Michael O’Leary and his plans for Aer Lingus…

Fewer business stories outline the changes in the Republic’s society than what has happened to it’s national air carrier, Aer Lingus. When I was growing up, it was largely the preserve of Ireland’s wealthy elite or the prosperous American relative ‘home’ for their regular ten yearly visit. Ryanair on the other hand is mostly short haul, and much loved by the ‘everyman’ traveller for not having to trek through Holyhead every time they go abroad. On Sunday Richard Delevan cut through the detail in his interview with Michael O’Leary on his plans if and when he can get a hold of his only serious Irish rival. By Richard Delevan

TALKING with Michael O’Leary turns out to be a bit like being late for a flight and stepping up the pace because you know that they’re not going to wait for you. We’re striding down the corridors of Jurys Hotel Ballsbridge. Ireland’s uncrowned king of aviation has had only a couple of hours’ sleep. “Home at one o’clock, up at a quarter to five . . . one of the joys of living in Mullingar.”

In the five or so hours between that moment and this he has rocked the Irish political and business scene with the most audacious move since Arthur Guinness won cash for the St James’s Gate brewery with a pair of jacks. He’s just done briefings with analysts and investors, followed by a press conference called so early and at such short notice that The Irish Times arrived to a packed room sans tie and . . . perhaps concerned that he was flattering O’Leary with sartorial imitation . . . donned it afterwards in the car park while O’Leary talked to two satellite news channels.

Now as we walk there is absolutely no let-up in pace, no hint of desire for a break. The guy is on a mission.

O’Leary signals that your time has begun by looking you in the eye and saying, “go.” He’s tearing off down the hall, looking, as it happens, for a lost bag . . . his own in this case. We duck into and out of several conference rooms before he relents and lets someone continue the search for him.

Earlier, a taxi driver watching him give an interview to camera in the car park had muttered to a uniformed hotel porter, “Look at him. He’s in heaven.

Everyone’s listening. And he’s less likely to buy Aer Lingus than I am.” So I start by asking, on behalf of the sceptics, is this just the most spectacular in a long line of publicity stunts?

“Ryanair is famous for cheap publicity stunts. At 200m . . .” he sticks his head into another conference room . . . “it’s not here either. At 200m [the amount Ryanair had already spent accumulating 16% of Aer Lingus before trading began on Thursday morning] this is no stunt.

Ryanair has made a legally binding offer that would cost us 1.4bn.”

With that sort of money, at Ryanair efficiencies, he could put a chip inside the head of every potential air passenger on the planet and let them book fares telepathically and still get change, so he may have a point.

“There’s a logic. If Ryanair doesn’t do this, Aer Lingus is stuck. It’s just a small regional European airline.”

It may be one of the things that simply hasn’t sunk in to the public consciousness and is partly why the takeover bid seems so shocking to so many. By practically any measure . . . market capitalisation ( 6.5bn versus 1.4bn), number of passengers carried annually (43 million versus seven million) . . . Ryanair is the bigger player.

So a takeover by somebody was inevitable. If not Ryanair, somebody else?

“I don’t think so. If you look at it in European terms, it can’t be taken over under the bilaterals except by an Irish company. Ryanair is an Irish company, we can do it. It really is not attractive to anybody else. Would British Airways really spend 1.4bn of money they don’t have, with a pension fund deficit of 2bn?”

What about Emirates, the Persian Gulf airline from whence came Aer Lingus’s current CEO?

“Why would Emirates want to buy Aer Lingus? I’ve read some of this nonsense that they would feed passengers through Dublin before flying them transatlantic. Emirates has the Airbus A380 for Christ’s sake. They’re going to fly straight from the Mideast to the US.

The notion that people are going to stop off somewhere in Ireland and connect somewhere else is outdated.”

Then I manage to do something rare, by using language too colourful even for Michael O’Leary. “So it’s bollocks, then?”

He smiles. “Well, now, I wouldn’t use language asf robust as that. Let us say, highly dubious.”

