Michael O'Leary (42 page)

State aid does not result in efficient airlines or lower fares – it props up inefficient airlines and high fares. I object to State aid for our principal competitor, when it is quite clear that this aid will be used to assist it to compete against Ryanair.

His argument was passionate but failed to deal with the newspaper's most pointed accusation – that O'Leary and Ryanair were hypocritical in their approach to state aid. O'Leary did not explain how state aid for Aer Lingus threatened Ryanair jobs but not profits. Without doubt, Ryanair's profits would have suffered if Aer Lingus, or any state-owned airline, was given unlimited resources by its government to compete with it. His objective was to ensure that as little state assistance as possible found its way onto state airlines' balance sheets, because the weaker they were, the better equipped Ryanair was to compete with them aggressively. There were, too, semantic distinctions that O'Leary took seriously: he saw his deal with the Walloon government not as a subsidy or state aid, but as a commercial deal that would benefit both sides. Ryanair would get the opportunity to build a new market at low cost and with financial help, but the long-term winner would be the Walloon region. It was not a subsidy to prop up an ailing
airline or to distort competition, but an investment by the Walloon government in a profitable future.

O'Leary also said that he was calling a truce with Mary O'Rourke, the transport minister. ‘We have requested a meeting to explain in detail how – by working together – Ryanair and the government can deliver two million new passengers and 500 new jobs for Irish airports and Irish tourism over the next two years. I hope she will respond magnanimously in the national interest.'

The day after his article appeared, O'Leary and O'Rourke attended a political fund-raising event hosted by Charlie McCreevy, Ireland's finance minister and a friend of O'Leary. ‘Reports say they [O'Leary and O'Rourke] were not observed in friendly conversation, or indeed any conversation at all,' the
Irish Times
noted. By early November, however, reconciliation was back on the agenda when O'Leary said he had decided to stop ‘slagging off' government ministers. His comments came during a conference call with stock market analysts, as he was discussing the prospects of Ryanair's terminal and the location of Ryanair's next base.

‘Our view remains unchanged that Aer Rianta is a high-cost, inefficient monopoly, but perhaps the Irish government's view is changing,' he said, according to a transcript of the conference call.

There is a new atmosphere and it's time to stop slagging off the government and certain Cabinet ministers and work more cooperatively with them. If not, we could see 15,000 to 20,000 tourism jobs lost. The government is giving some consideration to our plans to break the Aer Rianta monopoly and our plans for a second terminal. But I'm guessing that the government will not be able to move quickly enough to meet our deadlines.

O'Leary, in any case, was not prepared to wait. He was hunting for a new continental base to complement Charleroi, and in late 2001 he chose Hahn, the former NATO airfield in southern Germany he preferred to call Frankfurt Hahn.

The two sides signed a twenty-year deal which would create 200 jobs and provide at least thirty flights daily to more than ten
destinations from February 2002. Ryanair promised these flights would deliver 1.5 million passengers in the first year. For the airline it meant a guaranteed low-cost base for twenty years in Europe's largest market. For the airport, the deal with Ryanair guaranteed its future.

‘A deal is a deal,' says Hahn's Helfer.

And of course it includes some provisions for inflation, and there are provisions in the deal concerning what happens if they grow to a certain level of base aircraft and so on, but basically it is a deal. It doesn't make sense for an airport to handle Ryanair as a customer, give it a low-cost deal, and then increase your charges by 100 per cent two years later, because then their business model wouldn't work. We have a passenger charge of €4.35 and that is it.

Helfer says Hahn offered Ryanair a cheap deal because it was the only airline flying there. ‘That's the problem of conventional airports,' says Helfer. ‘They have, let's say, one daily flight from Lufthansa going to Frankfurt or one daily flight from Aer Lingus going to Dublin and they have to be very careful not to deteriorate their price base with the traditional customers when they start doing business with Ryanair. We did not have this problem.'

