by Alan Ruddock
Foreign airlines might have been easy prey for O’Leary, but at home the media had grown wise to his stunts.
Less than two years after Ryanair launched its route between Stansted and Kerry, with the route a success and tourism numbers on the rise, Kerry airport was looking to expand. The expansion would need funding, and the airport’s management decided the best way to secure that funding was a £5 ‘development levy’ to be paid by all departing passengers from 1 May.
In April O’Leary took to the newspapers and airwaves, denouncing the charge – which would add 6.25 per cent to its lowest fares of about £80 on the route – as ‘unworkable’ and urging passengers to refuse to pay it. A former Kerry executive says the airport was surprised by Ryanair’s reaction. ‘On the [first] anniversary of our first flight [June 1997] we said to Ryanair, “Listen, we’re going to bring in this thing,“’ he says. ‘They said, “Grand.” They didn’t seem too perturbed. And then they just decided against it, I think on the basis that if this was successfully introduced in Kerry this would happen everywhere and it would be a bad precedent for Ryanair to accept it.’
He was right. What was the point, O’Leary thought, of winning lower airport charges if a small-time operator like Kerry could then turn around and introduce new levies on his passengers? If he allowed Kerry to charge his passengers five pounds, how could he prevent them charging ten? Or object if Treviso or Charleroi introduced similar charges? Kerry had negotiated low landing charges with Ryanair in good faith, and Ryanair had delivered the passengers. The airport’s opportunity was to make money from those passengers by selling them goods and services, not by slapping on levies.
The Irish media, however, was instinctively sympathetic to Kerry and growing tired of O’Leary’s relentless hostility, with the Irish Independent reporting, ‘Ryanair, the discount airline, has declared war on yet another Irish airport.’ O’Leary did not care about the media’s attitude and rolled out another pamphlet campaign, distributing 20,000 ‘No to Kerry levy’ leaflets on Kerry-Stansted flights. ‘They handed them out for about a week,’ says Bellew. ‘We just thought, fair enough, if that’s what they want to do. We weren’t happy about it, I suppose, but it was just a bit of a nuisance.’
The leaflet’s impact was limited to the felling of a few trees, and the levy stayed, for the moment.
A year on from the IPO, Ryanair was still perceived as a family firm. The Ryans were no longer the airline’s sole shareholders, but about 27.7 per cent of the airline’s stock was still controlled by Tony, Declan, Cathal and Shane Ryan. At the end of May 1999 the company moved to correct that, announcing that the airline’s major stakeholders would sell a total of 15 per cent of Ryanair’s equity valued at about GB£168 million. The Ryans would reduce their holding by a third, leaving them with just over 17 per cent of the stock, and Ryanair would become a more attractive proposition to investors, who often shy away from companies where families exert a dominant influence. Bonderman was to almost halve his interest, reducing his 6.3 per cent stake to 3.2. O’Leary disposed of 1.5 per cent of the company, retaining a 9.3 per cent stake.
The timing of the share sale was critical to its success and Ryanair opted to synchronize it with the announcement of its fourth-quarter results for 1998. The results once again showed record highs, with a 20 per cent rise in adjusted net earnings (to £37.7 million) and a 28 per cent rise in turnover to £182.6 million, and earnings per share up 11 per cent to 27.47 pence.
Ryanair also had good news on its protracted row over Dublin airport charges. Aer Rianta had insisted it would cease all rebates for airlines, but at the end of May had submitted a plan to Transport Minister Mary O’Rourke that would allow operators of new routes a 75 per cent discount on charges for the first year and a 50 per cent discount for year two. The compromise offer represented some progress: Aer Rianta was clearly prepared to encourage new routes with lower charges. But the plan fell short of Ryanair’s demands, and the market responded negatively to the news: the airline’s share price dropped 14 per cent, to GB£6.69). It was a short-lived plunge. The sale of the Ryan family, O’Leary and Bonderman shares proved a resounding success, with the share price closing at an all-time high of GB£7.30 on the day of the sale.
