by Alan Ruddock
The union’s opportunism was hardly surprising. ‘SIPTU jumped on it straight away,’ says one senior manager.
Their typical line at the time was that these poor underpaid guys have been worked to the bone and are badly paid, and this guy gets an absolutely immoral amount of money out of the company at the same time. It almost made out that they were working the salt mines in Silesia. But at the end of the day Michael was essentially the guy who took a company that was bankrupt and turned it into a profitable entity, and he had a share in that, so it wasn’t a salary for him really.
Inside Ryanair the news about O’Leary’s pay also sparked outrage, but he seemed oblivious to the resentment when he joined some management colleagues for lunch in the staff canteen a week after the information about his bonuses had been published. ‘A group of us were having lunch and just having a chat about different things,’ says one former executive, ‘and Michael says, “Hey, did you see the newspapers there, did you see your man Schumacher, he earns ten fucking million a year.” And he was saying, “It’s fucking crazy, ten million dollars. For driving a car around a racetrack. Mad.” And all of us looked at each other. Here was a guy who had just earned seventeen million pounds, which was about thirty million dollars at the time, in three years, and he was saying he couldn’t believe what Schumacher earned.’
Privately, O’Leary was bothered by the revelations. ‘It was a big concern for Michael. He was very private about his wealth and he never would have come across as a wealthy guy in 1996,’ says one former colleague.
O’Leary did not flash his cash. He had plans for Gigginstown and was prepared to dabble in cattle and horses, but ostentatious displays of wealth were not his style. In business he was no different. O’Leary was happy to earn bonuses, but he despised corporate excess. The company was run as leanly as he could manage, and he was not going to allow his standards to slip when he and his executives, accompanied by their Wall Street bankers, went on the road to sell the company. When he set off on the two-and-a-half-week investors’ roadshow in early May O’Leary insisted that he and his team stay in modest hotels and travel on commercial flights and not a private jet.
‘Michael did not just suggest that everyone flew on a commercial flight, it was a requirement,’ says one of those involved in the flotation. ‘Companies preparing for a flotation would typically use a private jet. So if there is not a flight from Boston to Milwaukee at 8 p.m. on a Monday you don’t have to worry about it, because the jet is waiting. It costs an extra $55,000 to $70,000 but it’s worth it because you get to see an extra twenty-five investors.’
O’Leary was having none of it. ‘Everyone stayed in dirt-cheap hotels. Michael said, “We’re not staying in the fancy Morgan Stanley Four Seasons,” so they stayed in some pretty grim places. It wasn’t as bad as sharing rooms, but it was close. And part of Michael’s big focus was that when Ryanair pilots travel and when Ryanair people travel they stay in dirt-cheap hotels and they fly economy class. So, he said, we are flying economy and we are not staying in fancy hotels.’
O’Leary was focused on the company’s image. He wanted to portray a lean, hungry company that knew how to cut costs and deliver low fares. There was no room for hubris or self-indulgence. ‘There was very little fun on the roadshow. No mad dancing, no strippers, no heavy drinking. Michael’s reputation as a workaholic travelled with him. He was working unbelievably hard,’ says a colleague. O’Leary had to live that image so that his executives and his bankers understood the message. And he wanted the Ryan-air staff to know that the management lived as frugally as they were forced to.
O’Leary was also determined to ensure that ordinary Ryanair staff would share in the proceeds of the flotation, and in May the company revealed details of the share options scheme for its 1,000 employees. A total of four million shares would be handed out. ‘The staff grant was not atypical, but in Ireland it would be more typical not to have done it than to have done it,’ says a source close to the company. ‘O’Leary was pushing for it, and the board was too; they wanted to make sure the employees were happy.’
But the share allocations did not win favour with all of Ryanair’s employees. ‘The senior management, the guys just behind the executive team, were very unhappy,’ says one management source. They had seen what O’Leary had earned from the company in the previous three years, and they wanted a larger slice of the business for themselves.
While the Irish obsessed over O’Leary’s money, American investors were unconcerned. ‘It wasn’t hard to defend in the US at all,’ says one source close to the float. ‘It’s like the anecdote where an Irish guy and an American guy walk down the street and they see this guy’s huge house up on the hill. The American guy goes, “Some day I’m going to get that house,” and the Irish guy goes, “Some day I’m going to get that fucker.”’
The Americans were also more receptive to O’Leary’s disregard for business norms, and did not seem to mind that he did not wear a suit and peppered his conversation with swear words, though it did give Morgan Stanley some cause for concern. Senior executives discussed at length whether it was acceptable for the Ryanair CEO to use the F–word so frequently, but in the end the bankers decided not to coach O’Leary on his language. ‘The decision in the end was that O’Leary runs a very successful business, so we’re going to coach him in terms of what works and what doesn’t work on the selling of a business,’ said a Morgan Stanley executive. ‘But he is very charismatic and extremely dedicated to driving the growth. So we didn’t really try to convince him not to be Michael O’Leary.’
‘O’Leary’s behaviour was very full on,’ remarked one source in the US.
