WELL PLACED FOR GROWTH

Strikes, a profit warn­ing, and calls for changes to the board, made it a dif­fi­cult year but air­line re­mains on course for green pas­tures

The Irish Times - Business - - BUSINESS REVIEW OF THE YEAR - Barry O’Hal­lo­ran

Ryanair has never for­mally said it has a succession plan, but O’Leary has ac­knowl­edged that the com­pany, like all oth­ers, does in­deed have one

The new year will mark Michael O’Leary’s 25th an­niver­sary as chief ex­ec­u­tive of Ryanair. It’s been a trans­for­ma­tional pe­riod dur­ing which he has led the com­pany from strug­gling up­start to Europe’s big­gest air­line, fly­ing some 135 mil­lion peo­ple a year around the con­ti­nent.

His five-year con­tract with the com­pany ends in 2019. O’Leary said three months ago that he still en­joyed the job, and wanted to stay on as over the next five years Ryanair takes de­liv­ery of 200 Boe­ing 737 Max-8 200s, a slightly larger craft the air­line helped de­sign, which will ex­pand its fleet to 520 and could bring pas­sen­ger num­bers closer to 200 mil­lion.

The only change that O’Leary might seek is a switch back to the rolling 12-month agree­ments he once had with the com­pany, rather than opt­ing for an­other five-year con­tract.

More than 98 per cent of share­hold­ers voted at Septem­ber’s an­nual gen­eral meet­ing to keep O’Leary as chief ex­ec­u­tive. As things now stand, it’s un­likely that they or the board will change their minds when they meet again on Septem­ber 19th next.

Bri­tish coun­cil work­ers

How­ever, some are look­ing to a time when O’Leary will no longer lead the air­line. In Oc­to­ber, the UK’s Local Au­thor­ity Pen­sion Fund Fo­rum (LAPFF), which holds £230 bil­lion of as­sets on be­half of Bri­tish coun­cil work­ers and owns 1 per cent of Ryanair, wrote to the com­pany call­ing for it to out­line its succession plan for the chief ex­ec­u­tive to share­hold­ers.

Ryanair has never for­mally said it has a succession plan, but O’Leary has ac­knowl­edged that the com­pany, like all oth­ers, does in­deed have one. In terms of who should get the job, he has pointed out sev­eral times that there are plenty of good can­di­dates in­side and out­side his or­gan­i­sa­tion, and the air­line should con­sider them all.

While O’Leary is likely to be around for some years yet, re­ports sug­gest that LAPFF wanted his long-time ally, chair­man David Bon­der­man, gone from the board by the end of 2019. Its chair­man, Ian Green­wood, said that it would air both is­sues at next year’s agm.

Ahead of this year’s gen­eral meet­ing, sev­eral “proxy firms”, which ad­vise share­hold­ers on cor­po­rate gov­er­nance, rec­om­mended that they oust Bon­der­man as he could no longer be con­sid­ered in­de­pen­dent. These groups cited his long ten­ure – he has been chair­man since Ryanair floated in 1997 – and his own­er­ship of 7.5 mil­lion shares among the rea­sons.

There was noth­ing new in this. Firms such as Glass Lewis and Pen­sions and In­vest­ment Re­search Con­sul­tants reg­u­larly call at agm time for Bon­der­man and se­nior in­de­pen­dent di­rec­tor Kyran McLaugh­lin to go. Share­hold­ers just as reg­u­larly ig­nore this, re­turn­ing these in­di­vid­u­als to the board with com­fort­able ma­jori­ties.

That pat­tern shifted this year. Some 70 per cent of share­hold­ers voted for Bon­der­man and 68 per cent for McLaugh­lin. It was the sort of ma­jor­ity that would have politi­cians cheer­ing, but it was less than that pre­vi­ously at­tracted by ei­ther man and well off the 98.5 per cent that O’Leary com­manded.

Risked gar­ner­ing less sup­port

In fact it’s un­usual to see both a chair and se­nior di­rec­tor of any Ir­ish-listed com­pany re­turned with less than 90 per cent. Also, there were signs are that both risked gar­ner­ing less sup­port next time. Ali­son Kennedy of Aberdeen Stan­dard, which owned 11 mil­lion Ryanair shares at the time of its agm, said her com­pany thought long and hard about vot­ing for Bon­der­man and McLaugh­lin.

She warned that it would vote against both if there were not “clear progress on succession for these two key board po­si­tions by the time of the agm next year”.

Bon­der­man kept his own coun­sel. O’Leary told re­porters after­wards that the chair­man was do­ing Ryanair a favour by stay­ing in the job, and added that he hoped the board could per­suade him to remain for an­other few years. Nev­er­the­less, there was a sense that Bon­der­man and McLaugh­lin were vul­ner­a­ble. LAPFF’s sub­se­quent move upped the ante, par­tic­u­larly for the chair­man.

Among other things, share­hold­ers such as the coun­cils’ fo­rum and Aberdeen Stan­dard ar­gue that Ryanair’s cor­po­rate gov­er­nance needs to change in light of the air­line’s new in­dus­trial re­la­tions regime.

That changed rad­i­cally a year ago when the com­pany broke a long-stand­ing pol­icy and agreed to recog­nise trade unions. Not un­ex­pect­edly, this did not prove easy. Dur­ing the sum­mer the Ir­ish Air­line Pi­lots’ As­so­ci­a­tion (Ialpa) held a se­ries of one-day strikes at Ryanair.

