Business Irish

Monday 11 December 2017

Ryanair chairman having 'too much fun' to vacate cockpit after 19 years on board

David Bonderman, a co-founder of private equity giant TPG, says Ryanair investment wasn't most lucrative, but most fun, writes John Mulligan

David Bonderman
David Bonderman

First things first: Is David Bonderman wearing matching socks? A little disappointingly, he is. The billionaire Ryanair chairman and co-founder of US private equity giant TPG, formerly Texas Pacific Group, has an irreverent reputation that precedes him - not least for his occasional disregard for the kind of dress sense you might expect from a Wall Street titan.

The 'Financial Times' noted a few years ago how Bonderman - 'Bondo' to his friends - has been known to wear the same sweatshirt three days in a row at investor meetings. But if you've been making a pile of money for them, they are unlikely to care less.

Bonderman (72) has flown in to Dublin the evening before on his private Gulfstream jet to attend Ryanair's annual general meeting (which was on last Thursday), having served as chairman since 1996.

Estimated by Forbes to be worth $2.6bn (€2.3bn), making him the 248th richest person in the United States, the tall and gangly Bonderman ambles unassailed through the foyer of the Radisson Blu Hotel at Dublin Airport just after 8am. Most of the guests, let alone hotel staff, probably wouldn't recognise him.

And very surprisingly, the former civil rights lawyer agrees to talk. He hardly ever does interviews, but says he's happy enough to talk about Ryanair but won't utter a word about TPG. He keeps his word, more or less, with questions about TPG quietly but firmly batted away.

Not known for his love of journalists, the concern is that one wrong question might bring an abrupt halt to the conversation. But we plough on, like diplomats carefully hacking out a ceasefire agreement. He's even courteous enough to offer tea or coffee.

Bonderman, who worked with well-known US businessman Robert Bass before founding TPG with James Coulter (who also worked with Bass), and Bill Price in 1992, famously saw the potential in Ryanair early on. "We thought that the airline had great possibilities, but I don't think that anyone foresaw that Ryanair would be the stunning success that it has been," he says.

Back in 1996, Bonderman had been about to do a deal to invest with Richard Branson in a planned low-cost Virgin offshoot, which would use Brussels-based EuroBelgian Airlines.

Around the same time, the late Tony Ryan, Ryanair's co-founder, had been trying to secure an agreement with British Airways that would have seen the then larger airline take a 25pc stake in the Irish upstart. But those talks had soured early on.

According to Tony Ryan's authorised biography, he had also been talking Virgin about a proposed deal that would have seen 51pc of Ryanair sold to a consortium backed by Virgin and Texas Pacific.

That strategy didn't work out either.

But according to Siobhan Creaton's book 'Ryanair', Ryan met Bonderman briefly in Dublin when the US investor came to thank executives from aircraft-leasing firm Guinness Peat Aviation (GPA) for their help on the restructuring of the America West airline. Soon after, Ryan went to New York in an effort to persuade Bonderman to plump for the Irish airline instead of Virgin's plan. It paid off.

In 1996, an investment firm led by Bonderman and associates at TPG provided £24m (€30m) in loans to Ryanair and £1m (€1.27m) in equity in return for what would be an extraordinarily valuable 20pc stake in the airline. Ryanair now has a market capitalisation of about €18bn, making it Ireland's second biggest company after CRH.

"It was a small investment which turned out nicely," says Bonderman in his soft-spoken, understated way.

While Bonderman has sold virtually all his personal stake, he still owns nearly 7.7m shares in Ryanair, or 0.56pc of the carrier. That holding is currently worth €104m.

It's been a pleasant flight, but not the most lucrative of investments ever made by Bonderman and TPG, whose expansive interests have in the past included other airlines such as Continental.

Despite that, does it rank as one of his favourite plays? "Without a doubt," he says. "It has all the things you'd like to see in an excellent investment: it did well; I liked the people; it was a lot of fun; and I get to be sitting here talking to you 20 years later."

But as Ryanair prepared to float on the stock market in 1997, the relationship between Michael O'Leary and Ryan was apparently strained. Ryan had also founded GPA, but its failure to float successfully in 1992 and its subsequent rescue by General Electric in 1993, worried O'Leary.

It's been said that O'Leary didn't want Ryan on the Ryanair board for fear it might tarnish the airline's efforts at an initial public offering (at the time of that IPO, Ryanair operated 13 routes between Ireland and the UK, one domestic UK route, and two routes from Ireland to continental Europe; today, it has about 1,600 routes).

"That's a little unfair to both of them," insists Bonderman. "Tony was on the board and an important player on the board. He and Michael didn't always agree and Tony was certainly more focused on customers than Michael. They had different views on some of Michael's more outrageous press statements. But basically they got along. It was kind of a father-son relationship in some ways."

At a memorial service for Ryan at his Lyons Demesne estate in Co Kildare following his death in 2007, three Ryanair aircraft did a fly-past. "He and Tony didn't always agree," Bonderman remembers of O'Leary's relationship with his former mentor. "One of my roles was making sure the two of them were speaking to each other. Well, put it this way, I earned my keep in those days."

But it was Bonderman who succeeded Ryan as chairman - a role he's now held for almost two decades. It's one he doesn't intend relinquishing any time soon.

Early in Ryanair's loss-making years, O'Leary (who was on the Ryanair board in the '80s but wasn't chief executive until 1994) had been tasked by Ryan with figuring out whether he could make Ryanair work. O'Leary famously advised Ryan to shut it down. But O'Leary also travelled to Dallas to visit Herb Kelleher, whose low-cost Southwest airline had been on the go since 1967 and transforming US air travel.

