Michael O'Leary (17 page)

Slowly, the policy of low costs and fares had become the dominant if still bare approach. Hayes had experimented successfully with low fares and high frequency, and it had stuck. What had evolved at the airline, through trial and error, was a way of doing business profitably – a gigantic breakthrough, but it had not yet been fleshed out into a business model that O'Leary could call his own.

His Ryanair was now lean, understood how to reduce its costs, had a clear idea of what it wanted to become – an airline that could expand profitably – and what it needed to do to get there, but its corporate clear-headedness was not the result of a eureka moment. O'Leary had visited Herb Kelleher, Southwest's charismatic founder, two years earlier and had left with an understanding of the dynamics of the low-fare industry, but he had not yet converted his knowledge into a strategy.

O'Leary's impact on the company was incremental: he was determined to make each day better than the day that went before it. ‘Looking back it looks like we were some kind of genius turnaround artists whereas in fact the company was in such a sorry state that all we did was try to keep improving it day by day, week by week. And it has kept improving,' he says.

By the time O'Leary decided to take the chief executive's chair he had started to put flesh on the survivalist strategy that had secured the airline's future by pointing it down the road of sustainable profitability. ‘He started to develop a plan based loosely on Southwest,' says Clifton. ‘The dynamic guy on top, single fleet-type, good culture and cheaper than everybody else.'

Within days of his appointment at the start of 1994 the new Ryanair began to emerge into public view, though few in Europe would have recognized the significance of what O'Leary was attempting. Throughout that year he rolled out a series of initiatives that, taken together, created the modern Ryanair. The business model that was to become the envy of low-cost airlines across the world has been refined since, but the fundamentals were laid down in 1994, and the first signs of O'Leary's emerging vision for the airline and what it could achieve in Europe had become apparent by the end of the year.

Ryanair was metamorphosing from a small, if profitable, Irish airline into O'Leary's creature: an airline that could challenge, create a market and defeat Europe's dominant national airlines.

For O'Leary there would be no honeymoon period in his new role. Ryanair had just survived a bruising battle with Aer Lingus, a battle that had plunged Aer Lingus into heavy losses, but Ryanair's success tempted yet more competition to join the market. On 4 January British Midland launched a price war on the Dublin–London route by introducing a return fare of £69, a 50 per cent cut on its existing price and a serious challenge to Ryanair. Six days later Richard Branson's Virgin group joined the fray when it teamed up with Cityjet, a struggling Irish start-up which serviced London's City airport from Dublin. The Virgin deal was effectively
a franchise: Cityjet would continue to operate the routes but would use Virgin livery, uniforms, catering, maintenance and other support services.

Branson's arrival and British Midland's low fare meant that Ryanair would have to fight even harder for customers, and would have to find new ways of reducing its costs so that it could offer still lower fares than its competitors. The years of attrition with Aer Lingus had hardened the airline and its management team; they knew they could fight, and they knew they could survive. The early reliance on Ryan's then bottomless pockets had been replaced by the bare bones of a business model which could see off challengers with a straightforward proposition: Ryanair's lower costs allowed it to make money from fares that caused the larger airlines to bleed. Ryanair's sticking power now came from its competence, not from its benefactor.

By 1994 Aer Lingus was on the verge of ruin. Under pressure on its core Ireland to Britain routes, where its market share had declined sharply to less than 50 per cent in 1993, Aer Lingus was also being pummelled on its profitable transatlantic routes, as more and more passengers availed themselves of lower fares from London to the United States and shunned its service. Time too was against Aer Lingus. Europe's steady deregulation of its skies meant not only greater freedom for new independent airlines like Ryanair, but also a looming curb on the amount of money governments could pour into their ailing national airlines. Aer Lingus had had one last chance of getting its hands on a sizeable state subsidy and no time to waste.