O'Leary was happy with the outcome, and happy to use it as a stick with which to beat Aer Rianta. ‘What makes Frankfurt Hahn different is that everything they said they would do from day one they have delivered on,' he said. ‘This new German base means that four more aircraft, 200 new jobs and over one million tourists have again been lost to Ireland by the high-cost Aer Rianta monopoly.'

His relationship with Dublin airport deteriorated further at the end of November, when the two disagreed about the creation of a special low-cost facility within the airport, prompting Aer Rianta to state that a low-cost deal for Dublin did not necessarily have to involve Dublin airport. ‘It is worth noting that Shannon airport is only marginally further from Dublin than many of the European airports Ryanair flies to [that claim to be city airports],' a spokesman said, referring to airports like Malmö, Hahn and Beauvais. It was
a valid, if mischievous, point. It also highlighted the differences between an established airport like Dublin and a transformed military base like Hahn. Dublin had an international market, a host of carriers as customers and far less flexibility to manoeuvre. Hahn, starting virtually from scratch, could offer dramatically cheap deals because it was desperate to build a business.

O'Leary is a supreme pragmatist who never worries that his actions might contradict a previously stated policy. He will do whatever he thinks is best at the time and execute a perfect U-turn moments later if conditions change.

In his long-running battles with Aer Rianta, O'Leary used a familiar refrain. The airport company's refusal to reduce its charges and the Irish government's inability to deliver a second competing terminal in Dublin was, he said, depriving Ireland of both new airline routes and consequent tourism growth. When he announced the new bases in Charleroi and Hahn he reiterated that Ireland had once again lost out on the opportunity to have more routes because of the intransigence of Aer Rianta and the government. He would not, he said, launch another route from Dublin until there was a change in policy, and other countries would benefit instead from Ryanair's growth. He had also denounced both Glasgow and Edinburgh airports as far too expensive and had opted instead to base Ryanair's Scottish operations in Prestwick.

Barbara Cassani, unfortunately for her and her fledgling airline, believed O'Leary's rhetoric and decided that Go would launch a route from Dublin to Edinburgh. Her decision was announced in July, with the service due to start operating at the end of September.

O'Leary's response was immediate and brutal: Ryanair would crush Go, no matter what it cost. In part, his determination to see off Go was simple machismo. Ryanair wanted to retain its dominance of the low-fare market between Ireland and the UK and would brook no competitive threat. His response was as consciously predatory as Aer Lingus's earlier attempts to knock Ryanair out of the skies, and showed that O'Leary only liked competition when it was on his terms.

‘Go foolishly decided to come into Dublin,' recalls Tim Jeans.

‘David Magliano, the Go marketing director at the time, apparently told Barbara Cassani not to worry. Go could do Edinburgh and Glasgow because Ryanair wouldn't follow. We had often said quite publicly that we would never darken Edinburgh's doors because [its landing and passenger charges] were far too expensive and it wasn't our kind of airport.'

Cassani's decision to launch a Dublin–Edinburgh service was not illogical. At the time the route was served by Aer Lingus, which operated two Fokker 50s and ran four flights a day. It was an expensive route – a typical return fare was more than £200 – and it seemed ripe for competition. Instead of a battle with Aer Lingus, however, Cassani got a price war with Ryanair, or as Jeans says, ‘a competitive response of biblical proportions'. The number of planes ploughing the route ballooned from two Fokkers to thirteen Boeing 737s daily, with a capacity of 1,500 passengers each way, as Aer Lingus, Go and Ryanair battled for supremacy.

‘We certainly weren't making money,' says Jeans. ‘But this was very much part of the cost of defending our territory. The costs of the exercise were never calculated and it was only a question of when would Go pull out.'

Ryanair's fares undercut Go, tumbling to £5 each way. Eightyfour days after launching the route, Go admitted defeat and withdrew. ‘We got a thrashing,' Cassani wrote some years later in her book about Go.

Going head-to-head cost us millions and we withdrew wounded. We learned another crucial lesson about discounting. You can't take on someone with lower costs because they dig deeper than you to lower their prices and still make money, while you're bleeding.

We seriously misjudged how seriously and how angrily they would take the incursion into Dublin. It was just a really tough lesson in business.

