Michael O'Leary (18 page)

We are incurring the costs to get us into the scheduled passenger game again. Prestwick will again start to appear in international airline timetables on travel agents' computer screens. The new service will bring a flow of scheduled passengers we do not have at present. We will make money from our duty-free, catering and car parking facilities which we operate ourselves. At the end of the first year we will have more money in the till than if we had not done it.

We have done our sums carefully. What we are doing is cutting costs to the bone to promote low-cost air services. We are taking a long-term view.

The industry was not convinced. ‘The extra income to be generated from duty-free, catering and car parking will at best be marginal compared to the costs incurred by PIK in providing the services to the airline,' said one commentator quoted in the
Sunday Times.

O'Leary, though, had got what he wanted: a deal that took his cost base lower still, which allowed him to offer cheaper fares and which gave him the routes that his new fleet needed if it were to be productive. He also believed that the deal would work for Prestwick – there was little point, he argued, in carving out a deal for Ryanair which would force airports into bankruptcy. He was simply shifting the airports' thinking from a low-volume, high-cost model to one predicated on high volume and low cost. His part of the bargain was to deliver the volume by persuading passengers to take to the skies. Better still, the welter of publicity that had
surrounded Prestwick's decision to grant Ryanair cheap access to its facilities meant that the Scottish public knew that a low-fare airline had moved into their country without O'Leary having to spend a pound on marketing the new service. The Ryanair name was known and its message was clear: cheap flights.

Much to Aer Lingus's horror, O'Leary trumped his Prestwick coup by extracting dramatic discounts from Manchester airport as well. According to Tim Jeans, then head of marketing at Manchester airport and later Ryanair head of marketing, Manchester had been trying to attract Ryanair ever since it realized how much traffic the airline was putting through its neighbour, and rival, Liverpool airport. Jeans began talking to Ryanair towards the end of 1993, and in January 1994 he flew out to Dublin to meet the airline's new chief executive.

‘The meeting itself was quite bizarre,' Jeans says. ‘Apart from anything else, my attempts to go across to Dublin incognito, by going through Liverpool and booking on Ryanair, were thwarted because I chose the one day in Liverpool when it was snowing.' His flight cancelled, Jeans had to switch to an Aer Lingus flight out of Manchester. ‘Who should I run into but a group of fairly senior managers from Aer Lingus, all of whom I knew well. They said, “Why are you going to Dublin if you're not meeting us?” So I was rumbled before I even took off.' When Jeans arrived at Dublin airport he met Ryanair's head of route development, Bernard Berger, finance chief Howard Millar and finally Michael O'Leary.

‘They just spent three hours telling me how much they didn't want to fly to Manchester,' Jeans says. ‘And I almost said, well if you don't want to fly that much then, okay, I'll go back…I was never going to accept the first proposal they put to me. And I said, look, I'm not in a position to commit to that sort of level of pricing, but I said I'm not going to close the door on you either, so I'll go back, talk to my colleagues, and we'll talk again.'

A deal was eventually agreed, and three weeks later Ryanair announced it was flying to Manchester. The price Ryanair negotiated was ‘substantially below the deal with Aer Lingus', Jeans says,
but the airport quickly offered the flag carrier the same terms. But Jeans was soon to learn that getting Ryanair to sign on the dotted line was only half the battle. The airline had, he says, a lengthy list of demands involving ticket desks, slots and services, and argued about every aspect of the deal. ‘There was a point where I almost said, just don't bother,' Jeans says, such was his level of exasperation. But he held his temper and Ryanair added Manchester to its route network.

Slowly but inexorably O'Leary was changing the nature of the airline business: low fares demonstrably stimulated air traffic, and airports benefited from the increased numbers of passengers. If airports wanted volume, then they had to lower their costs and change their way of doing business, because the only way to generate volume was by offering low fares. Prestwick, Manchester, Luton and Stansted had seen the logic, and before long others were queuing up to revitalize their terminals.

