It was an unusual night for a party, an otherwise quiet Monday evening in early February 2006, but Michael O’Leary was in attack mode. That night Channel 4, a British television station, was broadcasting a documentary on Ryanair, the result of a five-month investigation by two undercover reporters. According to the programme makers, the documentary would expose serious flaws in Ryanair’s safety practices, showing scenes of overworked pilots and cabin crew, dirty aircraft and security lapses.
O’Leary had decided that the best way to defuse the programme was to ridicule it. Instead of chastising those members of staff who had been caught on hidden cameras moaning about their working conditions, he organized an ‘Oscars’ night to be held in Stansted, where the airline employs close to 1,000 staff. The prizes would include an award for the Ryanair staff member ‘who tells the best whopper on air’, as well as a special award for the staff member who delivered the best chat-up line to one of Channel 4’s ‘undercover investigative dollies’, the term O’Leary had coined for Charlotte Smith and Mary Nash, the two reporters who had trained and served as Ryanair cabin staff.
‘The Oscars night wasn’t for the press, it was for the staff,’ said O’Leary. ‘Either they’d all be sitting at home worried that they were going to be sacked, or we could deal with it the best way we know how. So we said, “Right, we’re going to have a free bar; everybody comes in and nobody gets fired.” We were not going on a witch-hunt. And it was great.’
O’Leary’s counter-attack against Channel 4 had started weeks earlier, when the allegations were put to him by Steve Boulton Productions, the programme makers. In a letter to O’Leary the company said that Smith and Nash had uncovered incidences of pilot and crew fatigue including crew falling asleep on duty, inadequate staff training, breaches of safety and security and a cynical attitude to passengers. During one flight, they alleged, vomit had been discovered on the floor of a plane but had not been cleaned up because of the constraints of the twenty-five-minute turnaround time, and the undercover reporter had been told to spray aftershave to disguise the smell. A Ryanair pilot said on air that if he refused to fly because he was tired he would ‘probably be fired and definitely demoted’. Most dramatically, Smith claimed that during her training she was told that any passenger sitting in seat 1A on a Ryanair flight would be killed on impact in any crash because a piece of metal used to attach a handrail would go straight into their head.
O’Leary responded directly, and caustically, to each allegation and offered to appear on the programme in an unedited interview to combat them. He dismissed the claim about seat 1A as ‘ludicrous’, saying the handrail attachment was not on aircraft used by Ryanair, and described the pilot’s claim that he would be sacked or demoted as ‘without foundation’. His offer of an unedited interview was rejected – Channel 4 said it was logistically impossible to guarantee an unedited version, though it was prepared to carry an edited interview that fairly reflected his point of view – and O’Leary decided on a pre-emptive assault instead. The programme’s claims were rubbished in advance by Ryanair, and the Oscars night was organized to show that neither he nor his airline cared about them. Channel 4 had, however, struck a raw nerve. Three times in the previous twelve months Ryanair flights had come close to danger.
On an approach to Rome the previous summer a co-pilot had been forced to take the controls from his senior officer, who had been suffering from stress; in December a flight to Glasgow had suffered a loss of cabin pressure after the captain and co-pilot had failed to carry out checks which could have identified the problem; and earlier in the year a flight to Beauvais airport in France had had to abort its landing because the pilot failed to line up his approach correctly. All three incidents had been resolved safely, and O’Leary could claim that Ryanair’s internal procedures and failsafes had ensured that crises were averted, but they revealed how close the airline – any airline – was to disaster.
Safety always gnawed at O’Leary. He always maintained that the one thing that could ground Ryanair was a crash, particularly if it could be shown that the crash had been caused by scrimping on safety. The perception of Ryanair was that it was cheap and occasionally nasty, but was also safe. Its Boeing 737s were fast becoming the youngest fleet in the skies as aircraft arrived each month, and while the new planes delivered operating efficiencies – primarily through lower fuel and maintenance costs – they also created an aura of safety around the airline. Bright shiny Boeings reassured passengers that while their tickets might have been cheap, they were not expected to fly in ageing rust buckets.
