When Michael O’Leary first walked into Ryanair’s central Dublin offices at the beginning of May 1988 it was, he says, ‘like you’d arrived at the pearly gates’.
Although the airline had lost ever-increasing amounts of money since its launch three years earlier, its lavishly furnished offices screamed success. O’Leary recalls a ‘gorgeous blonde chick at every desk’, plush carpets, beautiful furnishings, and then the pièce de résistance: the chief executive’s office, which was dominated by a ‘huge big massive table’ so large it could not be carried up the stairs; the windows had to be removed to get it in and the floor strengthened to support it. The effect was dramatic: instead of a sense of crisis, there was still a buzz of expectation. ‘The place was a shambles and yet it was still amazingly sexy,’ O’Leary says.
The young Ryanair was living up to airline tradition. It may have been the dynamic newcomer, the upstart that would challenge the Aer Lingus–British Airways duopoly over the Irish Sea, but it was going to mount that challenge with style. When it launched new routes, it would do so in the extravagant style so beloved of airlines at the time. Commemorative crystal glasses and gold-plated letter openers engraved with the name of the route and the date of the first flight were ordered by the hundreds to hand out to staff and passengers. Champagne flowed at the launch parties as the new airline wooed the media, projecting the image of a young successful company that was going to take the industry by storm.
It was an exciting, glamorous and chaotic place to work, a shaft of light in an Ireland that was still in the depths of economic gloom. It was also a company full of young people and run by young people. Eugene O’Neill, the chief executive, dressed sharply, courted the newspapers and projected the image of a new generation of Irish business leaders. Ebullient youth was replacing the stodgy corporate grey hairs, but it was not making any money. In its first year of operations Ryanair lost £4 million, followed by £5.5 million in 1986 and a further £7 million in 1987. The more passengers it carried, the more money it lost.
‘The place was in a mess. There was no cost control. They were trying to be a me-too airline like everyone else and not really succeeding very well with it,’ O’Leary says. O’Leary’s role was to find out what was happening, and to ensure that further money did not flow into a black hole. It was a heavy responsibility for a twenty-seven-year-old with no experience of the airline industry, a man who had failed to stay the course in his chosen accountancy profession and whose only commercial success had been to turn a profit on a few corner shops. O’Leary had made no effort to study the airline industry before he walked through Ryanair’s doors for the first time. His immediate objective was to stop the airline bleeding cash, not to understand the dynamics of a global industry.
At first, he could see no hope for Ryanair. ‘No one had a handle on the finances and money was leaking out all over the place. All Ryanair was doing was cutting 20 per cent off the fares charged by Aer Lingus and British Airways and losing loads of money.’ It took him less than a month to conclude that Ryanair could not be turned around and that it would continue to be a drain on Ryan’s wealth. He had but one solution: close it down.
Declan Ryan agreed and both men travelled to Kilboy to tell Ryan their conclusions. He disagreed, refused to close the airline that carried his name and told them to sort it out. Ryan’s stubbornness was not grounded in blind faith alone. GPA made its money by leasing aircraft to airlines across the world and Ryan knew how poorly those airlines were run. ‘He made millions from their incompetence,’ says O’Leary, ‘and he thought he could do it better than them.’ The trouble was, O’Leary adds, that Ryan may have thought he understood the industry but in truth he knew ‘fuck-all’ about running an airline. O’Leary knew even less, but he was to prove a better student than Ryan.
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By May 1988, the month O’Leary arrived at the Ryanair offices, O’Neill was able to boast to the London Times that ‘in one day we are taking more telephone calls than in a week last year. Competition has benefited everyone. All the airlines on the [Dublin–London] route are now carrying more passengers.’ But while his confidence was high, his accounts were a mess.
Throughout the first half of 1988 O’Neill had pressed ahead with Ryanair’s expansion, ignoring the financial returns and concentrating instead on driving his passenger numbers ever higher. On 1 March he launched a Dublin–Manchester service in direct competition to Aer Lingus, and by April Ryanair was operating fourteen flights a week on the route. Also in March O’Neill launched new services from Galway to Luton and followed that three weeks later with Shannon–Luton. In April, while increasing the number of flights on the Manchester route, O’Neill went head to head with Aer Lingus on the Dublin–Glasgow route as well, and in May, as O’Leary started his forensic analysis of the accounts, O’Neill pitted Ryanair against the national carrier once again, this time on Dublin–Liverpool.
