Michael O'Leary (13 page)

O'Leary believed that profits were possible if unlikely, but he had no idea that he could turn Ryanair into a money-making machine. ‘I thought that if I got it right I could make some decent money, but not a fortune,' he says. ‘I thought in a good year we'd make a couple of million and I'd get 250 grand, and there you go, more money than I could imagine, I'd be rich. But at that stage it was as likely to go bust as it was to make a million quid.'

The deal remained a secret. Hayes was unaware of O'Leary's cut of future profits when he joined the company, though he knew that there was an understanding between the two men. He assumed that O'Leary was on a profit-share deal, and knew that his relationship with Ryan went far beyond Ryanair, but he did not probe. His responsibility was to turn around an airline, not worry about who would benefit.

For O'Leary, the agreement changed everything. He now had a tangible stake in the airline's future. He was not, yet, an owner of the business, but the profit share was as good as ownership – better, in fact, while Ryanair remained troubled, because it involved no responsibility for current losses. Ryan's incentive strategy had an immediate effect and was a powerful motivator. O'Leary had always wanted to be his own boss. When Ryan had first sounded out O'Leary about working for him he had offered him roles at GPA, his aircraft leasing company. O'Leary had consciously turned down those offers and had offered instead to
work as his personal assistant, determined to learn the art of business so that he could make a fortune for himself, not for others. It was an unusual role, and a vague title. ‘Personal assistant' conjures up the image of a valet or batman – a servant who helps his master dress, irons his shirts and perhaps manages his social diary. Ryan, though, used the term for young hungry men who worked for him on his private investments, his eyes and ears on current and future investments while he toured the world for GPA. Now O'Leary had an enormous incentive to make Ryanair work, because he knew that every penny saved, every extra seat sold, was potentially money in his own pocket. He was determined to work harder than ever, and threw himself into the business.

‘I thought his life was very strange,' said Brian Bell. ‘His whole life seemed to revolve around work. He was always there early in the morning, he was always there late in the evening. I heard stories of him being in on Saturdays reading a book at his desk and helping out the baggage handlers on Sunday. He played football with the staff and he didn't seem to have any personal life outside it.'

O'Leary did not have all the answers to Ryanair's problems, and Tony Ryan was well aware of that fact. So in early 1992, just after McGoldrick's departure, Ryan dispatched O'Leary to America to learn what he could from the master of low-fare airlines, Southwest.

Set up in 1971 as the original low-fare operator, Southwest had just reported after-tax profits of $26.9 million for 1991, a considerable feat when rocketing oil prices were inflicting heavy losses on most airlines. Southwest was a roaring success story, a story which Ryan was keen to repeat on his side of the Atlantic, and so he sent O'Leary to meet Southwest's hard-drinking founder, Herb Kelleher.

While O'Leary's recollections of his meeting with Kelleher vary, the central importance of Southwest's experiences to Ryanair's evolution remains clear. In December 1998 in an interview with the
Financial Times
O'Leary placed Southwest at the heart of
Ryanair's success. ‘We went to look at Southwest. It was like the road to Damascus. This was the way to make Ryanair work.'

O'Leary spoke and drank to excess with Kelleher that night, and the two hit it off. ‘I passed out about midnight, and when I woke up again at about 3 a.m. Kelleher was still there, the bastard, pouring himself another bourbon and smoking,' O'Leary told an audience of Boeing workers in 2004. ‘I thought I'd pick his brains and come away with the Holy Grail. The next day I couldn't remember a thing.'

Kelleher admired O'Leary's focus and determination, but Southwest's secrets did not come tumbling from the great man's lips. They did not have to. O'Leary had spent two days studying Southwest's operations from the ground and had begun to understand what it took to make an airline work. He watched the speed of the Southwest turnaround – the amount of time that a plane spent on the ground before being dispatched skyward again with another load of passengers. Where other airlines took an hour and a half, sometimes longer, to turn their planes around, Southwest did it in less than thirty minutes. He studied the check-in, where Southwest passengers were boarded speedily without seat numbers, and he studied the prices the airline charged.

