YOU ARE HERE: LAT HomeCollections

People Express : Determined Fight to Pull Out of Dive

September 14, 1986|ROBERT E. DALLOS | Times Staff Writer

NEW YORK — It was an idea whose time had come. Airlines had been deregulated and fares were no longer artificially propped up. Carriers could fly wherever they pleased--wherever there was business. Routes could be changed at will.

Three years after the 1978 deregulation act became law, People Express Inc. was born. Its name told it all: an airline for the masses. Its low fares would be cheaper than even the Greyhound bus and would enable everyone to fly , though without the usual comforts.

Today, People Express is in deep trouble and its survival is very much in doubt. It is losing money and has been so low on cash during the summer that its management has said all or part of the airline is for sale. And late last week, rumors revived that it was on the auction block because its wallet was nearly empty.

To stem the outflow, People Express is trimming its fleet, pruning its schedule and route system and is desperately trying to change its image from its original no-frills, low-cost, high-frequency concept to one closer to those of conventional carriers that put a high value on less-seasonal business travel.

"In a relatively short time," said Anthony B. Hatch, airline analyst with Argus Research of New York, "People Express has gone from being an innovative start-up carrier to a widely analyzed success story to a financially troubled company. In our view, (there is) serious risk that the company will not be able to resolve its problems--and therefore will not survive."

Louis Marckesano, airline analyst with Janney Montgomery Scott, a Philadelphia brokerage house, said: "If I were a betting man, I'd be betting against them."

And, clearly, the odds are not in People Express' favor.

After a summer in which the airline had only one month, August, during which it carried enough passengers to create a positive cash flow, it is estimated that it has only $25 million to $50 million left in the till. The airline would not reveal its current cash position, nor would it make any member of its management available for interviews for this article.

People Express had a $74.5-million loss in the second quarter of this year, an average daily loss of $819,000. At that rate, $25 million would last only a month.

However, Frontier Airlines, a subsidiary that has since gone into bankruptcy, contributed $32.7 million to the second-quarter loss. Without the burden of Frontier, People Express will be able to make its cash last a little longer.

In the first quarter of this year, People Express needed a load factor (percentage of seats filled) of 69.8% to break even, but its actual load factor was only 60.2%. Observers say the airline's business is so cyclical that it traditionally has made money only in the summer vacation months. And it would cost an estimated $100 million, they add, to upgrade People Express to a full-service airline, a sum that just is not available.

Situation Could Worsen

"The time they have to make something happen is a function of how much cash they have," John Pincavage, airline analyst with the Paine Webber brokerage, said. "If all of a sudden interest rates go up and start draining cash, and fuel prices go up and start draining cash, or the economy goes down and traffic drops and drains cash, the cushion is eaten up and they lose the time they need."

Pincavage added that the adverse publicity People Express has had in recent months has hurt it both with the public and with travel agents, who do not like to make reservations on an airline that, they fear, may not be around for long.

What is the reason for the carrier's troubles?

People Express simply grew too much too fast, and it underestimated the resolve of its competitors, the nation's major airlines, to match its discount fares no matter how low they got.

Timothy Pettee, airline analyst with Bear, Stearns, a brokerage in New York, said: "While People Express was growing--and it was very successful in achieving its (growth) goals--the other airlines, American, United, Delta and Continental, had deeper pockets, and it was clear they were willing to test just how deep (People's) pockets were. It has been a five-year war of wills to see who was going to buckle first."

In its overambitious expansion program since its birth in 1981, People Express grew quickly from its origins: 250 employees and three airliners serving three cities. Today it has 80 planes, serves 49 cities and also owns two subsidiaries besides Frontier--Britt Airways in the Midwest and Provincetown-Boston Airline on the East Coast.

Will Have to Shrink

People Express boosted its capacity 124% in 1984 and 63% last year. But now, those who give People Express any chance to survive say that it will have to become a much smaller version of itself.

Los Angeles Times Articles