Michael O'Leary (25 page)

The airline's dependence on Michael O'Leary and other senior managers was also highlighted as a concern. ‘Ryanair's success depends to a significant extent upon the efforts and abilities of its senior management team…and key financial, commercial, operating and maintenance personnel,' the prospectus noted. ‘Ryanair's success also depends on the ability of its executive officers and other members of senior management, none of whom has any prior experience of managing public companies, to operate and manage effectively, both independently and as a group.'

The risks did not deter investors. They understood the Southwest story – a tale of unbroken profit from a Texas airline which had helped prompt deregulation and profited hugely in its aftermath by keeping its fares low, its costs lower and its customers happy – and they wanted to be a part of the European revolution that Ryanair promised to deliver.

Despite five years of progressive deregulation, the European market had not caught fire like the US had after 1978. Aviation expert Dr Markus Franke says that by 1997, ‘In theory every carrier in Europe, or in EC Europe at least, could…fly within every other country. But nobody was really doing that.' Between 1992 and 1997 the number of international routes within Europe rose by 13 per cent – notable but hardly seismic – and the amount of competition on those routes had increased only moderately as well. Progress had also been unspectacular on domestic routes. Investors understood the potential if the sleeping giant could be woken, and the scene was set for Ryanair to expand. All it needed was the money the flotation would provide to buy more planes, and the
belief that the business model that had proved so successful on the Ireland to Britain routes could be exported to Europe.

The roadshow was a success. ‘The management did a great job selling the story,' says one of the bankers involved in the flotation. ‘O'Leary and his deputies [Michael Cawley and Howard Millar] are very good salesmen.'

While the senior executives sold the company, back in Dublin the flotation remained an abstract concept to most of the staff until very close to the event.

‘There wasn't a huge build-up to it. Michael was very much business as usual. Keep the show on the road, and let us, the financial people, look after making sure the flotation goes successfully, and everybody else make sure that the company runs smoothly. For the staff it was, like, we're gonna float, there's an American guy who's bought 20 per cent. That's great. What does floating mean?' says Ryanair veteran Charlie Clifton.

Most of the staff got either 2,500 share options or
£
2,500 in cash. ‘It floated at
£
1.97 so the shares were a better bet, but the cash looked better to those who knew nothing about the markets,' says Clifton. ‘It took a lot of explaining to some staff members, and a lot of people said no, I don't trust that stuff. Give me two and a half grand in cash, thank you.'

Two weeks before the flotation O'Leary promoted Clifton to Ryanair's senior management team. ‘I didn't even know what it meant,' says Clifton. ‘Michael said, “Good news, we're going to make you a director. By the way we'll be floating; by the way you're getting this many shares.” I was clueless about it. It was only later that the penny dropped. He had his reasons for promoting me though. It was, like, here's Conor [McCarthy], one I've poached from Aer Lingus. And here's Charlie, one I've grown myself'.

The share options also gave Ryanair something which had previously been sorely lacking in the airline – stability at the top. With the options, senior managers were tied in for three years. ‘The good news is you get X number of shares, the bad news is you've gotta stay three years before you get them,' says Clifton.

‘Nobody knew the upside potential,' says Tim Jeans. ‘I bought quite a lot of shares as well as the share options because I knew we had a good company. Because of what had happened with GPA the shares were priced to go,' he says. And up they went. Ryanair floated at 2 p.m. Irish time on 26 June. ‘It was a landmark day,' says Jeans. ‘There was a massive TVon the first floor, with a link-up to Wall Street. There was a graph on the TV. The shares started at 1.95 and the graph started off at the bottom left hand of the screen. By the end of the day it was at the top right. There were lots of very happy people, people who could buy their first car or put a deposit down on their house.'

‘We all watched the flotation on TVat work,' says Clifton, ‘and there was a big party. It was hugely successful on the first day. It was a great day, it was fantastic. And I remember asking Michael what does it mean, and he said it's like paying off your mortgage. He was floating around, delighted.'

