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The Rise and Fall of PEOPLExpress
|By Eric Kochneff|
August 13, 2004
PEOPLExpress burgeoned out of less than nothing, seemed bound for instant greatness, and then perished almost as quickly. Take a visit, now, to the origins of the low-fare airline of the 80s, and the politics of big business in the deregulation era.
People Express was the baby of deregulation. It represented all that was good and bad about, and all the new chances offered by, deregulation, as well as the pitfalls that were a direct result. A low-fare airline started by an ex-airline executive prospers under deregulation, becomes too big too quickly, and finally founders and dies under the same system which gave it life. The first part of the story is exactly what deregulation was supposed to be about: a new airline, new competition, lower prices, and a better market for consumers. The second part, strangely enough, was also what deregulation, and capitalism, is supposed to be about. So, why did People Express fail? What was it about this airline with no union contracts, no route restrictions? It was supposedly the “deregulation-proof” airline...Click for large version
On January 7, 1980, Frank Lorenzo (chairman of Texas International Airlines and, later, chairman of Texas Air Corporation) received a letter of resignation on his desk from one of his top executives, Donald Burr. The two had been friends; they met in 1969 and had been partners (of sorts) in business for nearly 10 years.
In 1973, Frank Lorenzo bought out Texas International Airlines (TXI) which, at the time, had a net worth of -$7,000,000(US) (Peterson, 66). Burr was a major shareholder in the airline at the time. This was a major reason for Lorenzo’s involvement. He soon enticed Burr to come out to Houston and help run the fledgling airline. Soon, Lorenzo, Burr, and another partner (Robert Carney) jettisoned Texas International’s management team, a small group of former military men who lacked any demonstrable business sense. They soon tempted executives from other airlines to come to work for TXI. After about one year, TXI started to turn around. They bought new jets and worked on service problems. They couldn’t, however, shed an image of failure. Passengers nicknamed the airline “Tree Tops” and “Try Try Again” (after its original name: Trans Texas Airlines). (Peterson, 66)
Photo © JOSE_CARRENO
One day, in mid 1976, TXI’s executives had an idea – one that was probably the most productive ideas in the history of the airline business: the notion that lower prices inhere increased demand. This would generate higher load factors and result in higher revenues. The industry was already starting to lean towards deregulation - American Airlines’ “Super Saver” fares were only about a year away.
The executives at Texas Air thought up the whole program. No-frill flights at 50% fare reductions; instead of meals they would serve peanuts. They were, thus, known as “peanuts fares.” TXI held a press conference that December in Washington announcing their intentions to reduce certain fares on less popular flights to half price. This brought TXI national attention, as this was the first cut rate fare with no restrictions, just a flat 50% fare on one flight on each day in certain markets.
The fares went into effect in January 1977, and the affected flights were immediately sold out. Don Burr remarked, “God, we’d never carried more than three people and a dog between here and Salt Lake City and all of a sudden planes were full.” (Peterson, 68) After the “peanut fares,” the airline Texas knew as “Tree Tops” was suddenly turning a profit.
Nonetheless, TXI started experiencing labor strife after its newfound success. Frank Lorenzo was notoriously anti-labor, and one of the airline’s unions went on strike. The strike lasted for 5 months, effectively grounding Texas Air as the pilots refused to cross the picket lines.
Eventually, labor would be part of the reason for Burr’s resignation from TXI. Donald Burr had a plan which he thought, at the least, could bring the non-union employees together. His plan was relatively simple, and would become the cornerstone of PEOPLExpress. His idea was to unleash a worker’s full potential by allowing him to move back and forth between different jobs within the company. It was known as “cross-utilization.” He included a catch, however: employees would be required to buy shares of stock. He thought that if every employee had something of his own vested into the company, it would motivate them to succeed, which would make the company succeed. He threw himself headlong into the idea, spending months doing fine tuning.
Unfortunately, Frank Lorenzo was not as fond as Burr of the plan. He humiliated Burr in front of the other executives, walking out of his presentation after 15 minutes muttering “this is Bullshit.” This childish display left Burr embarrassed and gave him serious thoughts of leaving and starting his own airline. (Peterson, 73-4)
Don Burr finally left TXI nearly three years to the day after the inauguration of the peanuts fares. He wasn’t the only one leaving Texas International however. He brought with him his personal secretary and the director of marketing. The three pulled all the money out of their savings and came up with about US$550,000 – enough to buy them about half an airplane.
