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People Express - PEOPLE EXPRESS We're now the biggest air...

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Unformatted text preview: PEOPLE EXPRESS We 're now the biggest air carrier in terms of departures at any New York airport. We ’ve flown almost 3 million passengers and saved the flying public over one—quarter of a billion dollars (not including the savings from fares reduced by other airlines trying to compete with us). We expect to see a $53 million profit this year... we have concept that works and is unique. But with no growth horizon, people have been disempowered. We’ve started slowing down, getting sleepy. So, we 've decided to set a new growth objective. Instead of adding 4—6 aircraft as we planned for this year, we are now thinking in terms of12 or more new aircraft a year for the next few years. With this announcement Don Burr—~founder, president, and CEO of People Express airline-concluded the business portion of the company’s third quarterly financial meeting of 1982, graciously received rousing applause from several hundred of his stockholder—managers there to hear about and celebrate the success of their young company. Company Background People Express (PE) was incorporated on April 7, 1980. In July of that year it applied to the Civil Aeronautics Board (CAB) for permission to form a new airline based in the New York-Newark metropolitan area and dedicated to providing low—cost service in the eastern United States. In applying to the CAB, PE committed itself to the following points: 1) provide a “broad new choice of flights with high frequency service 2) keep costs low by extremely productive use of assets 3) offer unrestricted deep discount price savings through productivity gains 4) focus on several high-density eastern US. markets which had yet to reap the pricing benefits of deregulation 5) center operations in the densely populated New York-Newark metropolitan area with service at the underutilized, uncongested, highly accessible Newark International Airport. The Civil Aeronautics Board was sufficiently impressed with this statement that it approved the application in three months (compared with the usual year or more). People’s managing officers proceeded to work around the clock for the next six months to turn their plans and ideas into a certificated operating airline. They raised money, leased a terminal, bought aircraft, recruited, trained, and established routes and schedules. “We were here every night. ..it was hell” said Burr. Service began on April 30th, with three aircraft flying between Newark and these cities: Buffalo, New York; Columbus, Ohio; and Norfolk, Virginia. By 1982, the company employed a work force of over 1200, owned 17 aircraft, and had flown nearly 2 million passengers between the 13 cities it was servicing. People had grown faster than any other airline and most businesses. In the spring and summer of 1982 PB underwent an extensive review of its infrastructure, added resources to the recruitment function to fill a 200 person staffing shortfall, and modified and attempted to implement more systematically a governance and communication system for which there had been little time during start-up. By the fall of 1982 three more aircraft were about to arrive and three more cities were scheduled to be opened for service. Management Background and Precursors Donald Burr had been president of Texas International (TI) before he left it to found PE with a group of his colleagues. After receiving an MBA from the Harvard Business School in 1965 he went to work for National Aviation, a company specializing in airline investments. Thus combining his affinity for aviation with his interest in finance. In 1971 he was elected president of National Aviation. Eighteen months later he decide he wanted to get into the “dirty fingernails” side of the airline business. He left Wall Street and joined Texas International airlines as a director and chairman of the executive committee. In June 1973 he became executive vice president and in 1976 assumed the responsibilities of chief operations officer. Between 1973 and 1977, TI moved from a position close to bankruptcy to become a profitable business. Burr was largely credited in the media for managing a turnaround. In June 1979 he was made Tl’s president; six months later he resigned. Looking for a new challenge, one option he considered at that time was starting a new airline. The day after Burr lefi TI, Gerald Gitner his VP of planning and marketing, and Melrose Dawsey, his own and the CEO’s executive secretary at T1, both submitted their resignations and joined Burr to incorporate PE. By the fall of 1980, 15 of TI’s top managers and several more experienced staff from the ranks followed Burr to become part of the PE management team and start-up crew. Some gave up their position even before they knew where the company would be based, how it would be financed, whether they would be able to acquire aircraft, or what their exact jobs would be. In spite of the personal and financial risks, the opportunity to start an airline from scratch with people they liked and respected was too good to pass up. It was an adventure, a chance to test themselves. Burr, at 39, was the oldest of the officers. Even if PE failed, they assumed that they could pick themselves up and start again. Lori Dubose, who became director of human resources at TI-the first female director there-within a year of being hired, spoke: “When Burr called to offer me the PE job he explained that we would all be working in different capacities. I’d get to learn operations, get stock-I didn’t know anything about stock, never owned any. At 28 how could I pass it up?” She joined even thought she was married and her husband decided not to move with her to Newark. Financing and Aircraft Acquisition To finance this adventure Burr put in $355,000, Gitner put in $175,000, and the other managing officers came up with from $20,000 to $50,000 each. The official plan called for raising $4-S5 million, buying or leasing one to three aircraft, and hiring about 200 people the first year. Burr’s ideas were more expansive. From the beginning he wanted to start with a large number of planes to establish a presence in the industry quickly and support the company overhead. With additional funds from Citicorp and they were able to make a very attractive purchase from Lufthansa of an entire fleet of 17 Boeing 7375’ all of which would be delivered totally remodeled and redecorated to PE’s specifications. While other managing officers recalled being a bit stunned, Burr viewed the transaction as being “right on plan.” Burr ’s Personal Motivation and PE ’s Philosophy Burr had a strong