The Ryans, who had almost lost everything five years earlier after the collapse of Tony Ryan’s Guinness Peat Aviation, grossed £137.3 million, Irish Air grossed £34.3 million and Michael O’Leary got £16.6 million.
Dublin, Stansted, Kerry and then Manchester. Early in 1999 Ryanair’s five-year deal with Manchester airport came up for renewal. The airport seized upon Ryanair’s improved financial position to demand higher landing charges. O’Leary was not impressed. ‘Michael decided that he would withhold some of the increase whilst in theory we would continue to try to negotiate a more acceptable cost base,’ says Tim Jeans. ‘Ryanair had delivered on all its promises in Manchester, and Manchester then flexed its monopoly muscles, hid behind the fact that it had to charge all airlines the same, which of course is nonsense because there are all sorts of one-off arrangements.’
O’Leary’s tactic of non-payment worked well for a few months, but by June Manchester airport had had enough. On 19 June flight 553 from Dublin arrived in Manchester fifteen minutes ahead of schedule. The airport staff directed the plane, with 126 passengers on board, to a taxiing area for impounded planes. The airport then sent a blunt message to Ryanair: pay us what you owe us – rumoured to be about £500,000 – or you won’t get your plane back. The passengers and crew were allowed to disembark but the plane had been seized.
O’Leary caved in. The debt paled in comparison to the value of his Boeing 737 and to the chaos that would hit Ryanair’s schedules if it was deprived of a jet. Within five hours of the seizure Ryanair’s bank had given a verbal guarantee that the debt would be paid, and the plane was released.
The airline was quick to criticize the airport for its actions, claiming the non-payment had been a ‘clerical error‘. But, Jeans says, the seizure had longer-term implications for the airport. ‘It did have an impact on our relationship with Manchester ever after.’ Ethel Power agrees:
We were not expecting it as we had done a lot of business with Manchester airport. Basically it was Manchester airport being bolshie, as Ryanair would always be negotiating lower landing fees, and in my opinion it was an airport manager saying, ‘I’ll fix them.’ But really it could have backfired in their face as Manchester airport had an awful lot more to lose than Ryanair. In our world it was a one-minute wonder – bill was paid and away we went.
Manchester manager Jim Stockton was unrepentant. ‘I agree the powers we exercised were severe but they were justified in the circumstances,’ Stockton told journalists. Seven years later, his views haven’t changed. ‘If we hadn’t acted as we did, we would never have been paid what we were owed, and the scale of the debt would have grown each day. We had no choice.’
In August of 1999 the military airfield at Baldonnel in west Dublin returned to the spotlight when Defence Minister Michael Smith brought forward plans to sell off parts of it. Tony Ryan, who had first proposed setting up a commercial airport there in 1995, latched on to the news, terming it a ‘very positive development‘. But O’Leary was quick to distance Ryanair from the future of Baldonnel, pointing out that it was ‘important that the Ryan family’s plans for Baldonnel do not cloud the debate’ on the second terminal at Dublin airport. It was a rare public spat between the two men, but O’Leary’s motivation was clinical.
‘Michael would have been annoyed that we were perceived to be fighting on two fronts,’ says Charlie Clifton. ‘His view was, “Get Aer Rianta to give us a deal; don’t let them off the hook.” Aer Rianta did start to say, “What are we talking to these guys about when they’re pissing off down the road to Baldonnel?” And that’s what he didn’t want to happen. Michael’s view was succinct: “Draw a line on Baldonnel, we’re never going to get it.”’
O’Leary tried to drag the question of a second Dublin airpo
rt terminal back to centre stage in early August in a 445-word letter to the Irish Times. He began by congratulating the paper’s editor, Conor Brady, on an editorial which recognized the value of tourism to the Irish economy. ‘Unfortunately the Aer Rianta monopoly represents a far greater threat to the health of our industry than Bord Failte [Ireland’s tourist agency],’ he wrote.
The facilities at Dublin Airport are inadequate, overcrowded, and ludicrously expensive. They are a testament to the failure of the Aer Rianta monopoly. The Irish taxpayer – through Aer Rianta – is investing heavily in hotels and airports in Birmingham and Düsseldorf [a reference to Aer Rianta’s expansion overseas] – yet we are subjected to Third-World facilities at this nation’s principal airport.
