Ryanair - how low can you go ?

[meerkat]

A friend recently emailed me this article from the UK Financial Times which you may find interesting. Beware this article contais bad language!

Meerkat


"Financial Times", 21 June 2003
-----------------------------------------------

How low can you go?

By Graham Bowley


Flight FR294 from Dublin to Stansted was due to leave at 9.30pm but the blue
monitors said it was already 15 minutes delayed. The 130 travellers sprawled
around Gate A17 flicked through magazines, listened to personal stereos and
gazed anxiously out at the runway. It looked like they were in for a long
wait. But they'd booked on a cheapo airline. What could they expect?

Yet at 9.21pm a blue, yellow and white plane swooped out of the red sky and
disgorged its passengers on to the tarmac. A fuel truck and a band of
baggage handlers and engineers in yellow coats swarmed the aircraft. The
passengers trailed into the hall, slipping on jackets and checking text
messages, and were gone. At 9.31pm a mother and her three children trotted
across to the plane. The rest of us followed, crowding up the steps - two
men with rucksacks, three young girls in khaki shorts, and two women who had
been hiking in Kerry, among the rest of the unlovely lot.

At 9.46pm, Kelly, the flight attendant - she wore a tight blue uniform and a
shiny made-up face - thudded the door shut on a full plane. The rows of
heads in front watched Kelly struggle with a blocked toilet. When I bumped
my neighbour's knee, I said sorry. "It's cheap," he replied, shrugging as if
no one could expect legroom at this price. "Sixty-five euros return," he
said, loudly, as the plane roared back from the gate, only 38 minutes after
landing.

Not so long ago, jetting above the clouds was not, except for a rare treat,
for the masses like almost everyone on FR294. As we left the Irish coast,
just about on schedule for London, it was clear that a revolution had taken
place in our skies. Just how had we got there? Who on earth was responsible?
And how much further did it have to go?

A few days later I was at a press conference in the elegant surroundings of
the City Club in London, where Michael O'Leary - controversial, reviled and
one of the most important people in world aviation today - said a remarkable
thing. He declared that one day soon airline tickets could be free for
everyone - even ultimately, in a decade or so, that airlines would pay
travellers to fly on their planes.

"There's no end in sight to how low fares can go," he said. Behind him, on a
screen, Ryanair's golden arrows advanced like armies across a map of Europe.
His voice was full of Irish lulls and barks. He spoke casually, almost as if
anyone would be stupid to doubt his plans for continental domination. It was
the same battle cry I had heard two weeks earlier when I watched him address
a meeting of investors and analysts in sombre suits: "We are going to be
driving down the airfare because we can. Why does Wal-Mart continue to drive
down prices? Because they can. We are, I believe, in a similar situation."

Neither of his audiences reacted, except for a few titters when O'Leary
swore, which the 42-year-old Irishman tends to do quite a lot. Maybe they
didn't believe him, for there are some who doubt his crowing ambitions. Yet
he has led the latest revolution in the European skies. As chief executive
of Ryanair, the Irish low-cost airline in whose blue, yellow and white plane
I had flown, O'Leary has pursued the answer to a single question: how cheap
can we make air travel? He has turned an industry on its head, cut the cost
of flying to the price of a cup of tea, and changed the way millions of new
passengers experience air travel.

In the process, he has transformed his small company into one of the biggest
- and certainly the most highly valued - airlines in Europe. Its market
capitalisation of around $5bn is higher than Lufthansa and almost a third
higher than that of British Airways. "We are stellar!" he said, skipping
from the hotel stage. "In 12 years' time we will be the world's biggest
airline. There is no shortage of ambition here."

In the late 1980s Ryanair was a small family-owned business flying
turboprops across the Irish Sea. The infant airline was losing money to
large rivals Aer Lingus and British Airways when Tony Ryan, the Irish
businessman who had founded the company in 1985, hired a rising young Dublin
accountant called Michael O'Leary. Ryan sent him to the US to talk to
Southwest Airlines. Herb Kelleher, the flamboyant, chain-smoking Southwest
boss - who once famously settled a business dispute by an arm wrestle and
held the company record for drinking seven Jack Daniels on one flight - had
made a fortune by offering low-price tickets and taking on the established
high-fare carriers in Texas. Southwest has since expanded successfully
across most of the US, taking on the large, embattled carriers such as Delta
and forcing some into launching low-cost subsidiaries of their own. At the
time, O'Leary returned to Ireland converted to the low-cost model and ready
to put it into practice in Europe at Ryanair.

