Michael O'Leary

by Alan Ruddock

  It was a war that Hayes could not expect to win outright, but he chalked up battle victories nevertheless. The Aer Lingus rescue plan was hemmed with conditions that Ryanair had proposed and which O’Leary could police in future years to ensure that the private airline, which had only just managed to make decent profits, would not be squashed by state subsidies. ‘Aer Lingus’s strategy will, if unchecked, lead ultimately to the demise of Ryan-air, albeit at enormous cost to Aer Lingus, since Ryanair simply does not have the resources to continuously fight subsidized competition,’ Hayes said.

  While Cahill’s excuses for the national airline’s difficulties were centred on international crises not under his control, his solution was single-minded. Aer Lingus’s new strategy was to have low fares when competing with Ryanair on routes to London and higher fares and yields on other routes to the UK where the airlines did not compete. Aer Lingus hoped to charge premium fares to London’s Heathrow and cut its prices on flights to airports that Ryanair did serve.

  Hayes and O’Leary were also prepared to show the Irish government and the EC that Aer Lingus’s rescue would not be victimless. In a pre-emptive strike they announced forty redundancies on 29 October, saying Ryanair ‘must now take all necessary measures to prepare for the inevitable increase in subsidized competition from Aer Lingus when they receive (as we expect they will) the £175 million of state aid from the Irish taxpayer’.

  Aer Lingus tried to strike back, with Executive President John Griffin writing to the Irish Times to claim, ‘Contrary to the notion that the national airline is another subsidized semi-state company, the public record shows that the Aer Lingus Group produced net profits of £120 million between 1986–92, after payment of interest, taxes and dividends to government.’ He neatly ignored the massive subsidies which had flowed into Aer Lingus over the previous years, and the fact that all those profits had been lost subsequently, but then the truth was rather more painful.

  Griffin then attacked the validity of the low-cost, low-fare phenomenon:

  The public record shows once again that the very low pricing policy established by this new private company [Ryanair], now publicly acclaimed, was not a basis on which to build a viable new airline. In 1989, only four years after starting up, it had to appeal to the government for assistance. Aer Lingus was effectively made to bail it out by having to surrender three routes to Ryanair, on a monopoly basis – all in the name of competition!

  Incidentally, apart from its monopoly on the Stansted route, Ryanair also enjoys subsidies there, which are not available to Aer Lingus at Heathrow, underlining the precarious economics of the airline business in this country at the moment.

  Griffin’s defence of Aer Lingus and its need for state aid was understandable, if tendentious. Ryanair had been saved from likely collapse by the government’s adoption of a two-airline strategy in 1989, but it had not received taxpayers’ money. Its ‘subsidies’ at Stansted were actually negotiated reductions in charges, granted because the airport’s owners were anxious for business. Griffin also ignored the fact that Ryanair had survived despite the best predatory efforts of the state airline, which had used state money in a determined attempt to send Ryanair the way of Avair, its bankrupt predecessor. He was reflecting the exasperation felt by the traditional airlines, which had grown accustomed to a world devoid of competition.

  Griffin and his colleagues still believed that state-owned airlines were members of a gentlemen’s club. They did not compete aggressively, they could charge what they liked and they could turn to their governments for cash whenever cyclical crises blew a hole in their bottom lines. Airlines, in their view, were not just commercial operators; they were an extension of government policy, providing an essential public service (in Ireland’s case air travel between an island nation and the rest of the world) as well as being a substantial employer.

  Aer Lingus would get its government aid this time, but it would prove to be the last handout. From now on the company would have to stand or fall on its ability to compete, and O’Leary was just about to up the ante.

  8. Bread and Water

  On 1 January 1994 Michael O’Leary finally stepped out of the shadows. For the previous five years he had been at the heart of the airline’s transformation, but he had operated below the radar. He was known within Ryanair but barely registered outside it. Now he was to assume official leadership of a company that he had helped drag from near bankruptcy to profitability, a role that he had combined with the sometimes all-consuming pressures of dealing with the sporadic crises in Tony Ryan’s business affairs.

