by Alan Ruddock
O’Leary’s message was as crude as his tactics and was certain to provoke a hostile response. Terrorist attacks remained the authorities’ greatest fear and the sight of a tank trundling towards an airport was hardly going to meet with widespread approval. Unsurprisingly, police refused to allow O’Leary to enter the airport and for a moment he weakened. Turning to Paul Fitzsimmons, O’Leary suggested pulling out of the stunt. ‘He said, “We can’t do this, it’s gone wrong.” I said, “No, we have to fucking do it,”’ says Fitzsimmons. And so O’Leary, megaphone in hand, berated easyJet from the turret of his tank outside the airport’s perimeter as the theme tune from The A-Team, an old American TVseries, blared from speakers. It worked. O’Leary was rewarded for his poor taste with the newspaper and television exposure he craved and his business needed.
However, O’Leary recognized that it was going to take more than stunts to fill Ryanair’s ever-expanding fleet. In early June, announcing the full-year results for 2002/03, O’Leary spelled out the evolving picture to investors. The airline would go through a period of ‘abnormal’ traffic growth in the 2003/04 financial year, he said, with passenger numbers growing by 50 per cent to twenty-four million, and fares would be between 10 to 15 per cent lower in 2003/04 than in the previous year.
Investors were spooked, prompting an 8 per cent fall in the share price on 3 June. But later that day the share price rallied and closed just 2.2 per cent below its opening price. The damage, however, had been done. The pace of Ryanair’s expansion was unsettling investors. Their mood was not improved when a few days later O’Leary announced that the cost of acquiring Buzz was actually €46.7 million, and not the €20.1 million he had previously claimed. The extra was for ‘excess lease and acquisition costs’, O’Leary told an investor roadshow on 7 June. ‘I think it is cheeky,’ one analyst told the Irish Times.
Investor unease had also been stoked by a critical report on Ryanair by Andrew Lobbenberg, an airline analyst with ABN-Amro, who published his views on the company under the provocative title ‘The Emperor Has No Clothes’. He advised his clients to sell Ryanair shares because he believed the company would not be able to sustain the levels of profit growth its share price implied. Lobbenberg was not arguing that Ryanair was a busted flush – he admired its business model and management – but he believed that the share price had been overinflated by expectations which the company would be unable to meet. O’Leary responded furiously to Lobbenberg’s assessment, demanding and receiving an opportunity to address ABN-Amro’s stockbrokers directly so that he could rebut his analysis, but O’Leary’s irritation did not sway the analyst’s views. The market, for once, had to balance contrasting views of Ryanair’s future, and the new air of uncertainty ensured that any difficulties would be amplified.
O’Leary, however, was not going to change course. He wanted to stamp his mark on the major European markets, establish the Ryanair brand and use his low cost base to frighten competitors away from his routes. Relentless expansion had its risks, but he saw no alternative. The planes arriving from Boeing had to be put to use, and changing perceptions of the low-cost airline market meant that a host of potential competitors were lining up to get their slice of the new market. Ryanair’s expansion was an aggressive land grab before competitors could establish their own presence. Expansion would, in the short term at least, damage yields and profits, but he had no time for a more measured approach. He told investors that rapid expansion was indeed choking yields, but then said that Ryanair was negotiating with forty new airports and nine potential new bases, and aiming to carry 30 million passengers within three years.
While championing competition in the market as a whole, O’Leary had no desire to engage in direct competition on specific routes. He wanted dominance of individual routes and airports so that he could maximize his bargaining and pricing power. But, unlike traditional capitalists, his objective was not to achieve dominance so that he could later increase his prices. He remained fervently committed to lowering prices as the only sure stimulant of new demand, and his objective was to increase the scale of his operation and the size of his passenger pool.
The new challenge was to exploit the opportunities that his expanding passenger base gave the company. Getting more money from every passenger was critical to future profit growth, but he was not going to go down the traditional path of simply raising prices. He sought painless extraction, not straightforward extortion, and his tool of choice was the Ryanair.com website.
