Michael O'Leary

by Alan Ruddock

  The reality was that the national carriers still held a massive advantage over aspirant airlines: they controlled the landing slots at the major airports. As the FT explained, ‘BA’s hold over slots at Heathrow has provided it with an inestimable advantage in developing its European network.’

  The 1993 deregulation package brought with it the concept of a European rather than national airline – this was ‘open skies’ within the European Union, allowing any airline registered in a member country to operate without restriction in all other member countries of the union. For Ryanair this was the package that at long last made it possible for the airline to build on its ambitions. Price controls – which required airlines to have their fares approved by their governments – had disappeared, and airlines were now free to charge what they wanted rather than seek government approval for their fares. Airlines could also fly to and from anywhere in Europe. Ryanair had avoided price control of its fares by operating services where none had previously existed – like its early Dublin–Luton route. This had given it access to the London market, but because Luton was technically not a London airport, there had been no price constraint.

  But despite the freedom that the previous waves of deregulation had brought, the basic make-up of the aviation market in 1993 was not significantly different to what it had been in 1990 or even 1985. By 1993 there were twenty-two independent airline operators in Europe, but Greece, Finland, the Netherlands, Luxembourg and Spain all had no competition for their flag carriers. Competition was advancing more rapidly in some areas – there were five jet airlines in both the UK and France, and two in Ireland. The real catalyst for change in the market was the 1993 reform, which at last spurred developments in the European aviation market.

  In 1993 four large airlines (using jets with seventy seats or more) entered the market, but seven large airlines exited. Between 1994 and 1997 thirty-three large airlines entered the market and a further eleven smaller-scale operations upgraded to larger aircraft. But twenty-four airlines ceased operations. It was a sign of the new order: competition would bring change and opportunity.

  The roller-coaster ride had begun.

  Tony Ryan’s life had been turned upside down by GPA’s collapse in the summer of 1992, but for Michael O’Leary and Conor Hayes life was getting better and better. Hayes’s price cutting and O’Leary’s cost cutting had taken Ryanair to the promised land of real profitability by the end of 1992. For the first time in its short history the airline would be able to announce genuine trading profits, rather than a surplus cobbled together by selling assets.

  Ryanair announced a trading profit for 1992 of £850,000. The real profits were substantially higher – almost £3.5 million – but Hayes and O’Leary, prompted by Ryan, decided to conceal the extent of the airline’s remarkable recovery. ‘They just plucked a number from thin air that year,’ says one former colleague, ‘and I remember one of them saying that 850,000 sounded good because it was exactly the number of passengers we’d carried.’

  Their coyness was unusual, but GPA’s collapse had altered Ryan’s priorities. Merrill Lynch, to which he owed $35 million, was pressing hard for a settlement of his debts and he was determined to hand over as little as possible.

  According to those close to the negotiations, Merrill decided to deal directly with Ryan rather than allow the two main Irish banks – Bank of Ireland and AIB (Allied Irish Bank), its syndicate partners on the loan – to lead the talks. Ryan played a cunning game. Even though Ryanair was legally outside his direct control, he offered a large stake in the airline to Merrill Lynch in exchange for a writeoff of his debts. But the bank was not prepared to take shares in a company which appeared to have no prospects of success.

  ‘Merrill wanted some cash, not a share of a loss-making airline,’ says one of Ryan’s associates. The airline industry, though limping out of the recession of the early 1990s, was still in trouble and Ryanair had a history of losses. Had Merrill’s bankers looked closely at the company’s accounts for 1992, which were published in early 1993, they might have noticed that the underlying cash position for the year was far better than the headline profits indicated – Hayes had thrown money at depreciation charges to keep the profits down – but they were not interested.

  The negotiations between Ryan and Merrill Lynch would drag on for another year, but while Ryanair’s real level of profitability may have been concealed from the bank, it was uppermost in O’Leary’s mind. He knew that his profit-sharing deal with Ryan would start delivering dividends very soon. He was just thirty-two years old, and was about to make his first serious money. He knew that his life was changing and he could afford to indulge himself.