"We were doing the same as everyone else," O'Leary tells me when I track him
down. Up close, he is a youthful looking man, though his wiry short hair is
turning grey. He wears a blue, open-necked shirt with rolled-up sleeves,
tight blue jeans and Puma trainers. His face is hawkish and slightly tanned.
He has sharp, persuasive brown eyes, animated eyebrows and an almost
perpetual grin, which only occasionally turns sour. "The [Ryan] family were
looking at closing it down back in the 90s. I was the biggest advocate for
closing it down. But then came the road to Damascus."

O'Leary's conversion to the low-cost faith was helped by Ryan's agreement to
give his protégé a huge chunk of future profits (O'Leary was revealed to
control about a fifth of the company when the company floated its shares in
1997). "Since 1972, Southwest has been the single most successful stock
market investment in the US," Joe Gill, an analyst at Goodbody stockbrokers
in Dublin, tells me. "What O'Leary tried to do is replicate that."

O'Leary began his revolution by insisting his company treat its workers
differently from other airlines. He refused to recognise or negotiate with
unions (although a few staff, including some pilots, still carry union
cards) and, in 1998, in Dublin he shut out baggage handlers who were
demanding better conditions. Earlier this year, when he bought the failed
Dutch low-fares airline Buzz, he cut about 500 of the 600 jobs. He also
refused to accept the existing union-backed contracts of those he wanted to
transfer to Ryanair. The contracts would have given workers extra holiday
and pension entitlements, which O'Leary wouldn't tolerate.

O'Leary is ferociously intent on getting his own way. But the pay-off is
that those who play his game share in the rewards of Ryanair's thriving new
empire. "Michael's genius is his ability to motivate and energise people
even far away from his office," Tim Jeans, a former Ryanair marketing
director, tells me. Jeans left Ryanair last year to run MyTravelLite, the
Birmingham-based low-cost airline. "Michael was a great tutor. I learned a
lot from his bollockings... I was one of the original gang of seven that
took Ryanair out into mainland Europe in 1995 with 10 aircraft and seven
routes... I was the only Brit allowed in the place... There is an incredible
energy in that place. People work incredibly hard and get a lot out of it.
They operate a very lean operation for a company of its size. It is without
peer."

Those Buzz staff that joined Ryanair must now work some of the longest hours
in the airline business. A typical Ryanair pilot flies about 80-90 hours a
month, close to the legal maximum of 100 and around twice the BA equivalent.
But the compensation is that Ryanair's pay (for pilots at least) is among
the highest. (According to Ryanair, the average salary for all its workers
is £50,582 a year, roughly a third more than BA.) As well as the base
salary, employees have share options, the prospect of rapid promotion, plus,
for flight attendants, a slice of in-flight sales of lattes, booze and
perfumes. The work-them-hard system O'Leary has established means that
Ryanair can fly its 24m passengers this year with only 2,000 staff. In
comparison, with its global network, traditional carrier Lufthansa flies
twice as many people but with more than 30,000 employees in its airline
business.

O'Leary extended his low-cost revolution to his aircraft. He abandoned the
old mix and built his fleet around one new model - the Boeing 737, the
standard workhorse of low-cost airlines such as Southwest. O'Leary calls
them his fleet of Toyota Corollas. Engineers only needed to know how to fix
one type of plane and stock one type of spares. By buying in bulk O'Leary
could negotiate cheap deals with manufacturers, and he strengthened his
bargaining power by timing his purchases to coincide with recessions. The
new planes are also bigger than his rivals' aircraft, which means he can
cram in more passengers. In airline jargon, this reduces the cost per
available seat kilometre, which will have appealed to O'Leary's accountant's
eye. (By contrast, EasyJet, O'Leary's slightly more upmarket UK rival,
recently mixed its fleet by buying cheaper Airbus planes as well as Boeing
aircraft, drawing criticisms that it was straying from the traditional
Southwest-inspired low-cost model.)

