by Alan Ruddock
Characteristically O’Leary refused to apologize. If Geraghty hadn’t flown Ryanair, why were the hard-earned dues of union members ‘being frittered away on higher fares for SIPTU bigwigs’? Or did Geraghty get a ‘special deal’ on Aer Lingus and ‘travel with the other fat cats in business class’?
‘I don’t travel with fat cats, skinny cats or any other cats,’ Geraghty replied. ‘Actually, I usually take my car and the ferry when I go on holiday. I would normally travel economy class and I travel with Aer Lingus because that’s where our members work.’
O’Leary could not have cared less. His airline was growing, his profits rising and his routes expanding. Disease and high oil prices had not knocked Ryanair off course; Blair had given the airline his blessing; and while O’Leary was bogged down in a long war over Dublin airport and its development, this was not distracting him from the main prize. European domination was the goal, and O’Leary was on his way. What could go wrong?
18. Terror in the Skies
Just before 9 a.m. on 11 September 2001 American Airlines Flight 11 was flown into the North Tower of New York’s World Trade Center. Fifteen minutes later United Airlines Flight 175 crashed into the South Tower, and thirty minutes after that American Airlines Flight 77 hit the Pentagon in Arlington, Virginia.
In less than an hour the world changed. Almost 3,000 people died in the attacks, which had been planned and executed by members of al-Qaeda. The consequences were immediate and far-reaching: death and devastation in New York, Washington and in the fields of Pennsylvania, where United Flight 93 had crashed after its hijackers had been overwhelmed by passengers, followed by the launching of US-led invasions of Afghanistan and, eventually, Iraq.
The attacks sent the airline industry into a tailspin. Who would want to fly in their aftermath? And what levels of security would have to be introduced to prevent a repeat of the easy hijackings that had made the attacks possible? ‘The US airline industry is in an unprecedented financial crisis,’ said Continental’s chairman and chief executive Gordon Bethune. ‘This patient is dying very quickly. We all are going to be bankrupt before the end of the year. There is not an airline that I know of that has the excess cash to handle this.’
Before 9/11 that crisis had already been well on its way. The major American airlines had consistently failed to bring their costs into line with their revenues and were racking up losses at a remarkable rate. Yet, thanks to the generosity of America’s bankruptcy protection laws, their financial incontinence did not force the collapses or mergers that would have rationalized the industry and allowed healthier and leaner carriers to emerge in their place. Smaller airlines went to the wall, and some larger ones; but the majority struggled on, fighting with their employees, staving off their creditors and trading at a loss.
For them 9/11 was also an opportunity, because it allowed them to blame external factors for their own deficiencies, gave them an excuse to announce large-scale redundancies already in the pipeline, and encouraged them to put out the begging bowl for government assistance. Within days of the attacks American Airlines and United Airlines both announced they were shedding 20,000 jobs, while Continental and Delta said they would cut 12,000 jobs each. Industry analysts estimated that the attacks would cost America’s airlines a further $3 billion in losses and that 100,000 jobs would be lost.
European airlines were also preparing for the worst. British Airways’ share price tumbled by almost 40 per cent in the four days after the attacks and the company responded by announcing 5,200 job cuts on top of the 1,800 voluntary redundancies revealed just weeks before. Alitalia, Italy’s long-suffering flag carrier, announced plans to cut 2,700 jobs and grounded thirteen jets in response to what it termed ‘by far the worst crisis commercial airlines have faced since the end of the Second World War’. And in Ireland Aer Lingus suspended a quarter of its flight schedule and said it would shed 600 temporary workers.
Back in Ryanair headquarters, however, the reaction to 9/11 was somewhat different. O’Leary’s immediate response was classic: he launched a seat sale, offering one million seats at the then low price of GB£9.99 each and using the iconic image of General Kitchener calling men to war with the tag line ‘Your country needs you.’