O’Leary’s obsession with safety transcended his normal approach to costs; it was a corner that he was not prepared to cut, yet it could destroy his airline if something went wrong. It was, in short, his Achilles heel, and there was nothing he could do about it other than ensure he could not be faulted if the worst happened. By exposing sloppiness in Ryanair’s training procedures and tiredness in its staff, Channel 4 was creating an uncomfortable context if anything did go wrong. Trade unions, particularly the pilots’ unions, were also acutely aware of O’Leary’s vulnerability on safety. In any dispute about union recognition – and despite the individual issues that might arise with pilots, every dispute was ultimately about recognition – the unions would use safety, particularly pilot fatigue, as a weapon.
That was why Channel 4’s documentary had to be attacked so aggressively and publicly. O’Leary’s approach would prove successful, but he was greatly assisted by the programme’s failure to convince Ryanair’s critics that it had uncovered anything of substance. The media response was desultory, while the Irish Aviation Authority, the regulator responsible for ensuring that the airline conformed to international safety standards, said it had investigated the allegations and was satisfied that no safety breaches had occurred. ‘I do not accept that there is a slack approach to safety in the low-cost sector,’ said Lilian Cassin, a spokeswoman for the IAA.
Simon Evans, of the consumers’ rights organization the Air Transport Users’ Council, concurred. ‘I didn’t see anything horrendous. You would have heard the same comments and apparent disregard for customers at any low-cost airline and, indeed, most organizations. It’s not a bad thing if the airline realizes it is under scrutiny by the public and the media, but the show will have no effect on the industry and I don’t think it will affect Ryanair’s bookings.’
O’Leary was not content with simply ridiculing the programme and exonerating his staff. ‘We’re doing a follow-up,’ he said the following week. ‘We have pulled in all of our cabin-crew trainers this week; we’ve sat down with the safety instructors and we’ve gone to the handling agents. And we sold 20,000 extra seats yesterday.’
One month later the publicity was even better. The Cheltenham Festival, held annually in March, is the marquee event for fans of National Hunt, or jump, racing. Each race in the four-day festival is a championship final, with the best horses from Britain and Ireland battling for supremacy. While the Grand National at Aintree is the most famous jump race of them all, the Cheltenham Gold Cup is the ultimate event for racing fans, and particularly Irish racing fans. Tens of thousands make the journey each year to the Cotswolds, thronging the racecourse for the duration of the festival and filling bars and hotels for miles around. Drinking and gambling to excess – the all-night poker games are legendary – they crave Irish victories but enjoy themselves no matter what. Although held on British soil, it is a quintessentially Irish affair that bemuses the British media. Each year the racing coverage is peppered by stereotypes, as newspapers tell tales of gambling priests, straying husbands and outrageous betting coups, and they are always on the hunt for the story that justifies the clichés.
This year, 2006, with the Gold Cup scheduled for St Patrick’s Day and Irish challengers hot favourites to take the prize, they did not have to look far for the main story.
Michael O’Leary’s family had always kept horses, but unlike his siblings he had never taken to riding. ‘I fell off a horse at the age of four and I realized it was a stupid activity. My brothers and sisters didn’t realize how stupid it was and kept going.’ Eddie O’Leary had kept going all the way, becoming a respected breeder and owner in an industry that still holds a special place in Ireland. Eddie’s involvement was the key to his brother Michael’s conversion. ‘If Eddie wasn’t involved, I wouldn’t be,’ O’Leary says.
He’s the judge. He decides what we buy or don’t buy. It’s important to have someone like that. Someone you can trust. It’s like any walk of life. There are great people in racing and there are messers. Eddie’s advice is vital. It’s 90 per cent frustration and 10 per cent fun. But then the 10 per cent does vastly outweigh the other side. The owner is the mug at the bottom of the food chain. As long as you know that, you’ll be okay. But you have to know you will lose your money. Which makes me an idiot.
