by Alan Ruddock
Aer Lingus had embarked on an expansion strategy that had seen it invest in a host of non-airline businesses, like hotels, recruitment, travel agencies, robotics and maintenance. Its senior management team, headed by David Kennedy, then CEO, believed that the cyclical airline industry was simply too risky and that the company needed to diversify to safeguard its earnings. It was a credible strategy for the time, but it meant, says one former senior executive, ‘that the core airline business was starved of investment and the better managers were moving into the newer businesses, because that’s where the profit was. The fleet was getting older and that was becoming a major problem.’
In reality, Aer Lingus’s airline business was a sitting duck, waiting to be shot by a competitor, but that competitor would need deep pockets to survive the initial maelstrom that its arrival would inevitably provoke, and would need strong political support within the Irish government if it was going to get the breathing space to survive. As the scale of the airline’s difficulties began to penetrate the minds of Ireland’s public representatives, political support for a more open market began to grow. To tip the balance, a crisis was needed.
No sooner had Aer Lingus seen off Avair in 1984 than it was embroiled in another turf war, this time across the Atlantic. Competition on the London–New York route had become intense in the late 1970s and early 1980s, and the still tightly regulated Ireland–US market was not immune to the pressure.
The Irish government controlled the price that airlines could charge on the routes from the US to Ireland and it also controlled the number of charter seats that could be sold in a given year at lower prices. That ought to have been enough to ensure that Aer Lingus was protected from competition and ought to have ensured that Aer Lingus made money, but the Irish government could not control what was happening in other countries, especially in Britain and the US.
Sir Freddie Laker, the British entrepreneur who had operated cheap charter flights to the US from London’s Gatwick airport in the 1970s, had finally won permission to launch his cut-price Skytrain service from London to New York in 1977. Laker offered fares of less than GB£100 each way, making transatlantic travel possible for people who had never thought they would be able to fly. Laker was a people’s hero, knighted in 1978 by the Queen, but his dream was undone by a combination of forces. Skytrain used McDonnell Douglas DC10s and public confidence in the plane was shattered by a series of fatal crashes which caused all DC10s to be grounded worldwide in 1979. Laker lost millions, but limped on until 1982 when his banks finally pulled the plug.
His legacy went far deeper than a five-year low-fares adventure. Laker had caught the public’s imagination and made it possible for ordinary people to fly. He had changed the mindset: air travel did not have to be prohibitively expensive and competition could expand, not destroy, a market. The next year People Express launched a cut-price service from Newark to London. There were only a few flights each week, but the fare was a staggeringly low $79 each way, or about GB£100 for a return flight. Aer Lingus’s cheapest fare that year was £399 return, or more than $600.
Neither Skytrain nor People Express were direct competitors with Aer Lingus, but they showed the travelling public that cheap flights were possible and created a hunger for discounts that the Irish airline refused to cater to. But if Aer Lingus would not discount, the travel agents would. They earned large commissions – up to 15 per cent on transatlantic ticket sales – and had plenty of room to cut prices if they were prepared to slash their own profits. And so the first price war started in the Irish airline business in 1983, under the noses of Aer Lingus and in direct defiance of government policy.
Neither government nor airline was amused. In April 1983 the Irish government took the unusual step of intervening in the market to prevent Liam Lonergan, the managing director of Club Travel, selling a return ticket with TransAmerica to America for £299 against the government-approved rate of £399.
‘We were [discounting] for about two years before [Aer Lingus and the government] got uptight about it. They made the usual noise – they threatened TransAmerica and said, “No, you can’t do this.” And that didn’t work and they threatened us and said, “No, you can’t do this.” And we said, it’s within the law – there’s nothing in the legislation which says we have to sell at a certain price. They said, “We believe there is.”’
Two months later the government took action against a travel agent who was prepared to discount Aer Lingus fares to London and Europe. In August the government moved again to stop Lonergan offering a £19 discount on an Aer Lingus flight to New York while in February 1984 it clamped down on an agent who was prepared to sell a full-price British Airways ticket but without forcing the customer to spend a Saturday night in the UK. In total, the government investigated nine infringements of its rules in seven months and, according to Ted Nealon, a junior minister with responsibility for transport, ‘Satisfactory assurances were obtained from the airlines involved that steps were being taken to ensure that further infringements of the terms of the minister’s approval would not take place.’ Trouble was, the airlines might agree, but the travel agents did not.
Nealon and his colleagues were outraged by the defiance and sought an injunction in the High Court to stamp out the illegal discounting. The government won the action, but then lost on appeal in the Supreme Court, which decided that the government was within its rights to regulate the airlines but that it did not have the power to tell travel agents how to run their businesses.
So Nealon, encouraged by Aer Lingus, introduced legislation to fine and imprison travel agents who broke the rules. He argued that a free-for-all could ‘lead to considerable instability in the market place, with discounting and other malpractices emerging on a scale that would undermine approved tariff structures and could have serious financial implications for airlines generally and for Aer Lingus in particular. In the long term, such a situation would only serve to put at risk the range of air services which Ireland enjoys, a development which would not be welcomed by either business or tourism.’