Given that O’Leary has, despite protestations of wanting to work with existing Aer Lingus management, just trashed , I wonder if there are other points of disagreement.

Mannion intimated in a pre-IPO interview with the Sunday Tribune that the rationalisation programme, as far as further reductions in headcount, was over. The industrial peace this idea bought was a key selling point to potential Aer Lingus investors.

“First of all, in the airline business, rationalisation is never over. And anybody who thinks rationalisation is over is doomed. The dodo is the last one who thought rationalisation is over. But it’s not a prescriptive. The way forward is not just cutting jobs, it’s delivering efficiency. That can be delivered twofold. Either work practices continue to improve, as Willie Walsh has demonstrated over the years, or you grow the business. And the way you grow the business is by getting access to cheap aircraft, more routes.

The way for Aer Lingus to do that faster is Ryanair.”

A little less than a year ago, O’Leary set tongues wagging by saying he would exit the business he’d built in a couple of years, possibly 2008. In a June interview with the London Times he reiterated the point.

“When we’re the biggest airline in Europe it will be inappropriate to have somebody here shouting, swearing, abusing the competition. You need more professional management than me. And that time is coming.”

So if his takeover of Aer Lingus succeeds does that mean he’s one step closer to that change in the business?

“Well I hope it’s not a step towards my exit. This is an opportunity that has come up. It’s not in Ryanair’s long-term business plan. Ryanair’s not going to merge with Aer Lingus. Ryanair will continue in its mission to double its flights over the next four or five years.

But we have a lot of spare cash. It would make us a much stronger Irish global airline.”

He demurs when asked whether seizing this opportunity was his idea.

“If it fails, it’ll be my idea. If it succeeds, everybody else will have thought of it first. But who came up with the idea?

Frankly, I honestly don’t know. But it was only a week or two ago.”

Many people would find that hard to believe. “Well, there was no point discussing it until it was clear they really would float this time. It’s not like we were going to go to the airline and ask them to buy it. And even if they were willing to sell it, there wouldn’t have been a valuation. The best thing for us to do was to stand back and wait for Aer Lingus to be valued by the market.

Now that the government and the board last week established a fair value of 2.20 per share, we’re happy to come in and offer investors a premium in the space of a week.”

But seriously, does he think that a successful creation of a Ryanair group that includes Aer Lingus would require a leader with a different style to his own?

“I’ve always said I would want to be involved as long as we’re doing interesting things, doing things that are . . . I don’t like the word maverick . . . doing things that are entrepreneurial. But there will come a point where there isn’t a need to be entrepreneurial, if we need some management team which will do the same boring tasks more professionally, better, develop relationships better than I can. It’s always hard to tell when that time will come. But this is an interesting thing to do and it’s worthwhile taking it on.”

It may be that the ultimate motives for launching the biggest, or at least what promises to be the loudest, takeover battle in Irish history are no more complicated than this.

However, the studied caution with which O’Leary parsed his statements in the run-up to the Aer Lingus IPO suggests otherwise. He had, after all, been asked directly in at least two press availabilities before flotation whether he planned to invest in Aer Lingus, despite the suggestion to the contrary by commentators on The Last Word and some other places that no reporter had the wit to ask O’Leary the question before. It’s merely that we were gulled by his standard answer.

“Commentary has been strictly since Aer Lingus IPO was announced, ‘we do not comment on the flotation of small regional airlines.’ And we’ve stuck rigidly to that script.”

Still, he protests, he didn’t spend time thinking about it. At least, not much.

“Frankly we’re too busy. It would be silly not to have it in your mind if Aer Lingus at some point in time was going to be floated or privatised that you might invest in it. But it would have occupied one nanosecond of our time, ” he takes the briefest of pauses, “until such time as it was actually going to happen. This is an airline that has been going through a flotation process for about 15 bloody years, you know . . . up-back, up-back, up-back.”

Ryanair had to be kept running. “In the last two days . . . I was supposed to go to Riga yesterday to negotiate a base deal with the authorities in Latvia, I’m supposed to be in Swindon today launching three new aircraft.”