  His rise was greeted with some internal trepidation. ‘Some were delighted to hear it, some weren’t,’ recalls Charlie Clifton. ‘They were scared he’d be cutting costs and cutting us. That it would be bread and water.’ Ryanair’s employees were right to be wary; the new chief executive was messianic about cost control. He was also convinced he could transform Ryanair from a successful niche airline into a serious European contender.

  O’Leary first needed to develop a new relationship with Ryan. The collapse of GPA had destroyed Ryan’s aura of invincibility and threatened to eliminate his wealth. The great man of Irish business was on his way down while O’Leary, his protégé bagman, was on an upward curve. He had chosen to stay in the background at Ryanair for years, first as Ryan’s eyes and ears, later as finance director and deputy chief executive. He had, as he reminds anyone who interviews him, wanted to shut the airline down but Ryan’s stubbornness had kept it flying. He had walked away from it for a time, only for his hopes of striking gold with Ryan’s millions to be dashed when GPA collapsed. He had returned to the airline, knowing that it was his only remaining opportunity of making serious money. He had in his pocket his previous deal with Ryan which promised him a 25 per cent share of any future profits above £2 million – a deal struck when the prospect of the airline being closed seemed more likely than recovery. Under Conor Hayes, however, Ryanair had stabilized and edged its way to profit, and O’Leary was prepared to sweat blood to take it to the next level. His routine was relentless: he arrived early in the office, left late, smoked heavily and drank coffee incessantly. He lived in his apartment in the Dublin suburb of Sandymount during the week, escaping some weekends to Gigginstown, but his real life was at Dublin airport, guiding the fortunes of the company he now directed.

  From 1988 to the end of 1993 the battle at Ryanair had been for control of the company, but not in the sense of boardroom struggles and jockeying for power; it had been a more basic battle. Hayes, who hadjust left, O’Leary and their management team had been fighting for control of the airline’s finances, slowly instilling order where there had been chaos. Loss-making routes had been closed, financial controls had been imposed, costs had been reduced, but the strategy that was to mark out Ryanair from the rest of the competition over the next decade had yet to emerge. Under first McGoldrick and then Hayes elements of that strategy had fallen into place, but it had not been pulled together into a coherent business model that could be the template for the future

  Slowly, the policy of low costs and fares had become the dominant if still bare approach. Hayes had experimented successfully with low fares and high frequency, and it had stuck. What had evolved at the airline, through trial and error, was a way of doing business profitably – a gigantic breakthrough, but it had not yet been fleshed out into a business model that O’Leary could call his own.

  His Ryanair was now lean, understood how to reduce its costs, had a clear idea of what it wanted to become – an airline that could expand profitably – and what it needed to do to get there, but its corporate clear-headedness was not the result of a eureka moment. O’Leary had visited Herb Kelleher, Southwest’s charismatic founder, two years earlier and had left with an understanding of the dynamics of the low-fare industry, but he had not yet converted his knowledge into a strategy.

  O’Leary’s impact on the company was incremental: he was determined to make each day better than the day that we
nt before it. ‘Looking back it looks like we were some kind of genius turnaround artists whereas in fact the company was in such a sorry state that all we did was try to keep improving it day by day, week by week. And it has kept improving,’ he says.

  By the time O’Leary decided to take the chief executive’s chair he had started to put flesh on the survivalist strategy that had secured the airline’s future by pointing it down the road of sustainable profitability. ‘He started to develop a plan based loosely on Southwest,’ says Clifton. ‘The dynamic guy on top, single fleet-type, good culture and cheaper than everybody else.’

  Within days of his appointment at the start of 1994 the new Ryanair began to emerge into public view, though few in Europe would have recognized the significance of what O’Leary was attempting. Throughout that year he rolled out a series of initiatives that, taken together, created the modern Ryanair. The business model that was to become the envy of low-cost airlines across the world has been refined since, but the fundamentals were laid down in 1994, and the first signs of O’Leary’s emerging vision for the airline and what it could achieve in Europe had become apparent by the end of the year.

