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Ryanair is facing a crisis: is O'Leary right person to lead it?

Unrest is growing and the executive's antipathy to unions is not helping

A year ago the prospect of a strike at Ryanair would have been unthinkable. It remained steadfastly non-union, a significant exception to its peers in Europe and North America, where organised labour is very much the rule. The only industrial action the Irish carrier worried about was persistent stoppages by French air traffic controllers.

This week the Irish Airline Pilots’ Association (Ialpa) – affiliated to trade union Fórsa – served notice that around 100 directly-employed members at Ryanair would strike for 24 hours next Thursday in a dispute over seniority.

The German equivalent, VC, began balloting its members for industrial action following what it called the failure of talks on improved pay and conditions.

Separately, the British Airline Pilots’ Association (Balpa), the first union that Ryanair officially recognised, submitted a pay claim to the airline.

To round it off, cabin crew backed by the International Transport Workers’ Federation (ITF) produced a charter of demands on wages, rosters, sick pay, in-flight sales and several other grievances.

Cabin crew in Italy will hold a 24-hour strike on July 25th and crew in Spain, Portugal and Belgium will strike for 48 hours on July 25th and July 26th, five unions said on Thursday.

Ryanair responded in kind. The airline said it has already offered to meet Ialpa 18 times to discuss recognition and pilots’ seniority. When it comes to cabin crew, the carrier says that they are paid up to €40,000 a year, have predictable five-days-on, three-days-off rosters that exceed industry safety standards, while they get sick pay and unpaid leave.

Unrest

It is little more than six months since Ryanair pledged to recognise unions. For passengers and investors the question is whether this unrest is a “new normal” at the airline, or simply sabre-rattling before all sides settle down to thrash out agreements that will govern their future relationship.

Alex Paterson, Investec’s London-based travel and leisure analyst, agrees that what is happening is disruptive for Ryanair at a key time of year, but suggests that it could be a phase in its developing relationship with the unions. “It could well be that after 30-odd years waiting for recognition, they want to make their presence felt.”

Ryanair let the union genie out of the bottle shortly before Christmas when it was facing strike threats from Ialpa, VC and their Italian counterpart Anpac among others. In a U-turn on a long-held industrial relations policy, it agreed to recognise organised labour for pilots and cabin crew.

The carrier’s about-turn followed an autumn where a mix up over pilots’ leave forced it to cancel thousands of flights, leaving it with a €25 million bill for compensating discommoded passengers.

This sparked unrest among pilots, who favoured jettisoning Ryanair’s employee representative councils for trade unions.

Since December, Ryanair has signed deals with Balpa and Anpac recognising their right to represent pilots in their respective countries. It struck a similar agreement for cabin crew in Northern Ireland and Britain with Unite. When the airline published its full-year results in May, chief executive Michael O'Leary said it had made a promising start to talks with unions.

Seniority

Ryanair has made less progress with Ialpa-Fórsa than with some others. Its chief operating officer, Peter Bellew, and chief people officer, Eddie Wilson, met the union in December and again in January. Since then the two sides have communicated in writing.

The issue over which the union’s members are threatening to strike is seniority. Ialpa-Fórsa raised this separately to recognition, but the two are linked. What it boils down to is they want a transparent system for managing problems such as base transfers, annual leave allocation and other decisions tied to length of service, down to if two captains are flying a plane which one actually takes command.

Ialpa-Fórsa maintains that these decisions have a big impact on members’ lives. Given what they do, pilots are busiest when most others are off, or they have to do their jobs from locations where they would rather not be based. But like everyone else, they have families that want to live in one place and take holidays during the summer when school is off.

Consequently, there is competition for certain bases and leave days, so, as one observer puts it, their employer has to be “equally unfair to everybody”.

A seniority agreement takes these things into account. Ialpa-Fórsa’s statement during this week pointed out that its members were seeking a transparent mechanism that would allow them understand why they were in the base they were in, the order in which they may be transferred, and why they received a particular leave allocation.

Invitations to meet

For its part, Ryanair says the proposals on recognition that it has sent to the union tackle these problems, and include an Irish pilots’ seniority list. The airline maintains that Ialpa-Fórsa has failed to take up its invitations to meet.

It’s a classic industrial dispute, with the two sides saying different things. The question is where does it go from here? Some suggest that Ryanair could stick out next Thursday, re-accommodate as many passengers as it can and shift the blame for disruption on to the pilots.

As the company itself pointed out this week, the Republic accounts for 7 per cent of its overall business, so most of its operations will not suffer.

It has coped with industrial action in recent months. O'Leary said in May that it managed a pilots' stoppage in Germany last December, and a recent round of cabin crew strikes in Portugal with minimum disruption to its services.

The risk is that it may not stop with Thursday or with Irish pilots. Ialpa-Fórsa signalled that there may be further strikes, and it has been suggested that its members could down tools one day a week until the issue is resolved.

While VC’s ballot will run for the rest of the month, if its members vote for industrial action German law requires unions to give less strike notice than here, meaning stoppages there could be more sudden and harder to manage.