It was a suicidal strategy. Following the first wave of European deregulation in 1987, which brought an end to the bilateral agreements that allowed airlines to carve up routes between themselves and loosened the restrictions on what fares could be charged, Aer Lingus had decided to build up its operations into and out of Manchester. This, the airline’s management believed, was Aer Lingus’s future in a world of unrestricted air travel. It would be a connecting hub for services to Amsterdam, Copenhagen, Hamburg, Milan, Paris and Zurich. In a foreign country, Manchester allowed Aer Lingus to compete directly with British Airways in a market more than ten times the size of Ireland.
Developing Manchester would be Aer Lingus’s response as Europe cut back on the red tape and started to liberalize the industry. The 1987 measures were the third stage of a process that would carry on for another decade as European Union airlines were allowed to fly between other member states as long as they started in their home country. So Aer Lingus could fly from Manchester to Copenhagen if the flight started in Dublin. This allowed it to pick up passengers in Manchester for the Copenhagen leg of the flight, and it could also market the route in Britain. It was an elaborate response to the new freedoms on offer, but Aer Lingus believed it would be able to compete profitably in the bigger British market, catering to the millions in the north-west of Britain who did not want to travel to London to catch a European flight. It also had longer-term plans to link up with airlines in Asia and the Far East, but for the moment it was committed to becoming a European player. Ferrying passengers from Ireland to its new European hub was an essential part of the strategy and it was prepared to defend it with as much firepower as it could muster. O’Neill’s decision to challenge it head on ensured a sharp response, just as his decision to chase Aer Lingus’s other UK routes ensured that he would face a host of price wars, and not just one.
Aer Lingus responded to Ryanair’s attack by cutting prices and increasing the number of flights on offer on the newly competitive routes. The response was so savage that some Ryanair executives began to suspect a conspiracy. ‘You got the sense that Aer Lingus was happy to allow Ryanair to get these routes because it believed it could finish it off,’ says one former Ryanair executive. ‘It was like an ambush, and they gunned us down.’ By July, just four months after Ryanair launched its Manchester route, the airline was forced to cut its flights there to eight a week. Three months later it pulled the route completely, its expansion strategy in tatters and its finances blown apart.
Ryanair’s Glasgow challenge to Aer Lingus met a similar fate. The national carrier lowered its prices and timed its flights so that they took off earlier than Ryanair’s. This was so effective that Ryanair abandoned the route in September.
The impact of the new routes – however short-lived – and the extra capacity and rising passenger numbers that they delivered had a further debilitating effect on Ryanair because they meant that the airline needed more planes. O’Neill, driven by the desire to expand no matter the cost, decided to order two new turboprop ATRs at a price tag of $18 million.
Watching from the sidelines, O’Leary could see that O’Neill’s expansion strategy was putting the airline on course to self-destruct. ‘They were opening routes fucking left, right and centre, the route network was nuts,’ he says. ‘They had no fucking schedule at all. O’Neill got blown off Liverpool because he went in twice a week and Aer Lingus was doing Liverpool three times a day. No wonder they blew him away.’
O’Leary is also critical of the state of the Ryanair fleet at that time. ‘When I got here they had two BAE 748s, fifty seats; they had signed a lease with GPA for brand new ATR 42s which they didn’t use; they were wet-leasing [taking both planes and crews] about six BAC One-Elevens from the Romanians. It was madness. It was all planes, planes, planes and no airline,’ he says, because the strategy was chaotic.
The scale of the financial chaos started to become clearer once O’Leary started trawling through the paperwork. A Ryanair board meeting in July 1988 was told that the airline was on course to make profits of about £1 million, but O’Leary quickly shattered that illusion. ‘It [the profit] was completely estimated,’ says O’Leary. The airline did not have a proper system for collecting money that it was owed and was saddled with bad debts – unpaid bills from travel agents and customers that had to be written off…It took little more than a cursory glance to realize that instead of making profits it was going to lose between five million and ten million.
The discrepancy between O’Neill’s estimated profits and O’Leary’s estimated losses was a rude awakening for Tony Ryan, and made a mockery of O’Neill’s claims of success.
‘There was a massive hole [in the Ryanair accounts],’ O’Leary says.
The numbers were rubbish. There was nobody collecting cash. We didn’t know how much money we had, except we had nothing in the bank. The bottom line was that if Ryan didn’t give us a million by the next Friday we couldn’t pay the wages. There was no cash in the company, and that was the problem…The turnover in 1986 was £4 million, and the cash at the end of the year was £18 million. The turnover in 1987 was £18 million and the cash at the end was £310,000. Where the fuck was our money?
