Super Savings in the Skies

By Charles P. Alexander

Hurry, hurry, hurry! Like almost everything else in the postholiday season, the skies themselves are on sale. The tailwinds are a bargain you can't afford to miss. With prices this low, staying at home is almost a crime, like being debt-free in a credit-card society. How can anyone resist these tags: Boston to Miami: was $99, now only $69. Dallas to Denver: was $95, now only $69. New York to Los Angeles: was $149, now only $99. Make your reservations immediately. Take the kids. Take Grandma and Grandpa. Buy your brother-in-law a oneway ticket to anywhere. But don't pass up the greatest deals ever. Operators are standing by.

Air travel, once an expensive way to go, is now discounted almost as fiercely as videocassette recorders and used cars. A new fleet of cut-rate carriers, launched over the past seven years by a wave of airline deregulation, has entered the big time by offering startlingly cheap fares from coast to coast and on hundreds of routes in between. The bargain tariffs have encouraged more people to take more flights to more places than at any other time in history. This week that wanderlust will receive another huge boost when a new round of fare wars erupts among the airlines, adding yet more commotion to the already crowded skies.

The spark for the latest skirmish is People Express, the fastest-growing airline in the annals of aviation. People is slashing most of its fares this week by 30% to 60%. Passengers can fly from the carrier's Newark base to Miami, Fort Lauderdale and other Florida cities for $69, to Los Angeles and San Francisco for $99, to Minneapolis for $49 and to Greensboro or Raleigh, N.C., for $29. By changing planes in Newark, People Express customers can fly from Chicago to Florida or from Boston to Houston for $99. People's biggest bargain of all is a nonstop flight from San Francisco to Brussels for $99.

Faced with such competition, other airlines are fighting back for all they are worth. Delta and Eastern are matching some of People's fares to Florida. Piedmont is offering the same low prices to North Carolina. Continental offers $99 "cheap frills" flights between New York and California and is letting senior citizens fly anywhere in the U.S. for an incredible $65. The first $65 tickets were sold to Susan Brunson, 115, and her "baby daughter" Mary McDaniel, 75, of Roosevelt, N.Y., who plan to fly to Miami or Los Angeles to visit relatives. All the largest airlines, including American, United, Delta and Northwest Orient, are offering discounts of up to 75% if passengers make their reservations 30 days in advance.

As the airlines battle it out, the only clear winners will be their customers. Ellen Farmer, a legal secretary in Elgin, Ill., plans to take a break from the cold weather later this month by boarding Midway Airlines' $99 flight from Chicago to Orlando. Says she: "I don't think Midway would have had such a low fare if People Express hadn't forced them."

Founded only five years ago, People Express now flies 1 million passengers a month, making it the fifth-biggest U.S. airline, behind United, American, Delta and Eastern. It has not only attracted millions of reluctant or first-time flyers but produced profound changes in the entire U.S. airline industry. Everyone from backpacking student to bargain-conscious businessman has flocked to take advantage of People's rock-bottom fares. Ronald Vaughn, a manager at AT&T's headquarters in Manhattan, flew from Newark to Atlanta with his wife Jo to visit relatives for Christmas. Says he: "If it wasn't for people Express, we would have had a more expensive holiday." The couple's total round-trip bill: $316.

People Express is the brainchild of Chairman Donald Burr, 44, a bold dogfighter who harasses competitors mercilessly while piloting his own company in a distinctly unorthodox manner. He and a group of colleagues left Texas International Airlines in 1980 to launch People, which began as a small regional line with service only from Newark to Columbus, Buffalo and Norfolk, Va. By last summer the airline was making 400 flights daily to 49 cities. Then in October, People agreed to acquire Denver-based Frontier Airlines and became a true national airline. Last month People signed a deal to buy Britt Airways, the third-largest regional commuter line, which serves 29 Midwestern cities. When the mergers are complete, People Express will have flights to 133 airports. Though financial figures for 1985 have not yet been released, the company probably passed the $1 billion mark in revenues.

