Michael O’Leary, the outspoken CEO of Ireland’s Ryanair, is fanatical about making air travel affordable for the masses

SATURDAY, JULY 27, 2013

No Frills, and No Excuses

By JONATHAN BUCK | MORE ARTICLES BY AUTHOR

Michael O’Leary, the outspoken CEO of Ireland’s Ryanair, is fanatical about making air travel affordable for the masses. He’s pretty keen on rewarding shareholders, too. The pitch for owning Aer Lingus.

Brash, cocky, outrageous? Michael O’Leary, chief executive of Ireland’s Ryanair, has been called all that and more. And no wonder. He dressed as the Pope when his airline opened a new route to Rome. He wants to charge passengers who stand in line to use the bathroom on his fleet of Boeing 737-800s. And—get this—he has offered to donate the levy to charity “for incontinence, or something like that.”Regrets? He hasn’t any.

For O’Leary, 52 years old, it’s all part of a relentless effort to promote the no-frills Ryanair—and drive down fares to make air travel more affordable for the masses. The CEO is renowned for his tirades against anyone he sees as standing in his way, including regulators, politicians, labor unions, competitors, and employees—pilots, in particular.

Even customers are fair game. He has railed against overweight passengers, and called those who don’t print their own boarding cards stupid. “People say the customer is always right, but you know what? They’re not,” he has said. “Sometimes they are wrong and need to be told so.”

O’Leary is happy to tell them. “If it generates a few headlines and gets more people to Ryanair, I’ll say anything and do most things short of committing a crime,” he confessed in a recent interview in his office at Dublin Airport.

He’ll also do whatever it takes to lower costs and ticket prices, the bathroom furor being a classic example. Figuring one toilet is enough for a typical Ryanair flight, which averages 75 minutes, he wants to remove the two bathrooms at the rear of the cabin to squeeze in six extra seats. This would allow the company to cut ticket prices by about 5%. How best to discourage queues for the lone remaining facility from interfering with inflight sales? Charge a toilet tax!

Not surprisingly, the idea isn’t flying with regulators, although O’Leary says it has been “a fantastic PR stunt.”

DESPITE HIS CRINGE-WORTHY comments and customers’ complaints, Ryanair(ticker: RYA.Ireland) is doing all right, as travelers are flocking to the carrier in ever-increasing numbers. As a result, it has become Europe’s largest airline, serving almost 80 million passengers last year. Around the world, only Delta Air Lines (ticker: DAL),Southwest Airlines (LUV), United Continental Holdings (UAL), AMR‘s(AAMRQ) American Airlines, and China Southern Airlines (ZNH) serve more.

O’Leary, who has charted Ryanair’s course for nearly 20 years, expects to add five million passengers a year in the next five years, boosting annual traffic to 105 million. Not bad for a company founded just 28 years ago in a country on the fringe of Europe, with a population of fewer than five million.

The role of corporate mouthpiece didn’t come naturally to the boss. Tim Jeans, Ryanair’s former commercial director, recalls O’Leary as reserved and camera-shy early in his career. O’Leary eventually saw the value of free publicity, however, and envisioned a low-cost, no-frills way of doing business that has turned the airline industry in Europe on its head.

“What you see today is entirely a construct of Michael’s own making,” says Jeans. “He changed the game by saying, ‘I can reduce costs by driving up operational efficiency.’ ”

Ryanair has profited mightily from O’Leary’s tactics. It also has benefited in recent years from the economic downturn in Europe, which has funneled more passengers to lower-cost carriers. In the fiscal year ended on March 31, the company reported a 13% jump in net income, to 569 million euros ($756 million), on a 13% rise in revenue, to €4.88 billion. It is expected to earn €639 million in fiscal 2014 on €5.25 billion in revenue. Earnings per share are forecast to rise to €0.44 from €0.39 in fiscal 2013.

Ryanair’s ascent hasn’t been lost on investors. The company’s Dublin-traded shares have nearly doubled in the past year, to a recent €7.35, and trade for 17 times estimated 2014 earnings, a reflection of the company’s superior prospects. (Ryanair’s American depositary receipts, which trade under the ticker RYAAY, ended last week at about $54.) The company’s success has made O’Leary rich: His stake of roughly 4% is worth around €400 million, based on the company’s market value of €10.5 billion.