  Ryanair was metamorphosing from a small, if profitable, Irish airline into O’Leary’s creature: an airline that could challenge, create a market and defeat Europe’s dominant national airlines.

  For O’Leary there would be no honeymoon period in his new role. Ryanair had just survived a bruising battle with Aer Lingus, a battle that had plunged Aer Lingus into heavy losses, but Ryanair’s success tempted yet more competition to join the market. On 4 January British Midland launched a price war on the Dublin–London route by introducing a return fare of £69, a 50 per cent cut on its existing price and a serious challenge to Ryanair. Six days later Richard Branson’s Virgin group joined the fray when it teamed up with Cityjet, a struggling Irish start-up which serviced London’s City airport from Dublin. The Virgin deal was effectively a franchise: Cityjet would continue to operate the routes but would use Virgin livery, uniforms, catering, maintenance and other support services.

  Branson’s arrival and British Midland’s low fare meant that Ryanair would have to fight even harder for customers, and would have to find new ways of reducing its costs so that it could offer still lower fares than its competitors. The years of attrition with Aer Lingus had hardened the airline and its management team; they knew they could fight, and they knew they could survive. The early reliance on Ryan’s then bottomless pockets had been replaced by the bare bones of a business model which could see off challengers with a straightforward proposition: Ryanair’s lower costs allowed it to make money from fares that caused the larger airlines to bleed. Ryanair’s sticking power now came from its competence, not from its benefactor.

  By 1994 Aer Lingus was on the verge of ruin. Under pressure on its core Ireland to Britain routes, where its market share had declined sharply to less than 50 per cent in 1993, Aer Lingus was also being pummelled on its profitable transatlantic routes, as more and more passengers availed themselves of lower fares from London to the United States and shunned its service. Time too was against Aer Lingus. Europe’s steady deregulation of its skies meant not only greater freedom for new independent airlines like Ryanair, but also a looming curb on the amount of money governments could pour into their ailing national airlines. Aer Lingus had had one last chance of getting its hands on a sizeable state subsidy and no time to waste.

  The European Commission, after intensive lobbying from the Irish government, had approved the £175 million rescue package. Bernie Cahill promised that costs would be slashed by shedding workers and boosting productivity, and Aer Lingus committed itself to maintain capacity at 1993 levels. Its objective, so it said, was to reinvent itself as a lean, modern airline rather than to use the state’s money to blow its competitors out of the skies, and it would raise money by getting rid of much of its non-airline business, like its hotel chain and human resources company.

  But O’Leary suspected that the state aid would be used to subsidize a fresh round of predatory strikes against its competitors, and he was determined to stop that happening. With that determination, another key element of the modern Ryanair model was about to fall into place: the aggressive and noisy pursuit of competitors and anyone who stood in the airline’s way. At the beginning of 1994 O’Leary complained to the European Commission that Aer Lingus was already using state aid to distort competition by ‘fare dumping’ – charging ludicrously low fares – on certain routes. His argument was that Aer Lingus could only charge those fares because it was using taxpayers’ money to subsidize them.

  The commission listened and acted. On 4 February officials from its competition office raided Aer Lingus headquarters in Dublin airport. In a statement Ryanair said it had ‘supported Aer Lingus in its application for state aid, primarily in the hope that it would lead to fair play in Irish aviation, and on the grounds that Aer Lingus would, as a condition of receiving state aid, be obliged to cease its practice of “below-cost selling” on those routes where it faces competition from Ryanair’. The statement continued:

  It is a matter of great regret to Ryanair that this has not happened. Indeed, in the four weeks since it received this state aid, Aer Lingus has, as it has done in the past, engaged in widespread ‘below-cost selling’ and seat dumping practices on those routes where it faces competition from Ryanair.

