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Ryanair Rising


It was vintage Michael O'Leary. On May 13, the 42-year-old CEO of Dublin-based discount airline Ryanair (RYAAY) outfitted his staff in full combat gear, drove an old World War II tank to England's Luton airport, an hour north of London, then demanded access to the base of archrival easyJet Airline Co. With the theme to the old television series The A-Team blaring, O'Leary declared he was "liberating the public from easyJet's high fares." When security -- surprise! -- refused to let the Ryanair armor roll in, O'Leary led the troops in his own rendition of a platoon march song: "I've been told and it's no lie. EasyJet's fares are way too high!"

This is a terrible year for the world's airlines, the worst perhaps in the 100-year history of the aviation industry. American Airlines (AMR) Inc. is flirting with bankruptcy. Germany's Lufthansa (DLAKY) just announced an operating loss of $486 million in the first quarter of 2003. SARS has forced Cathay Pacific Airways (CPCAY) Ltd. and Singapore Airlines Ltd. to ground big chunks of their fleets.

But in the middle of this ungodly mess, one man is having fun -- a football-mad Irish accountant with a wicked sense of of humor and a ferociously competitive streak. This is, after all, the CEO who chose Mar. 17 to announce the relaunch of Ryanair's recently acquired rival Buzz -- and got kitted out as St. Patrick in the process.

Buffoonery? Of course. But O'Leary can get away with it. Ryanair's 31% operating margin dwarfs British Airways (BAB) 3.8%, easyJet's 8.7%, and the 8.6% of the granddaddy of discount carriers, Dallas-based Southwest Airlines (LUV) Ryanair has built up $1 billion in cash. Its $5 billion market capitalization exceeds that of British Air, Lufthansa, and Air France. Ryanair, meanwhile, is expected on June 3 to post pretax profits of $308 million for the year ended Mar. 31, up 53% from 2002 on sales of close to $1 billion, according to consensus analyst estimates from financial research firm Multex. "O'Leary and his management team are absolutely the best at adopting a winning strategy and sticking to it relentlessly," says Ryanair's Chairman David Bonderman. He should know: A founding partner of Texas Pacific Group, Bonderman is credited with helping Continental Airlines Inc. emerge from Chapter 11 bankruptcy in 1993 and then rebound.

Now there are new rivals for O'Leary to conquer. "When we were a much smaller company, we compared ourselves to British Airways. But they are such a mess, most people just feel sorry for them," O'Leary says. "Now we're turning the guns on easyJet."

O'Leary's new offensive speaks volumes about the changes that have occurred in Europe's airlines since deregulation started in 1997. A swarm of discount airlines has stripped away the profits of majors such as British Airways and provided Europeans with rock-bottom fares on short-haul flights across the Continent. Now, after assaulting the majors, the strongest of the discounters are squaring off against each other. Though Ryanair and easyJet, another $1 billion carrier modeled after Southwest, compete head to head on only one route -- London to Rome -- the two are waging a publicity war to fill seats.

EasyJet may be bigger, with 19 million passengers in the past 12 months to Ryanair's 16 million, but it's Ryanair that is raking in the profits. On May 7, easyJet reported half-year losses of $79 million, due to acquisition costs and a 10.7% reduction in average fares during the six months ended in March.

EasyJet execs scoff at O'Leary's antics, but they know the Irishman is deadly serious. To steal customers from easyJet, Ryanair vows it will lower fares 5% a year for the foreseeable future. O'Leary thinks he can launch a new price war and still stay highly profitable -- even after bearing the cost of launching 60 new routes in the past year and opening two European bases in Milan-Bergamo and Stockholm. In January, Ryanair ordered 100 new Boeing (BA) 737-800s to facilitate the company's rapid European growth plans, less than a year after placing an order for 150 next-generation 737s. (Analysts estimate Boeing Co. offered Ryanair more than 40% off the list price.) Ryanair's revenues are likely to grow by 30% a year through 2006, says BNP Paribas European airline analyst Nick van den Brul in London.

What's O'Leary's secret? Keeping operating costs to a bare minimum and slashing fares aggressively to stimulate demand. Half-off discounts are common, and Ryanair sometimes even gives seats away on off-peak flights. Its lowest fare, on flights between Glasgow's Prestwick and London's Stansted is $71, round-trip, while easyJet's round-trip flight between Glasgow International and London's Luton is $123. Ryanair's average fares last year were 30% cheaper than easyJet, and its unit costs are 80% less.

The biggest savings come from flying to small, secondary airports outside major European cities. These airports, many of them former military bases, are eager to boost tourism. They offer Ryanair sweetheart deals on everything from landing and handling fees to marketing support. Moreover, because of less congestion, Ryanair is able to get its planes back in the air an average of 25 minutes after landing, half the turnaround time at busy major airports. Of course, a Ryanair flight to Milan means Bergamo, 31 miles away. EasyJet, in contrast, uses major airports. That's why business travelers still prefer easyJet.

The Ryanair CEO, though, is making money on more than the fares he charges. In-flight perks such as food and drink? Forget about it -- passengers have to buy the snacks. O'Leary has rented out the overhead storage and seat backs on Ryanair planes to advertisers. In February, O'Leary launched a Ryanair credit card in conjunction with MBNA Europe that entitles users to a free flight after one purchase. With more than 90% of tickets sold online, Ryanair.com Ltd. is now one of Europe's leading e-tailers. Ryanair.com has hooked up with hotel chains, car-rental companies, life insurers, and mobile-phone companies to expand the Web site's range of offering.

Ryanair needs all the profits it can get as the consolidation of Europe's discounters gets under way. Over the past year, both Ryanair and easyJet have snapped up smaller low-cost players. In July, 2002, easyJet acquired British discount airline Go for $610 million. Nine months later, Ryanair bought Buzz, the loss-making discount carrier of KLM Royal Dutch Airlines, for $23 million, a bargain according to analysts. O'Leary immediately took a knife to Buzz's bloated cost structure, paring down the number of routes and getting rid of 80% of the workforce. As a result, Buzz was profitable in May, its first month of operation following O'Leary's reengineering. What about new competition? O'Leary reckons few will survive. "There are huge barriers to entry now, and none of these new airlines are going to be able to find a price point below Ryanair or easyJet," he says. The latest potential entrant is Now Airlines Ltd., a Luton-based carrier promising the same price for every seat on the same flight. Joking about delays in Now's launch, O'Leary calls it "Never."

The biggest threat to O'Leary's ambitions is the potential end of the airport deals that have kept Ryanair's costs down. Earlier this year, the European Commission launched an investigation to see whether the discounts Ryanair receives from Brussels-Charleroi airport amount to illegal subsidies. A decision is not expected until September, but O'Leary says he's "confident Ryanair will be vindicated." He notes that such deals are available to any airline, as long as it generates the traffic. A negative ruling, however, could set the stage for an EC investigation of Ryanair's deals with other airports. "If the inquiry results in higher charges, it would have a very negative effect on Ryanair's margins," says van den Brul.

O'Leary's not bothered, at least for now. He's currently talking to 40 new European airports and scouting out future options in Eastern Europe. When he's not travelling in Europe, he's back at headquarters at Dublin Airport, where he joins in the company's Thursday football match. He recently acquired a Mercedes taxi and driver, enabling him to speed through Dublin's notorious traffic in the bus and taxi lane. "I've always been a transport innovator," he jokes. Millions of Europeans flying Ryanair planes would agree. By Kerry Capell in London


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