Michael O'Leary

by Alan Ruddock

  There was, he recognized, the potential for problems with the European Commission because of the combined power of Aer Lingus and Ryanair in the Irish market, but he believed that any objections on competition grounds were surmountable. If the commission were to block the deal, it would have to tread warily, finding a form of words that did not preclude future consolidation in the European airline industry. He had, too, a major precedent on his side: the merger of Air France and KLM had created a European giant that dominated airports in Paris and Amsterdam, yet it had been waved through by Europe’s regulators.

  Just as important for O’Leary was the frozen terror that his bid would provoke at Aer Lingus. While its management devoted its energies to fighting off the takeover, he could concentrate on Ryanair’s expansion from Dublin and new European bases, confident that a major rival was distracted. He was quick to note that the potential deal was relatively small-scale for Ryanair, and he referred to Aer Lingus as a tiny regional airline. Ryanair now dwarfed Aer Lingus, carrying almost six times as many passengers. If the airline continued to grow at 20 per cent a year, it would add the annual total number of Aer Lingus passengers in a single year’s organic expansion, and O’Leary had not deviated from his ambition to double Ryanair’s size over the next five years. Victory, if it came, would make him impregnable in Ireland, but would not significantly alter his European ambitions.

  Some Ryanair shareholders were worried that the airline would be dragged down by dealing with the unions, that it would not be able to manage Aer Lingus’s long-haul operations and that its ability to grow profits by expanding on its own terms – rather than by acquisition – would be hampered. O’Leary countered by saying that Aer Lingus would be run as a separate business, that the two airlines would continue to compete with each other, that fares would fall not rise from Dublin and that Ryanair’s purchasing power and influence with jet manufacturers would ensure that Aer Lingus would be able to modernize its fleet at advantageous prices.

  Ryanair’s formal offer document for Aer Lingus was published on Monday 22 October, complete with cartoon cover depicting Ryanair and Aer Lingus as two small rugby players standing shoulder to shoulder against the snarling charge of three giants – Lufthansa, Air France and BA. It was a disingenuous image and in stark contrast to O’Leary’s claims that Aer Lingus was but a small regional airline while Ryanair was a European colossus. The details of the offer, though, were more straightforward. Ryanair would pay €2.80 a share, a premium of 27 per cent over the flotation price. The document highlighted the volatility of Aer Lingus’s profits – over the previous fourteen years its cumulative losses of €616 million had exceeded its cumulative profits of €433 million – and it committed Ryanair to keeping Aer Lingus as a ‘stand-alone separate airline’. Seeking to preempt concerns about the creation of a single dominant airline at Dublin airport, the document noted that it ‘continues to be served by over 50 other scheduled airlines currently serving 112 international destinations’. It also claimed that the combined airlines would account for 61 per cent of aircraft movements at Dublin airport, well short of the 73 per cent dominance enjoyed by Olympic at Athens and about the same as Air France’s 62 per cent at Charles de Gaulle in Paris.

  In the fury that followed O’Leary’s bid, however, commercial arguments gave way to emotional opposition. Aer Lingus pilots started to buy small parcels of shares at the inflated, bid-induced prices, paying up to €3.00 in a desperate attempt to block Ryanair control. Then, dramatically, Denis O’Brien, the mobile telecoms billionaire who had started business life as Tony Ryan’s personal assistant more than twenty years earlier, announced that he had bought a stake because of his patriotic desire to keep Aer Lingus independent. There was in this an undercurrent of personal hostility. Only weeks before O’Leary had lampooned O’Brien’s tax exile in Malta by using an image of him to advertise Ryanair’s new route to the Mediterranean island.