For Ryanair the battle had been a resounding success and had created a firm precedent – mess with us and we will crush you.
Prey had turned predator, and would use its power to drive away competition by cutting fares to the bone. O'Leary's response, though, was only possible because of his obsessive attention to costs. Ryanair had become the lowest-cost operator in Europe, and so could charge less than any competitor on any route without losing money. Even where it dropped its fares to loss-making levels, it could still recoup revenue from its ancillary deals. Critically, its low costs allowed it to sustain a price war longer than any rival could bear.

‘It sent a warning shot to everybody,' says Clifton.

If you step on our toes we can sustain lower costs and lower fares better than anybody else. It's particularly true when you've got a guy like Michael on top. Airline executives have to decide if they'll compete with Ryanair or not. They look at the cash balance and they look at the guy running it. And [after Go's experience] it wasn't a very good idea to go into your board and say, ‘I've decided to take these guys on, because they'd have to fly for free for ten years to beat us off,' because a number of people sitting around the board table would say, ‘Well, maybe they just will.'

For O'Leary, route dominance mattered. It gave him extra power with the airports served by his airline, and it gave customers in search of a cheap ticket no option but to choose Ryanair. It was not, however, predation in the old style. Where Aer Lingus wanted to crush Ryanair so that it could restore high-priced travel, O'Leary's philosophy was fundamentally different. He wanted volume, and the way to drive passenger numbers ever higher was to reduce ticket prices. He wanted dominance on a route not so that he could push up prices, but so he could have far greater control over the airports and their charges. The result would be higher profits, but they would come from squeezing his suppliers for extra savings and from boosting passenger numbers, not from raising ticket prices.

While O'Leary and his colleagues basked in their swift victory over the pretender, Aer Rianta complained to Ireland's
Competition Authority that Ryanair had ‘launched services on the same routes with the sole purpose of putting its competitor off the routes'.

Aer Rianta chairman Noel Hanlon had already written to the government to complain. ‘Ryanair publicly stated that they would not allow another low-cost airline to operate on these routes, and proceeded to offer fares at £5 return with the sole purpose of putting its competitor off the route. To do so, Ryanair pulled capacity from three other routes which had an overall effect, from Ryanair's point of view, of not increasing capacity but of undermining its competitor.'

O'Leary was unfazed. ‘The thought of our airport monopoly making a complaint to the Competition Authority fills me with joy and wonder,' he said.

For Cassani, the battle with Ryanair was a defining defeat. The barbarians had trampled all over the nice people and Go's credibility had taken a battering from which the company would struggle to recover. O'Leary just banked the victory and moved on. It had been important to win, but he had had no doubts that he would. Securing a deal for new aircraft was far more important, and demanded his full attention. By the end of the year Airbus had won, or at least it thought it had. It had offered to sell Ryanair its planes for just under $30 million each – effectively half price – and Boeing had come up short.

Chris Buckley suggested O'Leary and his team come out to Toulouse to finalize the deal. ‘And that is exactly what we accomplished. That day in Toulouse, Michael and our president at the time, Noel Forgeard, shook hands on a deal for a hundred A321s.'

As far as Airbus was concerned the deal was done, but O'Leary had other ideas. Airbus's offer was attractive, but it gave him the ammunition for one last shot at Boeing. ‘As far as I know, Michael called Boeing on the day, and said he had been in Toulouse, had a deal with Airbus,' says Buckley. ‘Boeing came back on the following day, knocked some more money off, and Ryanair called us up, and said they were going to stick with Boeing after all.'

Boeing, like Airbus, was up against the wall. Production at the 737 plant in Renton, Washington had been cut in half, morale was at rock bottom and tens of thousands of employees had already lost their jobs. It was not a situation Boeing was used to. It was the dominant player in world aviation, having snapped up old rival McDonnell Douglas – maker of the infamous DC10 – in the 1980s. Airbus, a European consortium driven together by political desire rather than economic compulsion, was the new kid on the block, and its aggressive sales techniques made Boeing look patrician, old-fashioned and complacent.