We actually came to a point one night where we bounced a cheque to Aer Rianta for £24,000. They said if the cheque didn’t go through on Friday they were going to put a yoke on the front of the plane [and seize it]. We had to call Tony and tell him we needed twenty-five grand or Aer Rianta were going to shut us down. Something had to give.
O’Neill, though, appeared oblivious to the source of the airline’s crisis and the severity of the situation. ‘Eugene said this is all the fault of Aer Lingus,’ says O’Leary. ‘He said if you allow me to sue Aer Lingus for anti-competitive [practices] in Brussels we will get 300 million in compensation and Aer Lingus will be ordered off the routes and all will be well.’ The answer, thought O’Leary, was simpler: ‘There is a hole in this fucking company.’
The Ryanair board’s response to O’Neill’s proposal to haul Aer Lingus before the Brussels competition authority was blunt. He was told that Ryanair depended on the Irish government for its route licences and could not sue the state-owned carrier. And the board had begun to recognize, too, that the problems went deeper than the crippling battle with Aer Lingus. O’Neill’s time was up, and he was acrimoniously fired at the start of the summer.
‘There was a meeting in a hotel, and Michael and Eugene were sitting beside each other on the podium,’ says Charlie Clifton.
They announced that Eugene would be departing the company. They just said he was moving on to pastures new.
It wasn’t evident to us at the time, but looking back it’s clear that financial controls had been very lax under Eugene. The staff loved him because he was a bright shiny thing.
He’d give you anything. The purse strings were loose. For example, we were supposed to pay for our uniforms at the start – we signed up for it. Six months in he said look, don’t worry about it, you’ve worked so hard. Of course that’s nice, that’s really nice. But nice costs money, and that’s why we lost a shit load of money.
O’Neill’s strategy of pursuing growth at breakneck speed had firmly positioned Ryanair as a serious player in the market – by the time he was fired the company had a 20 per cent share of the Dublin–London market – and had established the Ryanair brand in the marketplace. But success in positioning the airline had come at a very heavy price – one that he thought Tony Ryan was willing to pay. The early Ryanair never managed to shake off the sense that it was an indulgence for Tony Ryan, a plaything for his sons rather than a serious commercial operation. Money, so O’Neill thought, did not really matter in those early years because Ryan had plenty. The objective, he argued, was to build a business that would eventually make profits.
O’Neill was only partly wrong. Despite the millions he had poured into Ryanair, Tony Ryan was not struggling for cash. A few weeks after dismissing O’Neill, Ryan spent £35 million acquiring a 5 per cent stake in the Bank of Ireland, the country’s most prestigious financial institution. O’Neill’s problem was that the state of the airline’s finances was hidden from view and investors, no matter how wealthy, hate surprises. Ryan had been led to believe that the airline’s success in attracting passengers had started to translate into bottom-line profitability – O’Neill’s wildly optimistic estimate that the airline would make profits of a million pounds that year had been unravelled late in the day by O’Leary – but the truth was different. Under O’Neill the company’s accounts had become a black hole and his expansion strategy was fraught with risk. Instead of seeking out markets that were underserved, he had chosen to pitch Ryanair directly at Aer Lingus, inviting the national airline to strike back. It had, and had finished him off: Ryanair’s ignominious retreats from Manchester and Glasgow were a sad epitaph for a man whose energy and charisma had put the airline on the map, but whose lack of basic financial acumen had cost him his job.
Bitterly angry at his ousting, O’Neill launched a series of court actions against Ryanair and, bizarrely, against Aer Lingus and its chief executive David Kennedy, claiming that they had all conspired together to reduce the value of his shareholdings in Ryanair.
O’Leary recalls the events with bewilderment. ‘He then said he was removed because he wanted to sue Aer Lingus and the Irish government, and Tony Ryan wouldn’t allow him…And then he said that we were cooking the books just to shaft his court case, and make it look like he was incompetent.’
Eventually O’Neill settled his case against Ryanair – the Ryan family bought back his shareholding in the company – and subsequently lost his action against Kennedy. A career that had promised so much had passed its zenith, and as O’Neill was dismissed, his legacy was already being dismantled. ‘People would have been pretty loyal to Eugene and they would have been pretty shocked at his dismissal. The old guard left when Eugene left,’ Clifton says.
But while O’Neill’s exit from Ryanair was acrimonious, O’Leary sees the value in O’Neill’s reign.