O’Leary was determined not to fall into the same trap as the early Ryanair, which had failed to turn rising passenger numbers into increasing profits. The key was the amount of money that could be extracted from each passenger for services and products other than the airline ticket. In 2003 Ryanair planned to carry 24 million passengers – a captive market who would book their flights directly with Ryanair and then sit for between one and two hours on its aircraft. The task of maximizing ancillary revenue fell to Conal Henry, who was hired as commercial director at the start of 2003. As one Ryanair manager remembers,
When Henry walked in [ancillary revenue] was seen as a big opportunity but it was felt that we probably weren’t delivering on it, even though the market probably felt that we were. The feeling inside was that we could make more out of this. [Ryanair’s executives] aren’t consumer marketing people. They’re not sitting there going, ‘Well, that customer proposition doesn’t match with our customer base and our brand.’ They’re much more traders than marketeers.
Henry was determined to transform the website so that the products offered were of a higher quality and a better fit for Ryanair. He was up against the company’s ingrained obsession with short-term profit. ‘Sean Coyle [Henry’s predecessor] had basically just said yes to anybody who would write him a cheque,’ says a Ryanair manager. In the spring of 2002 Ryanair had started selling Bank of Scotland mortgages on the website because ‘a friend of one of the senior guys in Ryanair bent his ear at a dinner party one night’.
The mortgages were marketed through a link to the website of a Dublin-based broker, Richardson Insurance. Ryanair and Richardson Insurance pledged to pay the property valuation charges for any customer who organized a mortgage through the new system. Unlike Richard Branson’s Virgin, however, O’Leary was not stretching his brand with company money; the Ryanair website was available to partners who could market their products if they were prepared to pay for the privilege. It was a cash stream not a financial risk, and it required no management time other than the negotiation of the deals.
Henry wanted to change the way Ryanair sold additional services to its customers. When Henry started, 15 per cent of passengers who booked with Ryanair Direct booked a car or a hotel or bought travel insurance, but on Ryanair.com it was less than 2 per cent, despite the fact they were the same products. A senior Ryanair manager says,
The reason was because in the call centre they were selling it as part of the same booking process. On the website you had to go off onto a different website, pull out your credit card a second time and complete a second transaction. People just didn’t bother and the product wasn’t so compelling as to drive you to it. What Henry wanted to do was like Expedia. If you booked a flight to Venice in May, he wanted to show you within that booking the price of a hotel for three days in Venice, [and you would just] tick to buy.
Henry’s proposal would have involved root and branch changes to Ryanair’s online booking system – a gamble that O’Leary was not prepared to take. ‘Michael was very wary to change it,’ says a Ryanair executive. ‘If you think about the Ryanair model it hasn’t really changed that much since 1995. Michael doesn’t know what bits of it actually work and what bits don’t so he’s very wary to change any of it.’
With radical change ruled out, Henry turned his attention to the deals Ryanair had struck with Need a Hotel for hotel rooms and with Hertz for car hire – with links to both companies’ websites carried prominently on Ryanair.com. There was clearly a problem with bot
h. Despite climbing passenger numbers, the number of hotel rooms being booked on Ryanair.com was falling and Henry was determined to find out why. ‘Every week Henry would go in [to the website] and show the hotel prices on Ryanair.com and the hotel prices on easyJet and the others,’ says one of Henry’s colleagues. ‘And we were always out on price. And the reason we were always out on price was that we had nailed [Need a Hotel] for so much margin that they had to keep their prices up.’
Henry arranged a meeting with Andrew Collins, financial director of Need a Hotel, and told him that he had to get his prices lower. ‘He said he couldn’t afford to. Then he said, “Conal, give me a chance to get my prices down and I’ll make you more money,”’ says a manager who attended the meeting.
