Michael O'Leary (15 page)

The media missed the significance of the route cull, interpreting the withdrawals as a signal that Ryanair was in terminal decline. In fact, they arose from a hard-nosed strategy focused on profitable routes that was actually proving to be the airline's salvation.

Seamus Brennan's controversial two-airline policy had given Ryanair the breathing space to build a profitable business by removing head-to-head competition with Aer Lingus on its key routes to London's Stansted and Luton airports – a compromise that had also protected Aer Lingus's routes to Gatwick and Heathrow. It was, however, a deal with a deadline: Brennan had agreed a two-year moratorium, not an indefinite one. The power of government to intervene in the airline business was also in steady decline, because the staged liberalization of Europe's aviation market was already under way and would reach a new milestone the following year.

Flight International,
an aviation trade magazine, reported, ‘Speculation that Irish operator Ryanair is in trouble has re-emerged following the announcement that it is to shut down its London service to three regional Irish airports…Until now, Ryanair has had the stated aim of becoming Ireland's leading carrier to regional airports…This leaves the airline largely dependent on the Dublin–Stansted route at a time when Aer Lingus is preparing to fly into Stansted from next year.'

It was a threat that Hayes and O'Leary were already moving to close off.

The crisis in the airline industry did not halt Europe's slow progress towards deregulation and by the time the next tranche of liberalization came into effect in 1993 the industry was showing early signs of recovery. Fifteen years after US deregulation, the concept of low-fare airlines had also finally made its way across the Atlantic.

Dan Air, a British-registered company, became the first genuinely low-fare European airline to live, and die. Originally a charter airline, Dan Air had transformed itself into a low-fare and relatively low-cost scheduled carrier, but it could not achieve profitability. It fell to earth in September 1992 and was subsumed by British Airways the following month.

As the
Financial Times's
Lex column wrote in September 1992,

There is a clear lesson in the plight of Dan Air for would-be liberalisers of Europe's aviation industry. Here, after all, was a relatively low cost airline which ought to have been a model beneficiary of the open skies policy pursued by Brussels in recent years. Instead its parent company, Davies & Newman, now finds itself in apparently life and death talks…The reason is largely the dire economic climate and delayed hopes for economic recovery. But Dan Air's failure to gather momentum as a scheduled carrier highlights the difficulty of breaking into markets dominated by the big national flag carriers.

The reality was that the national carriers still held a massive advantage over aspirant airlines: they controlled the landing slots at the major airports. As the
FT
explained, ‘BA's hold over slots at Heathrow has provided it with an inestimable advantage in developing its European network.'

The 1993 deregulation package brought with it the concept of a European rather than national airline – this was ‘open skies' within the European Union, allowing any airline registered in a member country to operate without restriction in all other member countries of the union. For Ryanair this was the package that at long last made it possible for the airline to build on its ambitions. Price controls – which required airlines to have their fares approved by their governments – had disappeared, and airlines were now free to charge what they wanted rather than seek government approval for their fares. Airlines could also fly to and from anywhere in Europe. Ryanair had avoided price control of its fares by operating services where none had previously existed – like its early Dublin–Luton route. This had given it access to the London
market, but because Luton was technically not a London airport, there had been no price constraint.

But despite the freedom that the previous waves of deregulation had brought, the basic make-up of the aviation market in 1993 was not significantly different to what it had been in 1990 or even 1985. By 1993 there were twenty-two independent airline operators in Europe, but Greece, Finland, the Netherlands, Luxembourg and Spain all had no competition for their flag carriers. Competition was advancing more rapidly in some areas – there were five jet airlines in both the UK and France, and two in Ireland. The real catalyst for change in the market was the 1993 reform, which at last spurred developments in the European aviation market.

In 1993 four large airlines (using jets with seventy seats or more) entered the market, but seven large airlines exited. Between 1994 and 1997 thirty-three large airlines entered the market and a further eleven smaller-scale operations upgraded to larger aircraft. But twenty-four airlines ceased operations. It was a sign of the new order: competition would bring change and opportunity.

