Michael O'Leary (52 page)

O'Leary argued persuasively that low-cost airlines, led by Ryan-air, had shattered the high-price airline cartel which had ruled Europe before the market was deregulated. Ryanair and its rivals were proof positive, he claimed, that enlightened policy on a European level could change the lives of ordinary people – a tangible example of the European Union working for the benefit of Europeans. So why, he asked, would the commission want to end that, unless it was improperly influenced by the concerns of the traditional airlines? Significantly the benefits of that European policy were being felt most dramatically in the United Kingdom, where scepticism about the EU is traditionally greatest, and O'Leary played to that scepticism. The British press delight in stories that make Europe's rulers look like bureaucratic buffoons – particular favourites were claims that Europe would outlaw British sausages, insist that all bananas be straight, deny British chocolate makers the right to call their products chocolate and outlaw pints of beer.

De Palacio was shaken by the onslaught but determined not to be turned. Under the media spotlight and faced by uncontainable leaks from within the commission to Ryanair, she pressed ahead with a decision that would unleash the full force of O'Leary's fury on her and her fellow commissioners. O'Leary, though, was playing two games. In part he wanted to make life as uncomfortable as possible for de Palacio. He wanted to politicize the debate and force the commission to side with populism – low fares – and not focus on the legal intricacies of his dealings with Charleroi. Just as important for O'Leary was the gathering sense of crisis that had the media hanging on his every utterance. By December 2003 Ryanair was suffering acutely from its heavy expansion in 2002 and 2003.

O'Leary knew that he would have to think the unthinkable and
issue his first ever profits warning. Ryanair was in no danger of losing money – its annual profits would remain healthily above € 200 million – but its unblemished track record of profit growth was about to be broken. Shares in publicly owned companies are valued by their growth potential – the higher the profits growth a company is expected to achieve, the higher its share price. Ryanair, as a fast-growing company, enjoyed a high market rating, reflecting its perceived ability to generate earnings growth of 20 per cent a year. If that earnings growth disappeared overnight, then the share price would tumble as analysts rushed to reassess their valuation of the company.

The stock market shuns companies that cannot grow their profits quickly, but it saves its ultimate dislike for companies that spring surprises. O'Leary could afford one shock, but no more. It was, he realized, imperative to get all the bad news out of the way in one dramatic week, rather than hope for the best and be forced to drip-feed disappointing news over the months ahead. Fortunately for O'Leary, de Palacio's tardiness in making her decision suited his timetable. The Charleroi announcement was now expected at the end of January or early February 2004, precisely when Ryanair announces its preliminary results for the preceding financial quarter.

This gave O'Leary his opportunity: the markets could be warned that profits would fall, the Charleroi decision would be known. Ryanair shares would, he knew, fall sharply but if he played it right that would be the end of it. And so he went for the meltdown strategy.

On Wednesday 28 January, six days before de Palacio was expected to announce her decision on Charleroi, O'Leary issued his profits warning. Ryanair's share price fell 30 per cent that day, wiping €1 billion off the value of the company.

O'Leary's comments to the media were laden with doom. Ryanair, he said, was now facing ‘an enormous and sudden reduction' in its income of 25 to 30 per cent in the January to March quarter. There was a vicious price war under way and there would,
he predicted, be a ‘bloodbath'. His warning to his competitors was stark: no matter how low they cut their prices, Ryanair would cut even lower, throw ever more planes into service, and would be prepared to sacrifice short-term profit for long-term survival and dominance.

The following week, with the media and the markets still frenzied by the profits warning, de Palacio announced her ruling: Ryanair had breached European rules, she said, and would have to repay more than €4 million to the Walloon government. It was a blow but it could have been worse. An early draft of the commission's decision had indicated that the sanctions against Ryanair would be more draconian, but intense lobbying by O'Leary and by Ray MacSharry, a Ryanair director and former EU commissioner, had helped to lighten the penalties. Publicly, though, O'Leary was apoplectic with rage.