Four of the first five horses O’Leary owned had to be put down. ‘Deaths and injuries are what I hear about most of the time. It’s very hard to take. But it’s what you have to accept as part and parcel of the game. If you can’t deal with them, you shouldn’t be in it,’ he says.
For the first time at Cheltenham O’Leary would have a horse challenging for the Gold Cup. His horse, War of Attrition, had been an unlikely runner-up two years earlier in the Supreme Hurdle but had failed to live up to its promise when being roundly beaten the following year in the Arkle Chase. This time O’Leary was not sure whether to run him in the Gold Cup or in the lesser Ryanair Chase – which carried an obvious attraction.
The weekend before the festival he told the Irish Times he was ‘leaning towards the Ryanair, I think it’s the more sensible option’. Michael ‘Mouse’ Morris, the horse’s trainer, had other ideas. ‘I was always going for gold,’ said Morris.
O’Leary’s claims of ignorance about horseracing and his relative indifference – he says too many people ‘obsess’ about Cheltenham and he prefers smaller meetings – sit uneasily with his character. He is a fast learner, a consumer of information who can spout at length about the intricacies of the handicap system that applies to jump racing. He may keep his obsession in check, but he is no novice owner throwing cash at the prospect of glory. O’Leary’s sales and purchases, managed primarily by Eddie, are astute. It was no fluke that he came to Cheltenham that March with a chance of victory.
War of Attrition started the race as a well-backed contender but was far from favourite. As the horses came to the final fences, three Irish runners were battling for gold but it was O’Leary’s that held off the challenge of Grand National winner Hedgehunter to take the cup, with Forget the Past in third. It was the first time in Cheltenham’s history that Irish horses had filled the first three places. The Duchess of Cornwall was on hand to present the prize to an ecstatic O’Leary, who promptly promised free flights for all who’d backed his horse.
One gambler who had had the foresight to invest was Willie Walsh, the former Aer Lingus chief executive who had taken over as CEO of British Airways. O’Leary had told him that War of Attrition ‘hadn’t a hope’ of winning. Walsh decided that O’Leary, as usual, could not be believed, and put down £100 for the horse to win at 7/1.
Each year Ryanair drops a few routes as it opens many more. The reasons may be straightforward – passenger numbers do not justify the route – but it is also a method of reminding airports of what can happen if they do not play the game by Ryanair’s rules.
In March 2006 Michael Cawley, Ryanair’s deputy chief executive, travelled to his hometown of Cork to explain the economics of modern air travel to its newly independent airport company, and to get rid of some routes while he was there. Cork’s problem was that it was just completing a brand new terminal that would cost €170 million – ten times what Frankfurt Hahn had paid for a similar increase in capacity. The cost was being covered in part by increases in landing charges.
‘There are three elements,’ he said at a press conference in Cork. ‘Supply, demand and price. We are the supplier and we create the demand by reducing the price. If somebody forces us to put up the price, the demand will go down and we’ve got to drop the supply. In our judgement, for the kind of increases [in charges] that we are suffering here in Cork, we should drop the supply by three flights a day on one route. It’s a judgement call.’
Ryanair’s view was that if it directed its routes to the cheapest airport operators, the passengers would follow. Cork had to come to terms with a new reality: it was no longer competing solely with other Irish airports; it was part of a new European market and had to compete as much with Polish airports as it did with Irish ones. There would still be some business for Cork if it chose not to compete, but if it wanted the volume of passengers that its new terminal demanded, then it had to recognize the new dynamics: volume came from low fares, and low fares were only possible at low-priced airports.
The result that day was that Cork lost its route from Liverpool to rival airport Kerry. ‘It could have gone to France or anywhere else in Europe, but Kerry came up with the best deal,’ says Cawley. He adds, ‘It was particularly nice for us to have Kerry as an alternative, because from our point of view we have already created the demand and we’ll now fill it at another Irish airport. Cork airport is going to lose these passengers.’