  The government’s 25 per cent stake, added to the employees’ 15, the pilots’ 2 and O’Brien’s 2.5 per cent, meant that O’Leary would have to secure almost all the outstanding equity in the company to get a simple majority of the shares, while outright control would remain outside his reach unless he could persuade the government and the employees to sell. The government’s holding was large enough, under company and stock exchange rules, to block asset sales, and without securing more than 90 per cent of the shares O’Leary would be unable to force the remaining minority holders to sell. At best, with more than 50 per cent but less than 60 per cent, O’Leary would have control of the board and the management, but he would not have the freedom to break up the airline or sell its rights to landing slots at Heathrow airport – a valuable commodity much coveted by airlines who could not get access to London’s major airport. O’Leary decided to increase his stake to 25 per cent and then wait for a ruling on the bid from the European Commission, knowing that even if the Ryanair bid were approved, there was no way he could persuade the major shareholders to sell.

  Although the takeover of Aer Lingus was now only a distant possibility, Ryanair’s presence on the share register had an immediate impact on Aer Lingus management. Even though it had assured the unions that cost-cutting had come to an end, O’Leary had forced Aer Lingus to recognize that far from finishing, it had barely started. As soon as management tried to negotiate fresh savings and more flexible working conditions, strike action was threatened.

  O’Leary does not plan to decrease the pressure on Aer Lingus. He says that his role as a shareholder will be similar to that played by J. P. McManus and John Magnier at Manchester United when the two Irish billionaires bought a stake in the club and bombarded its board with demands for action and information before eventually being bought out at great profit by Malcolm Glazer.

  O’Leary’s bid for Aer Lingus was a classic example of the extreme opportunism that characterizes the man. The raid on the airline’s shares was a plan cobbled together in a matter of weeks, and only formalized in the days before the shares went on sale. While he had harboured ambitions of controlling Aer Lingus for years, he was not prepared to devote any energy to the project until such time as it was a real possibility. ‘I’d love to say that everything Ryanair ever does was extremely well thought out,’ says one former executive. ‘But the honest answer is it’s not. It’s seat of the pants; you make it up as you go along.’

  For O’Leary, nothing is set in stone, even if he says it is. ‘Having a long-term plan is a waste of time,’ he says. ‘I’m not a thinker. You see opportunities and you try to take them. There’s no point in having some long-term plan because a long-term plan gets knocked on its ass.’

  O’Leary has always taken a hard line against all trade unions, but no area of labour relations has been more vexing to Ryanair than its long-running dispute with its pilots. Although Ryanair cannot legally forbid its employees from joining unions, it can refuse to negotiate with them, and that had been its position vis-à-vis the Irish Airline Pilots Association (IALPA), which is part of the larger union IMPACT. In 2004, when Ryanair was upgrading its Dublin fleet from Boeing 737–200s to 737–800s, O’Leary decided to use the cost of retraining pilots as a bargaining chip. The pilots could either foot the €15,000 bill for the training themselves or could sign an agreement whereby the company paid for it on condition that it was not forced to deal with IALPA for the next five years. The union was outraged and plotted a legal response.

  ‘On a scale of one to ten, O’Leary hates the pilots at least eleven,’ says one former executive, ‘and he hates IALPA even more. The pilots are well-paid professionals, and their working hours are restricted by law to 900 hours a year. He can’t screw anything more out of them.’

  In August 2004 the two representatives of the Dublin-based pilots on the Ryanair pilots’ Employee Representative Council withdrew from it. IALPA, through Impact, claimed that the pilots and Ryanair were engaged in a trade dispute and asked the Labour Court to order the company to negotiate with the union now that, the
pilots having withdrawn from the ERC, there was no internal company mechanism to resolve the dispute.

  The retraining dispute spawned a number of separate legal battles between Ryanair and its pilots. Apart from the Labour Court case on union representation, which found in favour of the union, Ryanair was brought to court by John Goss, one of its Dublin-based pilots, and the company in turn went to court in an attempt to force a union-created website to reveal the names of pilots who had made anonymous postings on the site. Ryanair lost its attempt to unveil the pilots’ identities and eventually reached an out-of-court settlement with Goss after a bruising battle that saw O’Leary threatened with jail for contempt of court and Ryanair claiming that Goss had intimidated other pilots who were prepared to accept O’Leary’s retraining offer.