He railed against the ‘fucking Kim Il-Jungs' in the commission, who were, he claimed, determined to destroy the low-fare industry – a garbled reference to the communist dictator of North Korea, Kim Jong-Il, and/or his dead father, Kim Il-Sung. ‘You cannot have civil servants trying to design rules that make everything a level playing field,' he told stockbrokers in a conference call. ‘That's called North fucking Korea, and everybody is starving there. This market works well. The European Commission has successfully followed a policy of deregulation and competition for the last twenty years that has transformed air travel in Europe, and has transformed regional airports.'

O'Leary was damaged by suggestions that his tactics had actually hindered Ryanair's case rather than helped it. Ms de Palacio said that O'Leary had ‘overplayed his hand. He thinks this is good for him; I am not sure that is the best for his company, but this is up to him.' De Palacio was not alone in thinking O'Leary had gone too far. For the first time in his sixteen-year career at Ryanair he faced shareholder unrest, with a number of institutional share-holders privately briefing journalists that the time had come for O'Leary's stewardship of the company to draw to a close.

Ryanair's rivals, who had been waiting patiently for the day
when O'Leary's world started to sunder, were ecstatic. Chris Walton, the finance director of easyJet, suggested that Ryanair's famed business model was creaking at the seams and stock market analysts rushed to downgrade their profit forecasts. The
Financial Times
warned that Ryanair's ‘air of invincibility' had been ‘finally shattered'.

O'Leary was unrepentant. In interview after interview he stoked the markets' fears rather than calming them. He vowed to cut Ryanair's fares by a further 25 per cent and refused to acknowledge, let alone bow to, pressure that he should be more restrained. ‘I love this,' he said, referring to the chaos in the markets and the consternation caused by his doom-laden warnings. ‘It is much more fun when the world is falling apart than when it is going boringly well. We had been saying fares and margins would fall. What we didn't foresee was that they would come down this bloody quickly.'

And his message to investors was unapologetic. In his conference call to stockbrokers, recorded and transcribed so that all investors could have equal access to company information, he said,

Hey, live with it. Remember, Tesco had a drop in profits four years ago and nobody said its business model was bust. Our profits have fallen for the right reason – not because we have a cost problem but because fares have gone through the floor. We expected that to happen but we did not expect it to happen in the space of one quarter. It is our job to show that this is a bump in the road and not some hole we have fallen into.

I fully accept that the share price will take a beating today and over the next couple of weeks, but we think it is an investment in the medium and long term. Southwest has had periods in its history where profits have taken a dip for a period of time, or the share price has taken a dip for a time – it's still the mother and father of low-fares airlines, and by now [indiscernible] the largest domestic airline in the US. I might believe that Ryanair is building a similar position here in Europe.

If O'Leary's attitude to the media remained bullish, his mood with stockbrokers became more considered. It needed to. In a meeting
with London brokers the week after the Charleroi ruling he was finally asked the dread question: did he think that investors would be ‘thinking about whether or not you should be CEO of the company, considering that you have been very, very confrontational with the commission on this issue? You started out saying that you would definitely win this, no problem. You handled it in such a way that it may have contributed to the size of the defeat, if it's as big as you say. Is this a time to reconsider your post as CEO of Ryanair?'

O'Leary's response was direct.

Personally, I don't think it's a time to reconsider, I think it's a time of interesting times and very interesting challenges ahead for the next couple of quarters. Will there be some people out there who believe that my performance or my handling of the case hasn't contributed or has caused a negative decision in the Charleroi casefe? Yes, I'm sure there are. And I would find it hard to disagree with some elements of that. I think if we lose that case, ultimately the responsibility rests with me. And it would be up to the board and the shareholders. If they want to change me, they can change me at any time.

And as I think on my feet, I think my defence just over the last twelve months would be that the company is still growing at over 50 per cent;we still have the lowest cost base in Europe; we have the number-one operational delivery in Europe in terms of on-time, fewest cancellations; fewest lost bags; no other airline in the world makes a 20 per cent margin; and we have got 1.1 billion in cash. I accept that some people may question my performance, but I think I am happy to stand over it.