Before the Aer Lingus board rejected his offer of 2.80, saying it undervalued a company that had been sold for 2.20 the week before . . . discharging their fiduciary responsibilities to shareholders to consider the offer with a speed that would be the envy of many a plc . . . I asked O’Leary what he thought Aer Lingus would say.

“Mannion’s on holidays, isn’t he? If people . . . apart from the emotion of it, which is always what dominates the first day or two . . . when people sit down and look at this rationally, they’ll see that Aer Lingus is a small, regional airline. It needs a strong international airline partner. There aren’t that many of them out there. Now it’s found a strong partner.

We’re paying a 27% premium to what was on offer last week. We give Aer Lingus benefits like access to cheap aircraft, access to cheap financing, access to skills in achieving efficiencies and job reductions.

“But it’s an opportunity for the management team of Mannion and Aer Lingus to boost profitability. It doesn’t threaten their jobs. We’re quite happy to work with them. I think if you look at it as a cold, clinical business, there’s no doubt it benefits staff. They get 220m out of it.”

All of which is a pretty powerful pitch to Aer Lingus. But what about Ryanair?

O’Leary says that the company has 2.2bn in cash earning 3.5% on deposit.

He argues that Aer Lingus yields would be around 5%, so it’s a better deal. But only marginally. Surely someone like O’Leary could do better than 5%?

“This is an industry we know very well and have a long track record in. It’s an individual business we know well for many years. Working with existing management . . . who are already committed to a continuous process of rationalisation . . . to help them speed up the cost reduction, speed up the fare reductions, that’s what speeds up growth, and you’d think they’d want lower fares, lower costs, rapid growth, more profits.”

O’Leary says that the first discussions of the move came in the week before the Aer Lingus flotation.

“I had a couple of conversations with the chairman David Bonderman. We first discussed the prospect of buying shares in the airline the Tuesday evening before it floated on Wednesday. We first discussed the formal offer with the board, I think only on Tuesday of this week. So it’s happened that quickly. Also, that’s why nothing leaked. Because we weren’t discussing it for yonks. At Ryanair we don’t sit around agonising over things.

We decide and do it.”

So after all his long history of battles with the Irish government and Dublin airport, to have left the country in awe . . .

even eclipsing the government crisis in Friday’s headlines . . . does it feel good?

“Weeeeellllf no, I wouldn’t necessarily say that. It feels interesting, it feels challenging. I mean, there are significant risks to this. There’s a risk the share price of Aer Lingus could fall and then we’d be sitting on an investment that would be at less than we bought. But life’s about taking the occasional risk.

“We think it’s a well calculated risk, a sensible use of our spare cash. But you don’t do it because it feels good. You do it because it’s the right thing to do for Ryanair, it’s the right thing to do overall in an Irish context. And we believe we bring significant skills at lowering costs to the Aer Lingus business model . . . and that we’ll make more money out of it.”

Why did this leave people gobsmacked?

“If they’re genuinely gobsmacked, just because most people will wonder why they didn’t see this thing coming . . .

it’s so blatantly bloody obvious. And yet in all the speculation of investors in Aer Lingus it was confined to Emirates and British Airways. But when you look at the logic of putting Ryanair and Aer Lingus together it’s compelling. People will be thinking, ‘shit, why didn’t we think of that?'” So are there more surprises in store?

Another acquisition?

“Well you can never say never. If this takeover works, our plan the day after that would be to double Ryanair over the next five years, to lower the costs and double the profits. Our focus is still on running Ryanair day to day.

“I think if it’s successful and we have a majority stake in Aer Lingus, we’ll just have to allocate some time working with the management team of Aer Lingus to work with their business plan and help get a return on our investment.”

First published in the Sunday Tribune.

CV

MICHAEL O’LEARY
Ryanair chief executive since 1994; board member since 1988 Trained as a tax accountant Educated at Clongowes and Trinity College Wife Anita, son Matt.

RYANAIR Market cap 6.5bn Sales 1.6bn Operating margin 21% 29% annual growth in passengers, from 5,000 in 1985 to more than 40 million in 2006. Aims to double that again in five years.

