People Express Airlines• Jason Bloemker• Skylar Gargan• Michael Rose• Rodolph Thermitus• Elena Sullivan

People Express Airlines

An airline that came out of nowhere…

became an instant success…

and disappeared almost as quickly

Don Burr -- founder, president, and CEO

- Graduated Harvard Business School – 1965

- President National Aviation Corp – 1972

- Hired by Texas International Airlines 1973- Airlines was in trouble and Burr helped turn it around

- President of TI –1979

- Left TI in 1980, because Burr saw TI business going in different direction than Frank Lorenzo, CEO

Airline Industry Climate and regulations were changing…

Deregulation in 1979 permitted new entry

Burr saw opportunity for new airlineJoined by Gerald Gittner

People Express was the first to enter the highly competitive airline industry.

“I cared about staring a new company [to] try and develop a better way for people to work together… that where the name People Express came from” – Burr, 1980

Economy was slowing… People were desperate for jobs

Burr bought cheap, used airplanes and hired laid-off workers who were willing to accept lower, nonunion wages

July, 1980: Applied To Civil Aeronautics Board (CAB)

September, 1980: CAB approves People Express Airlines application

October, 1980: People Express goes public, and raises $24 Million

Burr Takes advantage of the Economic Climate

Texas International’s management team to People Express…

15 of TI’s management joined Burr and Gittner at their new startup airline

The business model was not based upon salaries, job descriptions or individual responsibilities, but more like buddies hanging out and figuring out what their interest were

We are friends… working together… and oh by the way

… we’re also running an airline company…

Six Precepts for the New Organization

1. Service, and a commitment to the growth and development of its people

2. To be the best provider of air transportation

3. To provide the highest quality of leadership

4. To serve as a role model for other airlines and businesses

5. Simplicity

6. Maximization of profits

Burr’s Strategy:

“Knock the price

down so low that it

fills the plane”

• This would attract business travelers eager to save money and people who would have normally driven or taken busses

Airline Strategy:

People Express tried a strategy of a uniform low-price in the mid-Atlantic states in 1981.

They cut costs by adding seats and eliminating all 'frills'. Low cost flying would compete with driving.

Eliminated galleys and first-class to increase number of coach seats

Low-cost Headquarters, Newark, NJBurr’s office doubled as their conference room

Bare-bones TerminalNo ticket counters – ticketing was done in-flight

Lean Cost Structure and employee commitment to continuous improvement

Lean Cost Structure (cont…)

** They created more roomy overhead compartments where “passengers” could store their own luggage, saving them time, money and the inconvenience of lost luggage

Unlike its “frilly” competitors, People Express was just a means to get from point A to point B

FREE FOOD

FREE DRINK

S

CHECK BAGS

**

SAVE MONE

Y

Innovative Human Resource Strategy

Minimal HierarchyEveryone was a manager

Self-managementThe people at People had to “self-mange”

Job RotationRotation and cross-utilization were necessary for personal growth

- no one spent to much time at any one role so not to “complicate” the position

Equity Ownership and Other Compensation

Recruiting Bright, educated, well-groomed, mature , articulate , assertive, ambitious, creative, flexible, energetic, conscientious, and hardworking

WHO WOULDN’T WANT THESE?

Management got blind sided by company’s quick success and lost their way (cont…)

“we have got a unique problem. We’ve designed a product which is so popular we can’t satisfy the demand for it.” _ Burr 1983

Company never took the time to realize why their customers choose them over other airlines (they became a leader in that market segment )

When the company first started its customer knew that People would take them where they needed to go cheaper than anyone else.

Demand spiked…

Their choice of using the Newark hub to fly out their airplanes was a very good choice (as their were a lot of demand for cheaper flight in and out of the NJ/NY area)

Revenues grew at a rapid pace and management did not take the opportunity to grow the company’s cash flow and better prepare themselves for rainy days

As fare wars continued into 1984 and 1985, smaller airlines like people suffered.

