The people at People Express say 'bye to a dream. Hopes of `owner-manager' employees slip as line bows out to mistakes, competition
It was only last summer that Troy Hopper began to realize the company he loved to work for - People Express - might not survive the airline wars after all. New York stock analysts had been saying it for a long time, and the newspapers had been describing its financial problems. But it wasn't then a pleasant thought for the lanky, sandy-blond young man from St. Louis. It isn't any better now.
Mr. Hopper has accepted the fact that this Sunday, People Express, which pioneered no-frills flights and ultra-low fares for millions, will cease to exist.
It was People's low fares that threw the airline industry into a five-year battle for survival. With People pitted against the rest of the industry, its acquisition by archrival Continental (headed by airline czar Frank Lorenzo) was hastened by management mistakes that sapped money and morale.
Yet the debacle of People Express and its subsequent acquisition is much more than a corporate takeover story. It is, rather, a story of failed ideals on a massive scale.
``Sure it hurts a little bit to see something you love disappear,'' says Hopper, an accountant and customer service manager. ``The dream is over. That's why a lot of us came here in the first place, to be a part of something unconventional.''
What was the dream at People Express? Why did cleaving to it both build and eventually destroy the company? The flawed dream
More than anything the ``dream'' of People Express was that every employee would be an owner-manager. As owner-managers (each owning a significant chunk of People's stock and a share of the profits), the company, they were told, would thrive because of their hard work, small salaries, and no overtime pay.
To build a company made up entirely of owner-managers was the corporate philosophy of People Express chairman Donald C. Burr. Everybody at the company had at least two different jobs - called ``cross-fertilization'' by Mr. Burr. The aim was to encourage innovation and creativity.
In 1983, after less than three years of operation, the airline began to receive newspaper and magazine write-ups aglow with news of the company's ``humane'' management system. It served to further attract eager, idealistic young people like Troy Hopper.
Burr's alma mater, the Harvard Business School, was similarly agog over its alumnus for putting in place such a radical and apparently profitable management structure. It made a great case study to teach aspiring business managers and was cited extensively in books like ``In Search of Excellence'' and ``Re-Inventing the Corporation.'' The corporate plan
Along with the owner-manager philosophy came the corporate game plan: across-the-board, ultra-low air fares - and no frills. No frills meant no advance reservations; a $3 charge to check a bag; paying for tickets on board; no meals or snacks; and 50 cents for a cup of coffee.
Low fares also meant a need to fill the airplanes. That need resulted in frequent overselling of flights, which often angered customers. The airline also operates out of its hub at the decrepit North Terminal in Newark, where, this time of year, passengers are forced to tromp through snow and up the wet steps of a mobile ramp to get to the door of aircraft.
Fliers, however, were thrilled to see $19 fares from Newark to Buffalo. But those little inconveniences nagged customers, especially since other airlines eventually learned how to compete with People on ticket prices while maintaining amenities.
Both People's philosophy and its operating plan met with initial success. Originally the company was just three airplanes flying between small cities like Buffalo and Newark. Soon, it had grown to 22 planes flying to the smaller Eastern cities.
That was a manageable size. Burr was the corporation's head cheerleader, leading by example and keeping a charismatic fire glowing under employees. By 1983, a good year for the entire industry, profits were looking up. Shortcomings noted
In retrospect, business management experts, industry analysts, and other observers say Burr's management philosophy was not adaptable to a really large company. But that is what the airline rapidly became when it expanded in '83, buying 50 planes from Braniff when that line went belly up.
Until then, People had avoided competing directly with major carriers by flying to smaller cities, but with the new planes came word from Burr that the company was now ready to battle head to head with United, American, Eastern, at the bigger cities they controlled.
``The problem was that People Express was going up against major carriers with deeper pockets that weren't going to give an inch or let their routes go to People Express,'' says Barry Gordon, president of the National Aviation Technology Corporation, a mutual fund.
Burr underestimated the impact of attacking major airlines' markets because those companies, Mr. Gordon says, were willing to take a loss for however long it took to beat People.
In 1984, it was increasingly obvious that competing strictly on the basis of low fares and no frills was a failing proposition. Big airlines spent hundreds of millions of dollars on advance computer booking and found ways to match People's fares.
By sticking rigidly to no-frills, the airline played into the hands of competitors. They knew a customer's rationale would always be: Why should I pay 50 cents for a cup of coffee when I can get the same air fare somewhere else and get my bags checked for free?
``The business customers wouldn't fly on them,'' Gordon says. ``If you had a choice between flying People Express or United for roughly the same fare, which would you choose? On People you got nothing.''
Other management mistakes, too, are clearer in hindsight. While employee stock ownership boosted morale, it also allowed the attitude of employees to be blown about by the whims of Wall Street.
``We used to post the stock price every day,'' Hopper says. ``It had a tremendous effect on how people did here. When it took a turn, it really put the brakes on morale.'' The Frontier fiasco
Finally, the move by Burr to purchase Denver-based Frontier Airlines in October 1985 initially caused a lot of excitement, reviving enthusiasm in the ranks.
Burr told employees the deal was done because it was essential to gain ``critical mass'' to survive the industry fight. The analogy was that People could either be a big fish swimming with other big fish or it could be snapped up like a sardine a few years down the road.
Yet the purchase of Frontier, perhaps more than any other thing, turned out to be the financial bomb, losing People $10 million a month for nearly nine months.
The battles are over now. R'esum'es are being sent out. People employees are packing. Burr is headed for a stint as a vice-president of Continental in Houston. There he will be part of a much more ordinary management structure under Mr. Lorenzo, his former boss at Texas International.
Troy Hopper is seeking a job with Continental. Annmarie Sheehan, a recruiter and customer service manager at People, has a new job already. Neither of them is bitter.
``When I came, things were already on the downside,'' says Ms. Sheehan. ``When Frontier was purchased, everybody just went crazy with excitement. We all had our big dreams about the airline.''
Of chairman Burr and his philosophy, Sheehan says: ``He was genuine in his intent, and I feel privileged to be a part of it.'' But she also believes his owner-manager system was simply an ``economically ingenious'' method to prevent overtime payments and the formation of unions. Drawbacks to the line's culture
The People Express culture should have prevented employees from wanting to leave. Yet one pilot recollects that the airline spent thousands to train pilots, but then lost more than 200 to other airlines.
``Low pay, no work rules, no seniority'' constituted working conditions that made them want to leave, the pilot says.
Many of the pilots and New York airline analysts also became alarmed at People's rapid expansion. Still, it remains considerably easier to analyze the cause of People's problems now than it was for Donald Burr then.
But one pilot, who left a promotion with the US Air Force to join People, says that although he likes Burr as a person, he feels he was autocratic, which ended up with Burr's surrounding himself with a comforting blanket of ``yes'' men.
``In 1983 I thought we had an excellent chance of complete success,'' he says. ``I never thought we would fold.''
The pilot admits he is now openly cynical about the new-style management he says had too many chiefs and not enough Indians to do the work.
``Even at the very beginning we were making suggestions on how to run the place, especially when it became fairly obvious that the customer didn't like a lot of the innovations that management rigidly adhered to,'' he concludes.
``Bozo the clown could have been running the airline in 1983 and made money,'' he says. ``The window of opportunity was open wide and we were there, but we didn't capitalize on it.''