The results, he says, were not ‘rocket science'. Southwest was obsessive about its costs. It reduced its staff training and maintenance costs by flying just one class of plane, the Boeing 737. It made those planes work harder than anyone else's by keeping them in the air longer and on the ground idle for as short a time as possible, flying more routes and carrying more passengers.

Scores of American airlines had come and gone in the previous decade, victims of overexpansion and poor financial control, but Southwest was a model of controlled expansion. It grew each year, adding more routes and more planes, but it did not rush and it kept a tight grip on costs. Its turnaround times meant that it could fly more routes in a day than other, less efficient airlines, giving it a simple productivity edge that translated into greater profitability. It could achieve much faster turnaround because it chose to fly to smaller airports than its rivals: airports like Love Field in Dallas,
Texas, which were uncongested and required only a few minutes taxiing by a plane from its stand to the runway. Unreserved seating meant that passengers could be loaded swiftly from either end of the plane, and the effect was to make airline travel more like bus travel. It was cheap, fast and unencumbered by mystery. O'Leary could see the model was sound. More importantly, he could see that the model was transferable to Europe. There was no magic ingredient, no special American factor that made a Southwest possible in Texas but impossible in Ireland and Europe. The arithmetic could not have been simpler: keep your costs lower than anyone else's, your planes working harder and your prices low and you could beat any competitor on any route.

Southwest had demonstrated that low fares actually worked. Just as Ryanair's arrival on the Ireland–UK routes had stimulated rather than cannibalized the air travel market, so Southwest's experience across its route network had shown that low-cost air travel boosted the overall market. Its success had come from serving new markets, but also from competing on traditional inter-city routes already served by traditional airlines.

O'Leary could see it worked. His challenge was to distil the best of Southwest's model and then adapt it to the realities of Ryanair. It was the genesis of a revival plan.

Hayes had a plan too but it was a more basic one. He had recognized quickly that Ryanair needed more paying passengers. The previous Easter Ryanair had run a successful seat sale – promotional prices on the Dublin–Luton route had been cut from £49.99 to £34.99 and tickets sold fast – but the promotion was seen as a once-off initiative to boost seat sales ahead of the traditionally busier summer season. Hayes thought it was worth trying again, but met resistance within the company. ‘Everyone said he was mad and pleaded with him not to cut fares,' said one former executive. ‘The only person who backed him unequivocally was O'Leary.'

O'Leary's exposure to Kelleher had convinced him that low fares were an essential part of the formula that Ryanair would have
to adopt if it were to claw its way to profitability, and Hayes, desperate to drive passenger volumes higher, was determined to gamble. Consciously Hayes borrowed his lowest fare – £29 each way – from Southwest Airlines' by now famous $29 fare from Dallas to Houston and then set higher fares at ten-pound gaps, with fewer restrictions applying as the price rose, and launched it as a ‘Happy Days' promotion in early February 1992.

It was an instant success. Later that month he doubled Ryanair's Dublin–Stansted services from twelve to twenty-four flights daily to cope with the increased demand and a week later he announced plans to launch a new service between Stansted and Shannon in April. The low fares were held for a second month, and then a third.

Ryanair, almost by accident, had become a genuine low-fare airline, and low prices, matched by even lower costs, were now being recognized as its most potent weapons. It was a discovery born of desperation rather than planning. O'Leary had yet to formulate his Southwest-lookalike model and Hayes was chasing volume not a strategy, but it worked. Ryanair could not compete with other airlines on service, but it could compete aggressively on two levels: price and the frequency of its flights. The key to success would come through implementing the flipside of a low-fare structure – Ryanair would make money on low fares and high frequency only if its costs were low and its productivity high. And so Hayes and O'Leary started to dovetail effectively. While O'Leary concentrated on driving down costs, Hayes worked on price and frequency. By May 1992 Hayes felt confident enough to tell Reuters that while the profit for the previous financial year might be small, ‘this year our profit will be measured in millions…I can't prove that [we have the lowest costs in Europe],' he said, ‘but I know I can sell a twenty-nine-punt flight to London at a profit even if it's a small one.' Hayes said that his competitors would need to charge seventy punts to make a profit.