As result an industry consolidation began

People Expanding too Quickly

In a little over two years the company grew from having…

250 employees to over 3000Three Boeing 737s to a fleet of 34 planesInitially, three airports served 24 flights a day and it grew to 264 nonstop flights daily to 24 destinations

Prior to expansion, People sought to avoid competition with major airline carriers by focusing on serving the mid-sized cities (that worked well for them)

External/Internal Problems mounted

Industry analysts worried about People’s management team’s ability to find qualified employees who could cope with an increasingly complex operation

In early 1982, Gittner resigned

“He did not believe in the strength or our precepts… He said it was a pipe dream.” –Burr

Customers & Employees became unsatisfied

External Customer Issues:lengthy delays

over booking flights

Internal Employee Issues:Few opportunities for self-management and personal growth

Employees were overworked

Flight managers underpaid

Expansion (cont.)

Despite mounting problems within the company and uncertainty in the industry, People Express Airline was expanding at a very rapid pace

Burr acquired Frontier Airlines out of Denver by outbidding his former boss Frank Lorenzo.

Frontier was poor business investment:Already loosing business

Now operating in a totally new city

Company’s management had no strategy put in place to stay in control of the mid-sized segment

In 1985, the company almost ran out of cash after quarter of crushing losses

People Express was mounting a lot of debt, as a result their interest expense took away a great percentage of their revenues over 8%

Major airlines started to compete more aggressively with People Express by offering lower-fare flight deals to customers

SWOT Analysis

StrengthsFinancial

Lean cost structure

Lowest cost per available seat mile - $0.05

84% load factor compared to industry 60%

Low fuel costs

Human ResourcesEmployee stock ownership

Recruit service professionals – Nurses, Social Workers, etc.

Employee profit sharing

SWOT Analysis

Strengths Cont.Technology/Equipment

One fleet type – Boeing 737 saved on fuel, training, maintenance.

WeaknessesFinancial

Avoided additional revenue by refusing cargo shipments

Human ResourcesOverworked employees

Understaffing

Difficult recruiting standards

Management Hierarchy

SWOT Analysis

Weaknesses Cont.Marketing

Fees for checked bags

“Nickel and diming” viewed as “cheap”

No hotel or rental car

Overbooking and lengthy delays

Baggage delays

TechnologyIssues with customer reservation system

SWOT Analysis

OpportunitiesFlexibility in the workforce by cross-utilization

Able to undercut competitors by the low cost structure

Ability to appeal to customers who might normally drive or take a bus

Continuing addition of aircraft allowed service to new routes

Deregulation in the airline industry reduced barriers to entering the market and government regulation.

SWOT AnalysisThreats

FinancialEmployees gain seniority and require wage increases

Predatory actions by competitors in price war

Human ResourcesDonald Burr’s large ego

Understaffing/overworking creates unhappiness

Low employee morale

Employees desired unionization like other airlines

External ConditionsFuel price increases

Recession

Accident/Crash

Strategy and Alternatives to Address People Express’ key

ProblemsRefocus:

People Express lost sight of their initial goal of offering excellent service at an affordable price

People’s initial strategy to let the employees manage themselves is counter-intuitive to running a successful business because it lacks organizational structure

People needs to take control of its financials

Their losses (debt position) are increasing at a rate which it cannot control

Management need to improve their cash position and cut down on their spending

delay the expansion of new terminal C in Newark

Cut out the businesses that are not profitableSELL FRONTEIR AIRLINES

Refocus: cutting costs and becoming efficient again

Restructuring the business

To cut cost and expense, People must sell some of their airplanes and use this money to pay off outstanding debt and to invest in rebuilding its business model.

They need to reduce flight frequency, especially those which are not so profitable

People needs to re-implement a general internal training program to retrain employees and reinforce the company’s strategic plan and goals

Communication between its employees and customers needs to be improved

Creating Profit

People Express can still be a leader in the market segment that they started

They need to go back to the basic by

providing customer the best experi-

ence at the lowest cost

By using smaller aircrafts on short flights to smaller cities that weren't reachable by major carriers made the company very profitable. (The Newark hub served that purpose)

Keeping Track

Management at the company should provide customer/employee a platform to communicate (they should also take very strong measures in keeping their stakeholders happy

Pay close attention to the financial statements

Keep control of customer traffic such as ticket sales

Hire the best financial managers that they can

Make sure that the board consists of people from diversified backgrounds

Pay close attention to how investor react to the company’s stock