$3 Bag fees and $149 Trans Atlantic Fares…Those were the days
Inspired by British low-cost aviation pioneer Sir Freddie Laker, a team of disgruntled Texas International executives led by Don Burr started “PEOPLExpress” out of an old terminal at Newark airport in 1981. The airline began its operations by serving Newark to Buffalo for an absurdly low fare of $23 – cheaper than driving as the carrier’s marketing message would claim. The low fares of PEOPLExpress was a story in itself and the media picked up on it big time which drove load factors up to 100% with minimal advertising. What soon followed was a vibrant a-la-carte airline business model that was tremendously successful – for a while at least.
PEOPLExpress just like Laker Airways SkyTrain operated a low cost trans-Atlantic operation which started in 1982 with Newark-London for only $149 one-way. For these long-haul routes Burr got a great deal on leasing Boeing 747-227Bs previously belonging to the recently folded Braniff Airlines. PEx also used 727s and 737s for their short-haul runs which they purchased from Lufthansa for only $4.1 million (including livery) per aircraft. Propelled by the popularity of their low fares PEx purchased Frontier Airlines in 1985, which quickly made them the fifth largest airline in the United States, and arguably marked the beginning of the end for this fascinating business experiment.
In the wake of an unpleasant departure from Frank Lorenzo’s camp at Continental (purchased by Texas International), Burr wanted a fresh start. He came up with an airline marketing plan based on pure simplicity. All seats on a given route were sold at the same price with only a slight variation between “Peak” and “Off-Peak” fares.
Does anyone really understand airline pricing?
The issue was that post-deregulation airline pricing might have been more affordable, but the complex matrix of time-sensitive price adjustments, or so called revenue management, caused some resentment and even suspicion among the flying public.
Since deregulation a few airlines have tried to remedy the public perception of airline pricing, including jetBlue when it first started in 1999 – however, they were all unable to sustain non-revenue-managed pricing. To his credit however, Don Burr made a true effort, but like his inspiration Sir Freddie Laker, Burr eventually became the victim of dirty business tactics.
Enter ancillary revenues and baggage fees
It was Don Burr who first introduced a fee in the US market for each checked bag with PEOPLExpress. Back in the mid-eighties if you wanted to check your bag on PEx, or as some later called the airline “People Distress”, it would cost you $3.00 per bag. In fact the “a-la-Carte” charges did not end there. All catering was sold onboard which included charging 50 cents for a can of soda, peanuts, and brownies. More discerning travelers had the option of purchasing PEx’s “Snak-pak” featuring cheese, crackers and salami for $2.
The interesting thing about Burr’s business model was that he aggressively lowered operating costs allowing him to generate profit before ancillary revenue – The same thing cannot be said for some LCCs today.
Besides keeping infrastructure costs low by doing things like operating out of a forgotten airport like Newark, PEx practiced an employee cross-utilization plan that Burr had developed when he was with Texas International. The bottom line was that PEx workers earned about half the salary of those at other airlines and did about double the work in multiple fields for which they were trained and required to do.
Much of PEx’s cross-utilization occurred with staff working in both marketing roles and as airport customer service and gate agents – a move that could do many carriers good today. To motivate their staff PEx would allow employees to purchase stock in the company below market prices. So if the airline makes money the employees do as well.
Can you make money off low fares? – Lets do the Math
As I mentioned before Burr intended to, and actually made money before factoring in ancillary revenues. If we examine Burr’s 1980 executive summary to Boston venture capitalist Thomas Lee, the opportunity to make money from the airline business, albeit dependent on ultra-low labor costs, is clear and present. According to Burr you could fly a 737 aircraft with 118 seats on a short hop of around 1 hour, in this case Newark to Buffalo. If you charged $35 per passenger that would gross $4,130. Burr calculated that his fixed costs including fuel and crew was roughly $2,000 for that sector. This yielded $2,000 gross profit per sector with a nearly 100% margin.
Those of us working in the airline business know that it’s just not that simple though. But until PEx deviated from it’s original marketing and business model, it actually managed to make incredible margins thanks to very low costs, cross-utilization, and generating their own market base by triggering new fliers motivated by fares lower than any form of transport available.