Ryanair has submitted a proposal to the Government which would see us finance and build a second terminal at Dublin [he reminded readers, in case they had managed to miss the acres of media coverage which had been dedicated to the issue]. Immediately after its construction we will hand this building, free of charge, back to Aer Rianta to own and manage. In return we would obtain a long-term low cost base, save Aer Rianta from the capital expenditure, launch at least ten new routes from Continental Europe to Ireland, carry over one million additional visitors to/from Ireland, and create over 500 jobs.
He concluded:
In recent years competition has transformed Ireland’s airline sector, our telecommunications industry, our bus services, health insurance and broadcasting. Even the ESB will shortly be in a competitive environment.Competition will transform our airport infrastructure by improving facilities and lowering costs. Aer Rianta now needs a similar discipline. Why not introduce competition now at Dublin? The facilities will be improved, the costs will fall, and low fares to a wide range of European cities will underpin the continuing success of our tourism industry.
Noel Hanlon, Aer Rianta’s chairman, rose to the bait. Three days later he made his own appearance in the letters page of the Irish Times. It was a peculiar way for the leaders of two major companies to conduct business but such was the level of animosity between the two that direct negotiation was not on the agenda. Hanlon wasted no time in getting to the point.
Independent consultants have concluded that Ryanair’s proposal to build its own terminal at Dublin Airport would mean the transfer of between £70 million and £80 million by Aer Rianta to Ryanair over a short period, hence Mr O’Leary’s enthusiasm for such a proposal. Aer Rianta is the most competitive commercial airport company in Europe and frequent reference to the airport monopoly by Mr O’Leary does not change that fact.
Hanlon charged, ‘Mr O’Leary’s quite extravagant claims about bringing in one million additional visitors from Europe is, I would suggest, a nice round figure but one which is very hard to accept.’ He finished his letter by spelling out what he claimed were Ryanair’s true motives. ‘I can only conclude that the constant barrage of spurious claims, frequently couched in superficially plausible language, from Ryanair and its highly paid spin doctors is more to do with Ryanair profits and its share price than with bringing in additional tourists to Ireland.’
Hanlon was correct, up to a point. O’Leary was primarily concerned with Ryanair’s profits and not Irish tourism, but the two were not mutually exclusive. He wanted to exploit opportunities in Ireland but believed that he could not do so profitably enough unless Aer Rianta compromised.
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Three days later Ryanair announced yet another set of record results, this time for the first quarter of the new financial year. Its pre-tax profit for the three months to the end of June had risen by 13 per cent to £14.2 million.
O’Leary always attributed Ryanair’s success to its ‘simple’ business model.
We have the lowest cost base of any airline in Europe. Business is simple. You buy it for this, you sell it for that, and the bit in the middle is ultimately your profit or loss. We have low-cost aircraft, low-cost airport deals, we don’t provide frills, we pay travel agents less [than other airlines], our people are well paid but work hard and we deal in efficiencies. A second low-cost airline will only survive in Ireland as long as it is prepared to keep losing money. Britain is a tougher market, but even there nobody can match our efficiency.
Other airlines were failing to implement the same formula with success because, he said, ‘nobody else has our discipline.’ It was a fair point. As Kerry had discovered, no airport was too small to escape his notice, no charge too minimal to be ignored. O’Leary’s pursuit of lower costs was relentless. ‘It was a war, a daily war,’ says one former executive. ‘Michael never stopped hunting for ways of cutting costs or boosting revenues, and his message was really simple: lowest costs means lowest fares.’
Aircraft turnaround time had been reduced to twenty-five minutes, compared with the one-hour turnaround that major airlines were used to at large airports. To achieve this Ryanair refused to sell peanuts, chocolate and other food so that it would take less time to clean the plane before take-off. ‘We can fly six aircraft a day where Aer Lingus or British Airways could fly four,’ O’Leary explained. ‘Where they can get six in the air, we fly eight. So we’re 20–25 per cent more efficient from the very start. It’s so simple a four-year-old could work it out.’ Ryanair’s flights were staffed by three flight attendants, compared with the five used by other carriers; its planes were all one type, so that crews and pilots could move seamlessly from one to another without retraining, while maintenance costs were kept to a minimum.