In a perverse way, if Ryanair had been run properly from the start, it would never have got off the ground. Eugene had a lot of faults, but he did such a good job with the marketing and he gave it great credibility from a standing start. If it had been started by a bunch of accountants it would never have gotten the credibility. And so in a fucked-up bizarre way, the best way to do it was to start with the panache and the style. Problem was, what they hadn’t built into the model was a cheque for ten million to pay for all this pizzazz.
With O’Neill out, O’Leary was becoming a more powerful force in the company. His style was in sharp contrast to O’Neill’s flamboyance. O’Leary worked from a modest office at Ryanair’s Dublin city headquarters and was rarely seen at the airport. Most of the airline’s staff had no reason to know he existed. Those who did were not to know that he was not even a company employee, but was instead personal assistant to the man whose money funded the company, even if that man’s children held nominal control. O’Leary’s role was to report to his master, not to the board or other executives. His brief was to watch over Ryan’s personal investments, and Ryanair was the biggest and most expensive of them all.
‘When he started he was very much shut away in head office,’ says Clifton. ‘The staff hadn’t a clue who he was. He was another guy who worked in College Park, who was fairly high up. That was it. Nobody assumed that he was a hatchet.’
O’Leary’s personal life was as understated as his approach to business. He drove a Honda Civic, a car more suited to students than business executives, and lived in an apartment on Morehampton Road in Dublin’s Donnybrook, a low-key if affluent suburb near the city centre. He rarely socialized in Dublin, returning to his parents’ farm in Mullingar most weekends. And while the young O’Leary grappled with the complexities of the airline industry – and any other problems thrown his way by Ryan – his father continued down his own entrepreneurial path, evolving from rendering plants and rabbits to his latest venture, making herbal remedies from nettles picked by students on the family’s land.
O’Leary’s working life did not, yet, revolve completely around Ryanair. His knowledge of the industry was thin and his responsibility was narrow. He was charged with finding out where the money was going, not with charting the airline’s future. And as Ryan’s assistant he still had other investments to divert his mind from Ryanair’s difficulties, including Ryan’s shareholding in the Bank of Ireland. O’Leary was not a candidate to replace O’Neill as chief executive and had no desire to take the job even if it had been offered. He did not want to become centrally involved in an airline that he believed had no future, and Ryan wanted to import a seasoned aviation industry professional to instil much-needed management discipline.
While he sought the right candidate he installed his son Declan as interim chief executive. Four months later Ryan appointed Peter (P.J.) McGoldrick to the position in October 1988. O’Leary would maintain his watching brief but remain in the background. ‘P.J. McGoldrick was sent in as a fireman,’ says one former executive. ‘He was expected to stem the losses and turn it round. There was a lot of confidence that McGoldrick would be able to do it.’
McGoldrick had a track record in the aviation industry, but not one which was a natural fit with a commercial airline business. He had run an air transport company out of Stansted airport in Essex and had subsequently sold it to Trafalgar House, a British conglomerate with diverse interests in shipping, hotels and the Far East. Ryan, his reputation as businessman on the rise, had been invited to join Trafalgar’s board, and when he came across McGoldrick he identified a ‘fellow traveller’, according to an executive who knew both men.
McGoldrick, at forty-nine, was substantially older than his predecessor and most of his workforce. He lived in Killaloe in County Clare, near Shannon airport, flying to work in his private plane. To the eyes of the people who worked under him, he lacked O’Neill’s dynamism. ‘He was not at all inspiring,’ said one senior manager. ‘An accountant would be a good description, not in relation to costs but in his manner. Kind of slow-speaking, not dynamic at all. One time he called me into his office and delivered a speech which was supposed to be uplifting and I could hardly hear the guy.’
Tony Ryan, however, was not interested in charisma or people skills; he wanted a veteran who could stop his airline losing money. ‘McGoldrick was a maverick and, as they say in Ireland, a bit of a chancer. He would take risks, and he would play right to the edge. He was not short of self-confidence, and he was in the Ryan mould,’ says a Ryanair veteran.
McGoldrick’s early priorities were to impose some order on the chaos within the airline. He needed to rationalize its route network, which had grown incoherently under the O’Neill expansion strategy; he needed to sort out the fleet and the schedules to make the airline more efficient; he had to kill off routes which were failing; and he had to impose some financial discipline. ‘It would be easier to say what we didn’t change than what we did change,’ he said some months later.