Even before passengers boarded O'Leary's Toyota Corollas, he had chipped
away at the edifice of costs. Ryanair's reinvention coincided with the
emergence of the internet and, as more and more people went online, he
abandoned the practice of distributing tickets via travel agents. Following
EasyJet's lead, he switched instead to selling flights directly online. This
meant he didn't have to print or post tickets, or even employ staff to take
passengers' details. Typing in their own names and credit card numbers, the
punters did the work for themselves. He also saved the 9 per cent cut of
fares that travel agents used to take. "British Airways says you can't upset
the travel agents," O'Leary says when I talk to him (although in fact BA has
significantly cut its commissions to travel agents). "Screw the travel
agent," he says, rolling his eyes and scratching his neck. "Take the fuckers
out and shoot them. What have they done for passengers over the years?" He
pauses, craning his head over my notebook. "So that's 'screw' in shorthand?"

Ryanair now sells nine out of 10 tickets online. Astonishingly, the web page
gets around 500m page-views each month. O'Leary has struck deals with
hotels, car rental, credit card and even mortgage companies, who hawk their
services on Ryanair.com. Now he's the one taking the cut, and the so-called
ancillary revenues make up about one eighth of Ryanair's total sales. The
profits were further boosted by the way the internet enables Ryanair to
monitor bookings. O'Leary's marketeers can gauge how full their aircraft
will be minute by minute. Should the graphs on their computer screens dip,
they can immediately slash prices to lure passengers into the empty seats.
But beware: they don't hesitate to raise prices if demand is buoyant. As any
late-booking traveller will know, this dark science of "yield management"
means you don't always get as fantastic a deal as the ads promise. But, by
and large, Europeans can now travel from Frankfurt to Barcelona for £59,
from London to Rome for £18, or from Milan to Hamburg for £8.

O'Leary decided that the only thing people wanted was prices like that, so
he got rid of everything else. No meals. No assigned places. He could sell
passengers a sandwich if they wanted one, but they could work out where to
sit for themselves. With fewer cabin crew to pamper them, Ryanair passengers
soon became used to the curt grimace which passes for customer service on an
O'Leary flight. Most complaints, O'Leary tells me, are generated by the
company's no-refund policy. "We don't fall all over ourselves if they... say
my granny fell ill. What part of no refund don't you understand? You are not
getting a refund so fuck off."

Fuck off granny is not the standard spiel you expect from your regular
company executive. Most corporations, sincerely or not, build themselves
around the mantra of the customer is always right. But what O'Leary's
phenomenal success has shown is that he doesn't have to smile and be nice to
his passengers as long as they don't have to pay for it. His pugnacious
tactics may even reassure customers they are getting the best deal. In the
late 1990s, his passenger persecution reached bizarre levels when he reneged
on a pledge to give Ryanair's one millionth traveller free flights for life.
She took him to court and won, the judge ruling that O'Leary had been
hostile and aggressive when she rang him up. But O'Leary's investors must
have loved the fact that their money was entrusted to such a miser.

Probably the most radical part of the O'Leary revolution was the new way he
treated the places he landed. While the big airports such as Heathrow were
full, and charged airlines expensive rates to land their planes, he noticed
that around Europe there were hundreds of small airports - many of them
former airforce bases - that were desperate for business. For the
cost-conscious O'Leary, these so-called secondary airports had two big
advantages.

First, unlike Heathrow, Paris Charles de Gaulle or Frankfurt-Main, they were
not congested so his planes could land and take off again within half an
hour. This has become a sacred rule for O'Leary: his planes must be in the
air as much of the day as possible since it is only aloft that they earn him
cash. If they are on the ground, they are costing him money. You can see
this principle at work if you watch any airport that Ryanair serves - the
planes flying in and out, depositing passengers and scooping them up, the
teams of baggage handlers, engineers and cabin crew, all in a continuous
rapid movement, like a hive.

