by
Charles Lamson
People Express Airlines was an amazing success story that turned into a spectacular failure. It provided low-cost and high-quality air service on the East Coast throughout the early 1980s and grew to be the nation's fifth largest air carrier. It had a reputation as a corporate pioneer, based in part on its emphasis on its people. The airline had a number of innovative human resource policies, such as job rotation, team management, employee stock ownership, and a flat hierarchy, that have since been widely adopted. These innovations kept its employees happy and committed to the organization and enabled the airline to offer excellent low-cost service. The airline grew rapidly and took over Frontier Airlines to help provide the capacity it needed to continue growing.
Despite its enviable position, People Express ran into trouble. Demand for the airline's flights far outstripped the available seats, and the overload resulted in delays and passenger complaints. Service on the flights deteriorated and its customers left in droves. By 1986 the airline had lost over $130 million and was rescued in a buyout by Texas Air Corporation.
At the time many theories were advanced to explain People Express's collapse. Some commentators traced the problems to a human resource policy that was too lenient. Others argued that the takeover of Frontier had been poorly planned and left the company strapped for cash, so that when its debtors called in loans it was unable to pay them.
However, these accounts do not give much insight into how the troubles at People Express developed. It is always easy to identify causes of an organization's problems from the outside, but to really understand the situation, it is important to consider the processes that created and worsened the problems.
People express crashed and burned because of a complex system of factors. The first of the low--fare airlines, People Express introduced an innovative concept - low price, no frills and high-quality air service. It gained a reputation that led to an increasing number of new customers. In its early days People Express's innovative human resource practices and employee stock ownership kept moral high and motivated its employees to work hard to maintain excellent service levels. However, as the number of customers rose, there were not enough staff to handle them, and current employees were overworked. Bringing more employees into the firm was slowed by its progressive human resource practices, which required lengthy training and development of new employees.
At the same time, demand for booking continued to increase, because reports in the media and by word of mouth continued to tout the airline as a great bargain. This drove the price of People Express's stock higher, to more than $20 a share. As a result, many of People Express's employees were wealthy. Though they were fatigued, they were happy and positively motivated.
Nevertheless, the crush of new passengers led to increasing customer complaints about service problems, ticketing delays, overbooked flights and overworked employees. The overloaded staff had few resources with which to address these problems. As problems persisted, customers began turning to other airlines. The resulting decreased revenues led to a fall in the stock price. Once employees realized that their hard work was not going to be rewarded by stock appreciation, their motivation began to shrink. There was a further decline in service quality and still more customers gave their business to other airlines, which further worsened the bottom line. Paradoxically, the very human resource plans that had originally made People Express distinctive eventually brought about lower motivation and declining service.
Increasing the size of its fleet by acquiring Frontier Airlines promised to help address the airline's capacity problems and offered an opportunity to improve service, but implementing the progressive human relations policy in Frontier meant a delay in using the new capacity, because Frontier's employees needed to be trained. Service quality continued to erode, and the new capacity really just added to the problem, because employees were overworked and saw little reward from working still harder. The end result of this complex set of processes was a worsening spiral that led to the ultimate demise of the airline.
People Express did not necessarily have to fail. Studies of People Express and similar airlines showed that it could have turned these negative processes around by either raising ticket prices by 25 percent or maintaining its high level of service, if it had acted soon enough. However, by the time the downward spiral developed momentum, raising ticket prices would have driven the airline's most loyal customers away, and maintaining high levels of service is difficult with a demoralized and overworked staff. These measures should have been enacted well before the spiral worsened.
People Express failed because of a lack of systems thinking. Its managers should have realized that if rising stock prices made workers happy and motivated and falling stock prices might do the opposite, they should have recognized that growing as fast as the company did would stress service quality. Managers should have known that in the face of demand a slight increase in ticket prices would not have been a problem, and might have reduced customer overload somewhat, giving a window of time in which to renew service quality. Employees should have recognized that they were the key to turning the airline around and causing stock prices to rise. Unfortunately, neither the employees nor the managers were able to see these things. Instead they stayed focused on their immediate jobs, assuming that what worked in the past would work in the future. They were not able to recognize the forces that ended up driving People Express out of business.
Systems thinking does not come naturally. Several tendencies prevent us from seeing the system. Most of us have been taught to break things into manageable parts, to focus on a single problem and look for its cause. This is useful in some cases, because it enables us to act relatively quickly and in a straightforward manner. However in the case of People Express, there was not a simple single problem, but a chain of interconnected factors that interacted in a complex way. This is the way it is in most organizations. Focusing on one part of the system leads to overlooking other important factors. Another barrier to systems thinking is the narrowing of perspective that comes from working on a particular position in an organization. Over time members tend to see things mostly in terms of their position and department and reduce problems to their perspective. For example, in People Express, the human resource people viewed the problems confronting the organization as human relations problems, while the finance people viewed them as cash-flow issues, and the operations management people viewed them as scheduling and capacity problems. Although each of these diagnoses captured a part of the problem, none grasped the whole system.
*SOURCE: STRATEGIC ORGANIZATIONAL COMMUNICATION IN A GLOBAL ECONOMY 9TH ED; CHARLES CONRAD AND MARSHALL SCOTT POOLE*
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