His argument was a perfect summary of Aer Lingus’s views on competition: it would cannibalize, not stimulate, the market and must be stopped.
Nealon’s proposal to fine travel agents up to £100,000 and imprison them for up to three years met a ferocious response from Des O’Malley, a senior Irish politician who was soon to break from Fianna Fáil to launch the Progressive Democrats, a party that would embrace economic liberalism. The government, he said, was
making a laughing stock of this country. [It is] the only government that I know of in the Western world at present who are bringing emergency legislation into their own parliament to push up air fares as much as possible. This is happening a week or two after the signature of an important bilateral agreement between the British government and the Dutch government which has been widely welcomed in both countries and has had the effect of reducing the return fare between London and Amsterdam to GB£49. But instead of increasing access to the country, making it cheaper for people to come here, we are introducing legislation which will ensure that our already extraordinarily high fares will be higher. We must be the only country in the world that puts people in jail for charging too little and for not making the maximum profit.
Although O’Malley was still unusual among politicians in taking a stand for liberalization, the debate had given voice to the campaign for lower fares and allowed economists, such as Trinity College’s Sean Barrett, to highlight the enormous price discrepancies that existed between Ireland and the United States. In a newspaper article in 1984 Barrett pointed out the cost per mile of an airfare between London and Dublin was 39 cents, while the cost of a similar journey in the US, from New York to Buffalo, was just 12 cents a mile. On the west coast of America, where low-fare airlines were more prevalent, the costs fell lower still, with San Francisco to Los Angeles costing just 8 cents a mile.
‘Barrett was probably the only public voice of any kind of stature maki
ng any comment on the nonsense that existed in the 80s,’ says Liam Lonergan. ‘There was a general acceptance at the time that Aer Lingus was always right, it wasn’t Aer Lingus’s fault…There was no recognition of [Ireland’s needs] at all. If they had any recognition of Ireland being an island they would have deregulated airfares twenty years before that. There should never have been regulated airfares out of Ireland. The government had no concept whatsoever of how to encourage tourism, how to get people onto the island, or how to get them off the island.’
Lonergan’s views were far from mainstream at the time. The government and Aer Lingus believed that Ireland being an island meant that it was essential to protect air services, because if carriers were allowed to compete they would collapse and Ireland would be left without an air link. The only sure way of keeping the market stable, they argued, was through state control. They did not trust the market and deemed air travel too important to be left to the fickle interests of investors.
Few apart from Barrett, O’Malley, Ryan and his collaborators embraced the idea that competition would create a more vibrant market and that tourism – one of the country’s most important industries – would blossom rather than wither as a result. But slowly the evidence from America, where fares continued to fall and the numbers flying to climb, from a small number of competitive routes in Europe such as London-Amsterdam, and from the success of the transatlantic discounters in stimulating market demand, prompted the Irish government to dip a toe in the dangerous waters of deregulation.
Its first experiment – allowing Avair to fly to Britain – failed because Aer Lingus ensured that it failed. Without a change in government policy, a change that would see a government minister face down Aer Lingus’s protestations and prevent predatory attacks on a newcomer, Avair’s successors would also fail.
Pressure for change was also building fast outside Ireland and the catalyst for action had come from the courts. Just as the Irish government had introduced legislation in 1984 to outlaw discounting by travel agents, so too the French had moved to bring discounters to court. After the case, which the French government lost, the European Court of Justice was invited to determine whether aviation should be included within the European Community’s strict rules on cartels and free competition.
To the dismay of the national airlines and the governments that owned them the court ruled that aviation should be subjected to the general ban on price fixing laid down under article 85 of the original Treaty of Rome. This increased pressure on Europe’s senior politicians to finalize a new aviation policy. The days of bilateral agreements – where two governments carved up the airline routes between their countries and controlled both prices and capacity – were numbered.
Jim Mitchell, the senior minister responsible for Irish transport policy, had seen and heard enough. He had been converted to the benefits of aviation competition, but while he wanted competition he did not want another Avair fiasco on his hands. He had to ensure that the next licence he granted went to a company that had the funds and the leadership to mount a credible challenge to the Aer Lingus monopoly. Mitchell’s strategy was not to undermine Aer Lingus, but to introduce a modicum of competition on regional routes between Ireland and the UK. Tony Ryan, a respected multimillionaire and recognized entrepreneur, fitted the bill, and so in May 1985 Ryan’s Irelandia project, renamed Ryanair, became Ireland’s second airline, with a licence to fly between a small airport in Waterford and London Gatwick.
Tony Ryan had his licence and was preparing for his first flights that summer but Michael O’Leary was oblivious to the dramas in the aviation industry. He had just one thing on his mind: money. He had for the moment rejected the corporate world, turning his back on accountancy and the slow path to wealth that it offered. His experiences at SKC had convinced him that the only way to make his way in the world was on his own.
‘Those days there were only two ways of making money: retail or drink,’ says O’Leary. ‘I didn’t have the money to buy a pub, so I bought a newsagent. You could buy up old newsagents and do them up, extend the hours, bang up the turnover.’ He found what he was looking for at Kestril Corner in Walkinstown, a tough working-class suburb of Dublin, and then went looking for the finance to secure the deal.