They set up an office in downtown Houston, thinking up ideas and making contacts. Burr contacted Herb Kelleher (founder and CEO of Southwest) in Dallas and talked to him about his airline. Kelleher was flattered to have someone try to model their business after his and he allowed some of Burr’s people to come watch his operation for a few weeks. By that time, Burr had lured a few more of Lorenzo’s executives to jump ship and join him in Houston. He had a fairly large sized management team for an airline which didn’t even exist! (Peterson, 96)
From Southwest, Burr compiled his ideas: Buy a cheap, used airplane, sell the seats even cheaper, put it on a short route, and give it a quick turn around, producing a schedule reminiscent of a city bus line. They decided that the Northeast was the best place to operate, with its high volume of traffic. The question was one of where to fly out of. Terminal space in New York was quite hard to come by. Burr’s marketing man suggested with Newark. It was within 15 miles of Manhattan and had an unused terminal building that had been vacant for over a decade. The team settled on Newark.
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Photo © Thomas D. Mayes, Jr.
Donald Burr went to Boston venture capitalist Thomas Lee in the spring of 1980 with his idea:
Take a 737 airplane that’s got 118 seats. Put it on a short hop; say, Buffalo to New York – about an hour’s trip. Charge thirty-five dollars a ticket, less than the cost of driving, and that gets you $4,130. The fixed costs of the fuel, crew, and other essentials-total about $2000 or so, which gives you have over $2,000 gross profit per hour; a profit margin of nearly 100 percent. (Peterson, 99)
With a high density route like Buffalo-New York, there was no doubt that such low fares would fill the plane. The key to his plan was the low fixed costs. He harkened back to his cross-utilization plan from TXI. Employees would be trained in several jobs, increasing efficiency and boosting productivity. The salaries would be much less than normal airline jobs however; about half. But they would get stock at lower-than-market prices, giving them motivation to succeed and, thereby, boosting productivity. Fares would be collected in flight; soda could be purchased for fifty cents a can, and passengers would be charged five dollars for every checked bag. No revenue source was overlooked. (Peterson, 99)
They decided on the name People Express. When they first went to Wall Street, investors quipped that it “sounds like a communist airline” – a comment not that far off: passengers of PEOPLExpress would receive a flying experience more in tune with Aeroflot than Pan Am.
As for airplanes, PEOPLExpress struck a deal with Lufthansa to receive 17 Boeing 737-100s for $4.1 million apiece. This price included the paint scheme and the cabin retrofit for the high density configuration. The first airplane was delivered on March 24, 1981, and they commenced operations with a flight between Newark and Buffalo on April 30. Two other cities, Columbus and Norfolk, were selected for initial service. Both of the cities made sense because of light competition and a “strong market potential.” (Mengus, 3).
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Photo © Howard Chaloner
Meanwhile, Frank Lorenzo was trying to start his own low-fare/no-frills airline, New York Air. Lorenzo had a head-start: an airline he could take resources from. He simply took Texas International aircraft, painted them in red colors, and put an apple on the tail. He hired non-union pilots and gave them reduced wages. This, as one would expect, enraged the Air Line Pilots Association. They saw it as a “…transparent bid to spin off assets of a unionized airline into a non-union sister company.” (Peterson, 104). New York Air was set for takeoff on December 14, but ALPA filed a lawsuit to block the airline, and the court issued a stay to consider the pilots’ argument. A few days later the restraining order was lifted. New York Air’s first flight lifted off on December 19, 1980. Frank Lorenzo had beaten his former friend to the punch.
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Photo © George W. Hamlin
PEOPLExpress began operations on April 30, 1981, with a $23 fare to Buffalo from Newark. That flat rate price beat the cost of driving the 400 mile trip. Unfortunately, only a few of the 114 seats were booked. But within days, newspapers had picked up the story of the low-fare airline and PEOPLExpress, with virtually no advertising, had load factors at near 100% levels within weeks of their first flight, a surprising feat for any new airline. Soon, the airline added two new cities: Boston and Jacksonville. On its Norfolk runs, its main competitor - Piedmont Airlines - had an $82 dollar fare... they dropped it to $35!
