Renegade Ryanair

Can CEO Michael O'Leary capture the Continent?

It's another damp, miserable March day in Dublin. But Michael O'Leary bursts into his office with the force of a tropical hurricane. His energy is even more surprising considering he has been up all night birthing six calves at his 250-acre farm an hour outside Dublin. Dressed in old Levis and a rugby shirt and belting out a song by the band U2, the 40-year-old head of Ryanair Holdings PLC is clearly not a conventional corporate chieftain. There aren't too many CEOs who would describe their interests--at least in public--as "smoking, drinking, and chasing loose women."

But then, Ryanair, Europe's first and most successful low-cost carrier, isn't a conventional European airline. "There's no one in Europe doing what Ryanair is doing," says Martin Borghetto, European transport analyst at Morgan Stanley in London.

What Ryanair is doing is making air travel within Europe more affordable. O'Leary has transformed Ryanair from a money-losing carrier serving Ireland and Britain into the leader among Europe's six low-fare airlines, with flights to 54 European cities. By emulating the same low-cost, no-frills model pioneered by the U.S.'s Southwest Airlines Co. 30 years ago, O'Leary has made Ryanair one of the world's most profitable airlines. "Ryanair is the best imitation of Southwest Airlines that I have seen," says Southwest founder Herbert D. Kelleher.

Europe, long served by entrenched high-fare national carriers, desperately needs airlines such as Ryanair to lower costs for travelers. When Europe's airline industry was deregulated four years ago, O'Leary was first on the spot, offering fares on intra-European flights at an average of half the price of competitors. Now, some Ryanair fares are as low as one-tenth the price of the national carriers.

Sounds like a recipe for red ink--but by continually chipping away at internal operating costs, O'Leary has so far managed to undercut rivals and still rake in the profits. Since joining the company a decade ago, first as chief operating officer and then becoming CEO in 1993, O'Leary has increased passenger numbers and profits by an average of 25% annually. Pretax profits last year were $111 million and are estimated to rise to $138 million this year. Operating margins--23% on estimated revenues of $432 million for the year ended Mar. 31--are higher than all other low-cost carriers in the U.S., including Southwest, and well above the 5% average for big European airlines. "Everyone always says, `What's your secret?"' O'Leary says. "It's very simple. We're like Wal-Mart in the U.S.--we pile it high and sell it cheap."

SOARING. That philosophy has propelled Ryanair into Europe's fastest-growing airline. Last year, it became the first startup to surpass its national carrier, Aer Lingus, in passenger number. Moreover, Ryanair's market value has risen tenfold, to $4 billion, since its 1997 initial public offering--bigger than Sweden's SAS, around the same size as Air France, and only slightly less than British Airways PLC's $5.5 billion. The stock, which trades on Nasdaq and the London and Dublin stock exchanges, is trading around $53, down from its 52-week high of $58 due to the general slump on Nasdaq and world exchanges. But it has held up much better than the Nasdaq's bombed-out tech sector and outstripped most airline stocks, including British Airways.

Even so, O'Leary may be about to commit a mistake that has brought down one upstart airline after another on both sides of the Atlantic: overexpansion. In a year when established carriers such as Sabena and Swissair are wading through deep losses, Ryanair is aggressively expanding on the Continent. On Apr. 26, Ryanair began service at Brussels' Charleroi Airport, its first Continental base, offering 30 flights daily to seven European destinations. Ryanair is investing $100 million, creating 100 new jobs, and basing four aircraft at Charleroi.

DEMANDING. With fares an average of 80% less than Belgium's flag carrier, O'Leary claims Ryanair will "put Sabena out of its misery." So far, he says demand is ahead of expectations: "We sold more than 50% of the seats on many of these new routes a month before we even started service." O'Leary expects the new base in Brussels to increase traffic fivefold, to 1 million passengers next year, and boost business on the Continent to 40% of Ryanair's traffic by 2003, vs. 20% now. To get there, O'Leary wants to add one new base, five new planes, and six to eight new European routes each of the next five years.

Such steady expansion has worked brilliantly out of Dublin and Britain. But as O'Leary delves deeper into Europe, his strategy will be tested. Deep-pocketed competitors with government backing such as Air France and Lufthansa have been steadily beefing up regional service in their respective markets. And with each new Continental base it establishes, Ryanair will have to deal with differing labor and regulatory issues.