Other unions, in­clud­ing those from Bel­gium, Ger­many, the Nether­lands and Swe­den, joined it on the picket line in Au­gust. The sides set­tled the Ir­ish dis­pute, which was fo­cused on is­sues such as leave and base trans­fers, af­ter in­dus­trial re­la­tions trou­ble-shooter Kieran Mul­vey stepped in as an in­ter­me­di­ary.

The strikes caused lit­tle enough ac­tual dis­rup­tion, but a profit warn­ing is­sued by Ryanair in early Oc­to­ber in­di­cated that they cost it €120 mil­lion. Some of that cov­ered com­pen­sat­ing or re-ac­com­mo­dat­ing pas­sen­gers whose flights the air­line can­celled as a re­sult of the in­dus­trial ac­tion. Some stemmed from the com­pany cut­ting fares to lure cus­tomers whose fear of dis­rup­tion de­terred them from book­ing tick­ets.

Since then Ryanair has con­tin­ued sign­ing in­di­vid­ual deals with unions around Europe, the lat­est with Ger­man pi­lots’ or­gan­i­sa­tion VC and Por­tuguese cabin crew rep­re­sen­ta­tive SNPVAC. That does not rule out fur­ther in­dus­trial un­rest, as many of them are out­line agree­ments, leav­ing the fine de­tails to be ham­mered out in com­ing months.

Cabin crew unions

One crunch is­sue, raised by Euro­pean pi­lot and cabin crew unions, is the use of Ir­ish con­tracts, which mean Ryanair pi­lots and crew are taxed here. The unions say that they end up with the worst of both worlds, pay­ing their own ju­ris­dic­tions’ so­cial in­sur­ance and Ir­ish PAYE.

O’Leary has ex­plained sev­eral times in re­cent years that the Repub­lic’s tax laws oblige it to do this. In Septem­ber he pointed out that his com­pany was lob­by­ing the Gov­ern­ment for a change to this regime, and last month the air­line ac­tu­ally be­gan a court chal­lenge to the rules.

At the same time there is dis­quiet among unions at the growth of Ryanair Sun, a Polish-reg­is­tered sub­sidiary that work­ers’ rep­re­sen­ta­tives claim al­lows the air­line avoid con­ces­sions given to or­gan­ised labour and hire staff on self-em­ployed con­tracts.

The com­pany re­sponded to this by say­ing that many work­ers were happy with this as they were bet­ter paid.

For ob­vi­ous rea­sons air­line work­ers do not tend to strike in the depths of win­ter as it makes more sense to do so dur­ing the peak travel months in sum­mer.

That gives Ryanair sev­eral months to make progress on de­tailed agree­ments with its main unions, some­thing it hopes to com­plete by March. This year’s skir­mishes with labour groups took their toll.

The €120 mil­lion bill was a key fac­tor in Ryanair warn­ing in Oc­to­ber that prof­its for its fi­nan­cial year, which ends on March 31st, would be be­tween €1.1 bil­lion and €1.2 bil­lion, in­stead of the €1.25 bil­lion to €1.35 bil­lion that it orig­i­nally in­di­cated.

Its shares have also fallen. At the be­gin­ning of this year they traded at just over €15, and reached highs of about €17 in Jan­uary, valu­ing the com­pany at around €20 bil­lion. By the mid­dle of De­cem­ber the stock was hov­er­ing close to €11, valu­ing Ryanair at €12 bil­lion.

Other fac­tors fed into this de­cline. Ris­ing fuel and bor­row­ing costs made in­vestors wary of air­lines gen­er­ally. So did Brexit un­cer­tainty. Ryanair cam­paigned against the UK, its big­gest mar­ket, leav­ing the EU. Since then O’Leary has warned that a “no-deal” Brexit could tem­po­rar­ily ground flights be­tween the UK and the rest of Europe. More re­cently, credit rat­ings agency Moody’s weighed in, say­ing that the Ir­ish car­rier’s cash flows could suf­fer in such an even­tu­al­ity.

Pre­pared for Brexit

At this point Ryanair says that it is pre­pared for Brexit. It has taken out a UK air­line li­cence, pro­tect­ing its right to fly do­mes­tic routes there. The com­pany is also tak­ing steps to en­sure it re­mains within EU rules, which ban share­hold­ers from out­side the bloc in­di­vid­u­ally or col­lec­tively own­ing more than 49 per cent of any Euro­pean car­rier.

In the mean­time air­line ca­su­al­ties are mount­ing. At the be­gin­ning of this month Ice­landair backed away from buy­ing low-cost car­rier Wow Air, leav­ing its ri­val fac­ing a po­ten­tial cash cri­sis. Just weeks be­fore Copen­hagen-based Primera Air col­lapsed. Flybe and Nor­we­gian are seen as po­ten­tial takeover tar­gets.

O’Leary, along with most ex­perts, be­lieves more air­lines will fall vic­tim to a shake-up in Euro­pean avi­a­tion as higher costs and lower fares hit home. In the past Ryanair has proved more adept than most at nav­i­gat­ing tur­bu­lence in its in­dus­try, and it seems un­likely that its new in­dus­trial re­la­tions regime will change that.

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