  In May that year Patsy Farrell decided to sell Gigginstown House, just outside Mullingar. The asking price for the house and 200 acres was £580,000. Gigginstown, an unpretentious Georgian mansion built in the 1850s for the Busby family and designed by John Skipton-Mulvany, needed renovation, but its setting was what O’Leary coveted. Robert Ganly, the auctioneer who handled the sale, described the house as being ‘grand and honest’ and remembers it as a typical Irish country house – ‘It needed work,’ he says, ‘like most country houses of the time.’

  O’Leary had always wanted his own home in Mullingar, where his parents had lived since he was a small boy, and Gigginstown was too good an opportunity to miss. Within a month of the house being put on the market, O’Leary had made his move. He negotiated briefly, knocked a few thousand off the asking price and struck a deal. ‘I don’t remember him being particularly aggressive or particularly difficult. It all went relatively smoothly,’ Ganly says.

  O’Leary says that when he bought Gigginstown

  I was probably to the pin of my collar to pay for it. I grew up on a farm and I’d always known that if I ever had the money I wanted to have my own house, my own farm. Then I got lucky and got more money and I wanted a grander house.

  The house itself isn’t massive. People go on about this magnificent mansion. It is a very nice family home – it is not one of these big palatial mansions, nor was it built to be. It was built as a sort of a weekend house for someone in Dublin, but on a grand scale. I wouldn’t want my kids rattling around in a ginormous fucking mansion. My house isn’t small but it feels fairly compact. If you have kids and the kids are growing up and bringing friends back, you don’t want them to think they are arriving in Buckingham Palace.

  It was to prove a bargain buy – over the next twelve years house prices in Ireland rose tenfold as the economy went into a period of double-digit growth – but in 1993 large country houses were slow to sell and relatively inexpensive to buy.

  Gigginstown was to become his oasis, a private retreat from the self-imposed frenzy that Ryanair had become, but not yet. For his first few years as Gigginstown’s owner O’Leary continued to spend most of his working week in Dublin, visiting his estate at weekends. He had plans for the house and for the land, but first he wanted to bank some ‘serious cash’.

  While O’Leary was completing his purchase, Hayes was preparing his exit. On 23 June 1993 Hayes formally tendered his resignation as chief executive, though he would continue in office until the end of the year.

  His departure was not a surprise: he had been contracted to do a specific job with a specific time limit. By the time he left Hayes would have completed two years at Ryanair and could take much of the credit for transforming the airline’s fortunes. His determination to impose rigorous and timely financial reporting had made it possible for him and O’Leary to fully understand the company’s problems for the first time, and his desperation to drive up passenger numbers had seen him experiment with, and then embrace, low price and high frequency as his twin weapons. By the end of his second year Ryanair was carrying close to one million passengers a year.

  Hayes had pruned out underperforming routes, had been prepared to take tough political decisions like withdrawing from small regional airports, and had insisted that every Ryanair flight that left the ground
covered its costs. Most importantly of all, he had imposed financial transparency on a company that had never had it before.

  There was little debate about his successor. Michael O’Leary had returned to Ryanair after his sabbatical working for Tony Ryan and was now committed to making his mark at the company. He had been appointed chief financial officer on his return, could see that the company had turned a significant corner and had a 25 per cent stake in its future profits. He also knew that there were no other options. For the moment Ryan was a broken man, consumed by bitterness at the demise of GPA and robbed, as he saw it, of the millions that were his right. Ryan would recover spectacularly from his fall from grace, but it would be on the wings of Ryanair. Ryan’s eldest children Cathal and Declan had tasted high office already and were happy to leave the airline’s leadership to O’Leary. He knew the company better than anyone, had played a key role in its recovery and was ready and willing to take charge. Hayes’s low-fare strategy, though born of desperation rather than strategic cunning, had set the airline on its way and, just as importantly, it meshed with the business philosophy which O’Leary had learned from Herb Kelleher’s Southwest. The basket case had become a viable proposition, and O’Leary was perfectly positioned to take advantage and build the business. The liberalization of the markets gave him the opportunity to expand, and the work done by Hayes and himself had given him a stable company.