O'Leary figures his biggest advantage is that Ryanair doesn't really compete head-on with Europe's biggest carriers. It targets the discount market the majors have long shunned in favor of the business-class traveler. "These [low-cost] companies are opening up new segments of the market without really taking clients from the regular carriers," says Air France CEO Jean-Cyril Spinetta. Some 48% of Ryanair's passengers are budget-conscious leisure travelers such as Emanuela Agni, a 34-year-old creative designer at London law firm Allen & Overy. An Italian native, Agni says the cheap fares enable her to fly home a lot more frequently than she otherwise would. "On such a short flight, I couldn't care less about perks," she says. "All I want is lower fares."

She's not alone, and fliers now can choose from a number of low-fare carriers. But none has managed to replicate Ryanair's results. Its "cost per available seat mile," the yardstick used by the airline industry to measure costs, is 30% lower than the average for Europe's major airlines, and its productivity--as measured by the number of passengers per employee--is 40% higher, according to analysts. As a result, Ryanair can break even when its planes are just over half full--an advantage that should help it weather the storm fairly well if an economic downturn materializes in Europe later this year. In contrast, low-cost rivals such as BA's Go need to fly their planes 77% full to break even.

O'Leary's biggest cost-saving move is to serve only secondary airports. These out-of-the way terminals are so hungry for business that Ryanair can negotiate airport fees of as little as $1.50 per passenger, plus get marketing and training support for as long as 20 years. That's a fraction of the average rate of $15 to $22 per passenger charged by Europe's major hubs. Because there is so little congestion at these locations, Ryanair's planes are back in the air no more than 25 minutes after landing, allowing it to squeeze two flights more per day from each plane than rivals using the main airports.

The company is fielding offers to start service to some 30 of these secondary airports. A handful of them, such as Frankfurt-Hahn, now owned by Fraport, are privatized former NATO bases looking to drum up business. "U.S. tax dollars have financed some of the best-equipped airports in Europe," says Ryanair Chief Financial Officer Michael Cawley, referring to the ex-NATO bases.

Ryanair does not offer your typical airport experience. A hop to Paris, for instance, really means a flight to Beauvais, 43 miles north in Picardy, where the terminal looks like a bus depot stuck in the middle of farmland and the baggage handlers are local firemen. Ryanair boasts that all of the airports it serves are linked to the main destination via bus or train. Beauvais passengers, for instance, pay $8.20 to ride a shuttlebus leaving Paris two-and-a-half hours before each departure. But it doesn't always work smoothly: On Apr. 9, the bus ran late, leaving passengers booked on a morning flight to Dublin stranded for three hours until the next plane out.

The low cost of a Ryanair ticket is what makes such hassles tolerable. To keep delivering on price, Ryanair tries to remove at least one layer of cost from its operations each year. Last year, it cut travel agents' commissions from 7.5% to 5% of the fare and switched to a cheaper computer-reservation system, saving around $6 million. These moves, plus the success of, a Web site launched in January, 2000, has dramatically cut the airline's dependency on travel agents. Now, 8% of sales are made by agents, 65% are made online, and the rest come through call centers.

COLD CASH. O'Leary isn't content just to save money, though. Every potential expense is treated as an opportunity to make money. Free drinks on board? Forget it. Even water will set you back a few dollars. And when the airline's catering company, Gate Gourmet, said it would no longer supply Ryanair with free ice, O'Leary stopped offering ice cubes, a move that should save about $50,000 a year.

O'Leary nurtures his reputation as a Robin Hood of the airlines, fighting Europe's big national carriers on behalf of the little guy. Truth is, he now lives like a lord, raising Aberdeen-Angus cattle and thoroughbred horses on his spread in Mullingar, County Westmeath. It wasn't always that way. The eldest of a family of six, O'Leary grew up on a farm in the Irish midlands. He worked two jobs, as a barman and "burger flipper," while studying business at Dublin's Trinity College. Although he never completed his qualifying exams, he worked as a tax consultant, buying and selling property on the side. It was during this time that he met the airline's founder, Tony Ryan, who was running the world's most successful aircraft-leasing firm, Guinness Peat Aviation. He became Ryan's "financial sweeper-upper," advising on tax and investment strategy until Ryan persuaded him to join Ryanair.

What a ride it has been since the company's meager beginnings. When Tony Ryan founded Ryanair in 1985, it had just one 15-seat turboprop. A year later, Ryanair broke the British Airways and Aer Lingus duopoly on flights between Dublin and London. But by 1989, Ryanair was in the red, having gone through some $25 million and five CEOs. Ryan turned to O'Leary for advice. "It was a basket case," recalls O'Leary, who told Ryan to shut it down.

