Michael O'Leary (58 page)

For the first time at Cheltenham O'Leary would have a horse challenging for the Gold Cup. His horse, War of Attrition, had been an unlikely runner-up two years earlier in the Supreme Hurdle but had failed to live up to its promise when being roundly beaten the following year in the Arkle Chase. This time O'Leary was not sure whether to run him in the Gold Cup or in the lesser Ryanair Chase – which carried an obvious attraction.

The weekend before the festival he told the
Irish Times
he was ‘leaning towards the Ryanair, I think it's the more sensible option'. Michael ‘Mouse' Morris, the horse's trainer, had other ideas. ‘I was always going for gold,' said Morris.

O'Leary's claims of ignorance about horseracing and his relative indifference – he says too many people ‘obsess' about Cheltenham and he prefers smaller meetings – sit uneasily with his character. He is a fast learner, a consumer of information who can spout at length about the intricacies of the handicap system that applies to jump
racing. He may keep his obsession in check, but he is no novice owner throwing cash at the prospect of glory. O'Leary's sales and purchases, managed primarily by Eddie, are astute. It was no fluke that he came to Cheltenham that March with a chance of victory.

War of Attrition started the race as a well-backed contender but was far from favourite. As the horses came to the final fences, three Irish runners were battling for gold but it was O'Leary's that held off the challenge of Grand National winner Hedgehunter to take the cup, with Forget the Past in third. It was the first time in Cheltenham's history that Irish horses had filled the first three places. The Duchess of Cornwall was on hand to present the prize to an ecstatic O'Leary, who promptly promised free flights for all who'd backed his horse.

One gambler who had had the foresight to invest was Willie Walsh, the former Aer Lingus chief executive who had taken over as CEO of British Airways. O'Leary had told him that War of Attrition ‘hadn't a hope' of winning. Walsh decided that O'Leary, as usual, could not be believed, and put down £100 for the horse to win at 7/1.

Each year Ryanair drops a few routes as it opens many more. The reasons may be straightforward – passenger numbers do not justify the route – but it is also a method of reminding airports of what can happen if they do not play the game by Ryanair's rules.

In March 2006 Michael Cawley, Ryanair's deputy chief executive, travelled to his hometown of Cork to explain the economics of modern air travel to its newly independent airport company, and to get rid of some routes while he was there. Cork's problem was that it was just completing a brand new terminal that would cost €170 million – ten times what Frankfurt Hahn had paid for a similar increase in capacity. The cost was being covered in part by increases in landing charges.

‘There are three elements,' he said at a press conference in Cork. ‘Supply, demand and price. We are the supplier and we create the demand by reducing the price. If somebody forces us to put up the price, the demand will go down and we've got to drop the
supply. In our judgement, for the kind of increases [in charges] that we are suffering here in Cork, we should drop the supply by three flights a day on one route. It's a judgement call.'

Ryanair's view was that if it directed its routes to the cheapest airport operators, the passengers would follow. Cork had to come to terms with a new reality: it was no longer competing solely with other Irish airports; it was part of a new European market and had to compete as much with Polish airports as it did with Irish ones. There would still be some business for Cork if it chose not to compete, but if it wanted the volume of passengers that its new terminal demanded, then it had to recognize the new dynamics: volume came from low fares, and low fares were only possible at low-priced airports.

The result that day was that Cork lost its route from Liverpool to rival airport Kerry. ‘It could have gone to France or anywhere else in Europe, but Kerry came up with the best deal,' says Cawley. He adds, ‘It was particularly nice for us to have Kerry as an alternative, because from our point of view we have already created the demand and we'll now fill it at another Irish airport. Cork airport is going to lose these passengers.'

A potent combination of rising demand, continued instability in the Middle East, disruption of supplies in Nigeria and a global shortage of refining capacity for transport fuels pushed the oil price to new highs in April, with the price of a barrel of crude climbing above $74. Shares in airline companies suffered sharp falls, reflecting the industry's vulnerability to events beyond its control. Air Berlin, one of the new breed of low-cost European carriers, was one of the early casualties of the frosty investment climate. Forced to scale back its forthcoming stock market flotation, it cut both the number of shares on offer to investors and the price of those shares as potential buyers drifted away.

