Business Irish

Tuesday 21 August 2018

Richard Curran: Real challenge for Ryanair is not cost of union U-turn - it's management culture

Michael O’Leary has helped Ryanair soar to new heights but it remains unclear as to whether his future is with the airline or not
Michael O’Leary has helped Ryanair soar to new heights but it remains unclear as to whether his future is with the airline or not
Richard Curran

Richard Curran

What will be the price of industrial relations peace at Ryanair? It is a question that has been exercising management, stockbrokers, analysts and of course investors. That is not to mention its thousands of staff, who may feel they will be positively affected by the volte-face the airline has done on the issue of recognising trade unions.

Ryanair is adamant it will amount to no more than €100m per year. A manageable number, but can anyone really say for sure? The alternative to the trade union U-turn is industrial relations strife, strikes, flight cancellations and a potential implosion of future flight bookings.

Ironically, it is easier to put a figure on the cost of strikes through lost bookings and cancelled flights. But the long term cost of a unionised Ryanair is actually harder to quantify.

Going down the union road isn't just about pay increases. It is also about rosters, shifts, holidays, other work conditions - not just cash.

Ryanair is financially well-equipped to deal with the costs at this point in time. It is enjoying record growth, record profits and a tried and trusted business model. Nevertheless, accepting a unionised workforce may be enough to permanently add cost to the operation which in turn would slow down some of that growth.

The question is whether that is such a bad thing at this stage in the company's evolution and development?

Davy Stockbrokers analyst Stephen Furlong estimated that Ryanair's cost per passenger is around €27 excluding fuel, which is about 50pc lower than that of Easyjet. Staff costs account for just €4 of that difference, which suggests Ryanair can still enjoy significant productivity gains on its rivals in a unionised situation that leads to higher pay.

The shortage of pilots internationally has shown that pay rates were likely to go up anyway. It is difficult to say how much extra wage costs might accrue from a process of engagement with trade unions beyond other pay awards that would be given anyway. O'Leary had promised to improve pay, conditions and contracts back in October.

In this new unionised scenario, Ryanair's business model would have to evolve, but it doesn't mean it is broken or permanently wounded.

On that basis the fall in Ryanair's share price may have been overdone earlier this week. Analysts believe that even with a new approach, the airline can still carry 200 million passengers year by 2024.

Ryanair shareholders dumped the stock when news of the strike emerged. Some of them dumped even more of it after the company surprised everybody by saying last Friday that it would, for the first time in its 32-year history, recognise trade unions.

That was a reaction to the shock and the subsequent uncertainty, why wouldn't they move quickly?

Ryanair's market capitalisation shed around €2bn between last Thursday and Monday of this week. The shares drifted back to around €14.61, levels similar to where they were a year ago. They had hit €18.59 during the summer.

But investors have been sitting on massive gains. Shareholders who bought Ryanair stock three years ago were buying at €9.60.

If you bought five years ago, in December 2012, you could have bought for €4.76. So some shareholders are sitting on five-year gains of 278pc or three-year gains of 87pc, excluding dividends. Naturally, they would react quickly and take a chunk of that profit off the table once uncertainty hits.

The biggest problem for Ryanair future won't be stumping up any additional costs required in a unionised scenario will be the challenge for management and the culture of the organisation.

Take the last days, for example. When pilots announced a one-day stoppage at Dublin airport, Ryanair's reaction was swift and brutal - as expected. On Monday December 11 a spokeswoman for the airline said the proposed strike: "was more PR activity by Aer Lingus pilots group IALPA, to distract from their failure in negotiating a paltry 3pc pay increase for Aer Lingus pilots".

A company statement said that while disruption may occur, it believes this "will largely be confined to a small group of pilots who are working their notice and will shortly leave the company".

Senior executives warned if pilots in Dublin supported any action, the company would withdraw benefits tied to its existing collective agreement.

Fast forward just three days: Peter Bellew, chief operations officer, is addressing pilots in Stansted. Mr Bellew, who only rejoined the airline a few months ago, tells the pilots Ryanair grew too fast, had a culture where people were discouraged from raising issues, and has become "miserable" even at head office. He said the situation had become far too adversarial, and said it was a time for cool, calm heads, adding that his biggest concern right now is trying to get pilots to remain at the company.

"Everywhere I turned," said Bellew, "I could see that people were asking for small things to be done and they just weren't getting done. Or not only were they not getting done, they were getting told: 'piss off; I don't want to know about this'."

The next day, Ryanair announced that it would recognise trade unions for the first time in its history.

So what happened inside the senior ranks at Ryanair between Monday and Friday of last week? It would be very hard to believe that everybody, from senior management to the chief executive, to the board, all agreed instantly on what was the best response and course of action.

It is also hard to understand how Peter Bellew's very honest and open comments last Thursday cannot reflect in some way on the person who has been running the company for the last 20-odd years - even if he suggested those at fault had left. After all, they work for the person at the top.

But Michael O'Leary came out of the traps yesterday saying union recognition was his idea. He was taking ownership of the change. Instead of a massive climbdown, this was a master strategy to allow it compete in the French market, where union recognition would be a pre-requisite.

O'Leary moved to dampen speculation that he might leave because he wouldn't want to or wouldn't be the best placed to run a unionised company.

O'Leary has proven himself to be versatile when he needed to be and the financial performance of the airline reflects that.

The question is whether sitting down on a regular basis with trade unions to decide the future operations of the airline he has built up, is a step too far for him personally.

He could always decide that the job is no longer as satisfying as it was. His five-year contract is up in 2019. He says he isn't going anywhere now, but how will he fell in September 2019? O'Leary had already said last year there was a fifty-fifty chance he would retire when the contract ends.

But equally, he might maintain his energy and determination to reach the 200 million passengers a year landmark.

If Ryanair's share price fell on the back of a decision to recognise trade unions, imagine the free-fall reaction if O'Leary were to announce that he was going in the short term?

And bear in mind, he owns 4pc of the airline himself, currently valued at around €700m. He doesn't strike me as someone who would readily trust the performance of that much of his own money to someone else.

Either way, the biggest challenge for a unionised Ryanair isn't the financial cost but the management culture.

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