O’Leary had no sympathy for the flag carriers’ woes and was sceptical about their motives in calling for help. ‘There is little doubt that tragic events in the US are being used by a number of European flag carriers as an excuse upon which to blame their long-standing cost problems and an opportunity to look for subsidies and handouts,’ he said. ‘We intend to fly our way out of this crisis by giving passengers even more reasons to travel at even lower prices. I think a lot of airlines are making hay out of what happened and trying to create their own crisis. This is our chance to send out a clear message to the big, fat flag carriers who are looking for state subsidies.’
It was a response that prompted accusations that O’Leary was trying to use the atrocities to grind his rivals into the ground. He was, but he was also doing what he did best: using any opportunity to sell seats, calculating that people’s fear of flying would be tempered by low prices. ‘You might be scared of flying at £200 return, but you’ll be a lot less scared at £20 return,’ he said. And he was right. While the high-fare airlines saw sharp falls in bookings, the Ryanair seat sale was an instant success.
A million cheap flights was, however, a small stroke of opportunism compared with O’Leary’s major coup. In the months before 9/11 O’Leary had been engineering a Dutch auction between Boeing, the aircraft manufacturer which supplied all Ryanair’s current fleet, and Airbus, its European rival. O’Leary’s expansion plans required scores of planes over the next five years and he was focused on securing the cheapest possible price. His tactics were crude but effective. During July he had cancelled options that Ryanair held on nineteen new Boeing 737s and then stated publicly that he would be trawling the second-hand market to find fifty planes to meet his growth targets. In August, just before the 11 September attacks, Ryanair had placed full-page advertisements in trade publications for fifty second-hand Boeings and within a month had 600 to choose from, all priced at under $15 million each. At the same time he informed Airbus that he was open to offers. He said he would not deviate from his policy of operating a uniform fleet, but if Airbus wanted to convert Ryanair from an all-Boeing to an all-Airbus carrier, now was the time to make its proposals.
He was not bluffing. The list price of a new Boeing was $60 million, with an Airbus A320 marginally cheaper at $58 million, both far more than he was prepared to pay. But the attraction of new aircraft was that ongoing maintenance charges and running costs would be significantly lower than with second-hand planes.
For both manufacturers the stakes were remarkably high. Each had studied Ryanair’s growth, subjecting its business model and projections to exhaustive testing. They knew that the airline would be a major customer in the years to come and also that O’Leary would not deviate from his conviction that Ryanair should operate only one type of aircraft. Winning O’Leary meant not just hundreds of millions of dollars in orders from the Irish airline, it meant that the winner could claim to be the provider of choice to Europe’s most dynamic airline.
For Airbus, the pressure to win was intense. Boeing already had Southwest, America’s most successful low-cost airline, as its largest customer. Airbus had no significant presence in Europe’s low-cost market – its home patch – and it needed to shoulder its way in.
Technically, O’Leary believes, there is little to choose between the planes. His criterion was price. ‘In the autumn of 2001 Ryanair started to involve us very seriously in the evaluation of sourcing additional aircraft,’ says Chris Buckley, a vice president with Airbus. ‘I would say that the main reason for doing that was to put tremendous pressure on Boeing so they could get the deal they wanted from Boeing for additional aircraft.’
It would have been a tumultuous battle even without the intervention of 11 September, but the terrorist str
ikes gave the negotiations added bite. The manufacturers’ plight was fast becoming desperate as carriers cancelled aircraft orders and dumped their options. Boeing was in crisis. Its order book had halved almost overnight and it was about to embark on a massive redundancy programme that would see 50,000 workers lose their jobs in Seattle. Airbus, too, was being pushed to the brink, although the company’s chief commercial officer, John Leahy, insisted there would be no job cuts.
O’Leary could smell blood. ‘As soon as either one of them came up with a price, O’Leary would fax their offer through to the other and say, “That’s what I’m being offered, better it,” says one former executive. The manufacturers knew that they were being played, but could not afford to back away. The second-hand market was bloated with planes, their customers were in retreat and there were no new ones on the horizon. O’Leary was the only buyer in a buyers’ market.