The following day newspapers reported that the offering was more than eighteen times oversubscribed at the initial level of 195 pence. The price immediately soared to 250 pence, and was trading at 315 pence in after-hours trading, valuing the company at
£
380 million, and O'Leary's share at almost
£
70 million.

O'Leary's pragmatism was on show the following week. ‘It had been the most successful flotation in Ireland,' says Jeans. ‘And then at the management meeting the following Monday it was not mentioned once. Life moved on; we'd done the float and that was that. Nothing changed, except that we had all these millions on the balance sheet.'

Once seen as plucky Davids fighting mighty Goliaths, O'Leary and Ryanair were now clearly successful and highly profitable. The scale of O'Leary's bonus package over the previous two years had shocked even his closest colleagues and thrown him into the media spotlight as Ireland's wealthiest young chief executive. Anonymity had been stripped away and replaced by instant recognition. Ireland's economy was growing dramatically and O'Leary personified the new breed of entrepreneurial managers putting the country on the world stage. Just as significantly, the flotation re-energized Ireland's trade union movement, which had been excluded from the airline since its launch and which now realized that it had to gain a foothold in the fast-growing company.

Ryanair's decision to be a non-unionized company had been an important element in the early business plans developed by Tony Ryan for his new airline. Instead, Ryan had hoped that all those who worked for the airline would become stakeholders in the company, owning shares and participating in its profits. As the company, if not its profits, grew, the unions failed to make inroads. Ryanair, from its launch, was a young and exciting company with a remarkably youthful workforce – the average age of staff was under twenty-six – who had no experience of the trade union movement and felt no need to be represented by them. A culture of direct contact and negotiation between management and employees was easy to maintain in the company's early years when numbers were small, and the flexibility this gave Ryanair was essential to its development because employees were not hemmed in by restrictive union conditions on job definitions. There were no boundaries; in a crisis – and there were many – employees were expected to help out wherever they could.

As the company grew, then non-union culture became embedded.
While the youth of the workforce played its part, it was also significant that Ryanair was fighting for survival in those early years against the predatory attacks of Aer Lingus. The national airline was heavily unionized and Ryanair's employees saw it as the enemy. They did not have common cause with the workers of an airline that was trying to put them out of business, and there was little appeal in being represented by the same unions which represented the very different interests of Aer Lingus workers.

The unions, too, underestimated Ryanair's ability to survive. Imbued with the same arrogance which characterized the early responses of the Aer Lingus management to the threat posed by Ryanair, they expected the new airline to fail. Why battle to sign up union members in a company that was never going to last, and which, if it did survive, would threaten the livelihoods of existing union members in the state airline?

Their complacency was shattered by the facts that emerged during the lead-up to the stock market flotation. Ryanair's success was relatively new-found – its first genuine trading profits had only been recorded four years earlier – but it was demonstrably a survivor and was also, by 1997, a significant employer with just under 1,000 workers. The unions now wanted a slice of the action and decided to agitate. It was an important fight for the union movement, which was belatedly beginning to realize the threat that Ryanair posed to its former monopoly at Dublin airport, where the vast majority of workers were union members. Aer Lingus and Aer Rianta could not make a significant management decision without union agreement. But if the unions wanted to maintain their grip on the airport, they had to gain a foothold in Ryanair.

They wasted no more time. The weekend after Ryanair shares started to trade, O'Leary was faced with the threat of strike action from a small number of baggage handlers at Dublin airport. They demanded significant pay increases, claiming that they were earning substantially less than other baggage handlers at the airport. A small number of Ryanair's handlers joined the ATGWU, a transport workers' union which represented many workers at the airport and at Aer Lingus.

