Michael O'Leary (16 page)

Accounts of the meeting between the three have taken on the mystique of an urban legend, with Hayes and O'Leary cast as young mischief-makers determined to wind Cahill up with no
intention of ever selling. In the legend, Hayes and O'Leary pushed Cahill all the way, forcing him to edge up his offer and yet, each time he raised it, they came back looking for more. Finally, they demanded £29 million, saying that Ryan would not settle for a penny less. And then Cahill realized what was happening: the figure had been chosen not because it was Ryanair's real price, but because it echoed the £29 fares that Ryanair was using to lure passengers onto its planes. Cahill had been played for a fool and was furious, the story goes.

O'Leary, however, remembers it differently. He says the negotiations were serious and based on Ryanair's profits the previous year. Cahill, he says, was told the company was his for £20 million. ‘There was no 29.99, this was a serious discussion.'

It was not, however, a discussion between equals. Cahill, a veteran of the Irish business scene, had to deal with Hayes and O'Leary, and according to some who knew him he took an instant dislike to the ‘young upstarts'. ‘After meeting Cahill a couple of times, it came back to us that he thought we were just a pair of young pups. Who did we think we were telling him what he had to pay?'

A former Aer Lingus executive agrees with O'Leary. ‘We heard that Bernie was high-handed. A deal was on the table, but it just did not happen.'

The proposed deal fell apart. ‘When you try to do these sorts of deals, they either gather momentum or they fade away,' says O'Leary. ‘It could have happened very quickly,' he says, acknowledging that Ryanair was genuine about the sale. Neither he nor Hayes, however, was convinced that Cahill was serious, and they refused to allow Aer Lingus access to Ryanair's accounts, because they feared that Cahill might simply be after information about the company. Those close to Ryan say that he might have sold, but for the first time since he had founded the company it was beginning to make serious profits and he knew that Cahill wanted to shut it down and destroy his legacy rather than invest and build it.

Months later, on 5 October, news of the takeover talks finally
broke in the media. The
Irish Times
carried a front-page report headlined ‘Ryanair rejects £20 million bid by Aer Lingus'. According to the report, ‘A valuation of £20 million is understood not to have been acceptable to Ryanair and it then refused Aer Lingus access to its books because it believed the national carrier was only on an information-gathering exercise,' a version of events that mirrored the fears of O'Leary and Hayes.

Cahill was apoplectic about the leak. He was about to go public with Aer Lingus's survival plan and did not want his efforts to save the airline sidetracked by speculation about buying Ryanair, especially since the mooted deal had been dead in the water for almost four months. Two days later, after intense pressure from Cahill, the
Irish Times
retracted its story and published a correction: ‘The Irish Times accepts that no bid was made or rejected.'

The story was true, but it was inconvenient. The
Irish Times,
which prides itself on being Ireland's paper of record, buckled under pressure and published a retraction that it knew was false. ‘Aer Lingus was furious about the story,' recalls Jackie Gallagher, its author. ‘It maintained that while there had been discussions, there had never been an actual bid. That is why the correction was specific to the headline – if there had been a formal bid the paper could have stood its ground, but at the time there were a lot of connections between the paper and the airline and so the correction was published.'

Two weeks later the reason for Cahill's anger became abundantly clear when Aer Lingus announced that 1992/93 had been the airline's worst year ever. ‘The period since my last report was the most traumatic in the 57-year history of Aer Lingus,' he said in the group's annual report. Annual losses were an eye-watering £109.7 million while the airline's debts were £540 million. Cahill attributed the company's dire performance to ‘the impact of worldwide recession which rocked the airline industry, the impact of the failed GPA flotation, the high cost base and the declining average yield per passenger'.

The GPA debacle had forced a write-off of £43.9 million. Restructuring charges were just short of £100 million and the
airline had just ten days left to finalize negotiations with its trade unions to save £50 million a year. If it failed to meet the deadline, it would not qualify for state aid, which had been tied to Aer Lingus's ability to reform itself.