The first step was to revamp the loss-making Luton-based Ryanair Europe. McGoldrick’s solution was harsh. In January 1989 Ryanair Europe closed its Brussels office and abandoned its scheduled services.
Ryanair Europe’s scheduled operations had been that most dangerous of hybrids – low fares with all the frills. ‘It was patently obvious that that was the way not to go,’ says O’Leary. Its acquisition, he says, had been a flawed response to Aer Lingus’s decision to develop Manchester as a hub. ‘The Ryans decided they would copy that strategy and they bought this bankrupt airline in Luton and relaunched it…It lost a fortune. It was all nuts, using Luton as a hubbing airport. It is hard to know looking back, with the wisdom of hindsight, how you could be so stupid in the first place,’ he says.
From London, Ryanair Europe was facing competition from British Airways and Sabena, who pandered to business travellers who did not pay their own fares because air travel was an expense paid by companies. A remarkable 80 per cent of BA’s passengers paid business-class fares, and Ryanair Europe had tried to compete by offering a similar quality of service but at a third of the price. Unsurprisingly, it had incurred heavy losses. McGoldrick had no option but to shut the service down before its losses dragged down Ryanair itself.
Back in Ireland McGoldrick embarked on a restructuring programme which included replacing the entire second management tier, revamping the accounts system and altering ‘all basic systems from holidays to promotion’. He reordered the company into five coherent parts: Ryanair, the main airline, based in Dublin; Ryanair Europe, based at Luton airport and now reduced to small-scale charter operations; Ryanair Engineering, also based at Luton; Ryanair Fleet Management, established to manage the aircraft of the two airlines; and Ryanair Tours and Leisure, designed to move into the tourism and hotel sector of the travel industry.
‘What we are doing is broadening the base of the group,’ McGoldrick said in early 1989.
Instead of operating just the two airlines, we had to change direction and place the group on a strong and more viable financial footing.
The airline started to run into problems early last summer [1988]. It just didn’t have the organization or structures to cope with the way business had grown. We had over-expanded our fleet. The company has now been restructured and we are on course for breaking even in the coming year.
On a pure business basis, what went wrong was that [Ryanair] expanded very quickly – it doubled its fleet within months. I don’t think the organization and head office were able to keep up with that expansion and a lot of things fell apart because of that. On top of that you had fairly aggressive competition from other carriers, particularly in Manchester and Glasgow, where we made major losses.
It was a sanitized description of the company’s problems under O’Neill, and it was economical with the truth by suggesting that Ryanair had only started to run into problems in the summer of 1988. That was when Tony Ryan had become aware of the scale of its difficulties, thanks to O’Leary’s intervention, but they had been building from the start.
McGoldrick had taken over a company in crisis, that much was clear. What remained opaque was the depth of that crisis. Throughout 1989 the real devastation of the previous year became more and more apparent as O’Leary worked his way through the accounts. The previous July’s optimistic forecast of profits had been replaced by the certainty of losses, but quite how deep those losses would be did not emerge until the following autumn.
In March 1989 the Financial Times reported that Ryanair’s losses for 1988 were expected to be in the region of £2.5 million; in September that estimate had risen to £6 million, and when the results were finally announced in October 1989, a year after McGoldrick had taken charge, the figure was £7.34 million. It had been, a company statement said drily, ‘a very difficult period’. Almost half of those losses had been incurred on the failed expansion into Manchester and Glasgow – a painful lesson in how not to compete with Aer Lingus and retrospective justification for the dismissal of O’Neill.
‘I never wanted a battle with Aer Lingus. Ryanair has proved there is enough business out there for both of us. I’m not going to waste the Ryans’ money fighting Aer Lingus,’ McGoldrick told the Financial Times. He was confident that his overhaul of the company would produce substantial rewards, and he announced in October 1989 that the airline had responded well to treatment and was now on course to make a profit.
But his optimism would come to look as foolish as O’Neill’s because he too was heading for abysmal losses in his first full year in control. Michael O’Leary, working quietly behind the scenes, would also feel the pressure. Despite his attention to the financial details of the business, he had failed to shed light on the airline’s core difficulties. His master’s investment remained a basket case, and O’Leary was expected to come up with solutions, and fast. His job, after all, was to mind Ryan’s private investments and Ryanair’s losses had become the most important part of his agenda. Until those losses were staunched, O’Leary would have little time to devote to what he really wanted to do: use Ryan’s money to make more money, and take his 5 per cent of the action on the way.