O’Leary didn’t wear a suit, which was very unusual at the time. He met with over a hundred institutions and several hundred people. I’m sure there were a couple of people who were put off by it, who were certainly surprised, including investment bankers, salespeople, investors. But people didn’t really complain about him. If he had only done five-minute presentations maybe. But after thirty, forty-five minutes, you realized that he was extremely focused, extremely bright, and that the business was very fast-growing. And he happens to swear a lot, but it’s part of the culture.
Investors try to focus on business results, not table manners.
They had a lot to focus on. Ryanair’s prospectus was crammed with detail, yet for the American investors who were critical to the success or failure of the flotation there was a simple message.
‘In the early 1990s the new management team, including the current Chief Executive and the then executive directors, commenced the restructuring of Ryanair’s operations to become a low-fares no-frills airline based on the operating model pioneered by Southwest Airlines in the US.’ Ryanair, Morgan Stanley and O’Leary were saying, is the European Southwest: a low-cost airline which will deliver unrivalled and unbroken profit growth for many years to come.
Southwest had developed a strong following in the US investment community. ‘Southwest was doing well as a company, so it was very good as a comparable stock,’ said one of Ryanair’s financial advisers. ‘A big part of the pitch was what Southwest has done in the US we are going to do in Europe.’
For a company which had barely dipped its toes in the European market and had faced collapse five years earlier, this was, to say the least, an ambitious claim. For some, the Southwest analogy was nothing more than a stunt; cynics said it was a wild claim which sounded good – was easy to justify on the surface but of little substance because Ryanair was such an unproven carrier.
O’Leary disagrees strongly. ‘Ah shit no,’ he says, offended at the suggestion. ‘Southwest was a big guiding thing for me. Before I heard about Southwest I had seen two airlines in Ireland, Ryanair and Aer Lingus, both of which were blindingly incompetent. They had complicated check-in, business class this, travel agent that, all the rest of that crap, and were turning planes round in an hour. Then you went to Southwest, banging aircraft out after fifteen minutes. They were phen
omenal, passengers loved it.’
The prospectus did not hold back on the risks facing the business. ‘Ryanair is very vulnerable to a change in demand in the Ireland to UK market,’ it noted, ‘39.9 per cent of passengers carried in 1997 were Dublin–London (46.2 per cent in 1996).’ The size of the airline, which had ‘smaller/fewer aircraft than some potential or actual competitors’, was a risk, as was the fact that future growth depended on the ability to acquire additional aircraft. The prospectus also said that Ryanair’s ageing fleet (average age fifteen years) could leave the airline vulnerable if new regulations or standards on aircraft maintenance were introduced. Investors were advised to be cautious about Ryanair’s ability to expand – ‘there is no assurance that Ryanair’s low-fares, no-frills service will be accepted on new routes’ – and even if the model worked, then Ryanair’s ability to manage growth became a risk, as did airport access and charges, and competition.
The airline’s dependence on Michael O’Leary and other senior managers was also highlighted as a concern. ‘Ryanair’s success depends to a significant extent upon the efforts and abilities of its senior management team…and key financial, commercial, operating and maintenance personnel,’ the prospectus noted. ‘Ryanair’s success also depends on the ability of its executive officers and other members of senior management, none of whom has any prior experience of managing public companies, to operate and manage effectively, both independently and as a group.’
The risks did not deter investors. They understood the Southwest story – a tale of unbroken profit from a Texas airline which had helped prompt deregulation and profited hugely in its aftermath by keeping its fares low, its costs lower and its customers happy – and they wanted to be a part of the European revolution that Ryanair promised to deliver.
Despite five years of progressive deregulation, the European market had not caught fire like the US had after 1978. Aviation expert Dr Markus Franke says that by 1997, ‘In theory every carrier in Europe, or in EC Europe at least, could…fly within every other country. But nobody was really doing that.’ Between 1992 and 1997 the number of international routes within Europe rose by 13 per cent – notable but hardly seismic – and the amount of competition on those routes had increased only moderately as well. Progress had also been unspectacular on domestic routes. Investors understood the potential if the sleeping giant could be woken, and the scene was set for Ryanair to expand. All it needed was the money the flotation would provide to buy more planes, and the belief that the business model that had proved so successful on the Ireland to Britain routes could be exported to Europe.
The roadshow was a success. ‘The management did a great job selling the story,’ says one of the bankers involved in the flotation. ‘O’Leary and his deputies [Michael Cawley and Howard Millar] are very good salesmen.’
While the senior executives sold the company, back in Dublin the flotation remained an abstract concept to most of the staff until very close to the event.
‘There wasn’t a huge build-up to it. Michael was very much business as usual. Keep the show on the road, and let us, the financial people, look after making sure the flotation goes successfully, and everybody else make sure that the company runs smoothly. For the staff it was, like, we’re gonna float, there’s an American guy who’s bought 20 per cent. That’s great. What does floating mean?’ says Ryanair veteran Charlie Clifton.
