by Alan Ruddock
It was also management by instinct rather than by design; there was still no grand plan of how Ryanair could be transformed into a consistently profitable airline. O’Leary had been down the road to Damascus, as he described it, but it was one thing understanding how Southwest managed to operate successfully and quite another to impose that structure on Ryanair overnight. Hayes and O’Leary were making progress through trial and error, both convinced that low fares and low costs were the only way forward. Their instincts were sound, but they were still a long way short of delivering a business plan that could pave the way for the airline’s expansion. Hayes was conscious of airline deregulation, but still not sure what impact it would have on the European market and was trying to balance the needs of strategic planning with the day-to-day pressures to reduce costs and seek out profit. It was a daily grind.
The two men were hunting for profit centres, prepared to chase American tourists flying to Stansted with American Airlines, dabbling in the charter holidays market, offering connecting flights to European cities through a marketing tie-up with Air UK and even contemplating franchised route operations for the bigger European carriers. ‘With deregulation of the industry there’s going to be amalgamation and the big operators cannot fly the thinner routes profitably,’ Hayes said in an interview. ‘It will be in our best interest to find those routes and do the appropriate deals with people.’
The strategy, what there was of it, was to scrabble together a profitable business from the chaos that had gone before. Nothing was ruled out as Hayes and O’Leary fought to make money in a market which was highly competitive on the domestic front and increasingly imperilled internationally by rising oil prices and war in the Middle East.
‘You’ve got to remember that from Michael’s and Conor’s point of view, and from the company’s point of view, this was backs against the wall stuff,’ says one former manager. ‘It was their way or no way and they were dead, dead right. Some people from the previous era just didn’t get it. But forget the stuff about developing a low-cost model, because it wasn’t even close to that back then. This wasn’t about low cost, this was about survival.’
For O’Leary, the battle for survival was wearing him down. Despite the profit-share deal he had struck with Ryan, he was growing restless and frustrated. ‘I was trying to get out,’ he says. ‘I wanted out all the time.’
O’Leary had been persuaded to stay at Ryanair by the prospect, however slim, of making his personal fortune if the airline could be turned around, but ‘a year or two in Ryanair, there was no action’. Instead of making money, O’Leary was cutting costs. It was, he says, ‘a pain in the arse. My role in Ryanair from 1988 to 1991 was stopping it from losing money – it wasn’t looking to make Tony [and, by extension, himself] money.’
On paper his deal with Ryan had seemed good but 25 per cent of nothing was not what O’Leary wanted. His time, he felt, would be more profitably rewarded by chasing his 5 per cent share of the profits that could come from using Ryan’s millions to invest in more exciting businesses. ‘I had had four years of this place on the brink of bankruptcy; we had gotten it back to making a small profit, and I had had enough,’ O’Leary says. A small profit was not what O’Leary had in mind. He was chasing bigger dreams, and Ryan was on the verge of floating GP A on the stock market, selling shares to institutions that would generate hundreds of millions of dollars for him to play with. The choice was a simple one: stay at Ryanair and work like crazy to turn a modest profit or help Ryan spend his fortune. In O’Leary’s eyes his job at Ryanair had been completed. The airline had stopped haemorrhaging cash and was no longer a drain on Ryan.
And so he stepped away from Ryanair in the first half of 1992, devoting most of his energies to his role as Ryan’s personal adviser. Hayes was left to fly solo, and he relished the challenge. By the summer of 1992 Ryanair was finally heading towards genuine trading profits for the full year. Hayes’s ‘Happy Days’ fares had worked, stimulating a sharp increase in demand, and costs had been brought down to levels that made it possible for the airline to make money on fares which would have bled its rivals.