  Is it reasonable that Aer Lingus, which has received vast amounts of state aid, should be allowed to use taxpayers’ money to subsidize temporarily reduced fares until Ryanair is driven out of business, and then, as it has done in the past, raise the fares to levels which are profitable for them, but will put air travel to the UK once more out of the reach of the vast majority of Irish people? This type of ‘dirty tricks’ must stop.

  Brian Cowen, the Irish minister for transport in charge of winning Europe’s support for his government’s rescue of Aer Lingus, said that it was ‘regrettable that it was deemed necessary [to raid the headquarters]. I don’t dispute the competency of the commission to act in that way, but it could have been done otherwise.’ O’Leary, though, had made his point. Aer Lingus, if it wanted to survive, would have to learn to compete on a level if vicious playing field, and he would stop at nothing to prevent it regaining its old dominance of the skies between Ireland and Britain.

  On 13 January 1994, less than two weeks after O’Leary started work as Ryanair’s chief executive, it was reported in the aviation trade publication Airclaims that the airline was planning to replace its existing fleet of aircraft and switch to the Boeing 737. This was the plane that Southwest had used to develop its low-fare empire in America. Ryanair chose the 737 because, apart from its reputation for needing little maintenance and an enviable safety record, it could be configured to carry the ideal number of passengers for the company’s market. Just as importantly, operating a single type of aircraft delivered savings across the airline, from maintenance to training and simple flexibility: all crew members, pilot or stewardess, could be moved seamlessly to any aircraft in the fleet.

  Two weeks later the airline made its decision public. It was acquiring six second-hand Boeing 737–200s, each with a capacity of 130 passengers (26 more than the existing 104-seat One-Elevens). Ray MacSharry, the former European Union commissioner who was now Ryanair’s chairman, said that Ryanair was ‘now a major Irish airline, with significant expansion plans for the next three years. This 737 fleet will provide us with a unique platform upon which to develop and expand our existing markets.’

  For Ryanair it was a major step: not only would the Boeings deliver savings, they would also bring credibility to a still young airline. Boeing was the most respected brand name in the aircraft business and O’Leary believed it would resonate with customers if, when they booked a Ryanair flight, they knew that they would always be flying in a relatively new, high-quality aircraft, rather than the mixed bag used by most young airlines. The decision to embrace the 737 set O’Leary on a course from wh
ich he would not deviate. The move would reduce a range of costs within the company by streamlining the training of pilots and staff, by reducing maintenance costs, by simplifying reservations with a standard layout, and by increasing capacity on every route they flew by almost 30 per cent.

  By the time the 737s were delivered ‘it was penny pinching to the extreme’ says Charlie Clifton, as O’Leary worked the airline to the bone to pay for his new machines.

  I remember when the first 737–200 came in I was head of in flight operations and we discovered that we didn’t have any safety cards for the new aircraft. They’re specific to the type of aircraft – some 737–200s have 130 seats, some have 121, and they sent over lots of cards with 121 seats on it instead of 130 seats.

  Unbeknownst to anyone, the night before myself and the cabin services manager found a stick-on that you could put on these cards that would cover out the old bit and put on the new bit. So we were in the office writing away and sticking the new bit on to each of these cards to put on the aircraft. Michael popped his head around the door and was really pleased: ‘Good, good, good lads.’ You were so conscious of doing this sort of stuff – instead of saying we’d go out and order 150 brand spanking new cards, you just tape over the old bit.

  By October 1994 Ryanair had taken delivery of five more 737s, bringing its fleet to eleven, and it had phased out all its other planes by not renewing lease agreements. The single fleet-type had arrived and O’Leary’s Ryanair was taking shape.

  Declan Ryan says that the decision to acquire the first six Boeings was ‘the real turning point for the company. If you had to identify one decision, that was it.’

  O’Leary agrees. ‘That was the big one,’ he says.

  Ryanair was now positioned to mount an inexorable challenge on the Ireland–Britain routes, which still accounted for the bulk of its business, but it was also, far more significantly, ready to test the continental European market.