RYANAIR WAS STARTED IN 1985 by Irish businessman Tony Ryan, who made his fortune as the founder of Guinness Peat Aviation, a forerunner of the aircraft-leasing business. The airline initially operated a 14-seat turboprop on a 100-mile commuter route between Waterford and Dublin. It leased its first passenger jet from Romania’s Tarom in 1986.

O’Leary, who was working as a tax consultant at an accounting firm in the mid-1980s, first encountered Ryan when he prepared the billionaire’s tax returns. Ryan tried to lure him to Guinness Peat, but O’Leary didn’t want to work in aircraft leasing, although he knew he didn’t want a career in accounting, either. He left to work for himself for a while, buying and selling candy shops, which he describes as “a great way to make money.” But in 1988 he accepted Ryan’s offer.

At first, O’Leary worked out of Ryan’s house in Tipperary, where he began “looking after” Ryanair. He quickly deduced that the airline was a money pit. Ryan had a glamorous view of air travel, but a populist view on pricing. “Tony was flying around on the Concorde at the time and felt that flying should be elegant—but prices should be €20,” he says.

O’Leary repeatedly recommended that his boss pull the plug on Ryanair, but Ryan wouldn’t have it. “The difficulty was that he had his name on the side of an airplane, even if it was a Romanian airplane,” O’Leary says. “He didn’t want to close it down.”

The fledgling carrier went through several CEOs, and when no one else would take the job, O’Leary, who had been named finance chief in 1991, was given the reins. “Eventually, Ryan was happy to do anything he could to stop losing money, so I got a free hand,” he says.

It was an important concession by Ryan, who died in 2007.

ONCE IN CONTROL, O’Leary determined to copy Southwest Airlines, which had been enjoying phenomenal success as a low-cost carrier under the leadership of co-founder Herb Kelleher. His real goal, O’Leary says, was to do Kelleher one better.

O’Leary went to Dallas to visit Southwest’s operations, and spent three days there studying how the airline was run. The most important lesson he learned was to cut the historical baggage. “Airlines existed—particularly the majors in the States, and the European flag carriers—to provide the employees with a grandiose lifestyle and the status to which they had become accustomed, because flying in the 1950s was an exciting and rarefied job,” he says.

Southwest taught him how to do things differently. O’Leary learned that flying a single type of narrow-bodied aircraft reduced complexities. Quicker airport turnarounds allowed carriers to fly more flights each day, increasing the appeal of smaller airports over congested hubs like London’s Heathrow.

O’Leary’s observations taught him to dispense with different passenger classes, so that all passengers would be treated the same. Above all, he recognized that flying is a commodity service, and that if you can get people from point A to point B safely and on time, and without losing their luggage, “they will follow you in the millions.”

Customer service isn’t high on his list. “His concern is more, ‘Look, when my load factors fall, then I’ll worry about customer service,’ ” said Conor McCarthy, a former director of group operations at Ryanair, who has gone on to co-found airlines in Mexico and Asia.

Ryanair’s load factor—a measure of the proportion of available seats filled with paying passengers—was 82% last year, compared with an average load factor among European airlines of 79.6%.

TODAY RYANAIR OPERATES a fleet of about 300 Boeing (BA) planes. It announced an order for 175 new Boeings in June, at a list price of $15.6 billion. The fleet expansion will allow the airline to add more bases and new routes, and carry more passengers. The price was “not dissimilar,” O’Leary says, to an order placed eight years earlier, a testament to his negotiating skills. “We are a bunch of cheap Irish peasants who will stand on our heads to save sixpence,” he says.

He insists the deal worked out well for Boeing, too. Boeing declined to comment.

Deposits of up to $1 billion on the contract in the next couple of years could crimp dividend payments, although the company expects to return €1 billion to shareholders via buybacks and special payouts in coming years. It paid a special dividend of €0.34 late last year. “We aren’t here for the piddly dividends,” O’Leary says. “We want to double or triple the share price over the next five or 10 years.”