Tony Ryan should have been able to breathe a sigh of relief. The money pit had been filled in. It might be many years before he saw a decent return on his eight years of investment, but at least there would be a return. By then, though, Ryan had a far bigger worry on his hands than the fate of Ryanair. The airline’s losses had always been an irritant, but profit had not been his prime motivation when he established Ryanair. Ryan had wanted a business for his sons and he had the essential wealth to make it happen. But that summer the wealth generator of the previous fifteen years fell apart spectacularly and Ryan did not even see it coming.
It should have been the best summer of his life. At the start of the year GPA was the largest buyer of new aircraft in the world, and had advance orders for more than 400 planes, worth more than $20 billion. It leased aircraft to more than forty airlines and its profits, which had hit $280 million in 1991, were forecast to rise to $380 million by 1995. GPA’s board was packed with business and political luminaries of the time, and the company’s shares changed hands at fancy prices in private deals. GPA executives were renowned for their swagger and hard work, travelling an average 140,000 miles a year to secure leasing deals for their aircraft, spending more than 170 days away from home on average and earning exceptional money for their troubles. It was a gruelling lifestyle, and one that O’Leary had rejected, despite the rewards, because he did not want to be trapped into life as a company executive. Just as he had shunned the opportunity to work his way through the ranks at SKC, so he shied away from becoming just another executive in a large corporation. He wanted to make money, but he wanted to make it on his own terms.
Now GPA was preparing for a stock market flotation that would value the company at more than $2 billion and would make Ryan’s shareholding worth more than $200 million. On the day the company was due to float, Ryan was going to pocket an extra $38 million as a fixed success fee, and would still enjoy a heady dividend stream from his shareholding. The flotation was also going to be a significant boon to GPA’s founding shareholders Aer Lingus and Air Canada, who both stood to make huge profits, and to many senior managers who had acquired shares in the company over the years.
GPA’s shares were to be sold in an ambitious global exercise, with investment banks finding homes for shares in Tokyo, London and New York as well as the other main European and Far Eastern financial centres. During the final six weeks leading up to flotation day on 7 June ripples of discontent were felt across the markets. There were mutterings that the share sale was being priced too high – GPA hoped to achieve $22 a share, but the market was indicating that it would only pay $16 to $18. And although GPA had survived the traumas of the Gulf War – indeed Ryan was keen to float that year precisely because GPA’s resilience during a period of crisis demonstrated how robust his company had become – investors fretted about the financial security of some of GPA’s major clients. The problem could have been dealt with in the market’s time-honoured fashion – by reducing the price at which the shares were to be sold – but Ryan refused to budge.
O’Leary watched the drama unfold but was powerless to intervene. Ryan did not employ O’Leary to tell him how to run GPA or how to negotiate with investment banks. Those close to the negotiations in the run-up to the flotation give different accounts about O’Leary’s input. Some maintain that he, like Ryan, was exceptionally bullish about GPA’s share price and shared the arrogance that persuaded Ryan to stick to his guns. Others claim that O’Leary was horrified by GPA’s hubris and could not understand why Ryan would not just float the company at any old price and let it find its own level in the market.
GPA’s astonishing profit performance had been based in large part on Ryan’s ability to outsmart the markets. He and his managers had accurately predicted the patterns of aircraft demand and had converted those predictions into massive orders for new aircraft when others were
too timid to take the plunge. When demand for air travel met Ryan’s predictions, he had the planes that the airlines needed. GPA’s executives believed that they were invincible, masters of their universe, and would brook no outside interference. Their self-belief was their undoing.
O’Leary says he will ‘never forget the rows over the share price. Goldman Sachs advised a price cut and Tony and the rest of them went berserk.’
Although GPA was only trying to raise $850 million in fresh capital, it had planned to borrow a further $3 billion on the back of its new liquidity – money urgently required to meet its forward aircraft purchase commitments. The complexity of the share offer, which involved securing commitments to buy shares from institutions on three continents, made a difficult situation worse, but in the end it came down to price.
‘I’d have sold the shares at any price just to get the thing away,’ says O’Leary. ‘Tony was going to collect a bonus on flotation of more than $30 million and I told him to forget about the price and just take the money, but he wouldn’t.’