The European Commission, after intensive lobbying from the Irish government, had approved the £175 million rescue package. Bernie Cahill promised that costs would be slashed by shedding workers and boosting productivity, and Aer Lingus committed itself to maintain capacity at 1993 levels. Its objective, so it said, was to reinvent itself as a lean, modern airline rather than to use the state's money to blow its competitors out of the skies, and it would raise money by getting rid of much of its non-airline business, like its hotel chain and human resources company.

But O'Leary suspected that the state aid would be used to subsidize a fresh round of predatory strikes against its competitors, and he was determined to stop that happening. With that determination, another key element of the modern Ryanair model was about to fall into place: the aggressive and noisy pursuit of competitors and anyone who stood in the airline's way. At the beginning of 1994 O'Leary complained to the European Commission that Aer Lingus was already using state aid to distort competition by ‘fare dumping' – charging ludicrously low fares – on certain routes. His argument was that Aer Lingus could only charge those fares because it was using taxpayers' money to subsidize them.

The commission listened and acted. On 4 February officials from its competition office raided Aer Lingus headquarters in Dublin airport. In a statement Ryanair said it had ‘supported Aer Lingus in its application for state aid, primarily in the hope that it would lead to fair play in Irish aviation, and on the grounds that Aer Lingus would, as a condition of receiving state aid, be obliged to cease its practice of “below-cost selling” on those routes where it faces competition from Ryanair'. The statement continued:

It is a matter of great regret to Ryanair that this has not happened. Indeed, in the four weeks since it received this state aid, Aer Lingus has, as it has done in the past, engaged in widespread ‘below-cost selling' and seat dumping practices on those routes where it faces competition from Ryanair.

Is it reasonable that Aer Lingus, which has received vast amounts of state aid, should be allowed to use taxpayers' money to subsidize temporarily reduced fares until Ryanair is driven out of business, and then, as it has done in the past, raise the fares to levels which are profitable for them, but will put air travel to the UK once more out of the reach of the vast majority of Irish people? This type of ‘dirty tricks' must stop.

Brian Cowen, the Irish minister for transport in charge of winning Europe's support for his government's rescue of Aer Lingus, said that it was ‘regrettable that it was deemed necessary [to raid the headquarters]. I don't dispute the competency of the commission
to act in that way, but it could have been done otherwise.' O'Leary, though, had made his point. Aer Lingus, if it wanted to survive, would have to learn to compete on a level if vicious playing field, and he would stop at nothing to prevent it regaining its old dominance of the skies between Ireland and Britain.

On 13 January 1994, less than two weeks after O'Leary started work as Ryanair's chief executive, it was reported in the aviation trade publication
Airclaims
that the airline was planning to replace its existing fleet of aircraft and switch to the Boeing 737. This was the plane that Southwest had used to develop its low-fare empire in America. Ryanair chose the 737 because, apart from its reputation for needing little maintenance and an enviable safety record, it could be configured to carry the ideal number of passengers for the company's market. Just as importantly, operating a single type of aircraft delivered savings across the airline, from maintenance to training and simple flexibility: all crew members, pilot or stewardess, could be moved seamlessly to any aircraft in the fleet.

Two weeks later the airline made its decision public. It was acquiring six second-hand Boeing 737–200s, each with a capacity of 130 passengers (26 more than the existing 104-seat One-Elevens). Ray MacSharry, the former European Union commissioner who was now Ryanair's chairman, said that Ryanair was ‘now a major Irish airline, with significant expansion plans for the next three years. This 737 fleet will provide us with a unique platform upon which to develop and expand our existing markets.'

For Ryanair it was a major step: not only would the Boeings deliver savings, they would also bring credibility to a still young airline. Boeing was the most respected brand name in the aircraft business and O'Leary believed it would resonate with customers if, when they booked a Ryanair flight, they knew that they would always be flying in a relatively new, high-quality aircraft, rather than the mixed bag used by most young airlines. The decision to embrace the 737 set O'Leary on a course from which he would not deviate. The move would reduce a range of costs within the company by streamlining the training of pilots and staff, by reducing
maintenance costs, by simplifying reservations with a standard layout, and by increasing capacity on every route they flew by almost 30 per cent.