A potent combination of rising demand, continued instability in the Middle East, disruption of supplies in Nigeria and a global shortage of refining capacity for transport fuels pushed the oil price to new highs in April, with the price of a barrel of crude climbing above $74. Shares in airline companies suffered sharp falls, reflecting the industry’s vulnerability to events beyond its control. Air Berlin, one of the new breed of low-cost European carriers, was one of the early casualties of the frosty investment climate. Forced to scale back its forthcoming stock market flotation, it cut both the number of shares on offer to investors and the price of those shares as potential buyers drifted away.
It was a dismal time for the Irish government to be planning the partial sale of Aer Lingus, and once again the airline’s immediate future was clouded in doubt. The government’s support for privatization had always been lukewarm, but before the latest oil price crisis it had seemed on course to sell a large part of its stake in the airline to private investors. The potential sale was not driven by ideological belief but perceived commercial necessity. Aer Lingus needed fresh investment to buy new planes, and the government had a simple choice: it could fund all of that investment from taxpayers’ money or it could allow the airline to raise money from the private sector. The airline’s commercial recovery under Willie Walsh’s regime meant that the government had a genuine choice: while European rules precluded state handouts to failing airlines, they allowed governments to invest in successful ventures. So, if Aer Lingus could attract private investment, then it was a suitable candidate for state investment.
Ireland’s booming economy and burgeoning tax receipts meant that money was not a problem for the government, but giving the state airline more cash was not an option it was prepared to consider. Aer Lingus needed new planes for its long-haul routes to America and for potential routes to the Far East and South Africa. A new fleet could cost as much as €2 billion, far more than the government was prepared to invest. And while Aer Lingus was for the moment profitable, its ambitions were not risk-free. If the government invested more money and Aer Lingus ran into difficulty, then the government would be precluded by European rules from making further investment. And if that happened, private investors would also shun the airline. The risks were too great, even if the cash was available, and the short-term political difficulties involved in pushing ahead with a sale were balanced by the realization that if the government failed to secure the airline’s future by giving it the ability to survive, it could pay a far heavier price in the future. If Aer Lingus was to expand, it would need to access money from other sources, and so privatization had once again gathered momentum.
Rising oil prices were not the only difficulty. Political opposition to a sale remained intense, both within the government parties and from the opposition. Also, Aer Lingus had a pensions deficit that would have to be plugged before new investors parted with their cash, and the trade unions in the company were determined that the airline’s workers should secure as large a stake as possible once the airline was sold – certainly no less than the 14.9 per cent they owned before privatization. The unions were also determined to conclude binding agreements with the airline’s management on wages and redundancies so that a newly privatized Aer Lingus could not metamorphose into a ferocious cost-cutter. ‘Without clarity over these issues, the company is simply not a credible investment prospect,’ said the Irish Times in an editorial comment in mid-May.
After protracted negotiations, the airline eventually agreed that the pay and conditions of staff employed before privatization would be maintained, but that new staff hired after the sale would be subject to different terms. It also agreed that there would be no compulsory redundancies in the future, unless ‘significant change’ affected the company.
Despite these agreements hopes of an early-summer flotation receded, to be replaced by doubts that a sale would happen at all. The government was in the fourth year of a five-year term of office and it was highly unlikely that a politically charged privatization would take place any time close to a general election. If a flotation could not be arranged by early autumn, Aer Lingus would remain in state ownership for at least another year.
June came and went, and pressure on the government to take a decision rose inexorably. Bertie Ahern assured the Dáil that a sale would take place ‘as soon as possible’ and said that ‘it is still the view that it can happen this year’. O’Leary watched and waited. He was not convinced the airline would ever be sold, believing the demands of the trade unions would make Aer Lingus unpalatable to private investors, and that unless those demands were conceded, the unions would not agree to a sale. It was, he figured, a classic catch-22.
But in early July Martin Cullen, the minister for transport, declared that shares in Aer Lingus would be sold in September. The unions had secured a post-privatization pay increase of 3 per cent as well as a lump-sum payment and a new profit-sharing scheme that would see up to 7.5 per cent of the airline’s profits transferred to the Employee Share Ownership Trust to buy shares in the company. Aer Lingus management also agreed to scrap plans for any further outsourcing of jobs to subcontractors and conceded that the number of staff on fixed-term contracts (as opposed to permanent positions) would not exceed 25 per cent in any department.