On the day that GPA’s shares were meant to start trading on the world’s stock markets, the sale was cancelled. Ryan’s refusal to lower the sale price had had a ripple effect across the markets, and potential buyers – particularly in the US and London – simply refused to pay the asking price. If the shares had been listed on the stock market, the overhang of unsold shares would have caused the price to collapse, leaving those who had actually agreed to buy shares with substantial losses. Ryan had no option: he had to cancel and watch his world implode.
The unravelling of the flotation proved disastrous for a company that relied heavily on its ability to borrow vast sums of money from the money markets. Deprived of the ability to raise fresh borrowing on the back of the flotation proceeds, GPA was left in a deep hole. Worse, the pummelling of its reputation had made its creditor banks circle nervously. In a business that depended on the ability to borrow money cheaply and in vast amounts, confidence was everything. That June, as the share flotation crashed, confidence evaporated and banks started to look more closely at the company’s creditworthiness.
Maurice Foley, Ryan’s right-hand man, left the company weeks later and predators started to sniff blood. Before long the inevitable happened: robbed of its power to borrow the money it needed, with its commitments to buy planes unmeetable and with the aviation market still in Gulf War turmoil, GPA was taken over by GE Capital, the financing arm of the giant American conglomerate General Electric, in a deal that left Ryan lamenting that he had been ‘raped’ by Jack ‘Neutron’ Welsh, GE’s aggressive chief executive.
‘GPA collapsed because Tony and the boys couldn’t help themselves fighting over the share price,’ says O’Leary. ‘And, looking back, they had called everybody’s bluff for about ten years. This was the one time they were outside of their own business, and they were dealing with the bankers in London.’
Ryan was not a man to hide his sense of betrayal. He believed, and still does, that GPA’s flotation was destroyed by the vicious rivalry that existed between American and Japanese investment banks, which shared responsibility for selling the company to international investors. ‘People say I’m arrogant and sure I am. But you should see those arrogant sons of bitches on Wall Street,’ he said in an interview two years later.
Ryan was retained by GE to see through the takeover, but it was scant consolation. His empire had gone and the vultures were on his back. Like many other GPA executives and directors, Ryan had borrowed money to acquire extra shares in GPA, believing that the flotation price would exceed the price they paid and leave them with easy profits. Now the shares were close to worthless. Without the sale proceeds and the bank loans that would have followed, GPA was a company saddled by liabilities and future obligations to buy planes with money that it did not have. Instead of sitting on a pile of shares worth hundreds of millions of dollars, Ryan owed Merrill Lynch, the US investment bank, $35 million. If Merrill Lynch collected all its money, Ryan would be a broken man.
‘You’d think that a man who enjoyed such wealth for so long would have put something away for a rainy day,’ says one former acquaintance, ‘but Tony is not the sort of man who salts away money in case he fails. He never expects to fail or contemplates disaster.’ Ryan had gone from vast riches to relative rags and Ryanair, the airline he funded but which he always maintained was his sons’ company and not his, became his most valuable asset. It was time for it to perform.
With GPA in tatters, Ryanair regained its place at the forefront of O’Leary’s attention. He would help Ryan steer his way through the GPA aftermath, but there was no longer any immediate prospect of making his fortune by investing the Ryan millions. They had vanished and Ryan now owed rather than owned millions. If O’Leary was to make his mark, it was Ryanair or nothing. So he returned full time to the airline, determined to make it work.
With the ruthlessness that would become his trademark, he could see that GPA’s weakness represented an important opportunity for Ryanair. The airline wanted to cut out three of Ryanair’s loss-making routes – from Galway, Kerry and Waterford – and get rid of the three turboprop planes that served them. All three were leased from GPA, and O’Leary knew that there would never be a better moment to get out of the contracts – whose terms were never favourable to Ryanair – as cheaply as possible.