Hayes's low fares had already had a dramatic impact on Ryanair's Dublin–London market share, which had leapt from an average 15 per cent on the route in 1991 to a remarkable 26 per cent by
April 1992, the third month of the low-fare initiative. ‘My target is that in eighteen months we will have stabilized at 25 per cent of the London–Dublin corridor,' he said. Unlike rival airlines, which advertised cheap fares but had few available, Ryanair was actually delivering its lowest fare to the majority of its passengers. By the end of the year more than 50 per cent of all seat sales were at the lowest available fare, decisive evidence that price was hugely significant in stimulating demand even on mature routes.

The success of low fares was also forcing Hayes and O'Leary to look closely at Ryanair's fleet of aircraft, which in 1992 was a modest collection of eight leased BAC One-Eleven jets and three propellor-powered ATR 42s. A larger fleet was vital if the airline was to grow by launching more routes and increasing the number of flights on its existing routes, and McGoldrick had placed orders for new Airbus A320s and ATRs.

Hayes, however, cancelled the orders and decided to wait. Acquiring new planes is always a gamble – on the one hand, they give airlines the firepower to expand, but they also bring a heavy financial burden and put the company under intense pressure to sell the newly acquired seats. The gamble only pays off when an airline's acquisition plans are perfectly in tune with its route expansion plans. Hayes was still uncertain about the airline's direction and did not want to end up with the wrong mix of large and small aircraft. ‘What we've got to do is put this business on a viable footing, then we'll see what fleet we need,' he said.

The accountant in Hayes was never far from the surface. While he was keen to lower fares and increase the number of flights on offer, he was equally determined that no individual flight should lose money. His solution horrified airline traditionalists. Hayes insisted that no flight should be allowed to take off until it had been given clearance to go by Bernard Berger, the man in charge of flight operations. He was instructed by Hayes to run the financial slide rule over every flight. If the total revenue from the seats sold on the flight added up to more than the costs of running the flight, Berger let the plane fly. If it fell short, then the flight was cancelled and combined with the next flight.

Twice in the early weeks of the new regime flight managers ignored the order and let planes take off without clearing the numbers with Berger. On each occasion the person responsible was fired. After that, the rule was implemented with religious fervour. ‘Flight consolidation was commonplace, but it was only possible because we had such frequency, particularly on the Stan-sted service. You could cancel the 18.30 and push everyone on to the 19.30 – so no one lost out hugely,' says one former employee.

It was ruthless but very effective. Passenger numbers climbed on the back of low fares, leaping from 650,000 in 1991 to 850,000 in 1992, and while more people flew, O'Leary worked tirelessly to ensure that the costs of flying them were kept low. By working the planes harder, making more trips, achieving faster turnaround times at the airports and by restricting service costs – planes were cleaned by the cabin crew not by contract cleaners, while toilets were emptied after a number of flights rather than after each one – O'Leary chipped away at the cost base and kept productivity high.

The formula worked, and the cash started to accumulate. It was too early to relax, but for the first time since the airline had been founded it was trading profitably and management knew exactly what was happening within the company they ran.

‘It was still a small company, but it was run very personally by Michael and Conor: they ran it like a sweetshop, not an airline. Everything was at their fingertips; they knew everyone and they knew the cost of everything. It was micromanagement in action,' says a former colleague.

It was also management by instinct rather than by design; there was still no grand plan of how Ryanair could be transformed into a consistently profitable airline. O'Leary had been down the road to Damascus, as he described it, but it was one thing understanding how Southwest managed to operate successfully and quite another to impose that structure on Ryanair overnight. Hayes and O'Leary were making progress through trial and error, both convinced that low fares and low costs were the only way forward. Their instincts were sound, but they were still a long way short of delivering a
business plan that could pave the way for the airline's expansion. Hayes was conscious of airline deregulation, but still not sure what impact it would have on the European market and was trying to balance the needs of strategic planning with the day-to-day pressures to reduce costs and seek out profit. It was a daily grind.