"Herb more or less invented this business - credit where credit is due," according to Bonderman. "I happened to be in Texas at that time and we were familiar with what they (Southwest) were doing. One of Michael's first acts was to go out to Texas and look at what Herb was doing. He came back as a co-religionist."

That religion was all about stripping out non-essentials, squeezing costs, getting Ryanair off its knees, and being able to offer low fares. Ryanair was on its way - but not without a lot of turbulence still to come - to being a European powerhouse.

"Controlling cost is a way to get to low, low fares, at a time when it was only Southwest who was doing something like that," Bonderman recalls. "It wasn't obvious that that was the right answer."

Even by the early 1990s, Ryanair's future was still touch and go. In 1992, it still operated a business class, and at times struggled to find enough cash to keep flying. "Michael had a relentless focus on lowest prices, with which I happened to agree," according to Bonderman. "We saw that from our airline investments in the United States. What passengers really cared about was low fares."

He says TPG did a survey years ago when it first got involved in the airline business.

"It had 25 questions about meal-cart service, being on time and so forth. Southwest came last in all categories except for fares, which they came in first, and they came in first overall. We took a lesson from that and Michael took a lesson from that. It wasn't that he disrespected his customers. It was that he thought - and rightly so I think at that time - that what people really cared about and what stimulated carriage, or didn't, was the fares. Michael was relentlessly focused on that."

But Tony Ryan also thought that O'Leary didn't care enough about customers. And it's interesting that Ryanair - having seen the success EasyJet was having by being nice to its customers - has now rapidly set about transforming its image.

"As a business matures, you learn things. In the past 20 years, people's attitudes change, the availability of competition changes, but I think Ryanair has been generally faithful to its low fares mantra," Bonderman says. "We've all heard Michael's quotes on the new kinder, gentler Ryanair. I think the time has come to be somewhat more customer-focused."

But that's not to say it will allow costs to get out of control.

"Number one has to be maintaining low costs and low fares," Bonderman stresses.

And now Ryanair is on a level neither Bonderman nor O'Leary could probably have imagined 20 years ago.

It has a fleet of 315 aircraft that's set to rise to 520 as it aims to carry 160 million passengers a year by 2024. This financial year, which ends next March, Ryanair expects to carry about 104 million passengers and make a profit of as much as €1.22bn. O'Leary has also pledged to try and reduce Ryanair's average fare from €45 last year to €25 within five years.

"It needs to keep fares low enough to stimulate air travel," according to Bonderman. "That's what Ryanair needs to do and that's what Ryanair will do, which why you'll continue to see - notwithstanding the kinder, gentler Ryanair - a relentless focus on costs as a way to keep fares down."

Last week, Bonderman shot down O'Leary's hope of one day operating low-cost transatlantic flights, insisting Ryanair will never do it. O'Leary has previously said Ryanair wouldn't do it, but that a sister company might. It's a non-runner either way, Bonderman says.

"There are no good examples of successful low-cost, long-haul carriers, for a variety of reasons," he explains. "Most notably, the business model isn't the same. If you look at why US low cost carriers are so successful, it's because they offer very inexpensive fares in total terms - not just cheaper for the route, but not for many dollars. By doing that they stimulate the market."

You just can't sufficiently stimulate a transatlantic market, Bonderman insists.

"Say I stimulate the market by offering flights from Dublin to the south of France for €30. I can't offer a transatlantic fare that is cheap enough to stimulate the market. You're not going to go to New York for a weekend for $500, even if it's a great bargain. You might to Paris for €30. You can stimulate that market, but you can't stimulate the market when the pricing is too high." Even if price alone was enough to lure large numbers of passengers, Bonderman says the DNA of low-cost carriers demands punishing aircraft utilisation - something that long-haul travel doesn't lean towards.

"If you're doing eight or ten segments a day, a 20-minute (aircraft) turnaround ten times a day allows you to squeeze in another leg. If you're flying to New York, it doesn't matter if you turn the plane in 20 minutes or two hours - you can't get any more flights. You can't take out the galley and not serve hot food if you're flying eight hours or 10 hours. So all the things that make up a low-cost carrier don't work, so I'm a total sceptic."

Bonderman says that even if tickets were offered for $100 each way, he questions who'd want to spend "the entire weekend" on an aircraft. "Tell me you want to take me to Paris for 20 bucks and I'll say 'great, it's a 90-minute flight'."

But this has come up at Ryanair's board meetings before. "I think the board has been pretty clear that it's not enamoured of transatlantic flying. A few guys have tried to do it, like AirAsiaX for example, and there was Laker Airways. Every one of them has tried it and it always failed. Never say never. Someone may figure something out."

He concedes that despite his scepticism, Ryanair may figure out a way to somehow get tangentially involved in transatlantic travel. "Ryanair occasionally makes investments in other things, as it did in Aer Lingus, hoping for a somewhat different outcome than what happened, and conceivably we could consider doing something offline as they say, but Ryanair isn't flying to the United States."

Despite publicly dismissing O'Leary's longer-term plan, Bonderman says the pair get on well and chat from time to time outside of board meetings. "Occasionally he's looking for advice, occasionally not. Michael and I get along great."

Ryanair announced last week that it will hand €398m to its shareholders - the proceeds from the sale of its near-30pc stake in Aer Lingus to IAG. Ryanair had originally harboured an ambition to use Aer Lingus to generate growth via primary airports in Europe - something that it's now doing itself. Bonderman believes the €1.36bn takeover by IAG will work for Aer Lingus.

"I think it's a good thing for Aer Lingus," he says. "There are going to be three airline groups and the other guys are just not going to make it. Being part of one is going to be good for Aer Lingus. Otherwise it would just have been a high-cost, niche carrier with nowhere to expand and it can't compete with Ryanair on cost, so what's it going to do for a living?"

And will he be leaving Ryanair?

"No. It's too much fun." Like odd socks.

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