Economists and consumer advocates admire Burr and People Express for bringing tough competition to a once clubby, complacent industry. Says Alfred Kahn, a professor of political economy at Cornell, who led the move to deregulate airlines as head of the Civil Aeronautics Board during the Carter Administration: "People Express is clearly the archetypical deregulation success story and the most spectacular of my babies. It is the case that makes me the proudest." Burr's innovative and unconventional management techniques, which include a heavy reliance on employee ownership and worker participation in decision making, have made the People story a part of the curriculum at many business schools. Asserts D. Quinn Mills, a professor at the Harvard business school: "People Express is the most interesting company in America today."

But critics of the airline's spartan service have dubbed the carrier People Distress, Many customers complain about late flights, an unreliable reservations system, and unbearable congestion at the 50-year-old Newark airport North Terminal, People's home base. Says an executive at a Chicago travel agency: "People Express is perceived as a sort of tatty bag lady." In addition, People's low prices have kept its profits slim, and many Wall Street investors shun its stock.

Love it or loathe it, almost everyone agrees that People Express has turned the airline industry topsy-turvy. It has forced established carriers to reduce fares and scramble frantically to cut expenses. Its low labor costs have spurred the industry's unions to accept wage cuts and search for ways to improve productivity. Perhaps most important, People Express has become the Greyhound of the skies, making air travelers out of many people who until now could afford to fly rarely or not at all.

Low fares have encouraged people to take excursions they would not have thought about in the past: a weekend jaunt to Florida, a crosscountry journey to a grandchild's graduation or a day trip to one of State U.'s road games. Buddy Yorke, a construction worker in Flagler Beach, Fla., has since August made four trips on People from Jacksonville to Newark to visit friends in nearby Roselle, N.J., where he grew up. Each time, he then flew from Newark to Buffalo on People to visit his girlfriend. Says Yorke: "I wasn't an avid traveler, but I am now."

The rise of People and other low-cost carriers has helped air travel grow at a jet-stream pace. During 1984, close to 400 million passengers climbed aboard scheduled flights, a more than 10% increase over 1983. In 1985, traffic for the first nine months was up nearly 11% from the same period the year before. Many of the flyers are first-timers. The percentage of American adults who have flown at least once is up to 70%, from 65% in 1979. Pleasure travel is growing especially fast. Business trips now account for only 50% of all passengers, down from 55% in 1979.

The surge in traffic was fostered by deregulation, which made it possible for entrepreneurs to launch new carriers and set their own prices. About 100 airlines now fly interstate routes, compared with 36 in 1978. In addition to People Express, many other new entries have had impressive takeoffs. New York Air is growing rapidly along the East Coast, Muse Air is doing well from its Houston base, and Jet America is carving out a niche with flights between California and the Midwest. Many others, though, have failed. After expanding too swiftly, Air Florida filed for bankruptcy in 1984 and then merged with Chicago's Midway Airlines. The casualties of competitive battles in the past two years have also included Louisiana-based Pride Air, Pacific Express of California and Northeastern International, all of which suspended flights or went out of business because of financial difficulties.

Though most of the newcomers have imitated People's low-fare strategy, one fledgling carrier went to the opposite extreme. Regent Air, which currently flies only two planes between Los Angeles and Newark, offers lavish $785 flights that feature caviar, French champagne and on-board hairdressers and stenographers. But Regent has also experienced lavish losses: in its first two years it went $38 million into the red.

Airline executives fear that increased competition and discounting will badly damage the industry's profitability. After suffering record operating losses of $800 million in the recession year of 1982, the airlines racked up a profit of $2.2 billion in 1984 and $1.6 billion in the first nine months of 1985. But the industry is expected to report heavy losses in the fourth quarter, and 1986 may also be disappointing. Speaking last November to a group of Wall Street analysts, United Chairman Richard Ferris predicted that fare wars will produce a "bloodbath."

Though the competition will create a bonanza for customers, they will have to shop around for the best deals and watch out for strings attached. Established airlines like United, American and Delta try to limit the revenue loss from discounting by loading the bargains with restrictions. "It's mind-boggling, all the different combinations of fares," says Bonnie Feinerman, a Chicago-area travel agent, who quips that passengers may not get the best price unless they "fly on a Tuesday and wear a pink hat." American's round-trip coach fares between Chicago and Long Beach, Calif., range from $238 to $800, depending on such factors as on what day customers fly and how far in advance they buy their tickets. To get the best discounts offered by many airlines, passengers must book their flight 30 days ahead of time and agree to pay a 25% penalty if they cancel or change their travel dates.