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  • Greenflag

    O’Leary knows what he’s doing . Let him have it 🙂

    “When we’re the biggest airline in Europe it will be inappropriate to have somebody here shouting, swearing, abusing the competition. You need more professional management than me’

    Is this chutzpah or what ?

  • Crataegus

    I for one would not use Ryanair if there is an alternative even if the alternative is more expensive. The reason is O’Leary; I find his attitudes incompatible to what I expect. I am the customer and if he is the person setting the standards for customer relations God help those flying on his airlines when things go wrong. There are other options on the cheap end and many of them have a decidedly better attitude. Try Air Berlin.

    However an Irish National Airline run by Mr O’Leary is probably an appropriate image. Who better as an ambassador for the Tiger?

  • Greenflag

    It’s an established maxim in business that it takes a certain kind of person to build a business up to a certain point and beyond that another kind to manage a slower growing more ‘mature ‘corporation .

    On short haul flights -2 hours or less I’ll always fly the least expensive taking all destination to destination costs into account 🙂 There’s no point in giving anybody any more of your money than you have to.

    Of course if you’re a spoilt pussy and not a hungry tiger you may prefer the more expensive option .

    I’d expect that long haul Ryanair would ‘adjust’ to market requirements .

  • Armed Atheist

    I feel sorry for poor Aer Lingus, a formerly bloated sacred cow now greatly slimmed, trembles behind a crumbling wall of statist dogma, sentimentality, begrudgery and old-boy’s-network bureaucracy as slavering wolf O’Leary, red in tooth and claw, stands outside dressed as the Pope, casually screwing a travel agent.

    Bertie Ahern must be wishing he’d let Willy Air happen now.

  • Spoilt Puss

    The thoughts of flying to the East, South America or Africa on Ryanair or relying on it for connecting flights. Utter madness.

    A lean and hungry Tiger or has it got rabies?

  • URQUHART

    O’Leary is a genius. Although his best line on the issue came in the Sunday Independent when he was asked about analyst’s doubts whether the Aer Lingus bid was a good move.

    ‘Analysts don’t really understand the industry. If they did, they wouldn’t be analysts’

  • Not strictly relevant to this post, but I was surprised that more wasn’t made of Richard’s comments at the blogging conference about the role of evil genius (and Tribune godfather) Tony O’Reilly’s possible role in frustrating the roll-out of broadband in the 26 counties. Any thoughts?

  • ‘Analysts don’t really understand the industry. If they did, they wouldn’t be analysts’

    Perhaps. But analysts advise shareholders on whether they should buy or sell. That’s why publicly listed companies spend a lot of money on keeping them happy and/or informed. If analysts think you’re making bad decisions your share value will fall.

  • Crataegus

    O’Leary is a genius.

    I think there are better words to describe his attitude and style. I deal with people with the same personality characteristics on a daily basis, he is by no means unique just more visible. They are people to avoid in business as they tend to have one loyalty. I have never found that particular style of management beneficial in the long term. They create enemies needlessly and in the end they tend to fall. He would do well to remember Ratner.

    Trust and personal standing are extremely important in business. I would not invest a farthing in anything related to Mr. O’Leary.

  • URQUHART

    Crataegus: “I would not invest a farthing in anything related to Mr. O’Leary.”

    Good man: http://finance.google.com/finance?q=ryanair

    I’m not sure that remembering ratner offers any great lessons. Ratner’s business collapsed because he didn’t believe in his own product and made the mistake of telling people that. I’m not sure that even the most die-hard Union O’Leary haters could accuse him of not believing in his product.

    Ciaran: “analysts advise shareholders on whether they should buy or sell. That’s why publicly listed companies spend a lot of money on keeping them happy…”.

    You’re 100% right. It’s one of the reasons why I was delighted to see O’Leary calling them properly.

  • Crataegus

    Urquhart

    The similarity is an underlying attitude to customers. Have you listened to O’Leary in interviews, deeply worrying? All I can say is if I adopted the same attitudes I wouldn’t last 6 months hence I wouldn’t invest.