  Hayes’s final months at Ryanair were not idle; he became embroiled in a major political battle with the European Commission, the Irish government and Aer Lingus.

  Ryanair’s success in winning market share by cutting prices was only just beginning to translate into profits, but through its loss-making years it had managed to wreak havoc at Aer Lingus. Already buffeted by the international aviation recession, Aer Lingus received a further hammer blow in the summer of 1992 as a major shareholder in GPA. Instead of banking heady profits from the flotation, it now had to write off its investment and swallow the losses. It would have been painful in a good year, but by now Aer Lingus was bleeding cash on its operations.

  The state-owned airline’s instant solution to its crisis was typical of a company used to monopoly and unsuited to the challenges posed by competition. Bernie Cahill, Aer Lingus’s chairman, decided he should get rid of the competition by buying out Ryanair, and was also preparing a survival plan for Aer Lingus that would require the Irish government to pour in £175 million to repair its balance sheet. Without the cash injection Aer Lingus would be bankrupt, and if it could not kill off Ryanair, it would be unable to return to profit on the Ireland–UK routes.

  In May, a month before Hayes tendered his resignation, Cahill approached Tony Ryan about a possible deal. He was, he said, prepared to offer £20 million for Ryanair – a price which he thought would tempt Ryan to cut his losses. O’Leary and Hayes were delegated to deal with Cahill, a decision that riled the Aer Lingus chairman as he believed he should be dealing with the main player.

  Accounts of the meeting between the three have taken on the mystique of an urban legend, with Hayes and O’Leary cast as young mischief-makers determined to wind Cahill up with no intention of ever selling. In the legend, Hayes and O’Leary pushed Cahill all the way, forcing him to edge up his offer and yet, each time he raised it, they came back looking for more. Finally, they demanded £29 million, saying that Ryan would not settle for a penny less. And then Cahill realized what was happening: the figure had been chosen not because it was Ryanair’s real price, but because it echoed the £29 fares that Ryanair was using to lure passengers onto its planes. Cahill had been played for a fool and was furious, the story goes.

  O’Leary, however, remembers it differently. He says the negotiations were serious and based on Ryanair’s profits the previous year. Cahill, he says, was told the company was his for £20 million. ‘There was no 29.99, this was a serious discussion.’

  It was not, however, a discussion between equals. Cahill, a veteran of the Irish business scene, had to deal with Hayes and O’Leary, and according to some who knew him he took an instant dislike to the ‘young upstarts’. ‘After meeting Cahill a couple of times, it came back to us that he thought we were just a pair of young pups. Who did we think we were telling him what he had to pay?’

  A former Aer Lingus executive agrees with O’Leary. ‘We heard that Bernie was high-handed. A deal was on the table, but it just did not happen.’

  The proposed deal fell apart. ‘When you try to do these sorts of deals, they either gather momentum or they fade away,’ says O’Leary. ‘It could have happened very quickly,’ he says, acknowledging that Ryanair was genuine about the sale. Neither he nor Hayes, however, was convinced that Cahill was serious, and they refused to allow Aer Lingus access to Ryanair’s accounts, because they feared that Cahill might simply be after information about the company. Those close to Ryan say that he might have sold, but for the first time since he had founded the company it was beginning to make serious profits and he knew that Cahill wanted to shut it down and destroy his legacy rather than invest and build it.

  Months later, on 5 October, news of the takeover talks finally broke in the media. The Irish Times carried a front-page report headlined ‘Ryanair rejects £20 million bid by Aer Lingus’. According to the report, ‘A valuation of £20 million is understood not to have been acceptable to Ryanair and it then refused Aer Lingus access to its books because it believed the national carrier was only on an information-gathering exercise,’ a version of events that mirrored the fears of O’Leary and Hayes.