Most airlines generally restrict discounts to a percentage of seats, which varies with the popularity of the flight. The companies use sophisticated computer programs to determine how many cut-rate seats they should offer to fill a flight. At American, some 100 traffic analysts study computer printouts almost around the clock, seven days a week, to adjust the level of discounting. Bargains are sometimes unavailable unless customers make reservations weeks in advance, as Carol Conklin, a Chicago financial analyst, discovered. In October she bought a $178 round-trip ticket on Midway Airlines to visit her parents in Philadelphia for Christmas. Early last month she learned that a close friend from California would be in Chicago on the day she was leaving. Conklin tried to reschedule her departure for a day later, but the lowest round-trip fare she could get was $318.

People Express owes much of its popularity to its practice of putting virtually no restrictions on its fares and using rules that are simple enough for someone without a computer to understand. On each route the carrier has two basic fares: peak, which generally applies to daytime and early-evening flights on weekdays, and off-peak, which is usually charged on late-night and weekend trips. The peak fare from Newark to Chicago, for example, is $99, and the off-peak is $79. On most People flights, every seat costs the same. The only exceptions are transcontinental and transatlantic flights on People's Boeing 747s, which offer a premium-class section for a higher fare. On People flights at peak times from Newark to Los Angeles, a first-class seat costs $325, compared with $735 on United and American.

To offer such fares, People Express had to come up with a revolutionary method of operation. It is like no other airline, from the way it handles baggage to the duties its pilots perform. Its unorthodox style has forced other carriers to re-evaluate almost everything they do.

Donald Burr has built People on the proposition that every worker should be an owner and manager. Having a stake in the company, he reasoned, would motivate employees to work hard and provide good service. To join the airline, all workers must buy 100 shares of the company's stock at a 70% discount. They can borrow the money to buy the shares and repay it with paycheck deductions. The workers also receive profit-sharing payments that can amount to as much as 30% of their regular wages.

Employees are divided into three groups: customer-service managers (ticket-counter agents and flight attendants); maintenance managers (who supervise the upkeep of the planes); and flight managers (pilots). The company hires independent firms to provide other services such as taking telephone reservations and doing mechanical work on the aircraft. The employees are divided into groups of 20, with two team leaders and a team manager. Above the team managers are only two levels of command: 29 general managers, who supervise groups of about 250, and eleven managing officers.

Employees regularly switch jobs, and all have a say in who does what. A customer-service manager may run a ticket counter one week and be a flight attendant the next. Pilots sometimes work in accounting or scheduling. Observes John Meyers, an economics professor at Harvard's Kennedy School of Government: "Burr broke rank by not following the hierarchical, paramilitary model. People is run more like a commune."

The stock ownership, profit sharing and democratic trappings are also designed to help make up for the company's low base salaries. People Express pilots earn $60,000 to $90,000, while captains at United can make $150,000 or more. Burr's compensation was nearly $114,000 in 1984, but United's Ferris earned about $425,000.

Most People employees, who tend to be young, seem willing to accept the substandard pay because the company's job-sharing program gives them a chance to learn many skills and the work is less monotonous than at other airlines. Says Leigh Yardbrough, 25, a customer-service manager: "I wanted to be part of something exciting, something untraditional. We're not oppressed workers."

Burr has discouraged People employees from joining labor unions, and none have. In a column that he wrote early last year for the Wall Street Journal, Burr was blunt: "We've gone to great lengths to avoid a unionized presence here because our competitive strategy depends upon free individuals doing what they freely enjoy." After People agreed to buy Frontier, a unionized carrier, Burr quickly dropped the antiunion rhetoric. The Air Line Pilots Association now has a quiet organizing drive going on at People.

