn’t in control.”