by Alan Ruddock
‘There was no ulterior motive,’ says Lowry. ‘It was, as I saw it, in the interests of Aer Rianta. I was for creating greater activity. I was for creating volume and quantity. Aer Rianta had become something like Aer Lingus in the sense that they could effectively decide and govern what prices they wanted for everything. My only consideration in making those decisions was to get a better deal for the consumer.’
O’Leary, however, was already thinking of different consumers, and in particular those prepared to travel from the UK to Europe.
Since 1993 Ryanair had been raking in money. The profit figure for 1992 was closer to £4 million than the reported £850,000, while in 1993 the profits had been substantially higher than the reported £2.03 million and the upward momentum had continued throughout 1994 and 1995. O’Leary’s basic strategy – a strategy started by Conor Hayes – was piling up the cash, but O’Leary knew that he could not rest. He and the company had survived a bruising war with Aer Lingus; Ryanair was an established player in the Dublin to UK market, a new player on the Scotland to London market and also had a toehold in Europe.
The real competition, however, was only just beginning. Europe’s economies were recovering from the deep recession of the early 1990s and entrepreneurs were beginning to realize the potential of the market. EasyJet was already up and flying in the UK and in January 1996 Debonair, the brainchild of Franco Mancassola, announced that it would be flying from Luton to five European destinations from 1 May. But Mancassola, like many of those who would follow, was about to make a critical error. He believed there was a middle ground, a place between the expensive national flag carriers and the rock-bottom, no-frills service operated by Ryanair.
Debonair, he said, would not be a ‘no-frills’ airline, though it would be cheap.
We want to be an innovator, not an imitator. We are not targeting any specific sector, but our airline will appeal to cost-conscious, discerning business travellers who value punctuality and reliability and want no compromise on comfort. Debonair will equally appeal to people who have time on their hands to explore Europe – to students, retired people who want to explore the beauty of Europe’s cities and holidaying families who want a change from the traditional hot summer resorts.
It was a mission statement that sounded good but delivered little. In the emerging battle for Europe’s newly liberated consumers, free at last to choose between competing airlines, and free to fly rather than travel overland or by boat, the battleground was price not service. Millions of Europeans who had never flown before and never expected or wanted airline meals or ‘free’ drinks on forty-five-minute flights, were prepared to fly if it were cheap. Traditional airlines, and those who had worked in them, never quite understood that price mattered so much; they thought that flying was an experience rather than a travel choice. Sure enough, Debonair went out of business in October 1999. Mancassola blamed its demise on Go, BA’s low-cost airline, saying it was not a genuine low-cost operator as it was backed by BA’s resources. As the International Herald Tribune commented at the time, ‘The consensus is that Debonair was doomed…by a defective strategy. By raising fares and adding frills to attract business travelers – separate check-in, free drinks and snacks in the front of the cabin – Debonair may have fatally compromised the promise of no-frills: Keep it cheap, keep it simple.’
British Airways, the first of Europe’s flag carriers to be privatized, had kept a wary eye on deregulation and the emergence of the low-cost operators. By 1996 it had taken on Cityflyer Express, Loganair, Manx Airlines and Brymon as franchise partners – small airlines that operated in BA colours, wore BA uniforms and operated routes that the main airline did not service. For the Ryan family, still desperate to recover its fortune following the crash of GPA four years earlier, BA offered an obvious route to extracting some cash from its airline.
On 22 April 1996 the Dow Jones news service reported that the Ryan Family Trust had confirmed it was in talks with a ‘major international company’ to sell 25 per cent of Ryanair. A company statement said the investment would ‘enable Ryanair to continue its expansion of low-fare air services in Europe’. Contracts were to be finalized by May, a press release said, and industry sources said the stake would cost £10 million, valuing the airline at £40 million.
‘A price was agreed with BA,’ says a senior Ryanair figure, ‘but the deal fell down on technical issues.’