O’Leary’s pennypinching ways extend throughout the firm, which is building a new headquarters a mile from Dublin Airport. But he notes that property is cheap because of the bust five years ago in the Irish economy. Besides, Ryanair has occupied the same building since 1991, and now has reached capacity. “The great joy is that we can’t hire any more people because there is nowhere for them to sit,” he says. “It is a great way of controlling the overhead.”

On a serious note, he adds, “culturally, we try not to waste money. We should use our savings to lower passenger fares and increase the share price to benefit shareholders.”

One thing O’Leary wouldn’t mind paying up for is the beleaguered Aer Lingus(AERL.Ireland). Ryanair accumulated a stake of almost 30% in the Irish carrier in 2006, but regulators have blocked Ryanair’s repeated bids for control of the company on anticompetitive grounds. Ryanair said last week that it would sell its stake to any successful bidder, but O’Leary notes no one has come forth with an offer. “In European or global terms, Aer Lingus is an irrelevancy,” he says. “It has no strategic or geographic value. It is a peripheral, subscale former European flag carrier, much like TAP in Portugal or Olympic in Greece. Nobody wants it except us, and we could do a terrific job growing and expanding it.”

O’LEARY, THE SECOND-OLDEST of six children, and the eldest of three boys, grew up on a farm in Mullingar, the town where he still lives. He was educated at Clongowes, the prestigious boys’ boarding school whose alumni include politicians, sportsmen, and literary figures, among them James Joyce.

He brings the same financial discipline on display at Ryanair to his private life, although he does have one indulgence. “Some people buy speedboats, chase girls, or do cocaine,” he says. “I’m too stupid, so I buy a couple of cheap horses and race them.”

That doesn’t quite reflect his involvement in the sport. In a country where steeplechase racing is a national pastime, O’Leary is one of Ireland’s leading horse owners. He breeds horses at a stud farm in Mullingar, and has 40 to 50 in training, but “not enough good ones,” he says.

It is an interest he picked up from his father, an entrepreneur who would buy a horse when he had money to spare. One of his brothers is among Ireland’s top breeders.

O’Leary laments the success of War Of Attrition, the third horse he bought, which won England’s Cheltenham Gold Cup, a race he calls the Kentucky Derby of jump-racing, in 2006. “If the first 20 horses I bought were all useless, I would have cured myself and given this up,” he says.

IN THE WINTER MONTHS, O’Leary likes to watch his horses race, but he finds himself increasingly drawn into the weekend activities of his children—three boys and a girl, all under 8 years old. The oldest two boys play golf and tennis, and O’Leary helps coach their rugby team. They delight in embarrassing their father.

“I take them out to a restaurant, and they will quite loudly say ‘Daddy, you’re an idiot’ or ‘You’re rubbish,’ ” he says. “They don’t understand why the whole restaurant breaks out laughing, which only encourages them.”

A few photographs of his children and horses sitting atop a corner cabinet are the only personal effects on display in his understated office. The horses had been in the foreground until his wife rearranged the photos a few months earlier, he says.

O’Leary might spend weekends ferrying the kids about, but driving isn’t something the owner of “Ireland’s most famous taxi” worries about. When Dublin’s taxis were deregulated about 10 years ago, he paid €6,000 for a license, which enabled him to equip his Mercedes limousine with a meter, light, and signage required to travel in bus lanes.

O’Leary employs two full-time drivers, and reckons that using the bus lanes saves him about half an hour on his commute each working day. “I have always been at the cutting edge of transport innovation, and I am at the cutting edge again,” he says proudly.

Despite his success with Ryanair, O’Leary is a controversial figure in Ireland. His views on that, too, are in your face. “We have an 800-year history of not admiring people who are successful, unless they go abroad and are successful abroad, in which case we lionize them,” he says. “We love Bob Geldof [the singer-songwriter behind the Live Aid concerts] in this country, but we aren’t too sure about a little [expletive deleted] like me. The great advantage of that is, I am not in the least bit sensitive.”