Burr, though initially dismissive of computer technology as a costly frill, finally got religion and contracted with NCR to develop an in-house reservations system for People Express. Burr demanded a crash effort, a “mini-Manhattan Project.” Month by month the development team provided encouraging reports, but after a year the team leaders seemed to be waffling. Burr soon realized he had “a dry hole.” Fired, NCR threatened to sue. “I don’t give a shit!” Burr answered. He hired a small division of American Express to start from scratch. Burr, as 1984 drew to a close, was no closer to a computer reservation system than he had been in mid-1983.
There was also a kind of family stress taking hold in the company. Burr’s goal was to have every employee think of himself as a manager, but there was too little management of the managers, too little rhyme and reason to everyone’s activity. Burnout swept the organization at all levels, including the top. Burr feverishly tried to keep employees focused on the Big Picture—the vision of People Express as the fulfillment of a dream. An in-house television station was established—WPEX—with a rah-rah news format that enabled Burr to continue pumping people up. He drilled the Precepts into everyone’s heads: “commitment to the growth and development of our people … to be the best provider of air transportation … to provide the highest quality of leadership …” Business plans and reports and decisions all had to be expressly evaluated against the Precepts. He read aloud to his managers from The Greatest Thing in the World—the chief executive of the fastest-growing company in the history of aviation, reading aloud from his boyhood treasure tome, his feet propped on a desk, his shoes and socks removed. He distributed rambling memos that read like something from the self-help section at a chain bookstore rather than like the work of someone who once contemplated a career as an English professor:
I am personally and painfully aware that in a place known for its primary aspiration—an intense, unyielding and demanding commitment to people, ourselves and our customers: Precepts One and Two—June has proven to be an extraordinarily difficult month for these same people. There have been tears of joy and sorrow as our heroes and champions have struggled to cope with the truly extraordinary demands of an historic month.… Our unique problem, if you could call it that, is because we are so inordinately productive, the demand for our product is outstripping our ability to produce it. In short, we are operating beyond our practical capacity.
Not to worry, Burr went on.
The intent of our effort, which we in fact accomplished, was to enhance our competitive survivability. This greatly ensures that we can build a place strong enough to allow us to aspire to enjoy the promise of our Precepts.
The People Express system, he believed, would soon spread to hospitals and schools. “This group,” he solemnly told a meeting of senior managers, “has been brought together to help us lead the world into the next century.” Burr’s confidence was so strong that he signed a 25-year lease for a massive new terminal to be constructed at Newark—a new place to grow, to escape from the horrors of the North Terminal.
Three days later Bob Crandall, the Enforcer, finally lowered the boom.
Crandall had not forgotten his experience as the data processing manager at Hallmark Cards, where a 1960s-era mainframe tracked sales trends down to the individual display slot at each retail location—and adjusted every restocking shipment accordingly. Now Crandall would do the same with airline seats.
Experimentation with this concept had begun in the late 1970s, when Crandall wiped out the charter operators with his “super saver” prices. Setting aside a certain number of seats for sale at a discount began as an imprecise process, which Crandall and his people set about to refine. Their aim was to vary the proportion of discount and full-fare seats day by day and departure by departure, according to whether booking patterns were running ahead of or behind a predicted level.
In principle the concept was as old as the bazaar or the farmer’s market, where prices varied by the minute according to the rules of supply and demand—and, in the case of grapefruits or other fresh food, how close to perishing the product was. A few years into Crandall’s Growth Plan the number of individual seats for sale on American Airlines at any moment totaled roughly no million: nearly 1,500 departures a day, each with an average of 220 seats, any one of which could be reserved 330 days into the future. This number required data processing power, and more particularly software, on a scale unseen in most industries. Crandall’s strategy of concentrating flights into hubs complicated the process by still another order of magnitude: in analyzing whether to sell a full-fare seat on a single flight segment, for instance, American had to take account of whether it might be displacing a discount passenger seeking reservations on two flight segments and which of the two sales at various fare levels would generate more revenue.
The Sabre system was overflowing with priceless historical data, years of bookings from which American could deduce how many days in advance vacationers tended to book to San Juan, how many days in advance business travelers booked to Detroit, in May as opposed to September, on Tuesday as opposed to Friday, in the morning versus the afternoon or evening. Every flight had a unique profile. Crandall wanted his staff to monitor the rate of actual bookings in various fare categories, compare them to the predicted rate, and then adjust the inventory of variously priced seats accordingly. To this tedious yet tremendously meaningful process Bob Crandall gave the leaden name of “yield management.”
Responsibility for yield management was assigned to Barbara R. Amster, who had become one of the few women to attain a senior position in the boys’ club of commercial aviation. She did so on pure genius, and a comfort level with computers born of having started out in the New York office as a telephone reservationist on the early Sabre machines. When she undertook the assignment in the late 1970s Amster had 30 clerks up to their chins in keypunch cards. Amster’s people began gobbling up every new piece of data processing technology in an effort to refine the process ever more minutely.