The previous deal had been based on a complex formula whereby Ryanair got a different percentage of Need a Hotel’s earnings depending on how many rooms were sold, with the percentage rising as higher targets were hit. Ryanair’s success had made the formula unworkable: its percentage take was so high that it was no longer worthwhile for Need a Hotel to sell the rooms. The two men set about creating a simpler deal, which was signed off in spring 2003.
Henry’s position was simple: he was interested in the cash. He didn’t care about the percentage structure, just how much cash he could make for Ryanair. Henry proposed a deal that guaranteed Ryanair the same minimum cash from Collins’s company, with additional payments triggered by passenger growth. Released from the straitjacket of the earlier deal, Collins could afford to drop his prices and fill his rooms. Suddenly Ryanair was making more money and the customer proposition was cheaper.
While negotiating with Collins, Henry was simultaneously trying to hammer out a new deal with Hertz, which was also hampered by a similarly restrictive deal struck when Ryanair’s growth was more modest. The deal with Hertz was that the more cars Ryanair shifted to its passengers, the higher the payment Hertz had to make. For the first 10,000 cars rented, the percentage was set at around 20 per cent of revenue, rising to 30 per cent for the next 20,000 cars, and then, at what both sides first thought was an unachievable target, Ryanair’s share would rise to 50 per cent.
Like Need a Hotel, Hertz was now actively avoiding new business from Ryanair because it made no financial sense. ‘So you had a situation in Charleroi where Avis were renting more cars than Hertz despite the fact the only airline in Charleroi was Ryanair, and our deal was with Hertz,’ says a Ryanair executive. ‘They pulled back their availability because it wasn’t worth their while, but Avis were making loads of money because they weren’t paying us commission.’
A new deal was essential. Ryanair needed the profit growth and Hertz needed the incentive to make its cars attractive to Ryanair’s customers. ‘We were all looking at each other saying, “This is fucking mad,”’ says one of the team. ‘Ryanair’s ancillary revenue per passenger was going down because the number of cars rented was going down. So we flipped it the other way round. We said to Hertz, the more cars you ship the lower margin we’ll take – provided you guarantee a minimum income per passenger, which is the income per passenger generated today. So the way for Hertz to make money is to ship loads of cars. And that’s what they did.’
This time Henry’s proposals met with O’Leary’s approval. ‘Once he could see he was guaranteed to make at least as much as he made on his own original deal he said, “Fine, do whatever you want, boys.” He was very happy,’ says one of the negotiators. A new five-year deal was signed in the summer.
With the core hotel and car-hire contracts tied up, Henry turned his attentions to the other products on Ryanair’s website. The previous years had seen a steady stream of products advertised. Some worked, some failed, and there was no overall strategy, just a suck it and see approach to what was a still new and unproven system.
‘O’Leary understands the airline product really well, but get him outside of airlines and he doesn’t see a good product from a bad product,’ says one airline analyst.
Ryanair is much more interested in the deals that they make than the value they bring to their customers. And they want nice big fat slabs of cash. So rather than seeing the long term, like here’s how we can get 70 per cent of our customer base into this franchise, they see the money. It devalued the quality of the real estate. Henry’s role was to bring order to the chaos, and to bring fewer, better links to the Ryanair website. He did a good job.
Slowly, Henry began to pick off the underperformers. As he cut, he created new revenue streams. His first innovation was Ryanair affinity credit cards, which offered a free flight for every ten booked on the card within a ten-year period. The agreement with MBNA, the credit card provider, proved a template for future deals. Ryanair was paid up front for access to its customers, with more cash to come after certain thresholds were reached. All it had to provide in return was free flights, which were already part of its marketing strategy.
The cards were launched at a press conference in mid-February 2003, with O’Leary and Fitzsimmons lining out for Ryanair. ‘I remember there was a gold card and a regular card,’ says Fitzsimmons. ‘MBNA came around to us all to make sure we had them and gave us stupid limits, scary limits. They gave me €100,000. I could have bought a house. We had to have the cards at the press call, not to be caught out if someone said, “And do you have one?” O’Leary was given a gold one that just said “Ryanair” on it. And he said, “Fuck, get me a regular one with the fucking plane on it.”’