  The major issue was not Goss or anonymous website postings but union recognition. The Labour Court had agreed with IMPACT that Ryanair should negotiate with the union but O’Leary had immediately sought to overturn this decision. Eventually, in February 2007, the Supreme Court ruled that the Labour Court’s reasoning had been flawed because it had failed to accept that Ryanair’s ERCs and its willingness to negotiate with the Dublin pilots meant that internal mechanisms to resolve the dispute had not been exhausted. It was a significant victory for O’Leary in his never-ending battle to keep trade unions at bay.

  The success of the Ryanair revolution has been among the factors that have pushed the aviation industry to the forefront of the debate about climate change. In January 2007 Ian Pearson, a junior minister in the British government, denounced O’Leary as the ‘unacceptable face of capitalism’ because of his attitude to rising carbon emissions from aircraft. O’Leary struck back, calling Pearson ‘foolish and ill-informed’ and claiming that Ryanair was Europe’s ‘greenest airline’, noting that its new fleet of aircraft is more fuel-efficient than older fleets.

  O’Leary dismisses the pressure as misplaced. ‘It’s just politicians pandering to the latest fashion. Gordon Brown wants us all to believe that he spends his days mulching his compost with his children, David Cameron’s gone Dutch with his windmills and clogs. Neither of them really means it. They know that changing a light bulb isn’t going to make any difference but a picture of them changing a light bulb will be a nice, cosy image,’ he said in an interview with the Daily Telegraph. ‘But the point is you can’t change the world by putting on a pair of dungarees or sandals. You need to look at the real culprits and begin negotiations with them,’ he said, arguing that the real battles against carbon emissions had to be fought with the Chinese, Russians and Indians, not with airlines.

  Whatever happens, O’Leary believes Ryanair will be able to maintain a price advantage over its rivals because it has a lower cost base. ‘We will go from 40 to 80 million passengers in the next few years. We will take them off British Airways and the other old carriers who are flying gas-guzzling, ancient aircraft and pack them into fuel-efficient planes. So Ryanair will be saving the environment – not that we care much,’ O’Leary said to the Daily Telegraph.

  Despite O’Leary’s colourful protestations, however, the environmental debate will undoubtedly affect the industry in the years ahead. The Stern Review, a study commissioned by the UK government on the economic impact of climate change and required responses to it, noted in its report published at the end of 2006 that aviation’s contribution to greenhouse gas emissions will rise from 1.6 per cent to 5 per cent by 2050. Environmentalists have also argued that the industry’s impact on climate change could be more pronounced than the bare statistics suggest, because aircraft make their emissions directly into the upper atmosphere.

  The industry is committed to using more fuel-efficient planes – its vulnerability to oil price hikes makes that a commercial as well as a politically correct imperative – but environmental taxes on flying remain a future threat to growth. There are measures that governments can take to ease the pollution – a more efficient air traffic management system in Europe would reduce emissions by as much as 12 per cent a year, according to IATA, while better management at airports, with reduced taxiing times for aircraft, would also have a significant impact – but taxes are simpler to implement than structural reform.

  Environmental taxes and rationing may still be a distant threat, but the cost of air travel is more likely to increase than decrease in the years ahead. Will that kill the low-cost revolution? O’Leary believes not, claiming that the differential between Ryanair and other, more expensive, carriers will ensure that it can continue to grow at their expense, even if overall growth in the market slows.

  Apart from the blip at the start of 2004, when O’Leary warned of a ‘bloodbath’ and cautioned that the airline’s profits could fall, Ryanair’s progression has been steadily upward over the past ten years. By the end of O’Leary’s first year at the helm Ryanair flew 700,000 passengers on nine routes, operating as a marginally successful but relatively unknown carrier between Ireland and the United Kingdom. In 2006 he carried more than 40 million passengers, and aims to carry more than 80 million by 2012. Ryanair can claim with justification to be the most outstanding business success story that Ireland has ever produced. It is the only Irish company to be a world leader in its industry sector and has played a leading role in the transformation of the European aviation market.