When by 1984 Crandall and Amster had nearly perfected the process, it seemed like alchemy. If People Express were offering a $99 fare to the West Coast, for instance, American, in theory, could advertise the identical fare but sell only as many seats as the gigabytes of historical data in the Sabre system suggested it should sell at that price. The remaining seats on that particular flight—the number varying by the day or perhaps by the hour—would be held in reserve for full-fare passengers making their arrangements closer to the day of departure. So while both People Express and American might advertise $99 flights to Los Angeles, the average fare on the American plane might be $250, say, while the average on People Express, where every seat was the same price, could never be more than $99. Crandall, it appeared, had attained the ultimate fulfillment of the First Rule: Any incremental passenger is worthwhile, at virtually any price.
There were, however, a few drawbacks. For instance, more full-fare business travelers than ever found themselves next to passengers traveling at one half the price or less. That was a serious long-term marketing problem. Another, more immediate problem was that the marginal passengers who topped off the airplane made marginal reservations. As People Express was also discovering, the no-show problem was worse at lower fare levels. It made no sense to make 40 seats available for low-fare travelers if 20 of those people turned out to be no-shows.
Crandall’s people set themselves to work urgently attacking the no-show problem. American needed to begin capturing the low end of the market if Crandall were to fill all those planes coming into his fleet—planes he needed to buy as a way of hiring more pilots, flight attendants, and mechanics at b-scale wages. Instead of merely reacting to the likes of People Express, Bob Crandall now had to use low fares to steal passengers from them as well as to create new markets to fill his new planes. Crandall, in short, had to take the fare wars to a new level.
It bothered Crandall that People Express and the new, low-cost Continental were conditioning people
to think that only they offered discount fares. The notion had to be eradicated from the public consciousness, Crandall believed, before the upstarts had permanently segmented the market. Even the business traveler was no longer securely American’s. Though one had to pay fifty cents for a cup of coffee on the typical People Express flight, Burr, in entering the long-haul transcontinental market, had finally added a first-class section—and the service was not horrible! Likewise, Southwest’s service, though stripped down and basic, was impeccably consistent and iridescently friendly. Crandall was concerned to learn that some businesses had begun requiring employees to travel at the lowest fare available, regardless of the level of service it required them to endure.
Of all these low-cost carriers, People Express was, in early 1985, the greatest threat by far. But People Express was also perhaps the most vulnerable. Barbara Amster of the American pricing department considered People Express “the guys with the Southwest Airlines philosophy but without the brains of Southwest.” More aptly, perhaps, Don Burr and People Express had all the great ideas of Herb Kelleher and Southwest Airlines but lacked their discipline. Either way, People Express had to die. As Crandall’s planning chief, Donald Carty, would one day proudly explain, “We devised the fare structure that put them out of business.”
On January 17, 1985, Crandall and his aides unveiled the new pricing strategy under study for so long. Passengers would have to go to the unusual length of paying for their seats when reserving them, just like buying a ticket to see A Chorus Line or the New York Yankees. You reserve it, you own it. You would not be a no-show. By selling nonrefundable tickets, American would avoid massive revenue losses. By bringing in more revenue, American could subsidize discounts to a level deeper than anyone had previously imagined possible for a major airline.
It took one’s breath away: fare cuts of 70 percent, in some cases more. DFW to New York: cut each way from $344 to $99. Fort Wayne to Chicago: cut from $125 to $39. This wasn’t just the odd route here or there to compete with Braniff or New York Air or People Express. This was almost everything. Crazy Eddic pricing had reached the major airlines. Every seat must go!
American had out-People Expressed People Express. Because he had no computer systems and no yield management, Don Burr would have to offer every seat on any given flight at the price Bob Crandall was offering on a fraction of his. Crandall was only too happy to let Burr sell a cheap seat to anyone that American had turned away for the sake of a passenger paying the full fare.
Within minutes of American’s announcement, all airline stocks plunged; investors braced themselves for the bloodiest fare war ever. People who had never dreamed of flying were now madly dialing American Airlines and before long all other major airlines, as the fares were quickly matched. United immediately canceled vacations for reservationists. Clients began lining up outside the doors and into the streets at local travel agencies. The Saturday-night stay restriction typical of the ultralow fares became such a commonplace feature in travel itineraries that hotels and rental car companies experienced a significant (and, as it would turn out, permanent) increase in weekend demand. Against all the great pricing leaders of airline history—Kelleher and Muse of Southwest; Lorenzo, Gitner, and O’Donnell of “peanuts fares” fame; Burr of People Express—Bob Crandall had seen their bets and had raised them. Or as Tom Plaskett later proudly explained in a meeting with American’s bankers, “They threw down the price card, and we trumped it.”
To Don Burr it was as if a bull’s eye had been painted over his likeness.
“This is it!” he cried, slamming the newspaper down on the desk of one of his marketing executives. “This is a shot across our bow! If we don’t invent a way to deal with this, we’re history! We’re going to be dead meat!”