The second advantage of local airports was even more radical. O'Leary
discovered that not only would small towns across Europe charge him very
little to land his planes - if he asked, they might even pay him money to
start a direct route. So now he is winning passengers happy (usually) to put
up with cramped seats and poor service if they arrive at their destination
for less than the cost of a pizza, even if they are then faced with an
hour's drive into the nearest big town. And he is being welcomed by towns
and businesses eager to greet him and the tourist hordes his planes bring.

At around the time it sold its planes to O'Leary, Boeing, understandably
anxious about doing a multibillion-dollar deal with a relative unknown, set
up a computer simulation of Ryanair's system to test for flaws that could
potentially damage the company's credit-worthiness. They zapped it with
drops in demand, and fluctuations in exchange rate and aviation fuel price.
"We could not find a quarter when they were not profitable. The lowest we
could do was a breakeven," Eric Hild, Boeing's director of sales for the UK
and Ireland, tells me. "It is probably the most robust model we have
encountered." This month, during the meeting in the City Club, Ryanair
announced that its after-tax profits had risen 59 per cent to £239.4m in the
12 months to March, a year in which many other airlines around the world
suffered big losses.

"What it is, is Tesco," says O'Leary, leaning back in his chair. "Ryanair is
doing in the airline industry in Europe what Ikea has done. We pile it high
and sell it cheap." But ultimately, if O'Leary gets his way and ticket
prices fall closer to zero, a better comparison than supermarkets might be
network TV - where viewers watch for free and advertisers pay for access to
them - or the internet. In the same way that websites earn money for
delivering click-through traffic to other online sites or advertisers,
airlines in O'Leary's perfect world would get paid for redistributing people
around Europe. We are all traffic now.

The losers in O'Leary's New Europe are the old national flagship carriers.
Just as American incumbents such as Delta and United were dented by
Southwest, on this side of the Atlantic airlines such as BA and Alitalia,
still burdened with high costs, have struggled to compete with Ryanair.
"They have waterfalls in the headquarters out at Heathrow, they swan around
sipping cappuccinos, thinking they are masters of the universe. But BA are
stuck on the horns of a dilemma. Their costs are high, so they charge high
prices, while we are going like gangbusters," is how O'Leary puts it to me.

The result has been an exodus from the national carriers. Aer Lingus, the
state-owned Irish airline, was Ryanair's first victim. After almost closing
down in 2001, it appointed a new chief executive, Willie Walsh, who is
turning Aer Lingus into a virtual copy of Ryanair, sacking thousands of
workers.

In 1998, after Ryanair added more British flights, BA finally reacted by
launching its own low-cost airline called Go, run by the American Barbara
Cassani. Tim Jeans says: "Michael called her 'the fragrant Mrs Cassani'. He
used to say that until she arrived the industry was run by a dodgy Greek and
a Paddy. Barbara gave it a terrible amount of respectability."

But wherever Go challenged Ryanair, O'Leary fought back ruthlessly. Until
that time, he had avoided introducing a service between Dublin and Edinburgh
because, in his view, Edinburgh was a high-cost airport. But when Go moved
into Dublin in 2001 and started offering services to the Scottish capital,
he immediately opened five flights a day at prices as low as £10. Four
months later, Go closed its Dublin flights. "After they left," Tim Jeans
tells me chuckling, "some wag went across the airport and scrawled NE after
their name. Nobody has gone head to head since that time."

In 2001, BA sold Go, and it has since been swallowed by EasyJet. Following
its subsidiary's demise, BA has pursued an O'Leary-style low-cost revolution
of its own. This involves cutting 13,000 jobs and shifting some ticket sales
to the internet where BA now sells two-fifths of its short-haul flights. Its
fares are lower than they were (in some cases 80 per cent lower) but
normally remain higher than Ryanair's. It hopes passengers will be prepared
to pay the extra margin for the comfort and frills, such as frequent-flier
programmes, meals and assigned seating, that Ryanair eschews.