No employee was in any doubt about the company’s mission, or its style. Where rivals baulked at the simplicity of the Ryanair model, they paid the price with higher costs. For O’Leary there was no middle ground. He did not want to be a little bit cheaper and a little bit more efficient than the major airlines. He wanted revolution, not evolution: fares that were eye-wateringly low, matched by costs that were lower still, generating ever-rising passenger traffic and ever-rising profits. There was no magic formula, no creative accounting, just hard work, obsession and relentless aggression.
The airline industry had begun to notice Ryanair’s skill. At the Paris Air Show the following June the airline was presented with the Best Managed National Airline award, a rare accolade from its peers. But far from becoming complacent, O’Leary’s plans for the airline were more ambitious than ever.
I think we can revolutionize Irish tourism to and from Europe, and I think it is a cause worth fighting for. We have a plan over the next five years to double the size of the airline again. This year we’ll carry six million passengers; in five years time we want to carry twelve million passengers. That will make us Europe’s fifth-biggest airline. My hope is that one million of those passengers will be on low-fare services from the Irish airports to Europe, but if not we’ll continue to grow out of Stansted, and from points within Europe.
Ryanair’s plans were all the more ambitious against the backdrop of an increasingly competitive European aviation market. When talking to investors, O’Leary expressed caution about the changing situation, pointing out, ‘the trading environment is not all blue skies’ and yields would be affected by the competitive nature of the market. He was much more bullish when talking to journalists. When asked in December if he was worried about competing with low-cost carriers out of Stansted, he responded with a laugh.
Hardly…Competition from other low-cost carriers is just not an issue. We compete with British Airways, Alitalia, Lufthansa, SAS on routes all over continental Europe. Why the hell would we fear Go? It’s lost GB£21 million on a GB£41 million turnover. And Virgin Express is a tiny airline which has issued twelve profit warnings in the last four quarters. It’s not an airline that anybody in Europe would fear or acknowledge as a serious threat.
The emergence of a flurry of new low-cost carriers had also concentrated some minds on possible alliances and mergers between the start-ups. Not O’Leary though. When asked about the prospect of a merger he replied, ‘No thanks. I’d rather have a social disease.’
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nbsp; 15. Dot-Com Revolution
As the end of the millennium drew near, technology swept all before it. The dot-com boom, which would implode in early 2000, was in full swing. The Internet, still a relatively new but fast developing phenomenon, was unavoidable; every business wanted to understand how to exploit its possibilities and was prepared to invest millions in the hope of hitting the Internet jackpot. The dot-com boom was based on the premise that profits did not matter. It was, in effect, a land grab, as new businesses raised money from credulous investors and then spent lavishly to achieve brand recognition. No matter their losses, the share prices of Internet companies were driven into the stratosphere on a wave of irrational exuberance. Few really knew how to make any money from the Internet, but investors were convinced that it represented a new world order.
O’Leary, though, was not prepared to rush in. EasyJet, his main rival in Europe’s emerging low-cost industry, had sold its first seat online in April 1997 and even the slow-moving Aer Lingus had joined the information superhighway with a website, albeit without a regular online booking facility. O’Leary could see the possibilities but saw no need to be an innovator. ‘Michael was hugely resistant to the Internet; he didn’t sign on at all,’ recalls Tim Jeans. ‘Michael took a lot of convincing,’ agrees Ethel Power. ‘At that stage he didn’t have a computer in his office.’
His opposition was not based on fear of technology or fear of the new; O’Leary was simply far from certain that the Internet could deliver what he wanted. He had dabbled the previous year, launching a brochure site which gave information on the airline’s route network but had no booking facility. It was a presence, a toehold in the market, but nothing more.
By 1999, the case for a genuine Internet presence was growing stronger. EasyJet had led the way, and now other airlines had begun to successfully sell tickets online. Senior managers at Ryanair could see the Internet’s promise as a business tool and knew that their company was in danger of being left behind.