conviction that people were basically good and trustworthy, that they could be more effectively organized, and if properly trained, were likely to be creative and productive. “I guess the single reason that I cared about starting a new company was to try and develop a better way for people to work together..that is where the name PE came from as well as the whole people focus and thrust..it drives everything else that we do. Most organizations believe that humans are generally bad and you have to control them and watch them and make sure they work. At PE, people are trusted to do a good job until they prove they definitely won’t.” Focus on People PE’s ultimate marketing strategy was to staff every position with competent, sensitive, respectful, up-beat, high energy people who would create a contagious positive atmosphere. The message to staff and customers alike was “at PE, attitude is as important as altitude.” Labor is an airline’s second biggest expense. Although salaries were generally competitive, and in some cases above industry norms, PE’s labor costs were relatively small. The belief was that if every employee was intelligent, well- trained, flexible, and motivated to work hard, fewer people (as many as a third fewer) would be needed than most other airlines employed. PE kept its work force deliberately lean and expected it to work hard. Each employee, carefully selected after an extensive screening process, received training in multiple functions (ticketing, reservations, ground operations, and so on) and was extensively cross-utilized, depending on where the company’s needs were at any given time. If a bag needed to be carried on board, whoever was heading that way would carry the bag,. Other airlines had different unions representing each job category and therefore were precluded from being cross-utilized. In addition to keeping the work force small and challenged, cross- utilization and rotation were expected to add the benefits of an ongoing quality and efficiency review. Problems could be identified and solutions and new efficiency measure could be continually invented if people were familiar with all aspects of the business and motivated to take management-like responsibility for improving their company. No Freebies People had no ticket counters; all ticketing was done either by travel agents in advance, or by customer service managers on board once they were airbound. Corporate headquarters, located upstairs over the main terminal, had none of the luxurious trappings associated with a major airline. Offices were shared, few had carpeting, and decoration consisted primarily of PE’s ads, sometimes blown up poster size, and an occasional framed print of an aircraft. There were no interline arrangements with other airlines for ticketing or baggage transfer, no assistance with hotel or auto reservations in spite of the potential revenue leverage derived from such customer service. PE offered none of the usual airline “freebies”. Neither snacks nor baggage handling were included in the price of a ticket, though such extras were available and could be purchased for an additional fee. People Burr repeatedly told his managers that it was PE’s people and its people policies that made the company unique and successful. “The people dimension is the value added to the commodity.” He said. “Many investors still don’t fully appreciate this point, but high commitment and participation, and maximum flexibility and massive creative productivity are the most important strategies in PE”. As PE moved from a set of ideas to an operating business, company managers took pains to design structures and develop policies consistent with the company’s stated precepts and strategies. This resulted in an organization characterized by minimal hierarchy, rotation and cross utilization, work teams, ownership, self—management, participation, compensation, selective hiring and recruitment, multi—purpose training, and team building. PE’s initial organizational structure consisted of only three formal levels of authority. At the top of the organization was the president-CEO and six managing officers, each of whom provided line as well as staff leadership for more than one of the 13 functional areas. Reporting to and working closely with the managing officers were eight general managers, each of whom provided day—to—day implementation and leadership in at least one functional area, as well as planning for and coordinating with other areas. PE’s managing officers and general managers worked hard at exemplifying the company’s philosophy. They worked in teams, rotated out of their specialties as much as possible to take on line work, filling in at a gate or on a flight. They shared office furniture and phones. Burr’s office doubled as the all—purpose executive meeting room; if others were using it when he had an appointment, he would move down the hall and borrow some else’s empty space. There were no executive assistants, secretaries, or support staff of any kind. The managers themselves assumed the activities that such staff would ordinarily perform. Individuals, teams, and committees did their own typing which kept written communications to a minimum. Everyone answered his or her own phone. Both practices were seen as promoting direct communication as well as saving money. What few authority distinctions existed between the functional areas (flight managers- pilots, maintenance managers-technicians, or customer service managers-generalists) were obscure and informal. The titles indicated distinctions in qualifications and functional emphasis rather than organizational authority. Those who had seniority (over one year) had more responsibility for giving direction, motivating, teaching, and perhaps coordinating, but not supervising or managing in the traditional sense. Ownership and lifelong job security Everyone in a permanent position at PE was a shareholder, required as a condition of employment to buy, at a greatly discounted price, a number of shares of common stock, determined on the basis of his or her salary level. It was expected that each employee, in keeping with being a manager owner, would demonstrate a positive attitude toward work and participate in the governance of the company. As managing officer Lori Dubose pointed out, “we ’11 fire someone only if it is absolutely necessary, for instance, we won 't tolerate dishonesty or willful disregard for the company ’s policies, but we don ’t punish people for making mistakes. ” In exchange, PE promised the security of lifetime employment and opportunities for personal and professional growth through continuing education, cross-utilization, promotion from with the company, and compensation high than other companies