It is this belief - that some passengers will continue to prefer some kind
of service on their flights and fly to convenient airports - that has
prompted some analysts to put a limit on Ryanair's growth, or even question
its entire low-cost philosophy. When I meet O'Leary, he is fulminating
against a report, written by Andrew Lobbenberg, an aviation analyst at the
investment bank ABN Amro, called "The Emperor Is Stark Naked". The report
argues that Ryanair will eventually have to pay more money to regional
airports and to its hard-pressed staff. "The company's not worth what it's
trading at," Lobbenberg tells me.

But possibly the biggest weakness of Ryanair's model - certainly one that
rivals such as EasyJet focus on - is the isolation of its airports. It has
led to criticism that O'Leary is flying to places nobody wants to travel to.
Why fly to Frankfurt-Hahn (100km from Frankfurt) or Paris Beauvais, when you
could fly to Frankfurt-Main or Paris Charles de Gaulle instead? "There is
only a certain level of market share which Ryanair is going to achieve,"
says Tim Coombs of Aviation Economics, a London consultancy (which advises
EasyJet). "People will always want to fly between London Heathrow and
Frankfurt-Main and will be prepared to pay more for the pleasure of doing
so."

EasyJet has pursued the opposite strategy to Ryanair, flying directly into
big cities such as Amsterdam, even if it has to pay the higher landing
charges. But O'Leary simply points to the numbers choosing to fly his
routes. "For the price-sensitive customers, distance is no problem," he says
blithely.

When I ask whether there's room enough for both British Airways and Ryanair,
he puts on a mincing voice. "There is too much: 'we really admire our
competitors'. All bollocks. Everyone wants to kick the shit out of everyone
else. We want to beat the crap out of BA. They mean to kick the crap out of
us." He predicts Ryanair will be carrying more passengers than BA's 37m by
the end of next year.

But, after Ireland and Britain, O'Leary's frenzied focus is turning to
mainland Europe. This is the next stage of Ryanair's development. He is
colonising the continent with new bases and destinations. This strategy is
bringing him into conflict with Europe's biggest airline, Lufthansa. So far
the German airline (or Lufty as he likes to call it) has played down the
threat of low-cost fares, although Jurgen Weber, Lufthansa's chief
executive, has founded a low-frills affiliate, called Germanwings. O'Leary
says: "Weber says Germans don't like low fares. How the fuck does he know?
He's never offered them any. The Germans will crawl bollock-naked over
broken glass to get them."

The swearing, chest beating, the triumphalism are what you get when you
speak to Michael O'Leary. He talks to interviewers nose to nose, before
flopping back in his chair and resting his feet on the table. He loves to
talk. He has a manic energy. Often you hear the same lines over again. I
heard this one twice during the course of our meetings: "They don't call us
the fighting Irish for nothing. We have been the travel innovators of
Europe! We built the roads and laid the rails. Now it's the airlines!"

His triumphalism is why many people loathe him. Of the nearly 50 people I
talked to over the course of a month for this article, only three or four
said they liked O'Leary, the person, though almost everyone respected his
business know-how. (Some of Dublin's stock analysts - who have a lot to gain
from association with the local success story - are sickeningly gung-ho
about it.) In Ireland, where he is called everything from "arrogant pig" to
"messiah", he has become a figure for public debate. But in London, one
senior air industry official tells me: "He is not regarded as very lovely.
He is a bully. He will have his run but he will almost certainly disappear
in a puff of smoke. These people always do."

The whiff of devilry deepened this month when he cashed in £23.8m of his
Ryanair stake just one week after promising at the City Club press
conference that he had no plans to sell any shares. He reduced his holding
from 5.9 to 5.4 per cent, and remains the single largest shareholder.

His antics may be repellent, but they represent a Barnum-like genius for
attracting attention. In this way he is no different from the crowd of
headline-seeking entrepreneurs - from Freddie Laker, Richard Branson,
Stelios Haji-Ioannou of EasyJet, and Herb Kelleher of Southwest - that the
airline industry seems to collect. Except O'Leary is even more shameless.
Last month, dressed in an army uniform, he drove a tank up to EasyJet's
headquarters in Luton Airport blasting out the theme song from the A-Team.
His point was that Ryanair, which had started new routes from Luton, was
challenging EasyJet even on its home base. He has dressed up as St Patrick
to promote a ticket offer. His ads have included one that claimed the fourth
secret of Fatima was Ryanair's cheap fairs, drawing a rebuke from the Pope.
He plasters the sides of his aircraft with his views: "Arrivederci Alitalia"
reads one I see on a Stansted runway. His biggest recent publicity splash
came earlier this year when he paid A6,000 for a Dublin taxi licence so his
chauffeur could put a light on top of his black Mercedes and drive along
Dublin's bus lanes.

