March 25, 2013

Chutzpah, vision and Ireland's biggest deal

Posted in Sunday Business Post · 31 comments ·

Last week saw the largest corporate transaction involving an Irish company ever. Yet it got precious little press coverage. Indeed, during the week, rather than going big on this huge business story, RTE twice carried a story about the company, Ryanair, being fined a modest €375,000 by the Dutch consumer agency, rather than focusing on the $16 billion deal announced last Tuesday.


Quite why Ryanair’s modest woes rather than its major triumphs tend to get more media coverage is a matter for another discussion, but what is clear is that the deal to buy 175 planes, at a list price of $16 billion, represents an enormous vote of confidence by Ryanair in its future.


It has been clear for a while that Ryanair’s aggressive expansion could only be sustained by expanding its fleet – but there is expansion and there is expansion. This constitutes a mega deal and it tells us as much about the state of the airline industry, and the state of the seller as it does about the chutzpah of the buyer. Details emerging suggest that Ryanair has got the deal of the century.


Its press statement said that it paid a price which is “not dissimilar” to the price it paid for jets in 2005. Back then, Ryanair paid only 53 per cent of the list price.


Ryanair won’t tell us what the planes cost this time around, but if it is a similar deal, it implies that Ryanair has secured 175 planes for the price of about 85 or 90. The list price for a 737 is in the region of $85 -$95 million if a rich company wanted to buy a single one. The rumour is that O’Leary got his planes for half that.


This move would be yet another example of Warren Buffett’s investment mantra which Ryanair follows of “buying when everyone is selling and selling when everyone is buying”. This strategy was best evidenced by Michael O’Leary heading to Seattle to meet Boeing and place an order days after 9/11 in 2001.


He is at a similar game now, sensing Boeing’s weakness and playing his hand.


This time around, Boeing is weak because of the problems you might have read about, with the launch of its new 787 Dreamliner jet. This is supposed to be the new big thing in long-haul travel, but there have been all sorts of glitches. The selling point of this new jet is that it is built in one piece, so there is no need for rivets joining bits of the plane together.


This brings down its weight and, as a result, will save between 18 and 20 per cent on fuel costs. But the problem is the electronics on test flights haven’t been up to scratch, delaying its launch. Therefore Boeing is in need of good news to counter this PR problem.


The second reason Boeing needs a good news story is that it is being hammered by Airbus in the short-haul market, the market in which Ryanair reigns supreme. This is because Airbus engines are designed with bigger fans, which are more fuel-efficient than Boeing’s. As a result, Airbus is out-performing Boeing by as much as eight to one in the new order business. But, of course, Airbus planes are more expensive and, when you are dominating your rival, you don’t discount your prices, which is why Ryanair is dealing with Boeing, which is now at its weakest.


The other reason Ryanair got a good price is that it is buying the last big batch of an old model of plane. This, as you can imagine, was hugely significant for Boeing. Boeing is upgrading its planes and is going to unveil a new, more fuel-efficient model by 2018. Ryanair knows this and so has come in and bought all the old stock. What manufacturer would not like a deal whereby a client came in and lifted most of the model the manufacturer itself was intent on phasing out?


So, what’s Ryanair’s risk?


Well the risks are two-fold. The first is that the airline will be left in eight years time with an outdated fleet, which is less fuel-efficient than the new models of both Boeing and Airbus. The second is that the market will dip and it will be left with too many planes. On the first concern, Ryanair knows that it will have less fuel-efficient planes in the future, but its management is taking the view that it is better to have capacity today, take advantage now and worry about ten years’ time in ten years’ time. They have probably learned from Boeing’s 787 experiences.


There is a huge difference between talking about a new model and actually delivering a new model. So Ryanair may be gambling that Boeing will slip up and it will be in pole position.


The second concern that the market may dip is something that Ryanair has obviously decided is a small risk. Unlike other airlines, it has the cash now and it is going for it. For example, Ryanair made €750 million in cash last year. The difference between this cash take and the €500 million of recorded profits is depreciation on planes.


Ryanair calculates that, after this deal, it will have the capacity to drive costs even lower and squeeze its competitors. According to its press release, Ryanair will end up – after retiring planes and giving back leased planes – with about 410 planes in total, up from the present fleet of 305 planes.