PEOPLE soon had 6 airplanes flying and 5 destination cities. Things were looking up for the young airline. But four months after their first flight, the members of 13,000-strong Professional Air Traffic Controllers Organization walked off the job. In an unprecedented swing of power, Ronald Reagan fired them three days later, and the air traffic control system was left drastically short handed. The FAA ordered the airlines to ground about one-third of their fleets, which didn’t hurt the larger airlines as badly since they had excess capacity. Unfortunately, one-third of 6 tends to be 2, which left PEOPLExpress with only 4 airplanes flying, a drastic revenue drop. Also, as each individual airport and ARTCC was understaffed, landing slots were reduced, and PEOPLExpress was shut out of larger destinations. Burr put his airplanes into Syracuse, New York, and Burlington, Vermont and charged very low prices down south. As soon as the snow fell, the flights were full (Peterson, 108). Despite the rapid retooling, PEOPLE lost nearly US$6,000,000 in the weeks following the controller strike.
Despite the setbacks, PEOPLExpress prospered under deregulation. Much of the credit had to be given to Don Burr and his management plan. As a relatively small airline, cross-utilization was a very useful tool in getting everything they could out of their employees. Giving every employee a secondary job prevented them from getting into a “rut” in their primary function and it also gave them leave to explore the company, as most employees’ secondary function was as Flight Attendant. Each new employee was ‘indoctrinated’ in Don Burr’s philosophy in an 8 week introductory course, and Don Burr also met with each employee on an individual basis. Burr came up with 6 “precepts” for PEOPLExpress employees. These were:
One: Service commitment to the growth and development of our people.
Two: To be the best provider of air transportation.
Three: To provide the highest quality of leadership.
Four: To serve as a role model for others.
Six: Maximization of profit. (Mengus, 5)
One of the more interesting facets of Burr’s philosophy was his encouragement relationships between PEOPLE employees.
Compensation was paid in salaries and stock. While most other airlines provided an hourly wage, PEOPLE offered a salary. Even pilots were paid a flat rate regardless of how many hours worked. Wages were about 50% of what the other airlines were offering. Captains were hired at $35,000 and could make up to $70,000; F/O’s were hired at $22,000 and could make up to $40,000. Each new employee was required to purchase 100 shares of company stock. Salary-for-stock trading was always encouraged at cut-rate lower-than-market prices. Don Burr believed productivity would soar if employees could actively contribute to their own compensation package. (Mengus, 5)
PEOPLE prospered at an astounding rate. At the end of 1981, over 950,000 passengers had flown on a PEOPLExpress flight. Most PEOPLE passengers had never flown before. PEOPLE soon added more 737s, -200 series this time, with a 130-seat capacity. The airline also acquired over 50 used but relatively well maintained 727 air frames from Braniff after it filed for chapter 11. Those airplanes were updated with noise kits and better engines, offering better range and endurance to allow PEOPLE to access distant markets out of the east coast. Soon they opened up a station at Hobby airport in Houston. This was a benchmark for Burr, as it allowed him competition directly with Frank Lorenzo. They sent three 727s per day at first and upped the frequency to eight flights per day with very generous load factors.
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Photo © Robert M. Campbell
After Freddy Laker of the no-frills Laker Airways introduced transatlantic service in February 1982, Burr thought PEOPLE could make the same thing happen. He leased a 747 formerly used by Braniff and started non-stop Newark-London service, charging $149 one-way. The flights for the following months were sold out within 24 hours of offering. He soon leased 2 more 747s and introduced transcontinental service to Oakland and Los Angeles from Newark. This marked the first time that PEOPLE embarked on head-to-head competition with the US major domestic carriers. They “invaded” United’s turf in San Francisco and American and United’s at Chicago O’Hare. Ironically, this marked the beginning of PEOPLE’s downfall. (Mengus, 8-9)
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Photo © Frank C. Duarte Jr.
