People Express, which rose fast by undercutting the fares of big airlines, has hit a severe financial downdraft. On Monday the innovative company founded by entrepreneur Donald C. Burr announced it would seek buyers for either all or part of the airline. Analysts say People's difficulties stem from too rapid expansion, poor on-time performance, and other customer service problems, as well as tougher competition from big carriers.
``This is no great surprise to us on Wall Street,'' says Marc Klee, an analyst with National Aviation & Technology Corporation, a mutual fund. ``They've been in modest trouble for a number of years, and worse condition more recently.''
Mr. Klee says that although it seems unlikely that People Express will go bankrupt, it still is a ``realistic consideration if they keep losing money the way they have been. Their debt balance can't continue to grow -- eventually they'll run out of cash.'' The company is thought to have some $80 million in cash, sufficient to keep it from going under anytime soon. Its debt is estimated at between $800 million and $1 billion.
Part of the problem, Klee and others say, is that the once tiny airline grew too rapidly out of the niche that protected it and entered cutthroat competition with major carriers that offered amenities it did not.
People, now the fifth-largest airline, was born out of airline deregulation in 1981. It began with three planes flying cheap, no-frills runs to places like Buffalo, N.Y., Columbus, Ohio, and Norfolk, Va., from its Newark, N.J., hub. It gained an ardent following of customers who didn't mind doing without if they could fly places for less. The company was also touted in newsmagazines as a model of employee ownership and clever entrepreneurship. Under Mr. Burr, a Harvard Business School graduate, the airline made waves and profits for a while.
But People's losses (combined with those of Frontier Airlines, which it owns) reached $32.4 million in the fourth quarter of 1985 and $58 million in the first quarter this year.
Much of these losses came from a rapid increase in operating costs associated with rapid expansion. During the past eight months People purchased Frontier for $300 million, Provincetown Boston Airways for $30 million, and Britt Airways, a Midwest regional.
As of April 1985, People Express had a fleet of 68 aircraft and more than 4,000 employees, and it served 32 destinations from its hub in Newark. Today it serves 145 destinations in the United States, Canada, and Europe, with more than 120 planes. But that rapid growth has cost the airline plenty.
Burr fought Continental Airlines' president Frank Lorenzo tooth and nail to buy Frontier and acquire its Denver hub last October. But Burr's victory was a dubious one. Frontier has been the biggest drag on People earnings, as Frontier has waged a fierce, losing battle with Continental and United Airlines in Denver.
Symptomatic of Frontier's problems in Denver was the mistake it made shortly after being bought by People. Frontier removed some frills, such as free food, from its flights. But Continental matched People fares and still offered free food and drinks. Business fliers switched to Continental. Frontier has moved to restore the amenities and get the business fliers back -- but it won't be easy.
The worst problem hanging over People since its expansion has been overcapacity. It just isn't putting enough passengers on its planes to break even. In an industry where thin profit margins depend on filling an aircraft beyond a certain percentage of seats, every extra passenger over the break-even point is important.
The average break-even percentage for the industry fluctuates during the year, but hangs around the low 60s. Increased operating costs caused by expansion and new amenities have pushed People's to around 65 percent, says Mr. Klee. In May, it is estimated, People was filling only about 53 percent of its seats. Last week the company said it was cutting fares -- an effort to fill more seats and generate cash even at a loss.
The barrage of fare wars, which have pulled millions of people into air travel, was initiated by People Express. Ironically, People seems to have fallen prey, at least partly, to the same big airlines that used to be inefficient and expensive. The big carriers are now benefiting from lowering costs to compete with low-cost carriers like People.
Those big carriers are now matching many People fares and routes -- but frequently offer free food and drinks as well. In short, People Express seems to have lost the low-cost advantage it once had.
``They outgrew that pleasure traveler and backpacker niche,'' says Marilyn McKellin, an analyst with Value Line Investment Survey.
``With all that additional capacity they had to attract the business traveler. But there's no extra service, sophisticated computer reservation system, or frequent-flier program. Instead, passengers get bumped off flights and arrive late a lot.''
Burr recently promised that the tradition of no frills would be giving way to a lot more incentives to attract business fliers. But that will also add to the percentage of seats it must fill to make money.
In the wake of People's announcement that it would seek buyers, two questions surfaced: Who will buy part or all of the airline, and will airlines' profits increase and fare wars lessen as People retrenches?
The answer to the first question is up in the air, according to market analysts. There has to be some advantage for another airline to buy even a piece -- such as Frontier. But analysts say there aren't a lot of obvious advantages. American Airlines has said it will grow internally. United is trying to absorb several recent acquisitions, and Texas Air is still absorbing Eastern.
Prices for airline stocks jumped after the People announcement that it would be seeking a buyer. Analysts say airline fares and profits will rise as People withdraws from some markets.