The company has said that it intends to increase passenger numbers by 3 per cent per annum for the next four years, bringing total passengers flown from today’s 80 million to 105 million by adding four to five million passengers per year.


To put this expansion in context, adding four million passengers per year would mean that Ryanair would create an airline the total size of Aer Lingus every two years.


The model is the same, lower fares than the rest, based on lower costs. In the Ryanair view, there are people who want to travel and will pay €70 to go to destinations that most people never contemplated in the past.


The price, rather than the destination, drives the decision. This is quite different from most tourist boards, which claim there are people who, for example, have always wanted to come to Dublin. Ryanair’s counterclaim is no, there are people who want to travel for €70 and, if they happen to go to Dublin, fine, but they will go to Aarhus in Denmark or Girona in Spain for that price just as happily.


Once the airline creates a route, the evidence is that people reinforce the demand for Ryanair by telling mates. The initial route decision is validated by word of mouth by people saying: “I went to a great place last year for €70, you should go too.” Given its growth rates, it is hard to argue with Ryanair.


O’Leary obviously thinks that Europe is full of opportunity, with countries where people are still used to paying €200 for a seat he can provide at €70. A quick look at the figures suggests that he is not wrong. Ryanair is the second-biggest airline in Greece, the biggest in Poland; it is strong in Germany and, unexpectedly, the second-biggest airline in Morocco. It is growing rapidly in Scandinavia. This is also happening because there are lots of under-used airports.


Given that the Ryanair nightmare is for these shiny new Boeings to be stuck on the ground because of congestion, making no money for the airline, it’s not surprising that it avoids the big airports. For the passenger, this is never ideal, but, given the way 80 million of us have responded to the Ryanair view of things, it is clear that we get over such inconveniences.


The biggest deal in Irish corporate history has been done by arguably the country’s most audacious company, driven by its most single-minded leader. Now this is truly a good news story worth reporting.
Like it or loathe it, Ryanair is doing the business and, after last week’s deal, it is doing it with a seriousness and an intent rarely seen – not only in this country, but in any country.

  1. alawlor

    Bravo David. When can we coax Mr O’Leary and your fine self into government. Well done Ryanair. A lot of people moan about the service but you just cannot beat the value for money. Nice article

    • jaysus

      O Leary would be a disaster in politics, why do people think he would be someone to vote for?? Ask his cabin crew how they enjoy working for peanuts. You never see anyone over 30 or who isnt spanish or polish working on his planes, says a lot.

      As for low cost, those days are long gone especially if you travel with children. Flying with SAS to Eire in june for about 60 quid more then the quote from Ryanair, difference: 25 kg baggage each plus bookable seats with SAS and they dont depart at 6am! If I paid for luggage and booked seats with Ryanair the price difference is only 60 quid. SAS are way better to fly with worth the extra, think its a trend that will continue….

      • Original-Ed

        He’d bring our public service pay into line with our neighbours – doctors and consultants would be on half what they now get. Law and all professions would no longer be able to gouge our hard pressed public.

        Ryanair profit margin averages out at around 6 euros per passenger, not exactly extortion, is it?

        Michael’s pay is relative low compared to that of Aer Lingus’ CEO – he’s got 305 planes to look after, Aer Lingus has only 44.

        He’s not a gouger as the union leaders would have you believe.

  2. Stephen-tds

    RTE did actually cover it, just on the business side so away from everyone really.
    Still you raise a very good point. The average person is only interested in bad news and the news organisations target that.

    As for Ryanair, I’d argue that it isn’t just the price people like. I’ve chosen Ryanair to places where other airlines fly to for cheaper. Ryanair is great because you know exactly what you are getting. A seat on a plane run like a bus service. Want something extra, then sure pay for it.

    • hibernian56

      Exactly, its funny how younger people don’t complain as much. My first couple of time s using them I wad horrified, simply because of memories of the Aer Lingus full breakfast on a flight to London!!!
      Once you think its a bus, have a beer and relax all is good

  3. hibernian56

    Without Ryanair most of use wouldn’t move out if this place.
    O’Leary is not a game player. This is why the civil service / vested interest propaganda machine blanks Ryanair. There also seems to be a huge resentment of Ryanair due to their views on unions etc..

