Is This Any Way To Run An Airline?

Michael O'Leary is sitting in his spartan office on the outskirts of Dublin airport, wearing headphones and crooning along--badly--to the U2 classic "Bad." "If you twist and turn away," he warbles, in a key that makes a visitor wish a jet would roar overhead. The music is coming from a handheld device about the size of an Etch A Sketch. It's a digital media player, equipped with music from 100 CDs and hours of video: cartoons, sitcoms, even first-run movies. Starting next month Ryanair, the no-frills airline O'Leary has turned into an industry darling, will begin renting the devices to passengers for $6 per flight. The plan has all the markings of the strategies Ryanair has made famous. The handheld units are far cheaper than installing the seat-back TVs other airlines use, and renting them gives Ryanair a whole new way to squeeze money from its passengers during flights. Says O'Leary: "We think this is going to be the next really big thing up in the air."

If his track record is any guide, the hyperbole may prove prescient. Over the past decade, O'Leary has reinvented the European airline industry and driven down fares across the continent. While his strategies owe much to Southwest Airlines, the pioneer in low-fare flying in the United States, industry observers credit him with going beyond imitation to find ways to improve on the model.

That's one reason Ryanair's ascent offers lessons far beyond the airline industry. The company is already a case study at Harvard Business School, used to illustrate how competitors respond when a new player enters a business. And O'Leary, who routinely garners headlines for trash-talking and outrageous stunts (he once drove a tank to a rival's headquarters to denounce its high fares), could offer any executive lessons on using publicity to help build a brand. Looking ahead, O'Leary is toying with some revolutionary ideas about pricing: he envisions a day when Ryanair gives away the bulk of its tickets and makes money by selling things to its captive in-flight audience.

Ready for a tutorial from the world's best airline? Buckle your seat belt.

Like many start-ups, Ryanair took a few years to get off the ground. Founded by veteran Aer Lingus executive Tony Ryan, the airline began offering $180 flights between Ireland and England in 1986. Prior to Ryanair's launch, getting from London to Dublin required either a $400 flight or a nine-hour journey by ferry and train. While Ryanair's sales grew, profits were elusive. "In the early days the company was trying to be everything to everybody--they were trying to provide service and amenities comparable to Aer Lingus and British Air, but at a lower price," says Jan Rivkin, a Harvard professor who's written on Ryanair. That began changing in 1991, when O'Leary, an accountant who'd become Ryan's protege, visited Southwest's headquarters in Dallas. At the time, Southwest was already garnering accolades as the industry's big innovator, though it hadn't yet expanded to become a national airline.

O'Leary liked what he saw. Then as now, Southwest used a single type of plane, the 737, to keep maintenance costs down. It shunned assigned seats and in-flight meals, providing service more akin to Greyhound than American Airlines. Its employees worked hard to cut turnaround time, allowing aircraft to spend more hours in the air. Most important, Southwest avoided major airports and the hub-and-spoke system of connecting flights favored by bigger airlines. "It's like everybody drives into the city during rush hour so they can all swap cars to drive back out," O'Leary says. "It's nuts--the most inefficient, ineffective, most expensive way to do it." Instead, Southwest flew point-to-point, using smaller airports like Oakland and Providence instead of San Francisco and Boston. Flying back to Ireland after a few days with Southwest 13 years ago, O'Leary laid plans to replicate the strategy.

Over the next decade he did even better. In addition to adopting the Southwest approach of standardized planes and direct flights to outlying airports, O'Leary attacked costs. He eliminated seat-back pockets to make it easier to clean planes. There are no blankets or pillows onboard Ryanair. There are no free drinks or snacks--the company charges extra for everything. Feeling airsick? Plan ahead: vomit bags are distributed only by request. If your luggage weighs more than 35 pounds, you'll face stiff charges. There are no frequent-flier miles, no commissions for travel agents and no refunds. "He's trying to cut it down to exactly what the customer wants," says aviation consultant Michael Boyd, who half-jokingly adds that he wouldn't be surprised if Ryanair instituted pay toilets. Says O'Leary: "Our trick is: can we shave 30 cents per passenger? When you're serving 30 million passengers, that's an awful lot of money."

To make those numbers, though, has required cuts that haven't always gone over smoothly. In "Ryanair: How a Small Irish Airline Conquered Europe," author Siobhan Creaton reports that "some newspapers now have columns dedicated solely to Ryanair customer gripes." For years the company charged extra for passengers needing wheelchair assistance. Merion Williamson of Essex, England, has flown Ryanair more than 50 times, but even this loyal customer complains about the price of onboard sodas, the absence of assigned seating and the long delays waiting for luggage to be unloaded. "You get what you pay for," she says, admitting that she often vows never to fly Ryanair again--but she always does. O'Leary, who describes the process of "weaning" customers off the frills offered by high-fare competitors, is unapologetic: "You paid us a fare of $19--go away."