The timing of the flotation was politically propitious – it would take place before the Dáil returned from its long summer holidays and there would be no awkward parliamentary debates until the sale had been completed – but there was still the danger that events beyond the control of the government or the airline’s management could conspire to scupper it, and on 10 August they almost did. In a dramatic swoop British police arrested twenty-five people, seventeen of whom were later charged with conspiracy to murder and commit acts of terrorism. Police claimed that they had foiled a plot to blow up ten planes as they flew across the Atlantic from Britain to the United States. Just as dramatically, it was claimed that the terrorists were planning to use liquid explosives smuggled on board the flights in everyday containers. Immediately, Britain raised its terror alert from severe to critical. Security at British airports was thrown into chaos: hand baggage was banned from all flights in the immediate aftermath of the arrests, massive queues formed at security checkpoints and hundreds of flights were delayed and cancelled.
Three days after the arrests, 30 per cent of flights out of Heathrow were cancelled to reduce pressure on baggage screeners. The tightened security prompted a vicious war of words between O’Leary and Willie Walsh of BA on one side and the British government and BAA, the airports authority, on the other. Walsh and O’Leary joined forces to lambaste the handling of the security scare, calling on the government and BAA to bring in extra staff to help ease the logjam at airports. O’Leary then threatened to sue the British government for compensation unless it moved speedily to ease the crisis.
He described the new restrictions as ‘farcical Keystone Cops security measures that don’t add anything except to block up airports’, and ridiculed the searching of small children and elderly people in wheelchairs.
These restrictions have absolutely no impact on security, they are nonsensical and the height of stupidity, but the more you call these restrictions stupid and nonsensical the more the [UK] Department of Transport digs in its heels and says, ‘Oh, we have to protect the nation, this is needed for security.’ If it was they would apply these restrictions on more likely terrorist targets like the London Underground or Eurotunnel…If you look at where the terrorists have been striking in recent years it’s the London Underground and the trains in Madrid. Yet you don’t see the government confiscating lipsticks and gel-filled bras on the London Underground. Most of them couldn’t identify a gel-filled bra if it jumped up and bit them anyway. It’s simply a way of politicians making it look like they are doing something.
Typically, he combined his attack on government with a seat sale, using an image of Winston Churchill to make his case. It was a classic O’Leary assault, one certain to grab headlines and make Ryanair look positive in a negative story for the industry. But for Aer Lingus, which planned to sell its shares six weeks later, the news could not have come at a worse time. Once again commentators were quick to muse about the long-term decline of the airline industry, in particular the low-fare sector which relied heavily on speedy turnaround times and uncluttered airports to keep down its costs. It also revived the spectre of the 11 September attack which had had such a long and profound impact on the aviation industry.
Gradually the situation stabilized. No one had died and potential attacks had been averted. In time, too, fear was replaced by a degree of scepticism about the claims that plans for attacks had been at an advanced stage. The climate for a share sale had, however, been damaged and the price that the Irish government could hope to extract from investors was edging lower.
O’Leary, meanwhile, had more mischief to make. In August he announced twelve new routes from Dublin, to be launched the following year, signalling that Ryanair was preparing to make Dublin a key target in its relentless pursuit of passengers and that Aer Lingus’s growth at its home base could no longer be taken for granted.
By the end of September, however, Aer Lingus CEO Dermot Mannion could pack his bags for a well-earned holiday. As the security crisis had eased, so too had oil prices fallen, slipping back below $60 a barrel by the time Aer Lingus shares came to market. The government had settled on a price of €2.20 a share, towards the bottom end of expectations, valuing the company at about €1 billion, but demand for the new shares had been high. Trading started officially on Monday 2 October, but in unofficial trading the previous week the price had risen gently and by the middle of the first week Aer Lingus shares were just over €2.51, a respectable gain on the offer price, with demand still heavy. The government and Aer Lingus senior managers could afford a rare moment of self-congratulation. Despite all the gloomy predictions, despite oil price scares and terror alerts, and despite O’Leary’s attacks on the Dublin market, the flotation had been a marked success. Investor interest was high, the shares had risen after the sale, but not so far as to prompt accusations that the government had sold on the cheap. All in all, it was a job well done and Mannion could depart for the United States with a smile on his face.