Rumblings about his stewardship of Ryanair were a price O'Leary was prepared to pay for a high-risk media strategy. It was a calculated gamble, but still a brave one. O'Leary was painting Ryanair's situation in the blackest possible light. Stripped bare of rhetoric the profits warning was less than calamitous. O'Leary was telling the market that profits had been hit by a temporary combination of factors. Clearly he was being cautious but the underlying message remained strong.

Despite the warning that profits would fall by as much as 10 percent, Ryanair would still record profits of more than €200 million. Its profit margins, at 20 per cent, would remain the highest of any airline in the world. Its passenger numbers were growing spectacularly, with traffic up a remarkable 54 per cent. It had more than €;1 billion of cash on the balance sheet and O'Leary's relentless war on costs was still paying dividends, with a further reduction of 8 per cent in non-fuel-related operating costs.

It was clear from a sober reading of the Ryanair statement that the airline's business model, far from being broken, was robustly intact. The factors that had caused profit growth to stall were the speed of Ryanair's expansion over the previous two years, when capacity grew by more than 50 per cent each year; the British pound's weakness against the euro, the currency in which Ryanair reported profits; the launch of two new European bases in Spain and Italy; and intense competition in the market.

As O'Leary said at the time,

We've seen a number of these cycles in the industry before. Ryanair continues to grow strongly and profitably, even during periods such as now when fares and yields are being lowered at a faster rate than we originally predicted. Our response to these market conditions will be to continue to lower fares and yields. We will continue to exploit our huge cost advantage over our competitors and tightly manage further cost reductions so that we can continue to deliver industry-leading low fares and profit margins.

It was O'Leary rather than his competitors who was actually contributing most to market turbulence. Ryanair was leading the market by boosting its capacity and by cutting fare prices in a determined attempt to put its rivals under pressure. The noise that O'Leary generated around the Charleroi decision and the profits warning that preceded it helped drown out the market's real difficulties, and deliberately so. O'Leary wanted investors to believe that low-fare airlines were engaged in a fight to the death and he wanted consumers to believe that the European Commission was
trying to drive a stake through their hearts as well. Terrifying the market ensured that potential rivals would find it difficult to raise money to launch new airlines, while demonizing the commission might, he believed, encourage it to soften its approach to Ryanair.

The main message, as always, was that Ryanair would continue to cut airfares, and there were few people in Europe during the last week of January and the first week of February 2004 who would not have heard that message, such was the blanket television and newspaper coverage generated by Charleroi and the profits warning. When O'Leary landed in Charleroi airport on 3 February he was met by thirty-five television crews from around the world and countless newspaper reporters. An impromptu press conference was broadcast live across Europe and the company's brand recognition soared ever higher.

The high-wire act worked. O'Leary's public protestations of doom deflated expectations of Ryanair's performance to rock bottom, and the only way was up. It was as close to perfect market manipulation as any chief executive could hope for: facing a difficult twelve months, Ryanair had managed to unload all its bad news in one concentrated seven-day period at the end of the first month of the year. The share price had collapsed, but it would recover. The only losers were those who had bought stock in the days immediately preceding the profits warning, and those who felt most sore were those who had purchased their shares from members of the founding Ryan family, who had sold two weeks earlier when the price was €6.90, netting €40 million. The Ryans had been unaware of the impending profits warning, but buyers were unimpressed.

Over the next few months, as Ryanair's traffic figures improved, profits recovered and rivals started to feel the pain, the flurry of sniping about O'Leary's stewardship subsided. There had, however, been questions for the first time about O'Leary's longevity at the company that he had transformed, and these had prompted some investors to look more sharply at the management structure.O'Leary was not about to be forced out and his aura of invincibility
had been barely dented, but the question of the succession had been raised. What would happen to Ryanair if O'Leary walked away or fell under the proverbial bus? Was it a one-man band?