The airline had begun with the strategy of short flights, small fares, no frills, and indirect competition (operating at lesser used airports in the vicinity of large airline hubs). Now, they were offering long flights, first-class service (on the 747 flights) and directly competing with the airlines at their own hubs. For example, PEOPLE launched service into Minneapolis/St. Paul in 1983; they offered a fare of $99. Northwest, which had a lowest fare at the time of $263, not only matched PEOPLE’s fare but undercut it by $4 for a fare of $95. It then increased frequency and placed its flights around PEOPLE’s flights, “skimming” off the extra traffic generated by the low fares. PEOPLE soon “decamped” from MSP. (Peterson, 114-15)
Cracks in PEOPLE’s system were starting to show. It was getting too big for its own good. The cross-utilization program worked very well for a smaller airline, but as PEOPLE developed into a major National Carrier (its 1984 revenue topped $2 billion) something had to change. (Peterson, 170) PEOPLE had no computer reservation system, and opted not to pay the fee’s on United’s Apollo or American’s SABRE reservations systems, so travel agents were all but useless to PEOPLExpress. It is estimated that an average of 6,000 people per day missed out on PEOPLE’s flights. (Mengus, 10)
The airline also was growing too large for its Newark hub, as runway design (two runways crossing a third) airspace restrictions, and availability around New York were becoming a hindrance. Also, because reservations were free, no-shows were wreaking havoc with their system. This lead to an overbooking policy of almost 200%. This practice soon gave the airline the nickname of “People’s distress.” (Mengus, 10)
PEOPLE’s facilities at Newark were also hampering its growth efforts. The cheap and decrepit Newark North Terminal handled over 9 million people in 1985. The decades-old building was being used far beyond its designed capacity. An agreement was reached with the port authority of New York and New Jersey in January, 1985 over the building of a new terminal. It would cost the airline an estimated $175 million. It was slated to have 41 gates, jet ways (amenities that the north terminal lacked) and a complete customs and immigration facility. Ironically, it opened one year after PEOPLE’s demise in 1988. (Mengus, 11)
The nail in the coffin for PEOPLExpress came in 1985 when it merged with Frontier Airlines. These two airlines were completely opposite in nature. Frontier was unionized, it had passenger amenities such as meal service, a reservation computer system and a frequent flyer plan – all things that PEOPLExpress lacked. If the integration would have been spread out over a few months or years, rather than weeks, perhaps the two airlines might have fared better together. The two systems did not mesh well at all. At the beginning of the merger, PEOPLE had about $100 million cash reserves. A senior economic advisor reported to Burr that the reserves would be gone within months of the merger (mainly picking up Frontier’s debt). PEOPLE had been turning a profit. Frontier, exactly the opposite, was hemorrhaging money.
Even so, Burr had hope for his airline. Unfortunately, he refused to face reality. He ordered 6 747’s in an “expansive moment” and crammed 450 seats into each airplane. His logic was “People like to fly 747’s.” However, traffic numbers showed this was true only on the Newark-London route. Any other route 450 seats would lower the load factor below 40% and sometimes 20%. His financial officers tried to persuade him to change his order to smaller 250 seat 757’s. Burr rejected the move, reasoning that because the public liked the 747, it must make some sense. This shows the hopelessness that the “baby” of deregulation was facing. (Peterson, 180-81)
Ironically, PEOPLExpress was bought out by the very man that Don Burr had left back in 1980. Frank Lorenzo’s Texas Air Corporation purchased PEOPLExpress September 1986, giving Frank Lorenzo the largest airline empire in the western world. Over 600 airplanes, 62,000 employees and over two-hundred airports served. The airlines served under Texas Air were PEOPLExpress, Eastern, and Continental.
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Photo © David Dawson
Lorenzo soon merged PEOPLExpress into Continental. Soon afterm Continental filed under Chapter 11 after labor strikes and bad management decisions had killed the airline.
PEOPLExpress was a unique airline. It prospered faster than any other airline before or since. Southwest has been around over thirty-years and it took them ten before they started any similar expansion. PEOPLExpress, on the other hand, went from not being an airline at all in 1980 to a certified Major airline in 1984, with revenues topping $2 Billion. Unfortunately, its explosive expansion resulted in management practices which worked very well as a smaller airline becoming fatal. Apparently, you can’t run a corner gas station the same way you run a Wal Mart.
Mengus, Alain. Air Transport Biz. July 2002.
AirTransportBiz.Free.FR/Airlines/PEOPLExpress-5. April 3, 2003.
Murphy, Michael A. The Airline That Pride Almost Bought. New York: Franklin Watts, 1986.
Peterson, Barbara Sturken and Glab, James. Rapid Descent. New York: Simon and Schuster, 1994.
Click here to see more great PEOPLExpress photos!
(Or, Click here to see more great Texas International photos!)
Eric Kochneff is a lifelong student of Aviation and a Commercial Rated Pilot. He attends a private liberal-arts college in Dubuque, Iowa and will graduate in May of 2005 with a major in Aviation-Flight Operations as well as a major in Communication. He plans on attending the University of Iowa for graduate work at the School of Mass Communication and Journalism. He recently was chosen as the new Flight Operations-Publications intern at Southwest Airlines, and will be living in Dallas, Texas for the fall of 2004. His hobbies include music (both making and listening) photography, flying, and writing.
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|11 User Comments:|
Username: StearmanNut [User Info]|
Posted 2004-08-18 23:03:07 and read 32768 times.