The carrier's lean salaries and the flexibility of its work force help keep expenses lower than those at any other big airline. Operating costs amount to 5.38-c- per mile for each available seat. That is much less than Continental's 6.19-c-, American's 7.61-c- or United's 7.98-c-.

Another way in which People pares fares is to charge passengers for only the services they want. When flying other airlines, customers pay the cost of food, whether or not they eat, and of baggage handling whether or not they carry suitcases. People, in contrast, itemizes everything. A can of soft drink, for example, costs 50-c- on board and a snack tray of meats, cheeses and crackers--no hot food is available--is $3. Each suitcase checked costs $3. Many customers are more than willing to cram their belongings into carry-on luggage and brown-bag their snacks. Says Christine Ferris, a student at Hampshire College in Amherst, Mass., and a People flyer: "Airplane food is horrible anyway, so I don't mind."

Unless they buy tickets through a travel agency, passengers do not generally pay for their seats until they get on the plane. During the flight, attendants come down the aisle collecting fares. They accept cash, credit cards, traveler's checks, money orders and personal checks (if the passenger writes a credit card or passport number on the back).

People passengers can make a telephone reservation, but that is no guarantee of a seat. Reason: the airline often gives out reservations to more customers than it has room for on a plane. Seats are assigned at the airport on a first-come, first-served basis to passengers with reservations. Veteran People flyers arrive at least an hour in advance to make sure they can get on board. Customers with reservations who are denied a seat are entitled to compensation: generally a place on a later flight and a free ticket good for a future round trip on any of People's U.S. routes. All airlines overbook, but People is the worst offender. About ten to twelve passengers per 10,000 are bumped from People flights, twice the industry average. The airline's executives justify the practice by saying that many customers who make reservations do not show up.

Gross overbooking produced a nightmare at Newark's North Terminal on the Sunday after Thanksgiving, People's busiest day of the year. The cramped building was so crowded that human gridlock developed. Hundreds of people never made it onto a plane and spent the night at the airport. On Dec. 20, People stranded 160 Newark-bound passengers in San Francisco because of overbooking.

Even when seats are not sold out, the Newark terminal is inadequate for the 400 flights that the airline operates daily. Not enough chairs can be fitted into the small spaces at the gates, and many passengers sit on the carpet as they wait to board. Burr thinks that this problem will be solved with the construction of a new People terminal at Newark. Scheduled to be completed in 1987, it will be nearly five times as large as the current building.

Though People says that it has raised the percentage of flights that leave and arrive on time from 40% to 65% in the past year, some passengers doubt that figure. On Christmas Eve at Newark, a group of impatient travelers waited nearly three hours to board Flight 197 to Greensboro. At one point, a young man in blue jeans and a Chicago Cubs baseball cap shouted, "I've taken a poll, and everybody here is pissed off at People Express." When told that the plane was finally arriving at the gate, the crowd broke into applause and alleluias. One couple sang an impromptu song to the tune of Somewhere from West Side Story: "There's a plane for us. A time and plane for us..."

Many People customers, though, are primarily interested in saving money and do not care if they are a few hours late. The airline is a favorite among passengers who are not facing crucial deadlines, including vacationers, families going to visit relatives, and students who are not at all bothered about getting back to school late and missing a few classes.

People is much less popular among business travelers with vital appointments to keep. Says Marisa de Santis, a Manhattan travel planner: "Business travelers don't like surprises. They want a confirmed flight and a confirmed seat assignment. We can't guarantee that if we put them on People Express." Stanley Bauer, a vice president at Ciba-Corning Diagnostics in Medfield, Mass., flew from Boston to Newark on People only because he could not get a reservation on another airline. Says he: "It's uncivilized. I would not subject myself to this unless it was absolutely necessary." Admits Burr: "We have to enhance our service if we want to convince those who don't fly People Express that we have a good product."

The airline is slowly starting to attract a sizable number of passengers from small and medium-size companies, which usually do not have large travel budgets. People's low fares have enabled Lee Noddin, vice president of a small textile company in Lewiston, Me., to fly more frequently. Says he: "People has opened up many doors of opportunity for me because I can chase down more prospects and visit more clients. If it wasn't for People Express, I might've lost business." To help draw in more executive customers, People is planning to start a frequent-flyer program that would enable repeat passengers to earn free trips on the airline. Similar promotions on other carriers have been extremely popular.