The roller-coaster ride had begun.

Tony Ryan's life had been turned upside down by GPA's collapse in the summer of 1992, but for Michael O'Leary and Conor Hayes life was getting better and better. Hayes's price cutting and O'Leary's cost cutting had taken Ryanair to the promised land of real profitability by the end of 1992. For the first time in its short history the airline would be able to announce genuine trading profits, rather than a surplus cobbled together by selling assets.

Ryanair announced a trading profit for 1992 of £850,000. The real profits were substantially higher – almost £3.5 million – but Hayes and O'Leary, prompted by Ryan, decided to conceal the extent of the airline's remarkable recovery. ‘They just plucked a number from thin air that year,' says one former colleague, ‘and I remember one of them saying that 850,000 sounded good because it was exactly the number of passengers we'd carried.'

Their coyness was unusual, but GPA's collapse had altered
Ryan's priorities. Merrill Lynch, to which he owed $35 million, was pressing hard for a settlement of his debts and he was determined to hand over as little as possible.

According to those close to the negotiations, Merrill decided to deal directly with Ryan rather than allow the two main Irish banks – Bank of Ireland and AIB (Allied Irish Bank), its syndicate partners on the loan – to lead the talks. Ryan played a cunning game. Even though Ryanair was legally outside his direct control, he offered a large stake in the airline to Merrill Lynch in exchange for a writeoff of his debts. But the bank was not prepared to take shares in a company which appeared to have no prospects of success.

‘Merrill wanted some cash, not a share of a loss-making airline,' says one of Ryan's associates. The airline industry, though limping out of the recession of the early 1990s, was still in trouble and Ryanair had a history of losses. Had Merrill's bankers looked closely at the company's accounts for 1992, which were published in early 1993, they might have noticed that the underlying cash position for the year was far better than the headline profits indicated – Hayes had thrown money at depreciation charges to keep the profits down – but they were not interested.

The negotiations between Ryan and Merrill Lynch would drag on for another year, but while Ryanair's real level of profitability may have been concealed from the bank, it was uppermost in O'Leary's mind. He knew that his profit-sharing deal with Ryan would start delivering dividends very soon. He was just thirty-two years old, and was about to make his first serious money. He knew that his life was changing and he could afford to indulge himself.

In May that year Patsy Farrell decided to sell Gigginstown House, just outside Mullingar. The asking price for the house and 200 acres was £580,000. Gigginstown, an unpretentious Georgian mansion built in the 1850s for the Busby family and designed by John Skipton-Mulvany, needed renovation, but its setting was what O'Leary coveted. Robert Ganly, the auctioneer who handled the sale, described the house as being ‘grand and honest' and remembers it as a typical Irish country house – ‘It needed work,' he says, ‘like most country houses of the time.'

O'Leary had always wanted his own home in Mullingar, where his parents had lived since he was a small boy, and Gigginstown was too good an opportunity to miss. Within a month of the house being put on the market, O'Leary had made his move. He negotiated briefly, knocked a few thousand off the asking price and struck a deal. ‘I don't remember him being particularly aggressive or particularly difficult. It all went relatively smoothly,' Ganly says.

O'Leary says that when he bought Gigginstown

I was probably to the pin of my collar to pay for it. I grew up on a farm and I'd always known that if I ever had the money I wanted to have my own house, my own farm. Then I got lucky and got more money and I wanted a grander house.

The house itself isn't massive. People go on about this magnificent mansion. It is a very nice family home – it is not one of these big palatial mansions, nor was it built to be. It was built as a sort of a weekend house for someone in Dublin, but on a grand scale. I wouldn't want my kids rattling around in a ginormous fucking mansion. My house isn't small but it feels fairly compact. If you have kids and the kids are growing up and bringing friends back, you don't want them to think they are arriving in Buckingham Palace.