  Competitors have continued to join the fray, but there are just two major players in Europe’s low-cost market, Ryanair and easyJet, with Air Berlin leading the next division of wannabes. The impact of the O’Leary revolution on European aviation has been felt by every traditional airline, and Europe’s low-cost carriers have grown their share of the market from 7 to 20 per cent in just four years. The expansion shows no sign of abating. Ryanair and easyJet plan to double their fleet sizes over the next five years, and both have ambitions to double their passenger numbers as well. O’Leary is determined to make Ryanair Europe’s largest airline, and to do that he needs to carry at least 75 million passengers a year.

  His hunt for growth has taken the airline into new and more far-flung markets. He has opened new routes to eastern Europe, Morocco and even Malta, a four-and-a-half-hour journey from London. That represented a volte-face; at the 2005 Ryanair AGM O’Leary had told one shareholder that routes to distant locations were a no-go because ‘people won’t pay four times more for flights that are four times longer, so fuck that’. One year later, however, all had changed. ‘Would we have a base in Athens? It’s too far away from everywhere else, so no. Would we have a base in Malta? No. But would we do a route down to Athens if we could get a low-cost base at an Athenian airport? Yes, we probably would,’ he says. O’Leary admits revenues from longer flights will be lower than from shorter routes, but ‘that won’t stop us going into those markets. We’re not going to leave the markets out there.’

  O’Leary has thought aloud about flights into former Soviet republics from continental Europe and there have even been suggestions that he would use bases there to extend Ryanair’s reach into Asian markets. Far-fetched perhaps, but there is no sign yet that he has lost his thirst for new ideas. Open Skies, the long-awaited agreement between Europe and the United States to deregulate the transatlantic market, creates other possibilities, with O’Leary considering a low-fare, long-haul model that would fly from smaller US airports, like Colombus in Ohio or Baltimore in Maryland, to Ryanair’s existing low-cost airports in the UK and Europe. He says that any transatlantic venture would be set up and run as a totally separate company to Ryanair, but he boasts that he could make money selling seats for as little as $15 each way. His apparent embrace of this market, however, still hovers somewhere between publicity stunt and firm plan.

  The logistics of the transatlantic market are very different to those of the short-haul routes that have allowed Ryanair to grow so quickly and so profitably under O’Leary’s stewardship. There would be ample opportunities to sell to a captive audience for the duration of a six- or ten-hour flight – O’Leary’s vision of planes becoming flyin
g casinos might be a possibility on Europe–America flights, and there are also savings to be had from operating a simple point-to-point service from cheap airports. Analysts may be sceptical, but in the past his public ruminations have often turned into solid earners. Free flights may have sounded mad three years ago, but now tickets for just 0.1 of a cent are a regular feature of Ryanair marketing drives. Charging for baggage in the hold, although ultimately self-defeating if it encourages most passengers to take hand luggage only, will generate millions, while reducing the amount of luggage in the hold gives Ryanair scope to reduce costs at airports. Charging for priority boarding is another new idea to gouge a few more euros from Ryanair customers, while the company website is constantly tweaked to drag in extra revenue, whether through increased charges for using credit cards, or by making travel insurance an opt-out function rather than an opt-in. Forget to uncheck the box, and you will be charged. O’Leary’s search for new ideas will not stop, driven by the knowledge that Ryanair, once the leader in ancillary sales, is actually slipping behind some newer airlines in the amount of profit that it generates.

  In large part this is because many of the modern low-fare airlines depend heavily on former Ryanair managers, and they have all developed and expanded on the original model. Conor McCarthy, who O’Leary poached from Aer Lingus, helped create AirAsia in Malaysia, Thailand and Indonesia; Charlie Clifton, a Ryanair veteran, helped set up Tiger Airways in Singapore and is now involved in Skybus in the US. In 2006 McCarthy was involved with Mexican start-up VivaAerobus, while Warwick Brady, a former Ryanair manager, is head of operations at Air Deccan, India’s first low-cost carrier. Funding many of these new airlines has been the Ryan family, using the wealth generated by Ryanair. And while the Ryans use their name and expertise to develop the low-cost model across the world, David Bonderman, Ryanair’s chairman, is expected to play a significant role in any restructuring of Europe’s airlines that Open Skies might prompt.