By the time the 737s were delivered ‘it was penny pinching to the extreme' says Charlie Clifton, as O'Leary worked the airline to the bone to pay for his new machines.

I remember when the first 737–200 came in I was head of in flight operations and we discovered that we didn't have any safety cards for the new aircraft. They're specific to the type of aircraft – some 737–200s have 130 seats, some have 121, and they sent over lots of cards with 121 seats on it instead of 130 seats.

Unbeknownst to anyone, the night before myself and the cabin services manager found a stick-on that you could put on these cards that would cover out the old bit and put on the new bit. So we were in the office writing away and sticking the new bit on to each of these cards to put on the aircraft. Michael popped his head around the door and was really pleased: ‘Good, good, good lads.' You were so conscious of doing this sort of stuff – instead of saying we'd go out and order 150 brand spanking new cards, you just tape over the old bit.

By October 1994 Ryanair had taken delivery of five more 737s, bringing its fleet to eleven, and it had phased out all its other planes by not renewing lease agreements. The single fleet-type had arrived and O'Leary's Ryanair was taking shape.

Declan Ryan says that the decision to acquire the first six Boeings was ‘the real turning point for the company. If you had to identify one decision, that was it.'

O'Leary agrees. ‘That was the big one,' he says.

Ryanair was now positioned to mount an inexorable challenge on the Ireland–Britain routes, which still accounted for the bulk of its business, but it was also, far more significantly, ready to test the continental European market.

On Valentine's Day 1994, ten days after the raid on Aer Lingus headquarters, O'Leary turned up the heat once again, announcing
Ryanair's simplified fare structure. Advance purchase requirements would be reduced to a single day – on most airlines the cheapest tickets had to be purchased at least fourteen days in advance – and Ryanair was abolishing the rule that travellers had to spend a Saturday night at their destination to get the cheapest fare.

The changes were seismic. Fare restrictions were used by the national airlines to create the impression that ticket prices were generally cheap, while in reality the cheapest fares were hard to come by. O'Leary's decision to strip away the rules gave Ryanair a critical edge in a market where it could now claim a 30 per cent market share and where it now carried more than 1.2 million passengers each year. Its route network was still small – in March 1994 it offered services from Dublin to Liverpool, Luton, London Stansted and Munich; from Luton to Cork, Galway, Kerry, Knock and Waterford; from Stansted to Galway, Kerry, Knock and Waterford; from Liverpool to Knock and from London Stansted to Munich and to Shannon – but it was no longer a bit player struggling for survival. It was a profitable airline gearing up for expansion, and the greater capacity of its Boeing 737s would increase the pressure on O'Leary and his team to sell seats.

If the new planes were to be worked productively Ryanair had to develop new routes, and O'Leary was pushing ahead with his expansion plans because he needed to keep the planes flying for as long as possible, with as many passengers on board as he could sell tickets to. He had set his sights on new routes to Manchester and Glasgow's Prestwick airport. First, however, O'Leary wanted to reduce the costs of that expansion by negotiating exceptional deals at the airports he wanted to serve.

Three years earlier he had played a role in the negotiations with Stansted airport that had paved the way for Ryanair's survival. It was a deal that had benefited both sides, because Stansted was a new airport with a need for customers. Now O'Leary had to persuade established airports that discounts were the way forward, arguing that passenger growth would compensate them for lower charges.

His negotiations with Prestwick airport, situated outside Ayr, about thirty-five miles from the centre of Glasgow, were to prove
a template for the deals that followed. When the details of the deal became public in April 1994, industry experts accused PIK, the owners of Prestwick, of ‘economic suicide'. The airport, which had not had a scheduled service for the previous five years, had agreed to waive all landing, passenger and air-traffic control charges in order to win O'Leary's business. The
Sunday Times
estimated that the deal would cost PIK about £600,000 in its first year and £850,000 in subsequent years, but PIK Managing Director Paddy Healy was unrepentant.