It was a dismal time for the Irish government to be planning the partial sale of Aer Lingus, and once again the airline's immediate future was clouded in doubt. The government's support for privatization had always been lukewarm, but before the latest oil price
crisis it had seemed on course to sell a large part of its stake in the airline to private investors. The potential sale was not driven by ideological belief but perceived commercial necessity. Aer Lingus needed fresh investment to buy new planes, and the government had a simple choice: it could fund all of that investment from taxpayers' money or it could allow the airline to raise money from the private sector. The airline's commercial recovery under Willie Walsh's regime meant that the government had a genuine choice: while European rules precluded state handouts to failing airlines, they allowed governments to invest in successful ventures. So, if Aer Lingus could attract private investment, then it was a suitable candidate for state investment.

Ireland's booming economy and burgeoning tax receipts meant that money was not a problem for the government, but giving the state airline more cash was not an option it was prepared to consider. Aer Lingus needed new planes for its long-haul routes to America and for potential routes to the Far East and South Africa. A new fleet could cost as much as €2 billion, far more than the government was prepared to invest. And while Aer Lingus was for the moment profitable, its ambitions were not risk-free. If the government invested more money and Aer Lingus ran into difficulty, then the government would be precluded by European rules from making further investment. And if that happened, private investors would also shun the airline. The risks were too great, even if the cash was available, and the short-term political difficulties involved in pushing ahead with a sale were balanced by the realization that if the government failed to secure the airline's future by giving it the ability to survive, it could pay a far heavier price in the future. If Aer Lingus was to expand, it would need to access money from other sources, and so privatization had once again gathered momentum.

Rising oil prices were not the only difficulty. Political opposition to a sale remained intense, both within the government parties and from the opposition. Also, Aer Lingus had a pensions deficit that would have to be plugged before new investors parted with their cash, and the trade unions in the company were determined that
the airline's workers should secure as large a stake as possible once the airline was sold – certainly no less than the 14.9 per cent they owned before privatization. The unions were also determined to conclude binding agreements with the airline's management on wages and redundancies so that a newly privatized Aer Lingus could not metamorphose into a ferocious cost-cutter. ‘Without clarity over these issues, the company is simply not a credible investment prospect,' said the
Irish Times
in an editorial comment in mid-May.

After protracted negotiations, the airline eventually agreed that the pay and conditions of staff employed before privatization would be maintained, but that new staff hired after the sale would be subject to different terms. It also agreed that there would be no compulsory redundancies in the future, unless ‘significant change' affected the company.

Despite these agreements hopes of an early-summer flotation receded, to be replaced by doubts that a sale would happen at all. The government was in the fourth year of a five-year term of office and it was highly unlikely that a politically charged privatization would take place any time close to a general election. If a flotation could not be arranged by early autumn, Aer Lingus would remain in state ownership for at least another year.

June came and went, and pressure on the government to take a decision rose inexorably. Bertie Ahern assured the Dáil that a sale would take place ‘as soon as possible' and said that ‘it is still the view that it can happen this year'. O'Leary watched and waited. He was not convinced the airline would ever be sold, believing the demands of the trade unions would make Aer Lingus unpalatable to private investors, and that unless those demands were conceded, the unions would not agree to a sale. It was, he figured, a classic catch-22.

But in early July Martin Cullen, the minister for transport, declared that shares in Aer Lingus would be sold in September. The unions had secured a post-privatization pay increase of 3 per cent as well as a lump-sum payment and a new profit-sharing scheme that would see up to 7.5 per cent of the airline's profits
transferred to the Employee Share Ownership Trust to buy shares in the company. Aer Lingus management also agreed to scrap plans for any further outsourcing of jobs to subcontractors and conceded that the number of staff on fixed-term contracts (as opposed to permanent positions) would not exceed 25 per cent in any department.

