by Alan Ruddock
What, Walsh wondered, was the point? What was he trying to create if he could not be certain that money would soon be available to complete the transformation? Would he start going backwards rather than forwards, and would his strategy – and hard work – simply unravel in the face of relentless Ryanair competition? Was he now an obstacle to progress at the company he had served for a quarter of a century?
The answers came with the joint resignation of Walsh, Dunne and Kearney. Ahern’s response was an all-out assault on Walsh.
The workers and the unions are concerned that the very people they were dealing with as management wanted to sell out to make themselves extremely rich. That was the underlying position of the trade union movement to which I have been listening all year. The level of trust between management and unions is non-existent. There is huge resentment that the management team has claimed virtually all the credit for the rescue of Aer Lingus after the events of 11 September 2001, ignoring the huge effort by union leaders and staff to make the changes work. That is what I have been dealing with…[The unions and staff] are also determined not to yield up savings which they perceive are intended to enrich a management team concerned with its own position rather than the company’s future.
Not content with impugning Walsh’s motives, Ahern also launched an attack on his business plan. ‘There is much evidence of some unease in the business community about the reduction in both the nature and quality [of Aer Lingus’s service],’ he said, without providing any evidence. ‘The government is trying, based on last month’s Goldman Sachs report, to make the necessary and right decision – it is a big decision for the staff, management, the board and the country – on the national airline. I will not just click my fingers because some right-wing economists believe we should privatize it.’ And in a direct attack on Walsh’s contribution to the airline’s transformation, Ahern continued:
No player is indispensable. A new management team will be appointed and the government will proceed to take the necessary decisions as shareholder. Aviation policy and, by extension, the future of Aer Lingus are major strategic questions for an island nation that is heavily dependent on trade, investment and tourism. Policy decisions will be taken with an eye to the long-term future. We will not be stampeded by anyone.
Walsh responded calmly and stuck to the fundamentals. ‘Given the brutally competitive nature of the industry, we need to move faster not slower. It was clear the government [does] not share our sense of urgency,’ he said.
Seamus Brennan confirms that in Walsh’s original request, he did not raise a management buyout. ‘They didn’t even use the word MBO. So we knew where we stood from day one.’
Brennan believes that Walsh, Dunne and Kearney were right to resign. ‘My [government] colleagues would not agree with this, but I thought they behaved very honourably. It became clear the government was not going to make an early decision on any equity sale, and the guys thought that if there is no early decision then maybe it won’t happen at all and maybe we can’t take the airline any further so we can go our separate ways.’
The consequences for Aer Lingus were catastrophic. It had lost the management team that had guided it from the brink of bankruptcy to sustainable profitability, and had lost it at a time when it needed it most. With Aer Lingus in turmoil, O’Leary was ready to pounce.
25. Full Frontal Assault
Two months after Willie Walsh tendered his resignation, Michael Cawley, Ryanair’s deputy chief executive, hosted a low-key morning press conference at Dublin airport. Ryanair, he said, would be launching six new routes out of Dublin. The new services were hardly dramatic – two of them, Doncaster and Eindhoven, were not likely to set the travelling public’s pulses racing – but the decision to expand from Dublin was the first signal that a new front was being opened in Ryanair’s fight for European domination. It was also a signal that Michael O’Leary’s pragmatism continued to win out over principle. He had consistently and very publicly maintained that he would not develop Dublin airport as a base until the Irish government had made a decision about building a new, independently owned terminal there.
O’Leary’s boycott of new services from Dublin would have been effective if it had brought a halt to the airport’s growth, but it had not. Aer Lingus’s aggressive expansion had swollen Dublin’s passenger numbers, and foreign airlines continued to open routes to Ireland’s capital city. O’Leary liked to claim that government dithering on the building of a second terminal had cost the Irish economy thousands of jobs and millions of euros in tourist revenue, but growth had continued without him.
His neglect of Dublin had not troubled Ryanair’s own expansion, because the growth opportunities within Europe remained apparently bottomless. New bases in Italy and Germany soaked up the new planes arriving from Boeing and Ryanair’s passenger numbers continued to climb month on month. The Irish market was but one growth possibility in a sea of opportunity. Ireland’s continued economic success and the rising levels of disposable income which that generated for its citizens made it an attractive market, but for O’Leary the poor economic performance of Italy, France and Germany made those countries even more attractive for a low-fare airline. As Cawley said on the morning of the route launches, ‘If anybody thinks that Ryanair needs Dublin, think again. The half-million passengers through Dublin is neither here nor there. Dublin, with all due respect to Dubliners, is a fairly insignificant city.’
O’Leary, though, had miscalculated. He had allowed himself to believe that Ryanair was critical to Dublin’s growth as an airport, and that he had the power to dictate the pace of that growth. He had underestimated the stubbornness of the Irish government, the resolve of the trade union movement and, more fundamentally, the airport’s ability to grow without Ryanair’s involvement.