The cards were an immediate success. ‘It was the fastest-growing affinity card in the UK and Ireland,’ says Fitzsimmons. ‘It grew like a weed.’ Within eighteen months O’Leary would be able to report that ancillary revenues were shooting ahead, rising by 35 per cent in 2003 to contribute just under £150 million in revenue – a figure that would have been even higher had it not been for the weakness of sterling, which accounted for two thirds of the revenue generated.
Ryanair’s European land grab was the dominant feature of 2003, but it did not mean that O’Leary’s traditional enemies in Ireland could rest easy. His home country’s significance to Ryanair’s immediate expansion plans was small, but O’Leary never lost sight of the future. Ireland had the potential to be a dynamic growth market for Ryanair if O’Leary could strike the right deals. The country’s dramatic economic growth had stalled around the turn of the century but was swiftly regaining momentum and there was a burgeoning market of newly affluent Irish consumers ready to board flights, if they were available.
The targets of O’Leary’s domestic venom remained constant: Aer Rianta, the state-owned airport operator, and Aer Lingus, the state airline. Aer Rianta caused him the most frustration because he believed that its inability to grasp the dynamics of low-cost travel was preventing him from building a bigger presence on his home turf. Aer Lingus was a different matter. The airline was a competitor, and for the moment an ineffective one. Its high costs and heavily unionized workforce meant that it struggled to respond to competitive threats. Its passengers were there to be taken, if only O’Leary could get better access to Ireland’s airports.
For the moment O’Leary contented himself with sporadic mischievous attacks on the national airline, accusing it of ripping off its customers and then watching with amusement as the row played out in the media, all the time generating publicity for Ryanair on its chosen battleground of price. He did not always win. To O’Leary’s consternation, Aer Lingus won an award that year as the best-value airline on routes between the UK and Ireland. ‘Only a bunch of complete idiots could possibly vote Aer Lingus as best-value airline,’ said Paul Fitzsimmons, his spokesman. ‘Aer Lingus’s fares are four times higher than Ryanair’s. If this is what passes for best value among the top thousand chief executives in the survey, then maybe they’re still drinking too much free champagne on Aer Lingus’s overpriced flights.’
These were minor squabbles, but they demonstrated that no fight was too small for O’Leary, and they set the tone for the larger battles that still had to be fought
. The main areas of disagreement between O’Leary and Aer Rianta – and by extension with the Irish government – were the continued failure to develop a second, independently operated terminal at Dublin airport; the expense of Aer Rianta’s expansion at Cork airport, which O’Leary argued was a waste of money that would have to be paid for by the travelling public; and the break-up of Aer Rianta, which had been proposed by Seamus Brennan, the minister for transport.
Despite years of campaigning a second terminal in Dublin appeared as remote as ever and in mid-May O’Leary launched yet another assault: ‘It’s time for the government to put the interests of the 16 million passengers – who have to use the third-rate Dublin airport facilities – above the sectional interests of those trade union leaders who seek to protect the Aer Rianta monopoly. It’s time for the taoiseach to stop talking about the problem and deal with it. Irish tourism is in a serious crisis. We need more action, not dithering, and we need it now.’ To illustrate his point, O’Leary dispatched a hearse and coffin to Aer Rianta’s annual results meeting – his way of showing that the authority was killing Irish tourism.
Brennan was sympathetic but seemed powerless to help. Aer Rianta, under Noel Hanlon, its combative chairman, wanted to press ahead with extensions to its existing terminal – dismissed by O’Leary as a ‘gold-plated’ waste of taxpayers’ money. The trade unions backed Hanlon. Allowing Ryanair to control a new terminal would be like giving a blood bank to a vampire, said Joe O’Toole, a trade union leader. ‘Let him [O’Leary] continue flying airplanes, he does a good job there, keep at it. I don’t want to give him the airports. I do not, frankly, trust Mr O’Leary on the issue of Aer Rianta. It’s just as simple as that.’