Environmental Factors That Led to the Growth and Decline of People Express Airlines

Name: Apaar Singhal

Section: A

Roll No: PGP 16067

Environmental factors that led to the growth and decline of People Express Airlines

People Express Airlines had fabulous growth from its inception in 1981 to 1985. A major boost to the airline industry in general was due to Congress deregulating and opening up the market in 1978. This allowed airlines like People Express to establish a new business in the aviation industry. In early 1980s, the economy went through a recessionary phase which forced many airlines to lay off their pilots. This provided a golden opportunity to a new airline like People Express to interview many pilots and chose from this large pool who were willing to take on extra tasks and work in different functional areas apart from flying the aircraft. When People Express started its enterprise in 1980, the standard was of offering air travel as a commodity. There was no innovation. Also for a typical airline, compensation was the greatest expense. Such under developed market allowed People Express to make a major dent in the industry. People Express was also fortunate to receive a small private financing from Citicorp Venture Capital and a large public financing from Hambrecht Quist. Another external factor that led to the growth of People Express was that the east coast airline operation was dominated by local and regional carriers. These airlines did not have deep pockets and so could not sustain the pricing war initiated by People Express. This ultimately led to such airlines fading out.

Along with this, People Express faced a number of external challenges which led to its decline in 1985. American Airlines introduced a sophisticated reservation system which allowed it to differentially price its seats. It sold a few seats to business travellers who were willing to pay a huge amount and sold the rest of the seats at a price which was comparatively lower than that of People Express. However, People Express could offer only one price for its seats. This led to People Express losing upto 50% of its market share. Also, when People Express started to challenge major carriers like American, United and Northwest directly in their key markets, these airlines reduced their fares in response. Being a big airline, Northwest could muscle the courage to reduced its fare to $95 on a route where People Express was offering $99. United and American responded in similar ways.  In order to counter the growing dominance of People Express, major carriers became increasingly aggressive with frequent flyer travel programs. They stepped up the development of hub and spoke systems threatening People Express out of key hub cities across the country. One of the major strategic advantages of People Express was that it was able to capture the market from small airlines by offering lower fares. However, a majority of these small airlines got into a partnership with larger airlines to gain an upper edge while discounting air fares. Vagaries of the weather of East Coast also paid a spoilsport and explosion of demand during holidays, Friday and Sunday nights led to People Express’s terminal getting very over crowded. This led to customer dissatisfaction. All this led to Burr selling both his airlines in 1986.