Today Ryanair's average ticket costs about $47. According to the airline's calculations, that's 55 percent less than its closest European rival's and a whopping 570 percent lower than British Airways'. Measured by revenue, Ryanair is roughly one fourth the size of Southwest, but it has more planes and a third higher sales than America's hottest airline, JetBlue. Though Ryanair's stock has dropped this year as a brutal fare war has crimped profits, most analysts remain upbeat. The reason: no competitor has found a way to match its low costs.

When Harvard students study how established airlines like British Airways respond to Ryanair, they wind up discussing how difficult it is to find an effective defense against a low-cost competitor. "The most common response is to start a low-fare subsidiary," says Rivkin, their professor, and several big airlines did. "The problem is, you accelerate the cannibalization." O'Leary is blunt about the strength of his hand: "Once you become lower-cost, lower-fare, it's an unstoppable model."

Faced with a low-cost rival, some competitors try another tack: moving upmarket. In discussing Ryanair, O'Leary constantly refers to Wal-Mart as his model. His point is simple: whatever the industry, the lowest-cost competitor will always win. But in the United States, Target has carved out a successful niche by selling more-stylish merchandise at slightly higher prices. Likewise, JetBlue is winning cultish devotion from U.S. fliers for low prices plus frills, which include seat-back satellite TV and comfy leather seats. "They're not the lowest cost in all cases, but they've created tremendous allegiance," says James Wyndbrandt, author of "Flying High," a book on JetBlue. While no European airline has copied that approach, O'Leary isn't worried. When people want a flight for the weekend, "the first question is always 'What's the cheapest price?' " he says.

Cheap prices aren't the only reason Ryanair gets attention. In recent years O'Leary has become a media fixture. That's partly driven by his personality: like Steve Jobs or Jeff Bezos, O'Leary is casual (during an interview he wears jeans, a shirt unbuttoned to his sternum and pauses occasionally to kick around a Gaelic football). He presides over a young, zealous work force that resembles a U.S. dot-com. (Ryanair's average employee is 27, which makes O'Leary, 43 and with graying hair, feel downright old.) O'Leary is also candid and profane, criticizing everyone from rivals to Irish politicians. In its advertising--dreamed up by O'Leary and colleagues, not an agency--Ryanair often invites controversy. In 1996, after a Sudanese airliner was hijacked in England, Ryanair responded with an ad headlined: it's amazing what lengths people will go to to fly cheaper than Ryanair. Says O'Leary: "Usually someone gets offended by our ads, which is fantastic--you get a whole lot more bang for your buck if somebody is upset."

With Ryanair already underpricing most rivals, one question looms large: how deep can its cost-cutting go? O'Leary sees several areas in which he can trim even more. His airline is currently upgrading its fleet to include more planes that carry 189 passengers, up from 150 seats today. That means all the fixed costs of each flight--pilots, airport fees, maintenance--will be spread over more passengers. "They've got a cost structure that allows them to grow... without comprising much in terms of profitability," says analyst Joe Gill at Goodbody, an Irish stock brokerage.

Indeed, O'Leary sees a time when Ryanair's costs decline to the point that many of its customers won't pay anything to board the plane. Last year Ryanair gave away almost 3 million seats free of charge (passengers still had to pay taxes and airport fees). "Basically it's a way to give away seats that would otherwise fly empty in the hope that we will at least get them to buy a sandwich or a drink onboard," O'Leary says. Last year those "ancillary revenues" totaled $180 million, but new initiatives--like those handheld entertainment systems--could drive that higher. O'Leary compares the strategy to the British theater chain UCI, which offers cheap seats to first-run movies and earns its profits at the concession stand. Asked what else he might sell onboard, O'Leary pauses for a moment. "Lap dances?" he says, then asks to strike the comment from the record. In time, if ancillary revenue grows enough, perhaps half of all Ryanair seats will cost nothing, he says.

Undoubtedly there will be turbulence along the way. Gill points out that Ryanair's corporate culture is based on its status as an underdog, but it's fast becoming a Goliath. Then there's the increasing celebrity of O'Leary, a phenomenon that can distract bosses. "He's kind of a folk hero in Ireland," says Trinity College economics professor Sean Barrett. For his part, O'Leary says he'll keep Ryanair wedded to its bargain-basement ways: he says any company that builds a new headquarters, buys a corporate helicopter or whose CEO writes a book is doomed. And with some observers predicting that Europe's fare wars could grow more brutal this winter, O'Leary sounds prepared. "They don't call us the Fighting Irish for nothing," he says. And tough as Ryanair has been so far, this game has a few quarters to go.