Instead, Ryan set up a meeting with Southwest's Kelleher, whom he had known for years. In 1990, O'Leary, Kelleher, and new Southwest President and COO Colleen C. Barrett met for dinner at the Palm steakhouse in Dallas. Several cocktails into the discussion, something clicked. "The man's a genius," O'Leary says. Ironically, both Kelleher and Barrett's ancestors come from Kanturk in County Cork, Ireland, the same small town where O'Leary's parents were born. Kelleher recalls that there are 413 people and 21 bars there. "O'Leary and I have a certain kinship," says Kelleher, who is known for his madcap antics, chain-smoking, and fondness for Wild Turkey bourbon.

Convinced that he could copy the Southwest model, O'Leary agreed to give running Ryanair a try, provided he got full management control and 25% of any future profits. In short order, he got rid of unprofitable routes and switched from 14 types of aircraft to just one, the Boeing 737, which reduced maintenance costs. Already-low airfares were slashed even further to boost demand. Business-class and frequent-flier programs were abolished. By the end of that first year, Ryanair was turning a profit. By the mid-1990s, profits were growing at such a clip that O'Leary's 25% cut was no longer feasible: The airline needed to plow profits back into the company to grow. To raise capital for expansion, Ryanair went public in 1997, raising around $130 million. O'Leary received a base salary of $340,000 last year and owns an 8% stake in Ryanair that is valued at $250 million.

CREDIBILITY. O'Leary brought in new managers as well as shareholders. In 1997, he helped persuade David Bonderman, CEO of investment fund Texas Pacific Group--and who had previously turned around Continental Airlines Inc.--to become chairman of Ryanair. Bonderman, says Cawley, gave Ryanair the credibility it needed in negotiations with Boeing Co. Ryanair bought 15 new 737-800s this year and 13 more are on order through 2003. Cawley won't say exactly how much the airline paid, but analysts estimate it saved close to $15 million off the $45 million sticker price for each aircraft. Ryanair paid 15% of the aircrafts' net purchase price with cash, and borrowed the rest. "Boeing recognized it needed to have a customer in Europe to help it kick Airbus' ass," says Bonderman.

After more than a decade at the helm, O'Leary has imprinted his irreverent personality on every aspect of Ryanair. At the airline's cramped and utilitarian headquarters outside the Dublin airport, the company's young staff dress as casually as the CEO. One day a week, O'Leary or one of his seven senior managers pitches in to help check in passengers or load baggage. And every Thursday, Ryanair's baggage handlers take on management in a soccer match. O'Leary has a reputation as an aggressive player.

TOO FAR? The same in-your-face attitude is a feature of the company's advertising campaigns, which O'Leary oversees personally. A recent ad that ran in Ireland, for instance, depicted the Pope claiming that the fourth secret of Fatima was Ryanair's low fares. Besides the "usual collection of loonies" calling in on Irish radio to complain, says O'Leary, his own mother told him that this time he had finally gone too far.

Indeed, just as Mum suspected, the Fatima ad got to a lot of people. The Vatican fired off a press release around the globe accusing the airline of blaspheming the Pope. Much to O'Leary's glee, the release attracted the attention of newspapers as far away as India, and generated a ton of free publicity. "I thought I died and went to heaven," says O'Leary. Adds Bonderman: "It's hard to think of another CEO of a company with a $4 billion market cap who would run those ads. They accomplished everything he set out to and more."

To be sure, no-frills airlines have had a notoriously checkered existence. With the exception of Southwest, all have fallen victim to either bankruptcy or safety disasters. Britain's Debonair, which filed for bankruptcy in 1999, was Europe's most recent casualty. Richard Branson's Virgin Express is still in business, but it reported losses of nearly $60 million last year. The biggest challenge for Ryanair, says Bonderman, is maintaining its cost discipline and corporate personality. "We're very conscious that what will screw us up is that we get fat and lazy," admits O'Leary. With such a driven boss, that's not likely to happen soon.

Corrections and Clarifications In "Renegade Ryanair" (European Edition Cover, May 14), the statement "Boeing recognized it needed to have a customer in Europe to help it kick Airbus' ass," was made by Ryanair Holdings PLC CEO Michael O'Leary, and not David Bonderman, chairman of Ryanair and CEO of investment fund Texas Pacific Group.

By Kerry Capell in Dublin, with Carlos Tromben in Beauvais, William Echikson in Brussels, and Wendy Zellner in Dallas

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