O'Leary's arguments were simple and compelling for those airport operators just outside the mainstream. He offered them what they needed: passengers. The operators, he argued, would make their money on the ground, from shops, restaurants, car parks and transport to and from the airport. It is an argument that he has refined over the years, but the fundamental insight hasn't changed: low-cost airlines should not have to pay to bring passengers to airports, which are captive retail markets.

For O'Leary cut-price airport deals meant he could fulfil another mission. ‘Some airlines enter a new route and aim to make a profit in three years. We will not enter a route if we cannot break even in three hours and grow the market by at least ioo per cent,' he said.

Tony Ryan had still not repaid Merrill Lynch the $35 million he had borrowed from them to acquire shares in GPA, and he could not afford to pay. He refused to contemplate personal bankruptcy, but he also could not afford the embarrassment and ruinous expense of a foreclosure by the American bank. Needing desperately to negotiate a settlement, he turned to his personal assistant of five years, Michael O'Leary.

‘Those Merrill boys were bastards,' says O'Leary, ‘but eventually we ground them down.' For weeks O'Leary battled for a settlement, flying to New York to hammer out terms. Eventually, in the early autumn of 1994, he reached it. Ryan would repay $4 million to Merrill Lynch, and the bank would write off the remaining $31 million. Critically, it was a clean-break agreement: there would be no clawback against any wealth Ryan might accumulate in the future. It was a remarkable deal, particularly since Ryanair's transformation from loss maker to profit centre – albeit on a small scale – was clearly complete.

Ryan now needed to raise the $4 million, and O'Leary came up with a neat solution – one that did not become public for another three years. The airline needed five more Boeings to complete its fleet transformation and maintain its growth. O'Leary negotiated a deal whereby Ryan would acquire the jets for $20 million and then immediately trade them on to the airline for $24 million, booking himself a $4 million profit that would pay off his bankers. It was in effect a direct payment by the airline to its founder, but it was never disclosed as anything as straightforward. Ryan had bankrolled Ryanair for its first seven years, spending more than £20 million to keep it afloat, and the time had come for payback. ‘The company paid the debt to Merrill Lynch,' a financial adviser confirms, ‘but it was more than he was due at the time. Tony had kept the place going when anyone else would have shut it down. He had poured in money, and now he needed some back.'

Ryan, finally, was free from the GPA debacle and also free, thanks to the deal with Merrill Lynch, to take a stake in what was rightfully his. The bank had missed an opportunity to acquire a stake in a company which was soon to be worth billions, and Ryan would waste little time before joining the board and assuming the chairmanship, as well as major shareholding, in the restructuring which would precede its eventual flotation three years later.

By the autumn of 1994 O'Leary had thus secured his bases and his boss's finances. Ryanair was not yet the dominant player in the
Dublin to London market, but it had more than 30 per cent of the traffic, had opened new routes to Glasgow and Manchester and was above all profitable. His mixed-bag fleet of 104-seat jets and turboprops had been replaced by a homogenous fleet of Boeing 737s, which carried 130 passengers each, and he was beginning to fill the planes. Ryanair, which now employed just 500 people – compared to the more than 7,000 employed by Aer Lingus – had a turnover of £
75
million, carried almost two million passengers and had the lowest cost base of any airline flying between Ireland and Britain.

‘We make 92p net profit per passenger and claim to be the lowest-cost airline in Europe,' said O'Leary. ‘Our strategy is about running the airline the way people want. Low fares, high capacity at busy times, flexible tickets. There are only three layers of management. No secrets. No dogma. No unions. I drive buses at the airport, check in passengers, load bags and get a good kicking when I play for the baggage-handlers' football team. The only thing I will not do is fly aircraft.'

Despite the changes throughout 1994, Ryanair was still pursuing a predictable and relatively traditional route network. It flew from a number of minor airports, but its primary source of passengers and profit was from major cities like Cork and Dublin to other major cities like London, Glasgow, Manchester and Liverpool. Some of his destination airports may have been on the fringe – Prestwick, Stansted and Luton were all some distance from the cities they served – but they were not significantly more distant than traditional airports like Gatwick and Heathrow.