The timing of the flotation was politically propitious – it would take place before the Dáil returned from its long summer holidays and there would be no awkward parliamentary debates until the sale had been completed – but there was still the danger that events beyond the control of the government or the airline's management could conspire to scupper it, and on 10 August they almost did. In a dramatic swoop British police arrested twenty-five people, seventeen of whom were later charged with conspiracy to murder and commit acts of terrorism. Police claimed that they had foiled a plot to blow up ten planes as they flew across the Atlantic from Britain to the United States. Just as dramatically, it was claimed that the terrorists were planning to use liquid explosives smuggled on board the flights in everyday containers. Immediately, Britain raised its terror alert from severe to critical. Security at British airports was thrown into chaos: hand baggage was banned from all flights in the immediate aftermath of the arrests, massive queues formed at security checkpoints and hundreds of flights were delayed and cancelled.

Three days after the arrests, 30 per cent of flights out of Heathrow were cancelled to reduce pressure on baggage screeners. The tightened security prompted a vicious war of words between O'Leary and Willie Walsh of BA on one side and the British government and BAA, the airports authority, on the other. Walsh and O'Leary joined forces to lambaste the handling of the security scare, calling on the government and BAA to bring in extra staff to help ease the logjam at airports. O'Leary then threatened to sue the British government for compensation unless it moved speedily to ease the crisis.

He described the new restrictions as ‘farcical Keystone Cops security measures that don't add anything except to block up
airports', and ridiculed the searching of small children and elderly people in wheelchairs.

These restrictions have absolutely no impact on security, they are nonsensical and the height of stupidity, but the more you call these restrictions stupid and nonsensical the more the [UK] Department of Transport digs in its heels and says, ‘Oh, we have to protect the nation, this is needed for security.' If it was they would apply these restrictions on more likely terrorist targets like the London Underground or Eurotunnel…If you look at where the terrorists have been striking in recent years it's the London Underground and the trains in Madrid. Yet you don't see the government confiscating lipsticks and gel-filled bras on the London Underground. Most of them couldn't identify a gel-filled bra if it jumped up and bit them anyway. It's simply a way of politicians making it look like they are doing something.

Typically, he combined his attack on government with a seat sale, using an image of Winston Churchill to make his case. It was a classic O'Leary assault, one certain to grab headlines and make Ryanair look positive in a negative story for the industry. But for Aer Lingus, which planned to sell its shares six weeks later, the news could not have come at a worse time. Once again commentators were quick to muse about the long-term decline of the airline industry, in particular the low-fare sector which relied heavily on speedy turnaround times and uncluttered airports to keep down its costs. It also revived the spectre of the 11 September attack which had had such a long and profound impact on the aviation industry.

Gradually the situation stabilized. No one had died and potential attacks had been averted. In time, too, fear was replaced by a degree of scepticism about the claims that plans for attacks had been at an advanced stage. The climate for a share sale had, however, been damaged and the price that the Irish government could hope to extract from investors was edging lower.

O'Leary, meanwhile, had more mischief to make. In August he announced twelve new routes from Dublin, to be launched the
following year, signalling that Ryanair was preparing to make Dublin a key target in its relentless pursuit of passengers and that Aer Lingus's growth at its home base could no longer be taken for granted.

By the end of September, however, Aer Lingus CEO Dermot Mannion could pack his bags for a well-earned holiday. As the security crisis had eased, so too had oil prices fallen, slipping back below $60 a barrel by the time Aer Lingus shares came to market. The government had settled on a price of €2.20 a share, towards the bottom end of expectations, valuing the company at about €1 billion, but demand for the new shares had been high. Trading started officially on Monday 2 October, but in unofficial trading the previous week the price had risen gently and by the middle of the first week Aer Lingus shares were just over €2.51, a respectable gain on the offer price, with demand still heavy. The government and Aer Lingus senior managers could afford a rare moment of self-congratulation. Despite all the gloomy predictions, despite oil price scares and terror alerts, and despite O'Leary's attacks on the Dublin market, the flotation had been a marked success. Investor interest was high, the shares had risen after the sale, but not so far as to prompt accusations that the government had sold on the cheap. All in all, it was a job well done and Mannion could depart for the United States with a smile on his face.