People Express

People Express's 1986 absorption into Continental demonstrated how low-cost airline strategies can succeed spectacularly, then fail just as spectacularly. The airline pioneered ultra-low fares and no-frills service, growing from 3 aircraft in 1981 to 117 in 1985. Founder Don Burr was a management visionary who eliminated hierarchy and gave employees ownership stakes. But People Express couldn't survive competition from established carriers who matched its prices while offering superior service. The mechanism failure was unsustainable competitive advantage. People Express's innovation was primarily pricing—which established carriers could match by adjusting yield management. When American, United, and others launched competing fares, People Express lost its differentiation. The airline had lower costs but also lower revenue per passenger; when revenue fell further due to price matching, the cost advantage couldn't compensate. People Express also suffered from acquisition indigestion. The company bought Frontier Airlines in 1985, attempting to create a national network, but couldn't integrate the operations while fighting price wars on every front. The expansion that was supposed to provide scale instead provided complexity and debt. Continental's acquisition preserved People Express's aircraft and routes while eliminating the brand—demonstrating how innovators can create value that surviving competitors capture.