    Did the Sunday Business Post have an article on it?

  4. pacoh

    I am genuinely more than surprised by the gusto with which you laud the Ryanair deal, for two reasons, both of which you actually give in this piece.
    Firstly, you express surprise at RTE (et al) giving priority to stories about fines imposed by consumer protection agencies on Ryanair and then you surmise that if the companies expansion plans come to fruition it “would mean that Ryanair would create an airline the total size of Aer Lingus every two years”; surely the point you are missing with Ryanair’s business model is that the consumer (ie low-cost/budget travellers) are expressing grave dissatisfaction and complaining, in considerable numbers to such consumer protection agencies. The damage to their reputation alone (not to mention the industry’s reputation) will determine whether this expansion plan will succeed. Personally (and I have no “axe to grind” with Ryanair other than disliking intensely their modus operandi and their apparent disregard for the consumer and the effect these have on the overall business reputation of Ireland (c.f. the considerable number of negative articles which start “Ryanair, the Irish low-cost airline…..”), my feeling is that a ceiling, in terms of low-cost traveller numbers, is very close and such expansion plans are best suited to “Alice in Wonderland” rather than rooted in sound analysis of future trends.
    Secondly, (and this is where I am surprised by your analysis) surely an ‘agent provocateur’ (and I mean this in the nicest way possible) economist, such as you, must be sceptical of such grandiose expansion plans? Notwithstanding the growth in the low-cost sector, particularly for Ryanair, and notwithstanding the back-story of Boeing and their keenness to do a deal (rather than no deal at all) and not withstanding the exceptional (surmised) price Ryanair must have gotten, are we to believe that this airline sector has no ceiling, that it will continue to expand ad infinitum? Because essentially, your projection that if Ryanair DOES see this level of growth, it will because there will be no serious, sustainable competition in this market sector (unlikely) and their target consumer group will grow considerably/dramatically (no evidence for this).
    Finally, (and I hesitate to congratulate RTE for anything these days) but perhaps the media WAS wiser to highlight proven consumer abuses rather than some cloak and dagger deal done with Boeing (timed perfectly for Enda Kenny’s audience on St Patrick’s Day)?

  5. pauloriain

    Good to see the realist analysis of Ryanair here. So many people go out of there way to criticise Ryanair and just can’t acknwoledge that without Ryanair putting manners on the rest of them, we’d still be taking the boat and train to catch flights to the rest of the world.

    The critics have a choice, why don’t they just shut up and choose a different airline. Ryanair is an enabler.
    How much export business is gone, because poeple can get on a plane and go meet customers.

    • Original-Ed

      Agree 100% – They’re a god send to the small exporter – their destination coverage is enormous, they’re punctual and their fares are affordable.

  6. Puschkin the Black and White Cat

    I first travelled to London as a young man with Aer Lingus in 1982 the cost was 210 IRP (266 Euro return), it was 7 years before the creation of Ryan Air. I was earning 400 IRP (508 Euro) per month as a graduate computer programmer. A flight to London by Aer Lingus in 1980 was half a month’s pay for a graduate with 2 years experience.
    If it were not for Ryan Air the Irish people would have been effetely denied travel by the State.
    Therefore we can assume that a without Ryan Air (and a few Croke Parks) it would cost more than 1,500 Euro to fly to London today. When I say this people often argue with me, but please do remember the ESB is the most expensive power in the WORLD.
    More pernicious than the Berlin Wall Are Lingus ensured the Irish people would be captive in their “wonderful little country”, sure, isn’t that grand altogether !!!.

  7. Adam Byrne

    Two today, impressive.

  8. Boeing V Airbus

    The real issues here are all about America v Europe or more importantly Common Law v Code of Napoleon .

    I disagree with the wisdom of Ryanair making this decision of brinkmanship when they do not have any cards to play .Their tactics are absolute pure bluff and a very risky gamble to pacify the shareholders of Ryanair .Who will be retiring soon from Ryanair that hold significant stock ?

    The ENARCHY ( aluminae of ENA Ecole National de Administrif ) hold ALL THE POWER in Europe and can DISTROY Ryanair with a blink of an eyelid.

