Rewriting the Case Study of People Express

Few things stay constant in business, so it’s not surprising when the best of success stories turns into a case study of what went wrong.

People Express is such a story. At Harvard Business School, where it has been good grist for classroom examination of innovation and modern management technique, the company’s more recent experience is going to provide prospective MBAs with a good lesson in why doing well at one thing doesn’t ensure doing well at another.

Started in 1981 with three airplanes, People Express grabbed headlines quickly with sharply lower fares made possible by sharply lower costs. It served some off-the-main-track cities not of primary interest to the major lines most capable of getting into a price war. Hence, the new airline was able to establish itself before competition became cutthroat.

The airline also tried an unusual management style. Little authority was imposed from the top and teams of employees set up their own operating systems and made their own decisions. Individuals got involved in a number of operating functions rather than being limited to narrow roles. All employees were owners with a direct stake in the profitability of the company.

Overnight Winner

What looked like a wild gamble in a business so heavily dominated by the big carriers turned into an overnight success. Within five years, the airline was flying 79 planes, not counting those of Frontier, which it acquired a year ago. People Express showed the rest of the industry how to manage costs and thus how to make money at fares often less than half the industry standard.

Because of the looseness of its management style under founder Donald C. Burr, People Express quickly became a prime example of how corporations may have to be organized in the future, with managers acting more as advisers than as drill instructors.

It obviously worked, for a while. Then as fast as it had grown, the airline turned around and slipped deeply into the red. Now, People Express is selling out to Texas Air to avoid financial collapse. The task for the lesson writers is to identify why it all came apart.

Harvard professor Quinn Mills believes it was not because of the original strategy but because a new one wasn’t developed to cope with greater size and changing market conditions. He says he’s still impressed with the style of the organization: Employee productivity remains about double that for the rest of the industry.

But People Express no longer has its own niche. It chose to go head-to-head with the Uniteds and the Americans on some of the major runs. In making that move, Mills observes, Burr feared that the major lines could match his pricing in the East and make up for the lost revenue with higher prices in the West. Hence, Burr went after Frontier, an entry into Western markets and a way to obtain hard-to-get gate space at major airports.

The end might have been justified, but the means used to get there presented a major problem: Frontier was not the low-cost operator People Express was, hence the People Express price structure couldn’t be imposed on Frontier and produce anything but red figures.

Insufficiently Structured

There were other problems. Inspiring as Burr’s style of leadership was, it wasn’t structured enough to cope with the growing complexities of bigness. Mills contends that the board of directors, originally filled with representatives of the venture capital and other investment interests that helped get the airline started, wasn’t adequately broadened to give Burr better advice on how to change his strategy while there was still time.

It’s hard to say what would have worked. Maybe People Express should have been satisfied to stay small, in a special niche, but few business executives are content not to grow. Maybe a cut-rate price strategy that worked to get a beachhead in the market should have been modified, and the airline should have attempted to compete on service and efficiency with the older carriers.

Whatever the case, it isn’t that Burr’s bold vision was bad. It just wasn’t long enough to get People Express through the process of going from small and special to big and not so special.