Sources suggest that other European pilot and crew unions could follow suit, or are waiting in the wings to see how the Irish dispute plays out. So there is a risk that Ryanair could find itself fighting industrial relations battles on several fronts, which could be particularly damaging if they spread to big markets such as Britain and Spain.

Industrial unrest

Everyone knows this is not a good time of year for industrial unrest to disrupt an airline. Ryanair carried 12.6 million passengers in June, but for air traffic control strikes, that would have been 12.8 million. It could conceivably fly 13 million people – 10 per cent of last year’s total – each month for the next three. Not only could strikes hit passengers who have already booked, the prospect of cancellations could put off those who have yet to do so, sending them to Ryanair’s rivals instead.

Darren McGinley, analyst at Dublin’s Merrion Stockbrokers, agrees that there needs to be compromise here, although he suggests that this should be more at the pilots’ side than the company’s.

He points out that they knew Ryanair’s business required flexibility and the ability to move craft to meet demand when they signed up. “I would have thought that this is an easy issue to overcome. It’s simply about a transparent structure.”

Others suggest that the problem may be that Ryanair is not really set up to deal with unions. At a press conference this week, Oliver Richardson, civil aviation representative with Unite and the ITF, pointed out that the company's management is very lean, and that it possibly needed to hire in human resources expertise.

However, the airline may well be trying to avoid such a move precisely to maintain its lean structure. “That will be a big challenge,” says one source, “that they don’t end up with a layer of unproductive management.”

Very profitable

Either way, now that it has recognised unions Ryanair has to change. Southwest Airlines, the US low-cost giant that inspired O'Leary's approach in the first place, could give a clue as what it might look like in a few years.

Southwest has 700 craft and flies 150 million passengers a year. It is completely unionised but very profitable, earning more than $2 billion last year. However, its margins are closer to 10 per cent compared to Ryanair’s 20 per cent.

Patterson believes Ryanair’s big profit margins give it the scope to absorb the impact of unionisation. “Even if they are giving substantial pay increases, at 20 per cent they still have a great cost advantage. It may well be the position that when the issue is resolved, it will make Ryanair a much more attractive airline to work for than others, and that could ultimately help to manage the costs.”

He notes that some shareholders sold out once the airline announced its U-turn last December, believing it had lost a key commercial advantage. However, he argues that the shares still offer considerable long-term value. “We’re actually a buyer of Ryanair at current levels,” Patterson says.

The six million dollar question is whether O’Leary is the man to lead this change. His antipathy to unions is well known. He previously declared that he would cut off his right hand before dealing with them.

When Ryanair was bidding to buy Aer Lingus, he regularly lampooned the labour movement grandees on that rival's board.

That antipathy is particularly marked when it comes to Ialpa, which he dubbed “the Aer Lingus pilots’ union” and regarded as a foe from his early days leading Ryanair. He has softened his line on labour organisations since, but insists that any deals with them cannot compromise the airline’s low-cost model.

Nevertheless, some analysts point out that his current contract ends next year and suggest that he may go then.

‘New reality’

O’Leary himself recently told investors he wants to stay on at least until Ryanair hits its 200 million passenger target. Insiders say that the board supports him in this. “Michael says that this is the new reality, and we just have to get on with it,” says one, who adds that O’Leary concedes that he always knew that the day of unionisation would come.

That source argues that anyone who thinks O’Leary should go should look at Ryanair’s figures – €1.45 billion profit last year despite the flight cancellation debacle, continued passenger growth and virtually full aircraft – the airline sold 96 per cent of all available seats last month.

One likely solution is that O'Leary does not deal directly with unions himself, leaving it instead to other senior managers. At the height of its crisis last year, Ryanair brought Bellew back from Malaysian Airways precisely to help deal with disgruntled pilots.

“I don’t see O’Leary getting into the nitty-gritty of dealing with unions himself,” one person close to the company suggests. “He’ll leave that to others, but he will manage the people who are doing it, and he will challenge them.”

Patterson is in the pro-O’Leary camp and says that the airline chief probably has a strategy for managing unionisation. “He’s done a pretty amazing job over the last 30 years. I am pretty sure he and his team will have a plan in place on how they are going to deal with these issues.”

O’Leary has been pivotal to Ryanair’s growth over those 30 years. Because of that, analysts and the media frequently speculate about how the company will manage his succession when the day comes.

One option would be to bring in a similarly big beast from outside. In Europe, the only comparable figure is another influential Irish aviation chief executive, Willie Walsh, of International Airlines' Group, parent of Aer Lingus, British Airways, Iberia and Vueling. However, the odds against him swapping that for the corner office in Swords are spectacularly big.

Succession plan

During last year’s cancellation controversy, it emerged that Ryanair did have a succession plan. It broadly involved handing gradual control over to the chief-executive-to-be, although it was not clear if anyone had been anointed.

McGinley says that there are good people within Ryanair management capable of taking over and running it on current lines. He believes that O’Leary ( 57) could go in the near future, but not because of its current industrial relations woes.

Instead, he believes that the current chief executive has brought Ryanair to its peak in terms of margins and profitability. The company will have to work harder to make the same money in future.

“In terms of his legacy, that’s peaked as well. From that point of view, going out on a high might be one reason that he might go, but I do not think he would do it because he is afraid of any challenges.”