Interesting and factual. As an old customer of TXI and a former ramp worker (college job) in those days, it brought back many good memories of dealing with a once great airline.
I remember the cross training for jobs within the airline, and I remember the times when pilots often worked the baggage hold on stops.
Also, as to TXI having a lot of ex-military management who were cluless to business sense, I remember a couple of former Texas politicians also thrown into the mix who had no kind of sense at all.
Anyhow, great article!!
Username: AZjetgeek [User Info]|
Posted 2004-08-18 23:33:39 and read 32768 times.
Very nice job! I enjoyed the article and found it to be quite enlightening. I've done my share of reading about Braniff, Eastern, Continental and Southwest in recent weeks. Eric, your portrayals of Frank Lorenzo and Donald Burr were excellent.
I was aware that PEOPLExpress merged with Frontier. I concur with you that it would appear that this was not a well-explored plan on Donald Burr's part. It was quite ironic that his airline was bought out by his former boss, Lorenzo. I wasn't aware of his (Burr) use of the cross-utilization concept. It's a great theory, in principle, but takes too much for granted, given human nature.
Obviously, while Burr attempted to learn from Herb Kelleher, he failed to learn some important lessons the Southwest founder and CEO provided. First, go slow. Burr apparently tried that, but must have been entirely too impatient. WN was approximately 14 years old when a significant expansion of their route map occurred (including PHX and LAS). Donald Burr would have done well to take it easy on the expansion.
While Lorenzo hammered the final nail into People's coffin, Burr provided the rest of the hardware. He took a tremendous idea and ran with it. Too bad he saw the race as a sprint rather than a marathon.
Username: Aapilot2b [User Info]|
Posted 2004-08-20 15:06:41 and read 32768 times.
Outstanding article! I never personally experienced People Express. I do remember taxiing past one of their 727s in Atlanta one morning. It was an atractive color scheme for its day. I had some friends that travelled on the London service once.
Username: Dtwclipper [User Info]|
Posted 2004-08-22 23:10:34 and read 32768 times.
Great piece, however you need to include New York Air into the merger of PE & CO.
Username: YKM97Y [User Info]|
Posted 2004-09-15 19:24:26 and read 32768 times.
My only experience with PE was sandwiched around its downfall. I spent the summer of '86 in Cameroon. My flights over were from GSO to EWR to BRU, all on PE (727 I think to EWR, 747 over the Atlantic, Sabena DC-10 from BRU down to DLA). Flight over on the 747 was completely full, certainly low frills but adequate service. I went over in June and came back in September. By the time of my return flights, PE's demise had been announced, but fortunately they were still flying. My flight from BRU to EWR was again on one of the 747s, only this time about 20% (or even less) full. One of the most enjoyable and comfortable flights I've ever taken, nice to be able to stretch out over an entire row of seats. I assumed at the time that the low passenger load was because of PE's buyout, but perhaps that was still fairly typical for that route.
Thanks for the history, fun to read.
Username: AireuropeUK733 [User Info]|
Posted 2004-09-16 11:33:41 and read 32768 times.
Enjoyed the article greatly - I remember seeing the PE 747 at LGW back in the 80's on my first trip to the viewing gallery. I was drawn by it's livery as it stood out against the tawdry colours of the other carriers.
Thanks for the enlightenment!
Username: Lumumba [User Info]|
Posted 2004-09-16 12:02:34 and read 32768 times.
Very nice article but I think That Brussels was also a very important step for them to start continental Europ flight's.
Username: RockyRacoon [User Info]|
Posted 2004-12-12 02:58:26 and read 32768 times.
Great article! Lots of good info.
Username: Jmalone303 [User Info]|
Posted 2005-10-15 00:45:17 and read 32768 times.
Nice article! You do a good job of telling PeX's story
Username: Skoker [User Info]|
Posted 2006-06-23 20:58:31 and read 32768 times.
Nice article! I had no idea that so much of PEOPLExpress' history took place here in Buffalo!
Username: PExDCA [User Info]|
Posted 2007-05-05 09:01:36 and read 32768 times.
Great article, brought back memories for me. One correction though, PE never merged with Frontier, PE acquired Frontier and ran it as a separate company. We connected pax across a 7 flights a day EWR-DEN airbridge (incl 2 daily 747 flts). You also did not mention PE acquiring both Britt and PBA. In combined form in 1986 The PEOPLExpress Team was the 5th largest airline in the U.S. Thanks for the trip down memory lane.