It was to prove a bargain buy – over the next twelve years house prices in Ireland rose tenfold as the economy went into a period of double-digit growth – but in 1993 large country houses were slow to sell and relatively inexpensive to buy.

Gigginstown was to become his oasis, a private retreat from the self-imposed frenzy that Ryanair had become, but not yet. For his first few years as Gigginstown's owner O'Leary continued to spend most of his working week in Dublin, visiting his estate at weekends. He had plans for the house and for the land, but first he wanted to bank some ‘serious cash'.

While O'Leary was completing his purchase, Hayes was preparing his exit. On 23 June 1993 Hayes formally tendered his resignation
as chief executive, though he would continue in office until the end of the year.

His departure was not a surprise: he had been contracted to do a specific job with a specific time limit. By the time he left Hayes would have completed two years at Ryanair and could take much of the credit for transforming the airline's fortunes. His determination to impose rigorous and timely financial reporting had made it possible for him and O'Leary to fully understand the company's problems for the first time, and his desperation to drive up passenger numbers had seen him experiment with, and then embrace, low price and high frequency as his twin weapons. By the end of his second year Ryanair was carrying close to one million passengers a year.

Hayes had pruned out underperforming routes, had been prepared to take tough political decisions like withdrawing from small regional airports, and had insisted that every Ryanair flight that left the ground covered its costs. Most importantly of all, he had imposed financial transparency on a company that had never had it before.

There was little debate about his successor. Michael O'Leary had returned to Ryanair after his sabbatical working for Tony Ryan and was now committed to making his mark at the company. He had been appointed chief financial officer on his return, could see that the company had turned a significant corner and had a 25 per cent stake in its future profits. He also knew that there were no other options. For the moment Ryan was a broken man, consumed by bitterness at the demise of GPA and robbed, as he saw it, of the millions that were his right. Ryan would recover spectacularly from his fall from grace, but it would be on the wings of Ryanair. Ryan's eldest children Cathal and Declan had tasted high office already and were happy to leave the airline's leadership to O'Leary. He knew the company better than anyone, had played a key role in its recovery and was ready and willing to take charge. Hayes's low-fare strategy, though born of desperation rather than strategic cunning, had set the airline on its way and, just as importantly, it meshed with the business philosophy which O'Leary had
learned from Herb Kelleher's Southwest. The basket case had become a viable proposition, and O'Leary was perfectly positioned to take advantage and build the business. The liberalization of the markets gave him the opportunity to expand, and the work done by Hayes and himself had given him a stable company.

Hayes's final months at Ryanair were not idle; he became embroiled in a major political battle with the European Commission, the Irish government and Aer Lingus.

Ryanair's success in winning market share by cutting prices was only just beginning to translate into profits, but through its loss-making years it had managed to wreak havoc at Aer Lingus. Already buffeted by the international aviation recession, Aer Lingus received a further hammer blow in the summer of 1992 as a major shareholder in GPA. Instead of banking heady profits from the flotation, it now had to write off its investment and swallow the losses. It would have been painful in a good year, but by now Aer Lingus was bleeding cash on its operations.

The state-owned airline's instant solution to its crisis was typical of a company used to monopoly and unsuited to the challenges posed by competition. Bernie Cahill, Aer Lingus's chairman, decided he should get rid of the competition by buying out Ryanair, and was also preparing a survival plan for Aer Lingus that would require the Irish government to pour in
£
175 million to repair its balance sheet. Without the cash injection Aer Lingus would be bankrupt, and if it could not kill off Ryanair, it would be unable to return to profit on the Ireland–UK routes.

In May, a month before Hayes tendered his resignation, Cahill approached Tony Ryan about a possible deal. He was, he said, prepared to offer £20 million for Ryanair – a price which he thought would tempt Ryan to cut his losses. O'Leary and Hayes were delegated to deal with Cahill, a decision that riled the Aer Lingus chairman as he believed he should be dealing with the main player.