O'Leary believes his escapades are for the company's good, but occasionally
even he grows self-conscious. When I see him last he is posing for German TV
cameras sprawled across a wooden bench on the balcony of the City Club (in
spite of my requests, he is too busy to see me in his office). He is
flirting with the blond interviewer who has asked him to take his sweatshirt
off. "Give up!" he is barking to Lufthansa. His shirt is untucked, his legs
are spread wide, his arms pointing above his head like he is about to take
off. Then he blinks and lowers his arms with a giggle. "I did a business
degree for this?"

The role of the uneducated provincial - an Irish bogman, a farmer's son -
who is confronting the rich metropolitan elite for the sake of the common
punter is one O'Leary loves to play. But he is in fact a highly educated,
gently reared scion of Irish country aristocrats, as I discover when I
talked to people who knew him in Dublin and Mullingar, his hometown in the
Irish Midlands about 50 miles west of Dublin. Although Mullingar is where he
grew up, he was educated at Clongowes Wood College, a Jesuit boarding
school, which has been described as the Eton of Ireland. (It was James
Joyce's alma mater.)

After Clongowes, O'Leary read business studies at Trinity College Dublin.
After graduation, while he had a day job as an accountant, he bought a
string of newsagent shops, which he traded on for profit. Dublin legend has
it that the young entrepreneur minted his first million by the time Tony
Ryan asked him to save his fledgling airline. The further millions Ryanair
earned O'Leary over the next decade - he is estimated to be worth around a
third of a billion pounds - allowed him to buy Gigginstown House, a grand
manor near Mullingar where thoroughbred horses and black Angus cattle adorn
his acres and he throws parties for Ireland's elite. It's a rather
incongruous lair for Europe's self-styled Low Cost King, but a rock-solid
testament to his success.

As O'Leary was building his wealth in the 1990s, and his company was
growing, Ireland was changing around him too. The emergence of Ryanair
coincided with the transformation of Ireland - lower taxes, a freer labour
market - that propelled the country to the top of the European growth league
in the last century's final decade. But Ryanair is no longer only an Irish
story. More and more, it is a tale about the modernisation of the whole of
Europe. As deregulation has spread, so Ryanair has gradually transferred its
low-cost model to the UK, and now to Scandinavia, France, Germany, Italy and
Spain.

As it does so, its US-style mass transit operation is transforming the
culture and geography of Europe. O'Leary brags that he triggers a property
boom wherever he opens a new airport. When he threatened to close a route
between the UK and Bergerac in France this year there were howls of protest
from holiday-homing Brits and local businesses. According to Miranda Neame,
editor of French News, a local English language newspaper, Bergerac Chamber
of Commerce stumped up a few hundred thousand euro a year for, among other
things, Ryanair's marketing budget. Ryanair reinstated the route.

For the rest of us, the rise of the discount airlines simply brings
countries closer, and puts on to planes people who would rarely fly - or
never have flown before. In some cases, the new, 21st century jet-setters
are flying to destinations they had probably never even heard of five or 10
years ago: Carcassonne, Haugesund, Jerez. When you see English weekenders
clutching £15 tickets stumble directly from plane to bar in, say, Trieste,
you suspect that many of the new low-cost adventurers are not travelling
because they need to, nor even because they particularly want to, but simply
because they can. "For years flying has been the preserve of rich fuckers,"
says O'Leary with his grin, confidently assured of his vision as ever. "Now
everyone can afford to fly."

Graham Bowley is a freelance writer

[sn26567]

Nice article, Meerkat, but the author did not look well around him when he embarked: it's the stewardesses that clean the plane, and the pilots sometimes help unload the baggage.

Anyway, that O'Leary is some guy

P.S. I was shocked by his language : not typical of a jesuit college