‘The first person I looked up to in my business life was the bank manager of AIB in Walkinstown, who gave me a £25,000 overdraft to buy the shop. Boy did I look up to him,’ says O’Leary.
The loan came with a penal rate of interest. ‘My ass was grass if I didn’t pay back this twenty-five grand overdraft in eighteen months,’ he says. ‘And at the time the annual rate of interest on personal overdrafts was 28 per cent…One of the advantages of that was that annual inflation was probably running not far behind 28 per cent,’ he says with typical exaggeration.
With borrowed money and an acquired work ethic, O’Leary set about his business with the energy that would come to define him, motivated as much by fear of failure as determination to succeed.
He was confident enough and determined enough to turn down an opportunity to join Tony Ryan soon after he had acquired the newsagent. ‘After I’d left SKC, Ryan approached me and wanted me to work for him, but at that stage I’d already bought the newsagent. Anyway I didn’t want to work for GPA because GPA was huge, just like SKC. I didn’t want to swap one big company for another big company.’
The Walkinstown shop was just the first step, soon to be followed by more corner shops. ‘There was another one near the Submarine Bar in Crumlin. It has now been developed as a shopping centre and there was a third one which I had a stake in, out in Terenure,’ he says. ‘The main one was Kestril Corner.’
His business philosophy was straightforward. ‘I bought mom and pop outfits,’ he says. ‘I’d open at seven in the morning, and close at eleven at night. Treble the turnover, treble your money.’ With the shops, O’Leary learned the basic rules of running a business. ‘A newsagent is a great business in that it’s very small scale,’ he says. ‘So you learn day one that my costs are this, my sales are that and what’s in the middle is my profit. So you are driving down costs, increasing sales and increasing your margins.’
Hard work was essential. O’Leary worked relentlessly long hours, opening and closing his shops, stacking shelves, serving customers and micromanaging every aspect of the businesses. And then he learned how to delegate. ‘I ran the first one myself. At the end of the first year I put in a manager. Then I bought the second one, and put a manager into it as well,’ he says.
‘I was much more like Del Boy [the notoriously dodgy trader from the popular TV series Only Fools and Horses] than Dev in Coronation Street. I was going around in this van that had no back seat in it, going up and down to Musgraves [the wholesaler] getting all the cash and carry stuff. It wasn’t very glorious.’
During his first Christmas as a shop owner in Walkinstown O’Leary proved that he had mastered the art of supply and demand and demonstrated a propensity to exploit which has stayed with him.
We had a turnover in the shop of about £1,000 a day, and being a greedy little bugger like I was at the time, we decided we’d open on Christmas Day. The staff weren’t too happy – since it was just my younger brother and my younger sister I announced that the management had taken an executive decision.
I had this theory that people were stuck on Christmas Day for stuff to do, so we bought these big boxes of chocolates. And we stocked up on an unbelievable quantity of batteries. And we spent most of Christmas Eve trebling the price of batteries and the price of the big box of chocolates.
By lunch time on Christmas Day we had been cleaned out. Of everything. They bought cigarettes by the 200s, they bought the big boxes of chocolates. I had tripled the price of batteries and I still sold them out. And we took in about £14,000 in the day, fourteen times the normal turnover.
I have never had a sexual experience in my life like it. The feeling of having one wad of notes pushed down one side of my trousers and another wad of notes d
own the other, waddling out of the newsagent in Walkinstown with about fourteen grand, hoping I wasn’t going to be mugged going to the car.
O’Leary had tasted success and he liked it. His instincts had been proved right: he had the talent to succeed on his own, and he did not need to work for a large corporation to make his way in the world. He had learned the basic rules of business in the sharpest possible way – with his own money at risk. He had dealt with customers, grappled with stock and come to a conclusion that would stick with him for the rest of his business career: cost reduction was the key to profitability. If he could cut his costs – by working harder, buying smarter and opening longer – then his margins would rise.
Most of all O’Leary discovered what he had always suspected, but never tested to the full: he loved working, he adored making money and he was good at it. He would make whatever sacrifices were necessary to feed his obsession – long hours and inhospitable locations mattered nothing. Social and family life would be sacrificed to the greater god of Mammon. His appetite whetted, O’Leary was ready for his next challenge. He knew that he had learned a lot, but that there was much, much more to learn if he was to take the next step. Success did not sate him, it fuelled him.
4. Dash for Growth
While Michael O’Leary was striking out on his own, turning a profit by raising the price of batteries in a Dublin corner shop, Tony Ryan was launching his assault on the Irish aviation market. From the moment he had been awarded his operating licence in early 1985 Ryan and his partners had assembled a small team to launch the airline which they believed could in time become a serious competitor to Aer Lingus. Eugene O’Neill, a young former merchant banker who had worked as Ryan’s personal assistant, headed the team, which first operated from a small prefabricated building at Waterford airport. Another key player was Christy Ryan, a former managing director of Aer Arann who had worked with Ryan at GPA and was godfather to his son Declan.