The price was significantly higher than the newspapers believed – BA was prepared to pay £25 million for a 25 per cent stake, which would have valued Ryanair at £100 million – but even that would have seriously undervalued the company. The true level of its profitability justified a price tag of closer to £300 million and if BA had struck the deal it would have been a bargain. It could also have sounded the death knell for Ryanair’s growth.
‘I was a staff member at the time, and the news kind of trickled out that this might have happened but it didn’t happen. It had fallen apart by the time the staff heard of it,’ recalls Charlie Clifton.
It would have been a huge change for all the people who’d been there: you’d have been marching in an entirely different direction, you’d have become ‘BA-ified’, uniform and corporate. In simple terms it would have squashed any of the competition, which was I presume part of the purpose. It would have been bad for morale and a number of people would have left. But equally I’d say quite a number of people would have been delighted. BA would have brought security – that’s brilliant, we’re working for ‘the world’s favourite airline’. At the time [we thought] the company had only just got into profitability, and people would have been happy to run for safety.
But it was not to be, and BA abandoned the negotiations, turning its attentions to its own internal problems. Tony Ryan’s dream of at last seeing a return on his investment would have to wait for another day.
10. Stepping up, and down
British Airways’ interest in buying Ryanair had whetted Tony Ryan’s appetite for a sale. He knew that the airline he had founded was now a remarkably valuable property, and he also knew that if it were to expand even further it would have to broaden its shareholder base. Ryanair would need more planes and more people if it were to take its successful business model out of Ireland’s skies and into Europe, and that would require deep pockets. The search for a partner or, failing that, the pursuit of a stock market flotation that could release cash for the family, was on in earnest.
In April 1996, shortly after the talks with BA had broken down, Ryan received a call from Paddy Blaney, a former vice president at GPA. Blaney had met David Bonderman, an American corporate lawyer and investor with a track record of successful investments in the US airline industry. Ryan had met Bonderman years earlier during the negotiations to salvage the US airline America West, which had leased planes from GPA. He knew Bonderman was a serious player.
Bonderman was not a typical American businessman. A former civil rights lawyer, lover of rock music, eclectic dresser and canny investor, he was far more suited to O’Leary’s informal but obsessive style than to the grey corporate world. Bonderman’s personal interests were as varied as those of Texas Pacific Group, his investment vehicle, which looked for value investments in companies as diverse as Del Monte foods, Beringer wine estates, Ducati the Italian motorcycle manufacturer, America West and Continental Airlines, and retailer J. Crew.
Blaney told Ryan that Bonderman was in Europe looking for investment opportunities, and that he was toying with the idea of investing in Virgin Express, Richard Branson’s new European low-cost carrier. Blaney had mentioned Ryanair to Bonderman, and he had shown interest. Perhaps, he suggested, Ryan could do worse than set up a meeting.
Declan Ryan was dispatched to make contact in early March and Bonderman, intrigued by what he heard, travelled to Dublin with a team of advisers. For a week they pored over Ryanair’s operations, probing its business model and examining its management team. Very quickly Bonderman recognized that the Irish airline had developed a
model that had the robustness to take on Europe and exploit the opportunities that deregulation would bring.
‘Bonderman understood what had happened in the US market after it had deregulated in 1978, and he knew what was necessary for an airline to survive and prosper,’ says a Ryanair executive who was involved in the negotiations. ‘Fundamentally that came down to cost control. Bonderman knew that the lowest-cost operator would always have the competitive edge, and he could see from O’Leary’s operation, and from the books, that Ryanair was ideally positioned. Its attention to cost was phenomenal and, just as importantly, he warmed instantly to O’Leary.’
Securing Bonderman’s investment was top of Ryanair’s agenda, but the company was still focused on extracting extra revenue from its business wherever it could, with no opportunity deemed too small or too bizarre to merit its attention. In June 1996 it became the first European airline to sell advertising on the exterior of its planes.