    Ryanair depends on the only market they have and that is Europe .I do not believe that EU Commissions will allow the policies that weaken Airbus to profit foreign shareholders who are outside the EU ie citizens of USA .

    Continental practices are so different to what we have in our mid-Atlantic American dream culture . Ryanair is a PAWN played in the Casino of Europe and the rules in that Casino can change and WILL .
    Time is the Factor .

    Check the route map of Ryanair and you will verify that there are No Bases in France and for a Reason . ENARCHY makes sure that they will be NONE . Policies will soon change in the EU and currently have been spoken about and in the future a reduction of BASES will increase elsewhere in EU .

    I believe many of these new aircraft will soon be flying in Africa under a new brand low cost carrier and a reduced capacity Ryanair will have more Airbus Crafts to ensure their survival .

    I see parallels between the Cypriot Bad Banking and the Irish Aviation Funnel Vision .

  9. lff12

    Good piece, David.

    Ryanair ALWAYS have tended to take advantages of lower contract availability – they hedge on fuel also to take advantage of price fluctuations.

    As for their routes – I think they long since realised that the “real” business isn’t places like Dublin but high capacity countries such as Germany and the UK. Aside from Dublin, Irish airports are far too small to sustain the kind of business RA need.

    On the other hand, they do use “loss leaders” to drive competition out of Irish airports. Only Aer Lingus has been big enough to fight this – and just barely. You’ll never seen them doing a run from Dublin to JFK or Boston though – they don’t touch long distance – none of the “low cost” business take on what is regarded as “high risk”.

  10. Louis Hoffman

    Suggest you read up a bit on Air plane manufacturers. Neither Airbus or Boeing build Engines!! Rivets the main reason 787 is lighter? Hmmm

  11. 5Fingers

    Ryanair was an opportunistic model which worked well in the early days. Just like Ireland was back in the late 80s. It is nearing the end of its life and will goo poof! like the Celtic Tiger. Building routes to nowhere today. No courage to really go after the new Asian markets. It is becoming king of the irrelevant. They are not cheap anymore – not by a long shot when you peel back the headline pricing. Ryanair has to go long haul intercontinental or start a new type of business or die. Time is running out and the guys there are not evolving – I predict a sale at the first opportunity – Chinese operation? who knows? I respect O’Leary’s genius – but make no mistake, he’s out for No. 1.

  12. AnthonyB47

    Many workers from the United Kingdom have left their jobs with Ryanair and as result the company is recruiting now contract labour from agencies as far away as the Baltic States and Poland. Pilots were recently told that in order to graduate from older planes to newer aircraft, they would have to pay for their own retraining.

    A cabin crew who works for Ryanair writes her experiences on a website where she says: ‘’Ryanair does not care about its cabin crew and just takes the most they possibly can squeeze out of us. After a twelve hour day without a break, I do not have the energy to be nice to passengers or check that my nail polish is still on. Come on Ryanair start valuing what we do because without us you could not fly4’’

    The employees and especially the cabin crew of Ryanair tend to be not dealing nicely with passengers. The statement of the employee of Ryanair above explains us what the cause is, the employees themselves work hard and are undervalued and have to work many hours without a break this leaves them exhausted and stressed and makes it hard for them to deal nicely to passengers. Not only will there be a high turnover but also Ryanair might lose more customers over time because of the bad customer service of the unmotivated and tired employees.
    Wake up people this business module is not good for workers or competition. Just look at Irish ferries exploiting workers and how lager retailer’s exploiting suppler and consumers. We need competition and we need unions. If you’re a fan of O Lery and also working and employment rights . I suggest you check your values, they seem conflicting. Your children will be slaves in the future with this man way,

  13. michaelcoughlan


    I read this article an interpreted it in the way it was written to be intentionally upbeat and thankfully someone writing in the papers is doing his bit to be positive.

    Could I respectfully suggest however that the more important story needing to be told about Ryanair was the fact that it was only founded by Tony Ryan after he had 34m written off with a down payment of 4m when GPA collapsed into nothing during its failed attempt to float on the stock market. The current chair of AerLingus Colm Barrington lost over 10m that time. The Late former Taiosech Dr Gareth Fitzgerald who had his debt written off by the bank also lost his house.

