The Rise and Fall of People Express

The recent approval by the Department of Transportation of the sale of People Express to Texas Air Corp. will close one of the more dramatic and painful chapters in the history of deregulation.

If it goes through as planned, the sellout will almost certainly have saved People Express from a fate worse than death.

Once the darling of the deregulation set, People was in grave danger, it seemed to most analysts, of following its late-lamented subsidiary, Frontier, into bankruptcy. Five-and-a-half years into a career that appeared to have revolutionized the airline business, People had hit what marathoners call “the wall.”

But what an exhilarating if at times seemingly self-destructive time it was. The People Express story is an epic.

Deregulation and Fares

The carrier epitomized, in many ways, what deregulation is all about. Its effect on what we paid for an airline seat was very real; that collective sigh of relief you hear is from its competitors, anxious to see the pesky newcomer under different management.

In its first year of operation, People suffered no more than a tiny loss, a much better showing than even it expected. By 1983, two years later, it was reporting a $10-million surplus in its fiscal year.

A share of its stock, which opened in 1980 at $8.50, was going for close to $26 at one stage, at a time when many of its rivals were awash in red ink.

Now, apparently, the bubble has burst. People Express has encountered the same money problems that have spelled finis to the plans of many post-deregulation airlines.

The company suffered a $53-million loss in the first quarter of this year and at least that much in the second. Indeed, its financial position has deteriorated to such an extent while the Department of Transportation approval for its sale was pending that Texas Air has asked for a renegotiation of the price.

What went wrong? Why did this promising low-cost air carrier turn sour?

On the surface, People seemed to have had a good idea and to be doing everything necessary to capitalize on it.

Birth of the Airline

Its opening gambit was a bold one. It decided to hub and headquarter in an abandoned terminal at the Newark, N.J., airport. A low-rent district, to be sure. And that was exactly what People Express’ management had in mind.

From the outset, the airline seemed to be getting good mileage out of the cross-use of its work force. Pilots took turns hefting baggage. So did flight attendants. Sales representatives worked check-in counters. Headquarters personnel doubled as helpers at the airport.

Employee productivity was among the best in the industry. The fact that the employees each owned a piece of the action may have had something to do with that.

People’s no-frills service enabled it to keep its overhead, and fares, down. It was making a living out of “unbundling” the various components of air travel. In other words, its passengers paid for what they wanted. And, more importantly, they didn’t pay for what they didn’t want.

If a passenger felt like eating on board, the meal was extra. Need a bag checked? That’ll be $3, please.

The management of People Express was betting that travelers without baggage and those who didn’t find airline food enticing would be prepared to give the company a try to save big on the fare.

For a giddy two or three years it looked as if they were right. Proponents of deregulation found in People Express everything they had expected the new law to produce. Here was a carrier that really was letting market pressures dictate prices and policies.

It was not only offering cut-rate air travel, it was forcing others to do so as well. Could there be a more ringing endorsement of the theory of deregulation?

New Routes

Somewhere along the way, though, People Express forgot its roots. Or, at any rate, its routes. The routes that made it such an instant hit and hiked its load factors into the mid-70% range were from Newark to cities such as Buffalo, N.Y.; Columbus, Ohio; Sarasota, Fla., and Norfolk, Va. There wasn’t much competition on routes like these.

Had People been content to stay with a winner, the vast secondary market tier represented by communities such as those, the majors would probably have left it pretty much to its own devices.

But People couldn’t resist the temptation to take on the big boys in their own playground. Soon the People livery was being seen in Chicago, where United holds sway, and in Dallas, where it came into competition with American.

It went into the Atlanta market, and suddenly Delta began to take notice. It bought a 747 and started charging less than $300 round-trip between Newark and London.

Then People began finding out the hard way about life in the big leagues.

Lesson No. 1 was that American, United, et al., do not surrender turf easily. No. 2 was that when you take on these behemoths you’re no longer competing on the basis of price, because they won’t let you charge less than they do; they’ll match you dollar for dollar, no matter how low you go.

Instead, you find yourself competing with their automated reservations systems, their interline agreements with other airlines and, perhaps most crippling for People Express, with their frequent-flier programs.

For a while some observers believed that People might back off. Little did they imagine that the next move by the Newark-based airline would be one of its boldest and, to some, the most inexplicable.

Far from backing off, People last fall carried the fight to the enemy camp, buying cash-strapped Frontier Airlines for $300 million. People had earlier bought a couple of small feeder airlines in the East, but this was something else again.

Frontier was based in Denver and the fare war to end all fare wars was in full swing in that market, pitting Frontier against United and Continental. And Frontier was losing.

Brilliance or Blunder

The industry wondered why People’s management had decided to grab for a piece of that grief. It was either the kind of instinctive, brilliant business move about which books are written, or a massive blunder.

History will not record it as a brilliant business move.

The People connection did nothing to restore Frontier’s flagging fortunes. All it did was transfer the financial drain to the new owner, compounding its own problems.

Now, it appears, People Express will be folded into the ever-growing world of Texas Air Corp. Texas Air is, itself, the parent company of low-price Continental but you can bet that, even if People Express continues as a separate subsidiary, its fares will start to inch up as soon as the ink is dry on the sale contract.

At times, analysts have accused People of “out-of-control” fare-cutting. From an industry point of view that may well be true.

Without a takeover by somebody, the carrier faces, at best, a belt-tightening future, starting with the cold Newark winter of 1986-87. But make no mistake . . . for a while there, People Express almost single-handedly rewrote the tariff book, and, for that relief, brief as it was, the traveling public should be grateful.