For the first time in Ryanair's history a strike was on the agenda. The initial ultimatum was averted by O'Leary's decision to meet his workers – but not the trade union – to discuss their demands. Keen to defuse the discontent as quickly as possible – a strike so soon after the flotation would have been a deep embarrassment, as well as being costly – O'Leary offered the baggage handlers an increase in basic pay and further productivity-linked increases which he argued were worth up to 20 per cent.

Conor McCarthy, head of operations, assured the handlers that their wages would not be allowed to fall behind the rates paid by other companies. ‘You will be earnings competitive,' he told them. For the moment the increases bought peace and McCarthy could also assure the company's shareholders that they represented just ‘a tiny percentage' of Ryanair's costs. But if the baggage handlers had been mollified for the moment, the union had not. Although excluded from the negotiations – Ryanair maintained that it was happy to recognize unions but preferred dealing directly with its own employees – the union was not about to give up on the bigger battle to gain negotiation rights at the airline. O'Leary had won the first skirmish, but the fight was only beginning.

The decision to float the company in the United States as well as in Dublin imposed tight financial constraints on O'Leary, forcing him to prepare quarterly financial statements for investors as opposed to the six-monthly reports which the Irish authorities required. With any newly floated company, the first results are a significant event and O'Leary had to prepare to meet his shareholders – or at least their representatives in the investment community – on 11 August. His performance would be critical to the continued upward momentum of the share price and would set the tone for his future dealings with the markets. The flotation was not an end but a beginning; O'Leary would need access to more money from the markets to fund his ambitions.

Building up the airline's fleet was a key priority. Ryanair needed planes to fly the expanded route network promised in the IPO document. The previous month it had purchased an extra Boeing
737–200. The aircraft was fifteen years old, acquired from Portuguese flag carrier TAP for about £S.9 million, and was due to be delivered in November. Four other aircraft were due by the end of the year, which would bring the fleet to twenty, but they were stopgaps – planes to meet the airline's immediate needs not provide it with the platform for aggressive expansion.

O'Leary's profits announcement did not disappoint. Profits before tax for the three months to the end of June were £
S.7
million, some 30 per cent up from £4.4 million for the same quarter the previous year; turnover was up by 34 per cent (to £41.3 million), and load factors on the new European routes were above 75 per cent. Surprisingly, perhaps, O'Leary chose to be downbeat and cautious in his commentary – a theme that he has followed ever since. The official statement said the company did not expect ‘this level of increase to continue consistently through each quarter' because of seasonal factors and because five more aircraft were to be added by the end of the year. He said that trading conditions ‘continue to be tough' and that in coming months Ryanair would ‘shoulder further challenges by increasing the size of our fleet by one third, and opening up new routes, despite facing continued intense price competition throughout our network'.

‘We have a job to do and it is never easy making a living flying people for fifty-nine pounds,' he told journalists. He insisted that his comments and the official statement that accompanied the results should not be seen as a profits warning, and that the airline was still on course for growth. And at that first results meeting he also laid down the mantra that would be repeated every three months: ‘We want to increase our business by 25 per cent to 30 per cent a year and to keep cutting out costs.'

After studying the results, stock market analysts set their estimates for Ryanair's full-year pre-tax profit at £35–40 million, a range with which O'Leary said he was ‘comfortable', but the caution in O'Leary's words had an effect: Ryanair's shares fell by 20 pence to £3.70 because of what analysts termed ‘a negative tone'.

O'Leary's reasoning was sound. Far better to cool expectations
and then deliver news that was marginally better than expected than to overexcite the markets and then disappoint them. Aggressive with his competitors and increasingly bullish with the media, O'Leary knew from the start that the markets required more sophisticated handling. The low-cost airline industry, not just Ryanair, remained an unproven phenomenon in Europe and could still only point to the success of Southwest in the United States. The market was in its infancy and the national flag carriers still dominated the skies, the airports and the regulators. For the moment Ryanair was a flea on the elephant's back, a serious competitor for none but Aer Lingus and not even considered a threat, let alone a rival, by Europe's major airlines.