In O’Leary’s book state aid was a mechanism to keep inefficient airlines in business. It distorted the market and was, he argued, illegal under European competition laws. When Sabena secured a €125 million ‘bridging loan’ from the Belgian government after 9/11, he complained to the European Commission. And he was preparing another tirade against ‘lazy incompetent national airlines’ when the waters were muddied by news that Ryanair itself was a beneficiary of a form of state aid.
The 9/11 attacks had prompted insurance companies to withdraw their war risks cover from airlines, and governments stepped in to provide the insurance indemnity without which airlines could not fly. As Ireland’s largest airline, Ryanair was the greatest beneficiary of the Irish government’s decision to provide the indemnity.
O’Leary insisted that Ryanair had offered to pay the government for its cover, and vigorously denied that the temporary provision of insurance cover in such exceptional circumstances could conceivably be termed state aid. ‘It is not state aid, because it is not costing the state a penny,’ he said. ‘We would be happy to pay in any case.’ Such subtleties, however, did not find favour in the Irish media. The Irish Times report was typical: ‘Ryanair wins under state aid cover plan’, and it followed up its news coverage with an opinion piece that argued that Ryanair and O’Leary were hypocritical about state aid.
‘Let’s get one thing clear,’ the article began. ‘Michael O’Leary is not opposed to state aid to Aer Lingus. He is opposed to anything that gets in the way of profit at Ryanair, be it state aid to the national carrier or ice in his customers’ drinks.’ Ryanair, it argued, had no objection to state aid when the Walloon regional government gave it subsidies of about €12 million per year to operate from Charleroi airport. And the airline’s ideological objections to state aid were muted when it accepted the government’s insurance indemnity.
O’Leary was not prepared to let the paper’s views go unchallenged, and three days later his own article appeared on its opinion pages. ‘We are indeed opposed to [state aid],’ he wrote. ‘Not…because it would get in the way of profit at Ryanair (it wouldn’t), but because it will threaten some of the jobs of 1,700 – mainly Irish – people employed at this company. How would [the Irish Times] feel if the Irish Independent or the Irish Examiner were to receive Government subsidies to compete with the Irish Times ?’ He then addressed the issue of state aid from the Walloon government.
The low-cost arrangement we have entered into with Brussels South Charleroi Airport is not State aid. It is a low-cost arrangement (which in turn is passed on in the form of low fares) which is available to every airline – including Aer Lingus – that wishes to fly there. This is not, as asserted, State aid.
State aid does not result in efficient airlines or lower fares – it props up inefficient airlines and high fares. I object to State aid for our principal competitor, when it is quite clear that this aid will be used to assist it to compete against Ryanair.
His argument was passionate but failed to deal with the newspaper’s most pointed accusation – that O’Leary and Ryanair were hypocritical in their approach to state aid. O’Leary did not explain how state aid for Aer Lingus threatened Ryanair jobs but not profits. Without doubt, Ryanair’s profits would have suffered if Aer Lingus, or any state-owned airline, was given unlimited resources by its government to compete with it. His objective was to ensure that as little state assistance as possible found its way onto state airlines’ balance sheets, because the weaker they were, the better equipped Ryanair was to compete with them aggressively. There were, too, semantic distinctions that O’Leary took seriously: he saw his deal with the Walloon government not as a subsidy or state aid, but as a commercial deal that would benefit both sides. Ryanair would get the opportunity to build a new market at low cost and with financial help, but the long-term winner would be the Walloon region. It was not a subsidy to prop up an ailing airline or to distort competition, but an investment by the Walloon government in a profitable future.
O’Leary also said that he was calling a truce with Mary O’Rourke, the transport minister. ‘We have requested a meeting to explain in detail how – by working together – Ryanair and the government can deliver two million new passengers and 500 new jobs for Irish airports and Irish tourism over the next two years. I hope she will respond magnanimously in the national interest.’
The day after his article appeared, O’Leary and O’Rourke attended a political fund-raising event hosted by Charlie McCreevy, Ireland’s finance minister and a friend of O’Leary. ‘Reports say they [O’Leary and O’Rourke] were not observed in friendly conversation, or indeed any conversation at all,’ the Irish Times noted. By early November, however, reconciliation was back on the agenda when O’Leary said he had decided to stop ‘slagging off’ government ministers. His comments came during a conference call with stock market analysts, as he was discussing the prospects of Ryanair’s terminal and the location of Ryanair’s next base.