Carefully, Cahill avoided mentioning the impact that Ryanair's aggressive pricing had had on the national airline's performance. Far better to blame international crises than look closer to home. Cahill could avoid talking about Ryanair, but the industry knew where Aer Lingus was being hurt. In November Tony Brazil, the outgoing president of the Irish Travel Agents' Association, said that Aer Lingus was losing ten pounds on every passenger on the Dublin–London route because of Ryanair competition. It was being forced to charge fares that it could not afford. ‘This blood-letting must end as surely to God the two parties can see where it is all leading.'

Hayes and O'Leary decided, after much discussion, not to oppose Aer Lingus's request for state aid, but Hayes was given the task of ensuring that the money came with strict conditions about how and where it could be used. Rescuing a state-owned airline was one thing, but using state money to prey on Ryanair was quite another.

Hayes spent the last months of his tenure as chief executive compiling Ryanair's dossier on the matter for the European Commission. He was determined that Aer Lingus should not be allowed to use taxpayers' money to subsidize its existing routes. The state aid was, Ryanair argued, permissible if it gave Aer Lingus a last, one-off chance to reform itself, but not if it was used to further distort competition and imperil Ryanair.

This was a genuine fear not mere posturing. Under Cahill's survival plan Aer Lingus was planning to launch its own low-fare subsidiary, to be called Aer Lingus Express. This, Cahill hoped, could compete with Ryanair on price, leaving the main Aer Lingus company to compete on service.

‘We believe that this specific proposal [to launch Aer Lingus Express], which envisages the misuse of a State subsidy to add capacity on our route network, is incompatible with the EC's transport competition and state aid rules,' Hayes said in the submission.
He wanted a requirement that Aer Lingus should be forced to operate all routes profitably from the following year and not from 1996, as was proposed in the Cahill plan. Hayes also asked the commission not to approve any EC aid for Aer Lingus flights from Ireland's regional airports – a subsidy which could be applied to commercially unsound routes that would otherwise not be flown by an airline but which the government deemed essential public services. He pointed out that Ryanair had initiated such services but had been forced to withdraw from them because of Aer Lingus's predatory pricing – a direct reference to its decision to withdraw from Galway, Kerry and Waterford airports.

It was a war that Hayes could not expect to win outright, but he chalked up battle victories nevertheless. The Aer Lingus rescue plan was hemmed with conditions that Ryanair had proposed and which O'Leary could police in future years to ensure that the private airline, which had only just managed to make decent profits, would not be squashed by state subsidies. ‘Aer Lingus's strategy will, if unchecked, lead ultimately to the demise of Ryan-air, albeit at enormous cost to Aer Lingus, since Ryanair simply does not have the resources to continuously fight subsidized competition,' Hayes said.

While Cahill's excuses for the national airline's difficulties were centred on international crises not under his control, his solution was single-minded. Aer Lingus's new strategy was to have low fares when competing with Ryanair on routes to London and higher fares and yields on other routes to the UK where the airlines did not compete. Aer Lingus hoped to charge premium fares to London's Heathrow and cut its prices on flights to airports that Ryanair did serve.

Hayes and O'Leary were also prepared to show the Irish government and the EC that Aer Lingus's rescue would not be victimless. In a pre-emptive strike they announced forty redundancies on 29 October, saying Ryanair ‘must now take all necessary measures to prepare for the inevitable increase in subsidized competition from Aer Lingus when they receive (as we expect they will) the £175 million of state aid from the Irish taxpayer'.

Aer Lingus tried to strike back, with Executive President John Griffin writing to the
Irish Times
to claim, ‘Contrary to the notion that the national airline is another subsidized semi-state company, the public record shows that the Aer Lingus Group produced net profits of £120 million between 1986–92, after payment of interest, taxes and dividends to government.' He neatly ignored the massive subsidies which had flowed into Aer Lingus over the previous years, and the fact that all those profits had been lost subsequently, but then the truth was rather more painful.

Griffin then attacked the validity of the low-cost, low-fare phenomenon:

The public record shows once again that the very low pricing policy established by this new private company [Ryanair], now publicly acclaimed, was not a basis on which to build a viable new airline. In 1989, only four years after starting up, it had to appeal to the government for assistance. Aer Lingus was effectively made to bail it out by having to surrender three routes to Ryanair, on a monopoly basis – all in the name of competition!