    Pity the same lessons couldn’t be applied by the people running the government.

    Back to Ryanair.

    I’ll give you any number of reasons why they are being ignored. First of all Ryanair manufactures NOTHING as in nothing at all. It provides a service. And what service does it provide? It basically fly’s you from one wheat field in one shithole part of a departing country to one disused airbase in some other shithole part of the same or some other country with No Value added at all to a client’s enterprise like an architect, plumber, lecture etc. Ryanair are merely gatekeepers David. Furthermore you can be sure that the way its business is structured it is designed to minimise the payments of taxes. Also when Mr O’Leary announces another 1000 or so jobs being created all that happens is a 1000 or so Latvian or Lithuanian teenage girls get giddy.

    So what exactly is Ryanair? Ryanair is basically a collection of corner shops with wings, merchants if you will, (Mr O’Leary started off as a retailer in Walkinstown after he qualified as an accountant) who only operate 5% of their merchant activity in Ireland. And in my view add nothing of value at all here. On top of that the accountant in charge of it is systematically driving the pay and working conditions of the thousands of people employed there into the gutter doing an enormous amount of damage to this country in ensuring that those misfortunes employed there have no disposable income etc. (which would contribute to the velocity of money in the economy and help drive recovery). Mr O’Leary’s business model will only help make things WORSE. The business model he employees will only continue to succeed so long as some employers somewhere pay staff properly thereby giving them the disposable income to fly in the first instance.

    Ryanair is headed by an individual who not only does not see how appalling his foul mouth, ignorance, and relentless aggression are viewed as dreadful vices he actually sees them as virtuous.

    Recently he was on the Late Late Show and he referred to the true professionals in the organisation (the Pilots) as taxi drivers. There’s nothing wrong with being a Taxi driver but it fades into comparison landing an Aircraft with 200 people on board in a crosswind in fog and sleet in the middle of the night in some shithole part of Poland with anything Taxi Drivers in this part of the world have to deal with. And then subsequently have your courage and professionalism discounted so disgraceful by the accountant in charge (We know what happened to this country, banks, regulators, and auditors offices when they were run by accountants).

    I put it to you that if a jet had to be landed in the Hudson would you rather have an individual like Mr O’Leary at the controls or Mr Chesley Sullenberger the guy who did it for real and had the moral and physical courage to walk a sinking aircraft TWICE after all passengers had escaped to ensure no one was left behind. I have never heard Mr Sullenberger behave so disgracefully either (When your supper cool you see humility and service as true virtues) but I know who I’d want in charge and it isn’t Michael O’Leary.

    When called to give evidence afterwards Mr Sullengberger complained bitterly about revolving door managements and dreadful pay and working conditions forcing him and his co-pilot to take part-time jobs to provide for themselves and their families? Thanks to accountants!

    Ryanair isn’t a success story David in the same way as G-Sucks isn’t a success story in the truest sense of the words they are aberrations of the modern hyper globalised world and sooner or later Mr O’Leary will overplay his hand like all the other accounts. When that happens and his day of reckoning comes I sincerely hope he gets the living shit kicked out of him unlike all the other accountants (regretably) who have systematically destroy one institution and virtue after another in this great Republic.

    Yours sincerely,


    • MrADC

      “Destroy one institution and virtue after another in this great republic”
      …err take of the rose tinted (rose obscured?!) visor. Ireland’s anchor institution was the church and it has proved itself to be less than virtuous, ditto the government, ditto the banks, ditto builders, ditto developers etc etc

      The only one with any integrity and virtue is O’Leary. He has never, ever pretended to be anything he isn’t. He sells cheap air fares to those who want them. And he is spectacularly successful at this and doesn’t swindle, steal or even rape as per all the other mentioned “virtuous institutions”

      BTW the taxi driver analogy is pretty bang on. Raise enough cash and enrol in a CPL/ATP flight school and anyone can fly a 737…we’re not talking space flight, writing a Nobel worthy piece of literature or … say… Something unique like managing an airline through one global catastrophe after another and always remaining on top and besting all your rivals. O’Leary deserves the plaudits and the snipers can just…to quote the man: “f@&k off!”