paid for similar skills and experience. Cross—utilization and rotation No one, regardless of work history, qualifications or responsibility was assigned to do the same job all the time. Everyone, including managing officers, was expected to be cross-utilized as needed and to rotate monthly between in-flight and ground operations and/or between line and staff functions. Seen by some as unnecessarily complicated and troublesome, cross- utilization and rotation was justified by PE in several ways. According to Burr, they were conceived primarily as methods of continuing education, aimed at keeping everyone interested, challenged, and growing. Rotation did create some difficulties, according to Bob McAdoo (Accounting): “it takes people a while to master each job. It might seem better to have an expert doing a given job. Cross-utilization also means you need high quality people who are capable of doing several jobs. This in turn limits how fast you can recruit and how fast you can grow. ” Self-management Employees were expected to manage themselves and their own work in collaboration with their teams and co-workers. According to Jim Miller, coordinator of training, “we don’t want to teach behaviors—we want to teach what the end result should look like and allow each individual to arrive at those results his or her own way. When desired results aren’t achieved, we try to guide people and assist them in improving the outcome of their efforts.” The guidelines for self—management encompasses the following: 9 Setting specific, challenging, but realistic objectives within the organizational context 9 Monitoring own performance by gathering information and seeking input from others 9 Inventing and executing activities to remedy performance problems or improve performance oActively seeking the information, resources and assistance needed to achieve performance objectives Work Teams Dubose observed that “even with smart, self-managed people, one person can’t have all the components to be the answer to every situation.” PE therefore had decided to organize its work force into small (3-4 person) work groups as an alternative to larger groups with supervisors. “If you don’t want a hierarchical structure with 40 levels, you have to have some way to manage the numbers of people we were anticipating” said Dubose. Teams were seen as promoting better problem solving and decision making as well as personal growth and learning. Each team was to elect a liaison to communicate with other teams. There were advisory councils, coordinating councils, ad hoc committees and task forces. Teams could be created at anyone’s suggestion to solve problems, conduct a study or develop proposals. Teams were seen as essential for promoting personal growth and keeping people interested in and challenged by their work. However, a study done by an outside consultant showed considerable confusion regarding purposes of the team and the roles that one was to play on the team. Compensation—high reward for expected high performance PE’s base salaries were determined strictly by job category on a relatively flatscale comparable to other airlines. Whereas most companies shared medical expenses with employees, PE paid 100% of all medical and dental expenses. Life insurance was $50,000 for everyone. After one year with PE all managers base salaries and benefits were augmented by three forms of potential earnings tied to the company’s fortune 1) plan based on quarterly profits 2) a plan based on annual profitability 3) stock option bonuses which allowed the purchase of limited quantities of common stock at discounts ranging from 25-40% of market value. Approximately 85% of shares were held by employees other than managing officers and general managers. Selective Hiring PE was looking for bright, educated, well-groomed, mature, articulate, assertive, creative, energetic, conscientious and hardworking people. While they had to be capable of functioning independently and taking initiative-—nd it was desirable for them to be ambitious in terms of personal development, achievements, and wealth--it was also essential that they be flexible, collaborative rather than competitive with co-workers, excellent team players, and comfortable with PE’s horizontal structure. Recruiting efforts for customer service managers were pitched deliberately to service professionals-nurses, social workers, teachers- with an interest in innovative management. No attempt was made to attract those with airline experience or interest per se. Applicants who came from traditional airlines where everyone “memorized the union contract and knew they were supposed to work X number of minutes and hours” were often ill suited to PE’s style. They were not comfortable with PE’s loose structure and broadly defined constantly changing job assignments. While it was easier to fill flight manager (FM) positions due to layoffs from other airlines, not all qualified pilots were suited or even willing to be a PE flight manager. Though flying time was strictly limited to 30 hours per week (100 per month, 1000 per year) and rules regarding pilot rest before flying followed FAA rules, additional staff and management responsibilities could bring flight manager’s work week to anywhere from 50 to 70 hours. FMs were also expected to collaborate and share status with others, even those who were not pilots. In return for being flexible and egalitarian-traits typically in conflict with their training and job demands-they were offered the opportunity to diversify their skills and benefit from profit sharing and stock ownership, if and when the company succeeded. Recruitment PE had a multi-step screening process. Applicants who qualified after two levels of tests and interviews with recruiters were granted a “board interview” with at least one general manager and two other senior people who reviewed psychological profiles and character data. In a final review after a daylong orientation, selected candidates were invited to become trainees. Only one out of 100 customer service manager CSM) applicants was hired. In screening pilots, the interview process was very stringent. Many people who were highly qualified were eliminated. Only one out of three flight manager applicants was hired. Training and Team Building The training program for CSMs lasts for 5 weeks, six days a week, without pay. At the end, candidates went through an in—flight emergency evacuation role-play and took exams for oral competency as well as written procedures. Those who test at 90 or above were offered a position. The training was designed to enable CSMs, many without airline experience, to perform multiple tasks and be knowledgeable ab...
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