O'Leary could sense greater opportunity, and he was hungry to try.

‘Continental Europe is a market with over 300 million people most of whom are now paying outrageously high airfares. I assure you that this is a market which Ryanair will not ignore but I cannot reveal our strategy today,' he said that autumn. He predicted that after 1997, when many of the remaining restrictions on airlines in Europe were due to be lifted, ‘short-haul, cost-efficient, point-to-point airlines will sprout up throughout Europe. They will, in
a short space of time, change the face of European air travel…From 1996 onwards continental Europe will be at the forefront of our plans, but whether the Ryanair assault will come from Dublin or London, we have yet to decide.'

His optimism was not universally shared, however. Air UK's director of planning and industry affairs, Phil Chapman, told an IATA conference on aviation economics that the chances of a European airline replicating the success of Southwest in America was virtually non-existent. ‘Governments still support many of our national carriers and in some countries the social implications of allowing a major carrier to fail or to dramatically reduce costs is nearly impossible,' he said.

‘But,' Chapman added, ‘set against this is the political desire to see low airfares to satisfy voter aspirations. Many of these carriers dominate their home markets, and with the structural advantage it is difficult to see how a real threat can be mounted by a low-cost, no-frills company. The numbers travelling by air in Europe are not sufficient to allow a real high-frequency, low-cost service to take place.'

Chapman underestimated the single-minded determination of O'Leary. He was right to foresee the difficulties which lay ahead and the determination of the flag carriers to retain their stranglehold on the market, but deregulation had already changed the game. The flag carriers would survive, and would continue to subsidize their European operations with the profits they made on intercontinental routes. Chapman also underestimated the European public's as yet untested appetite for low airfares.

Ryanair, even in its earliest and most chaotic period, had shown that competition would stimulate a market. In its first ten years of existence the number of people flying between Ireland and Britain had more than doubled. Ryanair had grown the market for everyone, but its ability under O'Leary to contain its costs and lower fares had made it impossible for rivals to compete profitably. Existing airlines could not match Ryanair's costs because they were laden down with the historical costs of serving a different type of
aviation market. Overstaffed and heavily unionized, national airlines were imbued with the ethos of public service, not profit. It was far easier for a new airline, without the baggage of the past, to adapt to a changing market and keep its costs at a level that could not be matched by its rivals.

The airline's success at new or previously underutilized airports like Stansted, Luton and Prestwick demonstrated that travellers would fly to relatively inconvenient locations if the price was right, and marked the beginning of an airport strategy that would turn the air travel market on its head.

Aer Lingus's experience should have been a salutary warning to the flag carriers that O'Leary would have to face down in the years ahead. It had tried to use its power as a state-owned company to blow the upstart out of the skies, but it had failed to understand the most basic of business lessons. In order to compete, it had to charge less, and unless it was prepared to bring its costs into line with those of Ryanair, it was doomed to lose millions on every head-to-head challenge. In 1994 Aer Lingus did not have the stomach for bloodletting on a serious scale. The airline's survival plan envisaged job cuts, but not a scale that could guarantee survival.

O'Leary was on his way; nothing, it seemed, could derail the ambition of this man who had helped salvage a company from near-bankruptcy and was now driving it relentlessly to dominance of a new and fast-growing market. The results for O'Leary's first year as chief executive would show that he had almost trebled the airline's reported profits to £5.68 million. Its arch domestic rival had been seen off and would not be able to mount a credible challenge for another nine years, while in Europe the slow but sure pace of deregulation meant that further opportunities were just around the corner.

During Michael O'Leary's first year running Ryanair Tony Ryan licked his wounds in the tax haven of Monaco, to where he had retreated after the GPA debacle. Then, in February 1995, Ryan bounced back. His brooding done and his debts settled, he was co-opted onto the airline's board and it was announced that he would take over as chairman the following year, on 1 January 1996, when Ray MacSharry's term was due to end.