‘Our view remains unchanged that Aer Rianta is a high-cost, inefficient monopoly, but perhaps the Irish government’s view is changing,’ he said, according to a transcript of the conference call.
There is a new atmosphere and it’s time to stop slagging off the government and certain Cabinet ministers and work more cooperatively with them. If not, we could see 15,000 to 20,000 tourism jobs lost. The government is giving some consideration to our plans to break the Aer Rianta monopoly and our plans for a second terminal. But I’m guessing that the government will not be able to move quickly enough to meet our deadlines.
O’Leary, in any case, was not prepared to wait. He was hunting for a new continental base to complement Charleroi, and in late 2001 he chose Hahn, the former NATO airfield in southern Germany he preferred to call Frankfurt Hahn.
The two sides signed a twenty-year deal which would create 200 jobs and provide at least thirty flights daily to more than ten destinations from February 2002. Ryanair promised these flights would deliver 1.5 million passengers in the first year. For the airline it meant a guaranteed low-cost base for twenty years in Europe’s largest market. For the airport, the deal with Ryanair guaranteed its future.
‘A deal is a deal,’ says Hahn’s Helfer.
And of course it includes some provisions for inflation, and there are provisions in the deal concerning what happens if they grow to a certain level of base aircraft and so on, but basically it is a deal. It doesn’t make sense for an airport to handle Ryanair as a customer, give it a low-cost deal, and then increase your charges by 100 per cent two years later, because then their business model wouldn’t work. We have a passenger charge of €4.35 and that is it.
Helfer says Hahn offered Ryanair a cheap deal because it was the only airline flying there. ‘That’s the problem of conventional airports,’ says Helfer. ‘They have, let’s say, one daily flight from Lufthansa going to Frankfurt or one daily flight from Aer Lingus going to Dublin and they have to be very careful not to deteriorate their price base with the traditional customers when they start doing business with Ryanair. We did not have this problem.’
O’Lear
y was happy with the outcome, and happy to use it as a stick with which to beat Aer Rianta. ‘What makes Frankfurt Hahn different is that everything they said they would do from day one they have delivered on,’ he said. ‘This new German base means that four more aircraft, 200 new jobs and over one million tourists have again been lost to Ireland by the high-cost Aer Rianta monopoly.’
His relationship with Dublin airport deteriorated further at the end of November, when the two disagreed about the creation of a special low-cost facility within the airport, prompting Aer Rianta to state that a low-cost deal for Dublin did not necessarily have to involve Dublin airport. ‘It is worth noting that Shannon airport is only marginally further from Dublin than many of the European airports Ryanair flies to [that claim to be city airports],’ a spokesman said, referring to airports like Malmö, Hahn and Beauvais. It was a valid, if mischievous, point. It also highlighted the differences between an established airport like Dublin and a transformed military base like Hahn. Dublin had an international market, a host of carriers as customers and far less flexibility to manoeuvre. Hahn, starting virtually from scratch, could offer dramatically cheap deals because it was desperate to build a business.
O’Leary is a supreme pragmatist who never worries that his actions might contradict a previously stated policy. He will do whatever he thinks is best at the time and execute a perfect U-turn moments later if conditions change.
In his long-running battles with Aer Rianta, O’Leary used a familiar refrain. The airport company’s refusal to reduce its charges and the Irish government’s inability to deliver a second competing terminal in Dublin was, he said, depriving Ireland of both new airline routes and consequent tourism growth. When he announced the new bases in Charleroi and Hahn he reiterated that Ireland had once again lost out on the opportunity to have more routes because of the intransigence of Aer Rianta and the government. He would not, he said, launch another route from Dublin until there was a change in policy, and other countries would benefit instead from Ryanair’s growth. He had also denounced both Glasgow and Edinburgh airports as far too expensive and had opted instead to base Ryanair’s Scottish operations in Prestwick.