    To his strength he is cheap, but often by the time you add on charges etc to all his headline prices there isn’t that much difference. I have to go to Wien shortly and the difference in cost between Ryan Air from Dublin or Air Berlin from Belfast on the dates I require I believe is about £40 return but one leaves from Belfast and the other Dublin and one lands in Austria and the other Slovakia. I do think some of the Biggles type airfields he uses have a quaint charm, and he does fly to some strange out of the way places but as the sector fills out given the choice I think he will need to change attitude or flounder.

    Basically what he is doing is not rocket science, is easy to copy and there are now better in that sector. Time will tell.

  • Fergus D

    I agree with Cretageous about O’Leary’s attitude to customers.

    As an example Ryanair don’t allow you to book specific seats. They argue, I think, that embarkation is more efficient if people pile on and mill about trying to find seats next to their travelling companions. Actually Ryanair’s boarding pass has a number on it, it’s just not a seat number! Many don’t realise this and spend time looking for the seat corresponding to their pass number – not very efficient. They also call you in two groups, depending on your boarding pass number e.g. 1-90 board first. But many people can’t hear the staff say this, or arrive after it has been announced, so join the queue anyway. And everyone stands up and queues very early because they want to get a seat next to their companion(s). Chaos. BMIbaby allow you to choose your seat while buying a ticket on the web. Very simple, with a plan of the aircraft allowing you to select outward and return seats, seats already chosen are indicated. No panic at the departure lounge, no scramble on board.

    If you really want to make boarding more efficient (turnaround times for Ryanair are tight!) allow selection of seats on the web. Board those in the middle seats first, some by the back door some by the front, and fill up from the middle out. Big signs to explain all this and instructions with your booking confirmation.

    Why do Ryanair stick to their no seat number policy? Seems mad to me, my only explanation “You’re flying cheap, and this way you’ll realise it – we treat you cheap!!”

    Having got that rant of my chest – I have benefited a lot from Ryanair, especially when BMIbaby dropped their flights to France from Nottingham.

    On a more important point. How much longer will we have cheap air travel? I am convinced of the scientific evidence for global warming brought about by human activity – and air travel is an important contributor. Seems to me governments are going to have to do something about increasing air travel (amongst other things) – or we fry. A technical fix would be great (bio-aviation fuel?) but seems a long way off (despite Branson’s millions). Taxing aviation fuel would seem an obvious way to go, in which case the Ryanair bubble could burst. Where would that leave Aer Lingus (to return to the thread!).

  • Crategus: “I think he will need to change attitude or flounder.” You’re not an airline industry analyst by any chance? Or perhaps an INvest NI business adviser?

    His attitude – that airline travel is a basic transport service and should be affordable to everyone has revolutionised the industry in Europe, has opened Ireland to the world, has opened the world to everyone in Ireland and built a vastly successful business (with a CASH war chest of 2 Billion euro).

    Floundering? Mmm.

    Have I listened to his interviews? Every chance I get. Do I find them ‘deeply worrying’? No. I find them hugely entertaining and I find his attitude towards the dinosaurs of Irish and British business invigorating.

    Your comparison to Ratner bears no scrutiny – I’m glad you choose not to try to explain it further.

  • Fergus D, your frustrations about queueing to get on a vehicle and then find a seat with your pals are frustrations I sometimes share. Most recently in fact when I stood for an hour at CEntral Station for a return journey to Dublin. (The price of which, incidentally, could probably have taken me to Italy with Ryanair).

    When those frustrations are just too much for me, I bite the bullet and buy an overpriced First Plus ticket. I take a similar approach with my flights. You should try it.

    On the question of what would happen to Aer Lingus if a tax attack burst Ryanair’s bubble, I can only assume that Aer Lingus and its shareholders (if they reject this offer) would be fecked. At Aer Lingus, they currently have twice the costs per customer of Ryanair – if Ryanair go, it’ll be the last of the Irish airlines.