O’Leary and Hayes took enormous pleasure from what they did. While GPA’s executives were still reeling from the flotation disaster and fighting fires on all fronts, Ryanair announced that it was handing back the planes. GPA refused to accept them, arguing that the airline had to honour its contract, but Hayes and O’Leary refused to budge. ‘They said they’d fly the planes to Shannon, park them on the runway and then call a press conference and announce to the media that GPA was trying to destroy Ryanair,’ says a former employee.
GPA backed down, the planes were returned and Ryanair agreed a break payment of just £5 million, £10 million less than the penalties that should have been incurred under the terms of the contract. Hayes then organized a meeting with Maire Geoghegan Quinn, the minister for transport, whose constituency included Galway airport, to tell her of Ryanair’s decision to cease flying to Galway, Kerry and Waterford. On 1 August the airline announced that the services would cease on 1 September. In a statement the company’s board described the withdrawal as ‘regrettable’, but ‘an inevitable consequence of both the continuing recession in the United Kingdom, which has had such an adverse impact on traffic numbers, and the worldwide recession in the aviation industry’. It described the routes as ‘economically unviable’ and said it would redouble its efforts to increase services to Cork, Knock and Shannon, where passenger numbers had already climbed by 55 per cent in the first six months of the year. All three were in the same geographical areas as the airports being dropped, with Knock and Shannon relatively close to Galway, and Cork not far from either Waterford or Kerry – which in turn was close to Shannon. It was a route rationalization that made commercial sense: passenger numbers were strong at the three airports being retained, and the existing traffic on the other routes could be diverted to them.
The media missed the significance of the route cull, interpreting the withdrawals as a signal that Ryanair was in terminal decline. In fact, they arose from a hard-nosed strategy focused on profitable routes that was actually proving to be the airline’s salvation.
Seamus Brennan’s controversial two-airline policy had given Ryanair the breathing space to build a profitable business by removing head-to-head competition with Aer Lingus on its key routes to London’s Stansted and Luton airports – a compromise that had also protected Aer Lingus’s routes to Gatwick and Heathrow. It was, however, a deal with a deadline: Brennan had agreed a two-year moratorium, not an indefinite one. The power of government to intervene in the airline business was also in steady decline, because the staged liberalization of Europe’s aviation market was already under way and would reach a new milestone the following year.
Flight International, an aviation trade magazine, reported, ‘Speculation that Irish operator Ryanair is in trouble has re-emerged following the announcement that it is to shut down its London service to three regional Irish airports…Until now, Ryanair has had the stated aim of becoming Ireland’s leading carrier to regional airports…This leaves the airline largely dependent on the Dublin–Stansted route at a time when Aer Lingus is preparing to fly into Stansted from next year.’
It was a threat that Hayes and O’Leary were already moving to close off.
The crisis in the airline industry did not halt Europe’s slow progress towards deregulation and by the time the next tranche of liberalization came into effect in 1993 the industry was showing early signs of recovery. Fifteen years after US deregulation, the concept of low-fare airlines had also finally made its way across the Atlantic.
Dan Air, a British-registered company, became the first genuinely low-fare European airline to live, and die. Originally a charter airline, Dan Air had transformed itself into a low-fare and relatively low-cost scheduled carrier, but it could not achieve profitability. It fell to earth in September 1992 and was subsumed by British Airways the following month.
As the Financial Times’s Lex column wrote in September 1992,
There is a clear lesson in the plight of Dan Air for would-be liberalisers of Europe’s aviation industry. Here, after all, was a relatively low cost airline which ought to have been a model beneficiary of the open skies policy pursued by Brussels in recent years. Instead its parent company, Davies & Newman, now finds itself in apparently life and death talks…The reason is largely the dire economic climate and delayed hopes for economic recovery. But Dan Air’s failure to gather momentum as a scheduled carrier highlights the difficulty of breaking into markets dominated by the big national flag carriers.