      • michaelcoughlan


        You clearly would never make it as a pilot because your first paragraph is so shortsighted; Your comment agrees with mine. All the institutions were destroyed one after another including the church.

        I’m not into foul mouthed responses like you so I’ll leave that stuff to you and Mr O’leary.

        By the way Hitler gave jobs to those who wanted and needed them paid for with the tooth fillings and savings of the Jews. He reduced unemployment in Germany from several million’s in the early 1930′s to several hundred thousands in the late 1930′s. Is he to be respected for his “success”?

        I would never claim that Mr O’leary is dishonest. Nor even Hitler. Hitler blamed the Jews for all manner of evils and when in power overtly went about humiliating and ultimately destroying them and he never pretended he was going to do anything other than that either.

        As for the word rape it was that very word Mr O’Leary used when describing the deal done with Boeing just after the attacks on 9/11.

        Thanks for your response.


        • joe hack

          Michael Excellent

          If everyone earned 1 euro a week we would be all OK but who could afford to fly. the race to the bottom by the other Micheal.

    • Tony

      “Furthermore you can be sure that the way its business is structured it is designed to minimise the payments of taxes. Also when Mr O’Leary announces another 1000 or so jobs being created all that happens is a 1000 or so Latvian or Lithuanian teenage girls get giddy.”

      When those giddy Eastern Europeans get jobs with Ryanair, their taxes are paid to the Irish Revenue, as they become Irish employees with an Irish contract.

      At least part of what David says above is bang on, as I’ve seen friends decide where to go based on the price of the flights – and little else. Did you ever see a gang of fellas take a stag weekend in Northern Italy? I did. It seems they had a ball.

      • michaelcoughlan

        “When those giddy Eastern Europeans get jobs with Ryanair, their taxes are paid to the Irish Revenue, as they become Irish employees with an Irish contract”


        I wont wrong anyone but I can tell you for a fact that when the Ennis Bypass was constructed the workers were hired on Turkish contracts and paid Turkish wages which were defacto €2/hr. The min wage CIF rate for a General operative at the time was €15/hr and for all the exploitation going on they accountants in charge still LOST €30m on a €145m Euro contract.

        Just because Mr O’leary turns up on TV talking about all the Paye/Prsi being paid dosen’t mean it is in actual fact happening and of course Mr O’Leary is the one reprimanded by a judge for lieing through his hole to the court.

        • ryanairdontcare

          The reason why this 16 billion Boeing deal is not such a big surprise or worth a bigger news frame,Ryanair and Boeing ,sorry David Bonderman,Ryanair chief and Boeing CEO together by the hip one can say…Looking at the money being used,shareholders money in buying aircraft with money going to senior Ryanair members,Ryanair’s moto, what extra can we get,…Ryanair lease up to 40% of their aircraft and this order is in no way showing Ryanair customer numbers growing,O;Leary in court as been proven to be a liar and can not be trusted..Probationary cabin crew are exploited the very same way as Pilots are,Paid less than 10 euro per hour..Pilot homes raided lst week in Germany..

  14. Original-Ed

    Year’s ago we used to marvel at the size of the Greek Shipping fleet with envy. If only we could have a flag carrier on that scale it would enhance our image abroad from that of Guinness swilling Potato eaters.

    Then along came Michael O’leary and now most Europeans are envious of us – they may carp on about the rigid rules but still fly Ryanair all of the time.

    O’Leary got a rough ride here when he started up and he doesn’t owe any favours to anybody as a result.

    I saw it happen first hand – Aer Lingus put every possible obstacle in his way but he still succeeded in spite of them and their political friends.

    I wouldn’t be so uppity as some here are – our success stories are very, very few.

  15. CorkPlasticPaddy

    Yes, thank God for the like of Ryanair amongst others in giving Aer Lingus and the others manners, but as for their service, well, it’s crap!! I flew with them once, but I’ll never fly with them again. Once was enough in my book!!

  16. joe hack

    If everyone earned 1 euro a week we would be all OK but who could afford to fly.

    The race to the bottom sponsored DMcW. or is that the other way about?

  17. So you want a minimum wage that allows all who work able to fly. The trouble with a minimum wage is that that it puts the least skilled labour out of a job at all.

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