The idea had been hatched by Tony Ryan over a dinner with Nick Sheele, the chairman and chief executive of Jaguar. Sheele agreed to pay £120,000 to get the Jaguar livery on a Ryanair 737. Once Ryanair had agreed the price with Jaguar, the aircraft was sent to Birmingham to be painted.
‘The Jaguar guys were so precise about it, they had to make sure the leaping Jaguar was exactly 331/3 per cent off the horizon to make sure of the perfect jaw,’ Charlie Clifton recalls. ‘Then the big day came and we said we’d have the launch in Birmingham. The idea was the aircraft would be towed out of the hangar, there would be two sports cars, photos, Tony, Nick Sheele, lots of pretty girls draped over the cars, and the aircraft in the background. Fantastic’
But there was one major hitch – the final part of the painting had to be carried out in the south of England, and the plane became stranded down there.
‘I arrived in to work, got a call to say the aircraft is broken down in the south of England. Tony arrived and I said the aircraft is tech [broken down],’ says Clifton. ‘Tony said, “Relax, don’t be a pessimist. It’ll work out fine; the aircraft will be there.” I said, “It won’t be, I bet you it won’t be.” And he said, “It will, I’ll bet you. What do you want to bet?” And I said, “A pound?” and he said, “Okay, I’ll bet you a pound.”’
When Clifton and Ryan arrived in Birmingham, there was no aircraft so they carried on with the photo shoot and digitally added the plane afterwards. But two months later, while Tony Ryan was in the middle of negotiations to secure Bonderman’s investment in the company, Charlie Clifton got a note through his letter box: ‘Dear Charlie, please find one pound for my indebtedness in relation to our bet. Regards, Tony Ryan.’
After a slow start, exterior advertising went on to provide a solid revenue stream for Ryanair, with companies such as Kilkenny beer, Hertz and Vodafone following Jaguar.
By August 1996 Bonderman and the Ryans had finally consummated a deal, and at a price which reflected Ryanair’s real profitability and not the carefully constructed numbers published for the previous three years which had helped conceal Ryanair’s real profitability from Merrill Lynch during its negotiations with Ryan over his debts. Bonderman, through a specially created subsidiary, would acquire 20 per cent of Ryanair for £26 million, a price that valued the airline at £130 million.
Bonderman used just £1 million of his own money to buy the stake, and funded the rest of the deal with debt – an astute move that would see the value of his equity stake rise from £1 million to £250 million in the years to come. It was, Bonderman said later, his ‘best ever investment’, but for Ryanair his involvement was just part of a package that would transform the airline over the next two years.
Tony Ryan was ecstatic with the Bonderman deal, which valued his family’s stake at almost £80 million. At long last he could smell the money. Eleven long years of struggle and near-bankruptcy were about to pay off in spectacular style, as long as he did not manage to repeat the mistakes that had destroyed GPA. O’Leary, for one, was determined not to let him, but Ryan did not yet know quite how determined. His days as chairman were numbered, but he was oblivious to the threat.
As a stock market flotation grew ever closer, O’Leary was a man on a mission and Ryanair was his obsession. He still arrived early, often starting work at six in the morning, and left late. He lived for the company, working weekends and bank holidays, surviving on coffee and cigarettes and snatched meals from the Ryanair canteen. Those who knew O’Leary at the time recall him as being singularly focused on Ryanair, to the exclusion of almost everything else. He did have a long-term girlfriend, but the relationship was not thought to be serious.
O’Leary’s obsession meant that by the end of 1996, just three years after he had taken the reins as chief executive, the airline was indisputably his. He was not yet an owner in the real sense – he shared in the profits, but had no shareholding – but the company reflected his character and ran to his beat. ‘He was in control of pretty much everything that went on,’ says Conor McCarthy, who joined Ryanair as operations manager in October 1996 after a successful career in Aer Lingus. ‘There was a team of us who backed up Michael, [but] we carried out mainly Michael’s bidding. If you wanted to do something and Michael didn’t want to do it, you could be pretty sure it was never going to happen.’