  Cahill was apoplectic about the leak. He was about to go public with Aer Lingus’s survival plan and did not want his efforts to save the airline sidetracked by speculation about buying Ryanair, especially since the mooted deal had been dead in the water for almost four months. Two days later, after intense pressure from Cahill, the Irish Times retracted its story and published a correction: ‘The Irish Times accepts that no bid was made or rejected.’

  The story was true, but it was inconvenient. The Irish Times, which prides itself on being Ireland’s paper of record, buckled under pressure and published a retraction that it knew was false. ‘Aer Lingus was furious about the story,’ recalls Jackie Gallagher, its author. ‘It maintained that while there had been discussions, there had never been an actual bid. That is why the correction was specific to the headline – if there had been a formal bid the paper could have stood its ground, but at the time there were a lot of connections between the paper and the airline and so the correction was published.’

  Two weeks later the reason for Cahill’s anger became abundantly clear when Aer Lingus announced that 1992/93 had been the airline’s worst year ever. ‘The period since my last report was the most traumatic in the 57-year history of Aer Lingus,’ he said in the group’s annual report. Annual losses were an eye-watering £109.7 million while the airline’s debts were £540 million. Cahill attributed the company’s dire performance to ‘the impact of worldwide recession which rocked the airline industry, the impact of the failed GPA flotation, the high cost base and the declining average yield per passenger’.

  The GPA debacle had forced a write-off of £43.9 million. Restructuring charges were just short of £100 million and the airline had just ten days left to finalize negotiations with its trade unions to save £50 million a year. If it failed to meet the deadline, it would not qualify for state aid, which had been tied to Aer Lingus’s ability to reform itself.

  Carefully, Cahill avoided mentioning the impact that Ryanair’s aggressive pricing had had on the national airline’s performance. Far better to blame international crises than look closer to home. Cahill could avoid talking about Ryanair, but the industry knew where Aer Lingus was being hurt. In November Tony Brazil, the outgoing president of the Irish Travel Agents’ Association, said that Aer Lingus was losing ten pounds on every passenger on the Dublin–London route because of Ryanair competition. It was being forced to charge fares that it could not afford. ‘This blood-letting must end as surel
y to God the two parties can see where it is all leading.’

  Hayes and O’Leary decided, after much discussion, not to oppose Aer Lingus’s request for state aid, but Hayes was given the task of ensuring that the money came with strict conditions about how and where it could be used. Rescuing a state-owned airline was one thing, but using state money to prey on Ryanair was quite another.

  Hayes spent the last months of his tenure as chief executive compiling Ryanair’s dossier on the matter for the European Commission. He was determined that Aer Lingus should not be allowed to use taxpayers’ money to subsidize its existing routes. The state aid was, Ryanair argued, permissible if it gave Aer Lingus a last, one-off chance to reform itself, but not if it was used to further distort competition and imperil Ryanair.

  This was a genuine fear not mere posturing. Under Cahill’s survival plan Aer Lingus was planning to launch its own low-fare subsidiary, to be called Aer Lingus Express. This, Cahill hoped, could compete with Ryanair on price, leaving the main Aer Lingus company to compete on service.

  ‘We believe that this specific proposal [to launch Aer Lingus Express], which envisages the misuse of a State subsidy to add capacity on our route network, is incompatible with the EC’s transport competition and state aid rules,’ Hayes said in the submission. He wanted a requirement that Aer Lingus should be forced to operate all routes profitably from the following year and not from 1996, as was proposed in the Cahill plan. Hayes also asked the commission not to approve any EC aid for Aer Lingus flights from Ireland’s regional airports – a subsidy which could be applied to commercially unsound routes that would otherwise not be flown by an airline but which the government deemed essential public services. He pointed out that Ryanair had initiated such services but had been forced to withdraw from them because of Aer Lingus’s predatory pricing – a direct reference to its decision to withdraw from Galway, Kerry and Waterford airports.