A former Aer Rianta executive says that negotiations between O’Leary and the airport’s owners over the previous five years had been characterized by O’Leary’s unflappable belief that he created the market. ‘We said you can either participate in the growth in this market, or you can go to less attractive markets, we don’t mind. Nobody creates the market, the economy creates the market. As an economy grows, the demand for travel grows with it and that’s one of the most robust statistics in international economics. The question is, who’s going to service it. If Michael doesn’t service it, somebody else will.’
Tim Jeans agrees. ‘Michael thought that because Ryanair wouldn’t expand from Dublin, effectively Dublin airport wouldn’t expand. And that was wrong. The fact was, other airlines, including Aer Lingus, did fill the void. And Dublin airport continued to grow despite Ryanair.’
Publicly, O’Leary did not waver from his position that Ryanair would not expand from Dublin until there was regime change, but Jeans says that his private views were far more considered. ‘He did listen to opposing points of view and he would frequently come into my office or Michael Cawley’s office, particularly of an evening, and we would debate these things rationally.’
Ryanair’s position as Europe’s dominant low-fare airline had not, however, changed O’Leary’s passion for his home country. Growth in Europe produced the results that satisfied his shareholders, but O’Leary’s patriotism fuelled his frustration at the failure to develop Dublin to its full potential. His battles with Bertie Ahern and the Irish government, with Aer Rianta and with Irish trade unions stemmed from his deep belief that Ireland could be so much better if its leaders only had the courage to strip away the obstacles that held it back from even more dramatic growth.
‘The [fighting] with Aer Rianta transcended business,’ says Jeans. ‘It went to the very heart of what Ryanair was about. It was about Ireland, it was about Ryanair as an airline delivering growth…I thought O’Leary and the management team were passionate about Ireland and the difference that we would make to Irish tourism. It wasn’t an altruistic, misty-eyed view of the mother country. It was based on the fact that we knew we could make money. The two interests coincided.’
Dublin was also edging towards a new slot-controlled system, which would create a more rigid structure for airlines flying in and out of the airport, rather than the more flexible, negotiated system that had existed for years. O’Leary was firmly opposed to slot control – ‘Dublin doesn’t need slot control because there is no problem with access to the runway; it’s the terminal that’s the problem,’ he says – and he would fight legal actions to prevent it, but Ireland’s aviation regulation authorities were in favour. If it came to pass, incumbent airlines would be in a stronger position than new entrants. The pressure on Ryanair to increase its presence at Dublin was mounting inexorably.
*
Three years after Seamus Brennan, as minister for transport, had sought tenders for the building of a second terminal at Dublin airport, the Irish government was finally ready to make a decision in May 2005. After studying all the proposals it decided to award the tender for a new terminal to the state-owned Dublin Airport Authority.
O’Leary’s response was withering:
the Taoiseach has dithered for three years on providing a second terminal at Dublin airport. As a result, Dublin airport today is not just a slum; it is a testament to the failure of Bertie Ahern to keep his own election promises…Another terminal provided by the people who brought us the Black Hole of Calcutta is not competition, it’s still the Black Hole of Calcutta. The government has been forced to open up telecoms, electricity and other sectors to competition and airports shouldn’t be any different. This is anti-competitive and anti-consumer.
It had also always been a fait accompli. The Irish government’s slowness to make a decision did not mean that it was ever in any doubt about what that decision would be. It was not that it could not make up its mind, just that it wanted to give the appearance that it had considered all the options and that, on balance, the proposal from the Dublin Airport Authority was the best. In truth, private tenderers did not have a hope of winning the contract. The trade union movement was vigorously opposed to private competition at Dublin airport and would have reacted aggressively to anything other than a continuation of the state monopoly that gave it and its members power and influence over the airport’s affairs. SIPTU, the strongest union at the airport, had toyed with suggestions that it should participate in the ownership of a second terminal, but had always been determined that union control would not be diluted by private competition.
O’Leary knew that continued opposition to the government’s plans was probably futile, but he was not prepared to retreat quietly. ‘We’ll go to the Competition Authority and the European Commission and challenge this on the basis that it contravenes competition and public procurement rules,’ he said. ‘It’s time for this monopoly to be tested in the courts and in Europe. It’s a state monopoly and it’s illegal.’ In July O’Leary confirmed that Ryanair would bring full proceedings under Section 82/86 of the Competition Law under the European Treaty. ‘Competition works, but Bertie giving in to his buddies in the trade unions doesn’t,’ he said.
O’Leary’s case to the courts alleged that Ahern ‘entered an arrangement with the trade union movement in relation to union work practices’. The agreement, O’Leary alleged, meant that similar if not identical work practices would be applied to the new terminal as were already in place in the existing terminal. He also claimed that Ahern ‘wrongfully and in breach of duty’ imposed the agreement on his minister for transport.
The case was adjourned, and the Dublin Airport Authority pressed ahead with its plans, revealing details in September and prompting another O’Leary tirade. According to the DAA, the new terminal would not be completed until 2009, and would cost €1.2 billion. ‘We, as the largest airline in the country, have not been consulted on either the location, the cost or design of this terminal. It’s an absolute bloody disgrace that it’s not going to be here until late 2009 [and] how you can spend €1.2 billion when the private sector has offered to build it for €200 million with no extra cost to the taxpayer is equally a disgrace.’