Some airline experts think that People is expanding far too fast. At first the airline flew to cities largely ignored by the major carriers, and that made it easy to attract passengers. But then People began invading popular routes and entering tough competitive battles with larger airlines. In the past 18 months it has added 29 U.S. cities, including Dallas, Denver, Los Angeles, Miami, Atlanta and New Orleans. It has been flying to London since 1983, and last year started service to Montreal and Brussels. It has applied for permission to land in Zurich.

The pell-mell growth has roused the industry's sleeping giants. Says Julius Maldutis, who follows the airlines for the Salomon Brothers investment firm: "At first they all thought People Express was a joke. But they woke up when they realized that People was a billion-dollar company and that its growth was coming out of their hides." In many cases, established carriers matched People's fares while still offering full service. The competition forced Burr to withdraw from Oakland and cut the number of flights to Minneapolis, Detroit and cities in South Carolina. But he remains confident that People can hold its own against the large airlines. Says he: "We're one of the big boys now." By acquiring Britt Airways, People will boost the number of its daily flights out of Chicago, which has long been ruled by United. Moreover, some industry experts speculate that People may use Britt to establish a major new hub at St. Louis.

As People has expanded its fleet of jets and route system, its business performance has become more and more uneven. It may have added too many flights to too many places. Though quite a few planes headed for popular destinations are still packed, the number of empty seats on less favored flights is on the rise. For the first ten months of last year, People's planes were 62% full on the average, down from 71% the previous year. That still beat the industry-wide figure of 60.8%.

Unfilled planes, combined with People's low fares, have depressed profits. Between October of 1984 and last March, People suffered operating losses of $21 million. In the following six months the airline recovered to earn $58 million, but some Wall Streeters think it moved back into the red during the last quarter of 1985. Its stock has dropped from a peak of 25 7/8 in 1983 to 9 3/8 last week.

Weak earnings have diluted the company's profit-sharing payments and hurt employee morale. Many pilots have left because they were dissatisfied with their pay and disliked being assigned extra jobs on the ground. Between 1984 and 1985, the number of pilots dropped from 1,100 to about 950. "We're having a family crisis," says Philip Rogers, a 727 captain who has stayed on. Burr says the remaining pilots are enough to fly the fleet, and new ones are being hired.

But a former high-ranking People executive thinks that the airline's personnel problems may be only beginning. Says he: "Burr has brainwashed employees into working 60-to-80-hour weeks by calling them all managers. They're in Disneyland, but his spell can go only so far." The former executive asserts that People's management is not nearly as democratic as Burr says. "There's only one way to do things at People Express, and that's Don Burr's way," says he. "Not only does Burr dislike being second-guessed, he dislikes being first-guessed."

People's riskiest, and most impulsive, move came when it outbid Texas Air and signed the agreement to acquire Frontier Airlines for $305 million. Burr says he made the decision to buy the Denver-based carrier without consulting other People executives when the deal was suggested to him by Jack Maatee, a lawyer for Frontier, during a tennis outing at the home of a New York investment banker. "I was convinced," says Burr, "that it was the brilliant thing to do."

Wall Street wonders, though, how Burr will mesh a traditional, highly unionized airline with People's unorthodox structure and style. Says Robert Joedicke, an airline expert for Shearson Lehman Bros.: "Running a company with labor unions on one side of the house and no unions on the other side is going to be tricky. Under those circumstances, collective bargaining can be contagious." In the merger agreement, Burr pledged to operate Frontier as a separate company until 1990. Says he: "Over the next five years, we'll try to convince the Frontier people of our way of doing things."

Buying Frontier puts People Express in a nose-to-nose confrontation with Continental, which has an important base in Denver. It pits Burr against a former colleague turned rival: Frank Lorenzo, the chairman of Continental's parent company, Texas Air. In the 1970s, before leaving to found People Express, Burr was Lorenzo's second in command at what was then called Texas International. The two men were once very close friends, but they now have colliding ambitions.