In his panic Burr wanted to know how many seats American was offering at these prices. Two seats on any plane, or 20, or 200 on a DC-10? There was no way of telling from American’s ads or public comments. Burr began rounding up people to dial the phones like mad, posing as American customers and keeping track of which flights had sold out of discount seats and which still had low-fare seats available, but the answers kept changing. The advertising agency working for People Express was pressed into action; hundreds more calls went out. But the more they called, the less they knew. As the days progressed, calls went out by the thousands, eventually to United as well, once it had matched American. The answers kept changing there too! Burr was beside himself. How could he compete with something he couldn’t see? How could he fight the devil?
And—whump!—just like that, the losses mounted at People Express. Twenty million dollars in a matter of weeks, a tide of red ink such as People Express had never experienced. The panic worsened. What could Burr do? Like many executives in times of crisis, he listened to Wall Street, and following the admonitions of the stock analysts who had always criticized People Express’s fares for being too low, Burr raised fares in the midst of everyone else’s lowering them.
Soon Burr was shocked to realize that Continental and New York Air between them were making severe inroads against him in New York. Burr couldn’t believe his complacency. He had allowed Frank Lorenzo to creep up on him.
Worst of all, Burr was dying at the thought that the mystique shrouding People Express was now evaporating. The red ink forced him to withhold profit sharing. The stock price was plunging. Soon there were union organizers at his doorstep. Burr imagined his employees turning on him, the pilots in particular. He heard that they were referring to the Precepts as “Kool-Aid,” the poison-spiked beverage that the demonic cult leader Jim Jones had used to conduct a mass suicide a few years earlier in the jungles of Guyana. Burr imagined the pilots in their cockpits asking one another, “Have you had your Kool-Aid today?”
Burr was in the depths of this depression when the editor of Inc. magazine stopped in with a tape recorder one day in the summer of 1985. Burr complained of being surrounded by “bad forces.” The love and trust, he said, were dissipating. People Express had become … corporate.
“But doesn’t it give you an extraordinary sense of achievement?” the interviewer graciously asked. “A thrill?”
“You know,” Burr answered, “it used to. When the first planes were delivered here, three whole planes—now that was a thrill.… Now when I look out there, I don’t know, there are just so many damn planes out there. It’s just not the same anymore.”
Later Burr’s mother called—the woman who had steeped him in the notion of public service, who had warned him against becoming just another money-grubbing businessman. She was planning a trip to visit Burr’s brother. She had purchased her ticket, she said, on American Airlines.
But Burr was not finished yet far from it. The team from American Express was madly working on the new in-house computer system, by which Burr hoped to adopt the same variable pricing that American, United, and even Continental were now using against him. And then another comeback opportunity emerged. While visiting an exclusive tennis club in Carmel, California, a guest of his investment bankers, Burr learned of a deal by which he might restore the market power of People Express—while also acting in the role of Frank Lorenzo’s spoiler.
The final battle for the dominion of Denver was under way.
Frontier Airlines, once a regional powerhouse in Denver under the late Al Feldman, was struggling for survival, caught in the crossfire between United and Continental. In the unwritten rules of the post-deregulation era, three major airlines operating within a single hub city was at least one too many. As American had displayed in Dallas, operating a hub had become a contest to control the maximum number of passengers between the maximum number of city pairs. This strategy demanded a huge number of airplanes flying hundreds of hub landings and departures every day, like a hive of worker bees racing to and from their queen. It was only marginally economical for two big carriers to conduct service on this scale at a hub; where three airlines attempted to do so, planes flew empty, which meant that fares plun
ged, which meant that no one made any money on anything. Thus was Chicago sorting itself out as the sole domain of United and American, Atlanta the sole domain of Delta and Eastern, Dallas the sole domain of American and Delta, and so on.
The imperative to eliminate one of the three Denver carriers had reached the point of no return by the mid-1980s. As the third-ranked carrier, Frontier’s principal value had become that of the kingmaker. In September 1985 Frank Lorenzo of Texas Air announced an offer to buy two thirds of Frontier for $20 a share in cash, a total of $250 million.
When word reached Burr on the tennis court in Carmel that his old boss had put Frontier Airlines in play, he was like a pyromaniac in a match store. He cut short the vacation and raced to Denver, formulating a new mission for People Express along the way.
It was obvious to Burr that the major airlines were winning the fare battle on the turf that he considered his own: the short-haul route. They could do so, Burr began to think, because they charged such high fares on their long-haul, transcontinental routes. Therein resided the kernel of a comeback strategy, Burr figured: if People Express could force the major airlines to cut their transcontinental fares, they would lose the profits with which they subsidized their short-haul flights. They could no longer afford to maintain such low fares in the mainstay markets of People Express. His company would be saved.
Burr realized, however, that he could never trash the prices for the entire transcontinental market just by flying a few jumbo jets between New York and California. Frontier, Burr determined, presented the solution. He imagined uniting Denver and Newark with massive service, an “air bridge” connecting two powerful hubs: 50 cities in the East feeding 50 cities in the West, and vice versa. People Express, overnight, would become a major transcontinental carrier.
Hard Landing Page 38