He said that the DAA’s terminal would be built in the wrong place, and would not meet the requirements of its airline customers. ‘It’s a shambles,’ he said. But it was a shambles he would have to live with.
At 8.50 a.m. on 7 July 2005 three bombs exploded in London’s Underground within fifty seconds of each other, and one hour later a fourth bomb exploded on a bus. The attacks killed fifty-two people and paralysed London’s transport system. Fourteen days later four more bombs went off, again targeting London’s public transport, but this time the main explosives failed to detonate and there were no serious injuries.
Inevitably, the stock markets reacted by marking down the value of airline companies, fearing that terrorist attacks would cause an immediate slump in travel, but the impact of the bombings on air travel was not as calamitous as the fallout from 9/11. Ryanair reported a sharp fall in bookings to London in the days after the attacks, but the slump was not matched for other destinations. Quickly, too, London traffic returned to the pre-bombing levels as travellers seemed to shrug their shoulders, accept the risks inherent in the new age of terrorism and carry on regardless.
Far more serious for airlines was the linked problem of rising oil prices, pushed ever higher by the continuing instability in the Middle East. In 2004 steadily rising prices had forced long-haul carriers to introduce fuel surcharges on their ticket prices, and after a brief lull the oil price had started to spike alarmingly through 2005. Fuel surcharges on international routes were hiked up again in March 2005, and soon spread from long- to short-haul flights. ‘Our fuel bill next year is expected to be an extra £300 million,’ said BA’s commercial director, Martin George. ‘With prices continuing to rise, a surcharge increase is regrettably unavoidable.’
In May Giovanni Bisignani, director general of the International Air Transport Association, had said that the high oil price was ‘destroying’ the profitability of the global airline industry, which was facing losses of $6 billion in 2005, its fifth successive year of net losses. Ryanair, though, was revelling in its rivals’ discomfort. Its advantageous price hedging on oil had allowed it to report a 29.5 per cent increase in pre-tax profits to €295.9 million on the last day of May and O’Leary was confidently predicting further growth in 2005/06. In O’Leary’s view high oil prices could even be seen as a positive. ‘At $60 a barrel there will be even less pressure on pricing, there will be no new entrants and some [recent start-ups] will disappear. The bloodbath in Europe is continuing and will get worse at $60 a barrel. It is not pretty out there. If oil stays at $60 per barrel over the next twelve months, most of Europe’s airlines will show enormous losses,’ he said. In America, while the traditional airlines struggled Southwest was also reporting strong profits, despite a 25 per cent rise in its fuel costs.
By the summer of 2005 BA’s fuel surcharge had increased fourfold to £24. O’Leary’s response was predictable. ‘Only Ryan-air guarantees no fuel surcharge on all of our fares, not now, not ever,’ he said in a statement. ‘Why don’t BA reduce other costs instead of always gouging their passengers?’ He then rammed home his point by wearing a highwayman’s outfit to a press conference in London, where he lampooned BA’s ‘skyway robbery’. ‘While oil prices have doubled, BA fuel surcharges have gone up twelvefold,’ he said. ‘BA and other airlines are simply using oil price increases to jack up fares.’
If war had created the impetus for the rising oil price, natural disaster soon
sent it higher still. Hurricane Katrina, which crashed through the southern states of the US in September, sent oil above $70 a barrel, and analysts were quick to predict that $100 was now a distinct possibility. In mid-September IATA predicated the global airline industry was now heading for losses of $7.4 billion for 2005 and said that oil was ‘once again robbing the industry of its return to profitability’. Worse, there was no end in sight as the oil price remained stubbornly high. War, terrorism and natural disaster ensured that airlines would have to come to terms with a new price regime, one that would increase pressure on the weakest players in the market and re-emphasize that the future lay with the leanest, lowest-cost operators.
The previous year O’Leary had generated acres of press coverage by saying he was thinking of charging for baggage, an idea that sparked heated debate across the travel industry. The travel supplement of the Sunday Times, which has more than four million readers in Britain and Ireland, devoted its cover story to the idea of travelling with hand baggage only.
Author Dan Ryan and his partner struggled to cope on a weekend away, despite carrying O’Leary’s mooted ten kilos of free carry-on luggage. Sweating and uncomfortable from layers of clothing worn to bolster his weekend clothing options, Ryan was irritated by the sight of two amply built passengers who clearly weighed more than he and his baggage combined. Why, he wondered, do airlines not charge fat people more than they charge thin people?
O’Leary, who has the lean physique of a man with a high metabolism rather than a body honed by hours spent in a gymnasium, was quite taken by the idea. He also delights in telling audiences that he cannot wait to show pornography on late-night flights (adding that he would be its best customer) and wonders aloud about the possibility of his fleet of aircraft becoming flying casinos, using international airspace to evade gaming laws, as soon as the technology to extract instant settlement of inflight debts is foolproof and cheap. ‘These things may happen, and some of them certainly will,’ he says. ‘Paying for baggage is logical, because if we can persuade people to fly with what they can carry, we can carve another chunk off costs and take fares lower still. But yes, it generates publicity, and every time we get publicity, good or bad, bookings spike up.’