McCarthy, accustomed to the slow, bureaucratic world of Ireland’s state-owned airline, was immediately struck by the informality of Ryanair, and also by its sense of purpose.
On my first morning I went into Michael’s office [and he was] dressed in his characteristic jeans and shirt. He took me round the office, introducing me to the different people. All pretty informal, but as he was showing me round he was also asking them about particular issues he wanted to chase up. So he’d say, ‘This is Conor, he’s just joined us as director of group operations. Oh, by the way, how did you get on with that crowd yesterday? I saw you meeting them. Did you get a good deal out of them?’ He used it, not just to introduce me, but to catch up on what was going on. I got an immediate feeling that it was a no-nonsense organization with no fat.
O’Leary’s growing dominance created a conundrum for the Ryans. The arrival of David Bonderman as a 20 per cent shareholder meant that a stock market flotation for Ryanair was now inevitable. The airline needed cash to buy more planes, and Bonderman would be looking for a swift return on his investment; a flotation would be the simplest solution to both needs. O’Leary was crucial to the airline’s future, but as an employee he stood to gain nothing from the flotation. It was an issue which would have to be resolved, and not in the normal way by offering stock options to the management team.
There was also a second problem to be overcome: O’Leary’s lucrative profit-share deal had become unworkable. ‘The profit share had become an embarrassment and it had to be unravelled,’ says O’Leary. He knew that the scale of his reward would become public knowledge during a flotation process, when all relevant financial information on Ryanair would be revealed to potential investors and, more significantly, to his fellow executives and the rest of the Ryanair workforce. His price for walking away from an annual bonus that had netted him £20 million by the end of 1996 was a 25 per cent share of the company, with Bonderman on 20 per cent and the Ryan family taking 55 per cent. Eventually O’Leary settled for 22 per cent.
As Bonderman signed off on his investment that August, O’Leary had begun preparations for the riches that were about to come his way. He created Garnham, an off-the-shelf company, with himself as a director alongside Howard Millar, who had joined Ryanair in 1992 as a financial controller. Two months later, in October 1996, O’Leary’s mother Gerarda replaced Millar as a director and the following July Garnham acquired just over twenty-two million shares in Ryanair – representing his stake in the airline – for a token consideration of less than £1 million. In a reversal of the normal entrepreneurial model, O’Leary had won his share of the company after leading it to triumph, rather than by gambling everything on a dream. His wealth and shareholding had required n
o risk other than his time; not once had O’Leary had to put his own money into the company or mortgage his house to keep the company afloat.
With O’Leary firmly installed for the long haul as a significant shareholder, Ryanair became fixated on growth where only recently it had been concerned with nothing more than survival. Its short-term priority was to prove that the low-cost model, which was now demonstrably successful on routes between Ireland and the UK, could shift to a far bigger stage: continental Europe.
For the international investors who would be wooed ahead of a stock market flotation, European expansion was critical. All the work done in the previous decade to secure Ryanair’s position as a profitable player on the Ireland to UK routes would count for little if O’Leary could not prove that his model could be transferred profitably to mainland Europe – a continent with a population larger than that of the United States; with a host of traditional, and expensive, national airlines; with virtually no experience of low fares; and, perhaps most significantly of all, with an increasing number of countries falling into the embrace of the European Union. A single European market would need a mobile labour force if it were to prosper. Cheap and frequent flights would be an important part of that.
European consumers knew nothing about cheap air travel. Unlike the American consumer, who had benefited from low fares for almost twenty years – and even longer in some states – Europeans had been fed a diet of expensive, restricted air fares on a small number of airlines which tended to be owned by their governments. Travellers in Ireland and Britain understood what low fares and competition meant because they had enjoyed the benefits of competition for a decade. But if continental Europeans wanted to fly, they could choose between an often prohibitively expensive scheduled flight or, during the holiday seasons, an inflexible charter flight – a package holiday that required them to buy accommodation as well as an air ticket.