Most of the staff got either 2,500 share options or £2,500 in cash. ‘It floated at £1.97 so the shares were a better bet, but the cash looked better to those who knew nothing about the markets,’ says Clifton. ‘It took a lot of explaining to some staff members, and a lot of people said no, I don’t trust that stuff. Give me two and a half grand in cash, thank you.’
Two weeks before the flotation O’Leary promoted Clifton to Ryanair’s senior management team. ‘I didn’t even know what it meant,’ says Clifton. ‘Michael said, “Good news, we’re going to make you a director. By the way we’ll be floating; by the way you’re getting this many shares.” I was clueless about it. It was only later that the penny dropped. He had his reasons for promoting me though. It was, like, here’s Conor [McCarthy], one I’ve poached from Aer Lingus. And here’s Charlie, one I’ve grown myself’.
The share options also gave Ryanair something which had previously been sorely lacking in the airline – stability at the top. With the options, senior managers were tied in for three years. ‘The good news is you get X number of shares, the bad news is you’ve gotta stay three years before you get them,’ says Clifton.
‘Nobody knew the upside potential,’ says Tim Jeans. ‘I bought quite a lot of shares as well as the share options because I knew we had a good company. Because of what had happened with GPA the shares were priced to go,’ he says. And up they went. Ryanair floated at 2 p.m. Irish time on 26 June. ‘It was a landmark day,’ says Jeans. ‘There was a massive TVon the first floor, with a link-up to Wall Street. There was a graph on the TV. The shares started at 1.95 and the graph started off at the bottom left hand of the screen. By the end of the day it was at the top right. There were lots of very happy people, people who could buy their first car or put a deposit down on their house.’
‘We all watched the flotation on TVat work,’ says Clifton, ‘and there was a big party. It was hugely successful on the first day. It was a great day, it was fantastic. And I remember asking Michael what does it mean, and he said it’s like paying off your mortgage. He was floating around, delighted.’
The following day newspapers reported that the offering was more than eighteen times oversubscribed at the initial level of 195 pence. The price immediately soared to 250 pence, and was trading at 315 pence in after-hours trading, valuing the company at £380 million, and O’Leary’s share at almost £70 million.
O’Leary’s pragmatism was on show the following week. ‘It had been the most successful flotation in Ireland,’ says Jeans. ‘And then at the management meeting the following Monday it was not mentioned once. Life moved on; we’d done the float and that was that. Nothing changed, except that we had all these millions on the balance sheet.’
12. A New Beginning
Once seen as plucky Davids fighting mighty Goliaths, O’Leary and Ryanair were now clearly successful and highly profitable. The scale of O’Leary’s bonus package over the previous two years had shocked even his closest colleagues and thrown him into the media spotlight as Ireland’s wealthiest young chief executive. Anonymity had been stripped away and replaced by instant recognition. Ireland’s economy was growing dramatically and O’Leary personified the new breed of entrepreneurial managers putting the country on the world stage. Just as significantly, the flotation re-energized Ireland’s trade union movement, which had been excluded from the airline since its launch and which now realized that it had to gain a foothold in the fast-growing company.
Ryanair’s decision to be a non-unionized company had been an important element in the early business plans developed by Tony Ryan for his new airline. Instead, Ryan had hoped that all those who worked for the airline would become stakeholders in the company, owning shares and participating in its profits. As the company, if not its profits, grew, the unions failed to make inroads. Ryanair, from its launch, was a young and exciting company with a remarkably youthful workforce – the average age of staff was under twenty-six – who had no experience of the trade union movement and felt no need to be represented by them. A culture of direct contact and negotiation between management and employees was easy to maintain in the company’s early years when numbers were small, and the flexibility this gave Ryanair was essential to its development because employees were not hemmed in by restrictive union conditions on job definitions. There were no boundaries; in a crisis – and there were many – employees were expected to help out wherever they could.
As the company grew, then non-union culture became embedded. While the youth of the workforce played its part, it was also significant that Ryanair was fighting for survival in those early y
ears against the predatory attacks of Aer Lingus. The national airline was heavily unionized and Ryanair’s employees saw it as the enemy. They did not have common cause with the workers of an airline that was trying to put them out of business, and there was little appeal in being represented by the same unions which represented the very different interests of Aer Lingus workers.
The unions, too, underestimated Ryanair’s ability to survive. Imbued with the same arrogance which characterized the early responses of the Aer Lingus management to the threat posed by Ryanair, they expected the new airline to fail. Why battle to sign up union members in a company that was never going to last, and which, if it did survive, would threaten the livelihoods of existing union members in the state airline?
Their complacency was shattered by the facts that emerged during the lead-up to the stock market flotation. Ryanair’s success was relatively new-found – its first genuine trading profits had only been recorded four years earlier – but it was demonstrably a survivor and was also, by 1997, a significant employer with just under 1,000 workers. The unions now wanted a slice of the action and decided to agitate. It was an important fight for the union movement, which was belatedly beginning to realize the threat that Ryanair posed to its former monopoly at Dublin airport, where the vast majority of workers were union members. Aer Lingus and Aer Rianta could not make a significant management decision without union agreement. But if the unions wanted to maintain their grip on the airport, they had to gain a foothold in Ryanair.