Story of two airlines that had high hopes for no-frills

When airline regulations were scaled back, two newcomers to the industry took off after the same idea. People Express and New York Air flew as no-frills discount carriers.

It has become apparent that what worked for one didn't work for the other. People Express is still a hefty discounter, and now it's winging passengers to and from London for a price almost half what other airlines charge. New York Air , meanwhile, is going after the business crowd - with separate lounges for its passengers, free newspapers, and a just-started New York-to-Washington shuttle. For these services, it is charging 50 percent more for tickets than it did a year ago.

The differing strategies seem to be working for these Big Apple neighbors. First-quarter profits at People totaled $2.1 million. And New York Air - for the first time since it started in late 1980 - has been flying in the black these past few months.

People Express is moving aggressively ahead with its no-frills operation, and there seems to be plenty of demand for it. Robert McAdoo, chief financial officer of the Newark, N.J.-based airline, says the $149 economy seats, one way from Newark to London, are already ''almost booked for the summer.'' First-class seats, at $439 one way, are moving more slowly.

Analysts see the international route as a ''natural extension'' of People's present business philosophy. ''They don't need to do it,'' says Mark Daugherty, a Dean Witter Reynolds analyst, ''but they've realized they have so much traffic pouring into Newark from all their outlying (midsize) cities, it's just a natural extension to link those cities which don't have good air service to Europe through their hub.''

It wasn't as if the executives at this airline had always been hankering for the international life, People Express president Donald Burr explained in an interview here last week. The new route ''just came along and we saw it as a good opportunity.''

When the Civil Aeronautics Board established the Newark-London route, it was originally awarded to Air Florida, although last December People Express applied to be the backup line in case the deal fell through. When Air Florida pulled out , the slot went to People. Five days a week for at least the next two years the airline will have one daily flight going to and from London. Mr. Burr says the overseas route will account for about 10 percent of 1983 revenues.

The new route is the most noticeable area of expansion for People Express, but other signs, like the addition of 37 planes (all used) to its fleet over the next two years, and its continued Northeast expansion to such midsize cities as Portland, Maine, and Atlantic City, N.J., show the airline is not standing still.

Neither is its stock. Trading at about $40 a share, ''the stock has taken on a super growth-stock image,'' points out Ron Moreno, an airline analyst with Smith Barney, Harris Upham. ''It's a bit overdone,'' he adds.

The airline can charge low fares because its costs are only 5.5 cents per seat-mile, compared with an 8.25-cent industry average. Nonunion labor, good deals on used planes, and an absence of such free services as baggage check-in and snacks (passengers can pay for both) keep costs low. Also, the airline claims that crossover of jobs among employees boosts productivity. For instance Mr. McAdoo, the financial officer, is a flight attendant once a week.

While New York Air started out with this same low-cost, low-fare mentality, the company never came close to People Express'success.

Michael Levine, president and chief executive officer of New York Air, admits the airline didn't know its market when it first started out in late 1980. ''There was some ambiguity about what product we were offering . . . ,'' he commented in a phone interview. ''We were going to be all things to all men.'' But the airline is based at La Guardia Airport, near Manhattan, where ''the competition and the market is heavily skewed toward the business traveler.''

On top of that, Levine says La Guardia is an expensive airport to operate from; so are Boston's Logan and Washington's National, two major destinations for the airline. Operating at Newark Airport, on the other hand, is much less expensive.

Recession and the air traffic controller strike, which hurt the major hubs most, added to the company's troubles. ''Because of the recession, our competitors figured . . . it was a good time to go in there and match prices whether they could afford to or not,'' Mr. Levine says.

The airline began its swim out of the sea of red ink last year by moving toward upscale service. It took some seats out of its planes for more legroom; switched its flight attendant outfits from a purple-and-red upbeat fashion to a more subtle, tailored look in gray; and offered unique snacks. ''None of these by themselves are very important,'' Levine says, ''but the package ends up being much more graceful, civilized, and bearable.'' He believes he can survive his competition, especially Eastern, with service and lower costs.

Analyst Moreno says New York Air's strategy ''is working well now,'' and expects the company to draw up net profits of $4.5 to $5 million this year. According to Levine, his airline has expansion plans, ''but we will attempt a plan that's easier to control than the one being attempted across the river.''

People's rapid expansion goals - Mr. Burr says his airline will fill in the cracks in New England, spread south into Piedmont territory this year, and move West maybe next year - have analysts worried. ''They are moving at a pace that could cause some problems down the road,'' says analyst Daugherty at Dean Witter.

Those problems aren't financial so much as management-oriented, those who watch the industry say. ''Personnel management will be the major challenge. Growing this fast, you run the risk of trading down on the quality of people you hire,'' warns Smith Barney's Mr. Moreno.

The People president sees some trouble ahead, too. He is already working on such problems as a phone reservation system that is constantly busy and looking for ways to end mass confusion and crowding at airport gates. But ''the biggest challenge will be building the environment where our (employees) can still get things done productively and like what they are doing,'' he admits.

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