While Burr was building a national airline from scratch, Lorenzo took over Continental and put the money-losing airline into bankruptcy proceedings as a way of breaking union contracts and slashing employees' pay by as much as 50%. Critics called it union busting, but Continental President Philip Bakes contends that such action was necessary for the airline's survival. Says he: "We were dead. Out of business. Bankrupt. The only way for us to come back was to offer employees jobs at a reduced rate." Reborn as a nonunion discount carrier, Continental became a moneymaker, earning $92 million in the first nine months of 1985.

Lorenzo made an offer in September for Frontier, but the airline's labor leaders thwarted the deal, fearing that he would break their unions. When they turned to Burr, it was a stinging personal defeat for Lorenzo. In November, Continental launched a campaign of newspaper advertisements that ridiculed People's buslike service. They read: "Give us your tired, your poor, your huddled masses, yearning to be free from People Express."

For the rest of the industry, Burr and Lorenzo and their cut-rate prices have been bad news. Says Eastern Airlines Chairman Frank Borman: "In a very real way, the new airlines are our Japanese. We can't have import quotas. We have to cope." Eastern, which had a near miss with bankruptcy two years ago, survived by persuading its unions to accept pay reductions and work-rule changes worth $367 million. In return, the workers got 25% of Eastern's stock and control of two seats on the airline's board. Without saying so, Eastern was copying the People Express emphasis on employee ownership. For a while, Eastern returned to profitability, but in the third quarter of 1985 it lost $28.6 million, and Borman is asking for new wage concessions.

Even strong airlines are making adjustments. In 1983 American Airlines' unions agreed to a limited amount of People Express-style job sharing. A maintenance worker, for example, might help handle baggage at busy times. That kind of flexibility results in more work from fewer employees and saves money. In addition, the new contract specified that American could pay new workers up to 25% less than old employees.

This two-tier wage system has spread to other airlines. In January 1984, United, the largest carrier, demanded that its unions accept two-tier pay. That eventually led to a 29-day strike that grounded 86% of United's flights last May. In the end, the employees reluctantly returned to work, agreeing to let United try the two-tier system through March 1988.

The airline industry seems headed for a period of consolidation in which strong carriers will try to grow more dominant by absorbing weaker lines. Piedmont agreed to buy New York-based Empire Airlines last year, and Texas Air narrowly lost to Financier Carl Icahn in the fight for control of Trans World Airlines. A Texas Air-TWA combination would have created the second-largest U.S. carrier. No. 1 United got even bigger when it bought Pan American's Pacific routes for $750 million.

Wall Street thinks that many airlines, including Eastern, Pan Am, Western and Ozark, are vulnerable to takeovers. But People Express is not on the hit list, Burr insists. Says he: "It would be nearly impossible to take over People. We're bulletproof." Burr points out that 62% of his airline's stock is controlled by employees, directors or other friendly investors.

Today's heady success is only the beginning, according to Burr. Says he: "In five years, People Express will be a worldwide transportation company, carrying people and freight, and packaging hotels and rent-a-cars, the works." Some skeptics, though, think that People could instead end up like Laker Airways, the cut-rate transatlantic carrier that expanded too fast and went bankrupt.

No matter what eventually happens to People Express, it has changed the airline industry forever. Burr, Lorenzo and other discounters proved that there was a huge untapped market for low-cost air travel. They have met the needs of millions of Americans. Says Venice Gorman, 31, a New York City hospital worker who flew on People to see her parents in Norfolk: "Before People Express, I used to stay home and call my relatives on the phone. Now I can visit in person."

When Congress deregulated the airline industry, it unleashed the powerful forces of competition into a field that had been tightly controlled. For the first time travelers have real choices. They can pick a People Express or a United, a Continental or a Delta. The competition has produced much confusion, and the best fares are not always easy to find. But customers today have a better chance than ever of flying where they want to go, when they want to go and at a price they want to pay. --By Charles P. Alexander. Reported by B. Russell Leavitt/Atlanta and Thomas McCarroll/New York

With reporting by Reported by B. Russell Leavitt/Atlanta, Thomas McCarroll/New York