On Thursday 5 October the telephone rang in the London home of John Sharman, the Aer Lingus chairman. At the other end of the line was David Bonderman, Ryanair chairman. It was a brief conversation, but a startling early-morning wake-up for Sharman. Ryanair, said Bonderman, had informed the stock exchange before trading commenced that morning that it had acquired a 16 per cent stake in Aer Lingus and that it was making a cash offer of €2.80 a share for the rest of the equity. Hurriedly, Sharman made contact with the rest of the Aer Lingus board and tried to contact Mannion, who had already departed. While Bonderman broke the news to Sharman, O’Leary was trying to contact Bertie Ahern to tell him. Ahern was unavailable, so O’Leary briefed his special adviser and spoke to Martin Cullen, minister for transport, as well as Brian Cowen, minister for finance, and Michael McDowell, deputy prime minister.
The shock was almost tangible; it was, says one official adviser, the government’s ‘worst nightmare’ come true. O’Leary, the tooth and claw capitalist, was pouncing on the national airline. In the financial community, the shock was no less profound. O’Leary, the champion of low-cost, low-fare flying, was stepping outside his comfort zone and into the world of traditional national airlines, trade unions, high costs and transatlantic flights. He was in effect breaking the mould he had fashioned so successfully over the preceding thirteen years.
The supreme opportunist, O’Leary had struck when no one was expecting it. He had often toyed with the idea of buying Aer Lingus, but clearly this would never be a possibility unless the airline was privatized. His own scepticism about the flotation ensured that he had not spent too much time planning his raid. Two weeks before the shares were due to start trading he had discussed the possibility of a bid with Bonderman. Initially surprised, Bonderman had quickly warmed to the idea. Ryanair had cash reserves of more than €1 billion, so had no difficulty funding a bid. Kyran McLaughlin, a Ryanair non-executive director and senior director at Davy Stockbrokers, a Dublin firm, was also briefed on the plan, as he and his brokers would be charged with implementing it. On the Tuesday night before Aer Lingus shares were due to start trading Bonderman called a telephone board meeting of Ryanair’s directors so that O’Leary could reveal the plan and seek the board’s support. It was the first any of the other directors knew about it, but their initial shock soon turned to approval.
‘I had a couple of conversations with David Bonderman,’ O’Leary said in an interview with the Sunday Tribune. ‘We first discussed the prospect of buying shares in the airline the Tuesday evening before it floated [on the unofficial market] on Wednesday. We first discussed the formal offer with the board only on Tuesday of this week. So it’s happened that quickly. That’s why nothing leaked. Because we weren’t discussing it for yonks. At Ryanair we don’t sit around agonizing over things.’
O’Leary argued to his board that Ryanair could not lose by buying shares and mounting a takeover bid. The Irish government was selling at a discount, so the stake could be acquired relatively cheaply. At best, victory would mean that Ryanair would get control of an overstaffed and underperforming airline, with ample opportunity to strip out costs and make it more efficient and profitable. At worst, Ryanair would be left with a minority interest in an airline that would then have to perform if it were to escape its clutches. Either way, the value of Ryanair’s investment should rise.
O’Leary knew that the government would react with alarmed hostility to his bid, and knew too that the trade unions in Aer Lingus would go ballistic. That, however, was a source of amusement rather than concern. The commercial logic of securing a strategic holding in Aer Lingus was what counted, not the damaged sensibilities of politicians and trade union officials. As a large shareholder in Aer Lingus, O’Leary’s hand would also be considerably strengthened in his long-running dispute with the Dublin Airport Authority, since the two airlines accounted for 70 per cent of traffic at the airport. O’Leary remained determined to block the authority’s plans for a lavish new terminal building – the estimated costs of which had continued to rise over the previous month – and remained committed to his goal of a low-cost alternative terminal operated by different management.
