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People might have stayed out of financial trouble had it not been for Burr's $305 million purchase last November of Denver-based Frontier Airlines. Frontier, a conventionally priced, full-service carrier, was already battered at its hub by competition from Texas Air subsidiary Continental and from United. Burr's Denver foray violated one of the initial ingredients in People's formula for success: offer no-frills travel in areas away from heavy competition. Says Burr in retrospect: "When we bought Frontier, our competitors decided Denver was going to be a battleground. It still is."
People speedily turned Frontier into a no-frills carrier. Unfortunately, that move just as speedily alienated the Denver airline's traditional customers. Frontier's competitors, especially Continental, responded with discounts of their own, and Frontier's amenities were soon restored--but not until the airline underwent a bashing that still continues. Says First Boston's Derchin: "They now feel they have People Express on the ropes. They're not going to let up."
Another People move, the February takeover for an undisclosed sum of Britt Airways, a Midwest commuter line with hubs in Chicago and St. Louis, has made more sense. Britt provides People with important feeder traffic into its Newark base.
The final sign that People Express was feeling the competitive squeeze came last month. Suddenly and without forewarning, the airline seemed about to drop its entire spartan philosophy. Burr announced that People would upgrade all its services, install leather seats in its aircraft, and offer --horrors!--luxury flying in newly installed first-class seating. At the same time the determinedly upscale VIP lounge was set up in North Terminal. The counterrevolutionary campaign was a clumsy attempt to woo the slice of the airline market that People had never served, the business traveler. The change in style came on the heels of a brief People effort to raise fares, a move that was reversed within seven weeks.
The ploy, says one Manhattan investment analyst, was "a major strategic ) error." For one thing, he notes, People was "going after the smallest sector of the flying public," since only about 11% of all airline passengers fall into the business and luxury classes. For another, the seduction was bound to fail, since such well-heeled travelers could often get more reliable and comfortable service, albeit at higher prices, from conventional airlines.
Many investors still expect People Express to survive in some trimmed-down form. Says Peter Lynch, manager of the Fidelity Magellan Fund, which has invested in People from its inception: "They may have to abandon Denver and shrink their company by a third." Nonetheless, he adds, "they're still in a dominant position in New York, the largest market in the country."