Incidentally, apart from its monopoly on the Stansted route, Ryanair also enjoys subsidies there, which are not available to Aer Lingus at Heathrow, underlining the precarious economics of the airline business in this country at the moment.

Griffin's defence of Aer Lingus and its need for state aid was understandable, if tendentious. Ryanair had been saved from likely collapse by the government's adoption of a two-airline strategy in 1989, but it had not received taxpayers' money. Its ‘subsidies' at Stansted were actually negotiated reductions in charges, granted because the airport's owners were anxious for business. Griffin also ignored the fact that Ryanair had survived despite the best predatory efforts of the state airline, which had used state money in a determined attempt to send Ryanair the way of Avair, its bankrupt predecessor. He was reflecting the exasperation felt by the traditional airlines, which had grown accustomed to a world devoid of competition.

Griffin and his colleagues still believed that state-owned airlines were members of a gentlemen's club. They did not compete aggressively, they could charge what they liked and they could turn to their governments for cash whenever cyclical crises blew a hole in their bottom lines. Airlines, in their view, were not just commercial operators; they were an extension of government policy, providing an essential public service (in Ireland's case air travel between an island nation and the rest of the world) as well as being a substantial employer.

Aer Lingus would get its government aid this time, but it would prove to be the last handout. From now on the company would have to stand or fall on its ability to compete, and O'Leary was just about to up the ante.

On 1 January 1994 Michael O'Leary finally stepped out of the shadows. For the previous five years he had been at the heart of the airline's transformation, but he had operated below the radar. He was known within Ryanair but barely registered outside it. Now he was to assume official leadership of a company that he had helped drag from near bankruptcy to profitability, a role that he had combined with the sometimes all-consuming pressures of dealing with the sporadic crises in Tony Ryan's business affairs.

His rise was greeted with some internal trepidation. ‘Some were delighted to hear it, some weren't,' recalls Charlie Clifton. ‘They were scared he'd be cutting costs and cutting us. That it would be bread and water.' Ryanair's employees were right to be wary; the new chief executive was messianic about cost control. He was also convinced he could transform Ryanair from a successful niche airline into a serious European contender.

O'Leary first needed to develop a new relationship with Ryan. The collapse of GPA had destroyed Ryan's aura of invincibility and threatened to eliminate his wealth. The great man of Irish business was on his way down while O'Leary, his protégé bagman, was on an upward curve. He had chosen to stay in the background at Ryanair for years, first as Ryan's eyes and ears, later as finance director and deputy chief executive. He had, as he reminds anyone who interviews him, wanted to shut the airline down but Ryan's stubbornness had kept it flying. He had walked away from it for a time, only for his hopes of striking gold with Ryan's millions to be dashed when GPA collapsed. He had returned to the airline, knowing that it was his only remaining opportunity of making serious money. He had in his pocket his previous deal with Ryan which promised him a 25 per cent share of any future profits above £2 million – a deal struck when the prospect of the airline being
closed seemed more likely than recovery. Under Conor Hayes, however, Ryanair had stabilized and edged its way to profit, and O'Leary was prepared to sweat blood to take it to the next level. His routine was relentless: he arrived early in the office, left late, smoked heavily and drank coffee incessantly. He lived in his apartment in the Dublin suburb of Sandymount during the week, escaping some weekends to Gigginstown, but his real life was at Dublin airport, guiding the fortunes of the company he now directed.

From 1988 to the end of 1993 the battle at Ryanair had been for control of the company, but not in the sense of boardroom struggles and jockeying for power; it had been a more basic battle. Hayes, who hadjust left, O'Leary and their management team had been fighting for control of the airline's finances, slowly instilling order where there had been chaos. Loss-making routes had been closed, financial controls had been imposed, costs had been reduced, but the strategy that was to mark out Ryanair from the rest of the competition over the next decade had yet to emerge. Under first McGoldrick and then Hayes elements of that strategy had fallen into place, but it had not been pulled together into a coherent business model that could be the template for the future