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 flying 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.
O’Leary and Ryanair have been part of deeper economic and cultural changes that transcend the airline industry. Labour-market mobility – one key to a functioning, integrated and expanding European Union – has been facilitated by the low-cost revolution, with Ryanair, easyJet and local rivals providing cheap travel for hundreds of thousands of eastern Europeans who want to earn a decent living. And ‘short break’ air tourism, a phenomenon that barely existed before Ryanair, is now an enormous phenomenon.
The maturing of Ryanair from irritating upstart to major European carrier causes O’Leary to muse aloud about his own future at the airline. He says he will leave Ryanair in ‘two or three years’ time’ – though he has been saying that for a number of years. He argues that there will come a point when Ryanair requires a more conventional management style. ‘When we’re the biggest airline in Europe it will be inappropriate to have somebody here shouting, swearing, abusing the competition. You need more professional management than me. And that time is coming,’ he says. His successor may come from the ranks of the existing management team – Michael Cawley and Howard Millar are the most likely candidates – but could just as easily come from outside the organization.
Either way, when O’Leary leaves he says he will leave completely, refusing a seat on the board or even the offer of the chair.
He says there will have to be a clean break, and the new chief executive will not need him in the background ‘banging on about the business’. For the moment, though, O’Leary remains on course to fulfil his ambitions. He will, too, continue to make enemies. As Tony Ryan noted in one of his earliest proposals for a new airline, quoting Machiavelli,
There is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries, who have the laws in their favour; and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.
O’Leary’s reform of the skies is almost complete, but he still waits for news from Brussels on his proposed hostile takeover of Aer Lingus. It is unlikely that he will get approval. Despite his strident claims that a Ryanair-controlled Aer Lingus would be good for competition, the creation of such a dominant company in a relatively small corner of the European market is expected to prove a step too far for Europe’s competition regulators.
The combined clout of Ryanair and Aer Lingus in Dublin would not be significantly different to Air France/KLM’s dominance of Paris and Amsterdam, but O’Leary faces the hostility rather than support of his government. EU lawmakers will, however, be trying to ensure that any reasons they give for blocking O’Leary’s ambitions cannot be used in future years to prevent the widely anticipated mergers between Europe’s traditional airlines. Open Skies will bring as many risks as it does opportunities and it is likely that a number of major airlines will, in time, be forced into defensive mergers as they face intense competition from US carriers on the lucrative routes to North America. Europe does not want to create a precedent that could block those mergers so will tread warily. O’Leary professes to be unconcerned, and knows that even if he is prevented from taking it over, Aer Lingus remains vulnerable and an attractive target for other airlines. In time, he may sell the Ryanair holding at a profit but for the moment he can sit tight and irritate the Aer Lingus management by using his position as a minority shareholder to demand improved performance.
Ryanair, in any case, is on course to become Europe’s largest airline by 2011, overtaking Air France/KLM and Lufthansa, but O’Leary’s hunger has yet to be sated. ‘I was always driven,’ he says, ‘and I was always competitive. Maybe I was kicked by somebody at some stage, but if I was I don’t remember it. Why are you the way you are? I haven’t a bloody bull’s notion. Would I want to spend a lot of time analysing myself? No. I think you make things happen. But an awful lot of things happen, and not because you are in control of them. The harder you work the luckier you get. You make your own breaks.’
He may talk of retirement, of trying new challenges and of devoting more time to his family and his farm, but as he said in November 2006, when questioned by stock market analysts, ‘You just have to remember that I also said that I would retire in 1992, that I would retire in 1995, and I think again in 1998. Some of my forecasts have not turned out to be terribly accurate.’
Or as one former colleague says, ‘I’ll only believe it when I see him being carried out of Ryanair in a box. With a stake through his heart.’