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OPINION

Norwegian Blue

Norwegian Blue
October 17, 2017
Norwegian Blue

The concept of a no-frills, low-cost airline is simply to shift passengers from one place to another. They cannot expect any support from the airline when things go wrong. Cancelling flights well in advance fits this model, as does disputing the rights of passengers, having to be put right by regulators and only then agreeing to pay compensation. Michael O’Leary, Ryanair’s charismatic chief executive, has pointed out that 2,100 flights might seem a lot but it is less than 2 per cent of the 130,000 flights planned. He says that he has grounded 25 of Ryanair’s fleet of 400 planes. The cold calculation of €5m (£4.4m) in lost profits has now increased with compensation to €25m. Other claims are pending. But they hardly skin the nose. Net profits in the year to 31 March 2017 were €1,316m. Low-cost is a resilient concept: whatever you do, passengers keep coming back for more.

 

Taxi drivers

But does the same go for its people? Low-cost fares require low-cost staff as well. Cost efficiencies require staffing for dips and relying on their goodwill to cope with the peaks. Compared with other airlines, Ryanair has a reputation of having more intensive flying schedules. Pilots complain of overwork and fatigue. Insiders have claimed that Ryanair has fewer pilots per plane than others, such as easyJet. On the flight deck, most of Ryanair’s captains are employees but most of the others are on contracts with agencies that exclusively supply Ryanair. They are treated as “self employed” despite wearing the Ryanair uniform, which exploited a historic weakness in the employment legislation in the Republic of Ireland, where Ryanair has its primary listing. Ryanair pilots based elsewhere complain of being on Irish contracts and have been pressing for local contracts for years. They complain of being frequently told to report to distant bases at short notice, of having to go in their own time and of paying for the travel and accommodation themselves. Mr O’Leary is resilient. “We are in an era now where the computer does most of the flying. The pilots are very skilled professionals. But are they hard-worked? No.” At least, that’s what he has told journalists. What are pilots but 'glorified taxi drivers'? And if a few leave, that’s fine, there are plenty more where they came from, in the training pipeline.

This model works well as long as there is no shortage of pilots. But the balance has shifted, thanks to the growth of new airlines, such as Norwegian Air Shuttle ASA in Europe and others in the Middle East and China. IALPA, the Irish pilots’ union, which Ryanair does not recognise, believes that 700 out of Ryanair’s 4,200 pilots have left; Ryanair says the number is fewer than 260 and, anyway, it is in the process of hiring 650 more. Of these, Norwegian claims that more than 140 have defected to them, the attraction being permanent employment, a competitive salary and better working conditions. That’s about a third of the 500 hires that Norwegian had targeted for this year.  

Mr O’Leary reacted by firing a broadside at Norwegian, another swash-buckling airline hell-bent on growth, claiming that it had “obvious financial difficulties”. “They are running out of cash. They are scrabbling around daily,” he told journalists early in September and, for good measure, predicted that neither Norwegian nor Monarch would still be around by the end of winter. Monarch obligingly went bust. Norwegian, needless to say, calls his allegations nonsense. Mr O’Leary seemed blithely unaware that he had been sounding distinctly Trumpish.

 

Board flexibility

If Mr O’Leary is as aggressively defensive in private as he is in public, questions must arise about whether his conduct in board meetings deters criticism. Concerns about groupthink among Ryanair’s directors emerged a few years ago. Even today, out of 12 non-executive directors, only five can be said to be truly independent. Of the others, three (including the chairman, David Bonderman) have each served for between 16 and 21 years. Nine years is the normal maximum. Another three directors are former employees and one is involved with related party transactions. The company argues that they are all independently minded and it complies with the UK corporate governance code, although not Nasdaq’s (where Ryanair also has a listing). It could be argued that by being more intimately connected, these directors share a familiarity with the company that should bolster their ability to challenge Mr O’Leary, but whether or not they do is something only the board members will know.

And yet the board has made some strange decisions. Like agreeing a five-year contract for Mr O’Leary. Normal practice is for contracts to be no longer than a year. Or awarding themselves share options, which are normally only available to employees. Non-executive directors are usually excluded to avoid suspicions that such awards might influence their decision-making. And they seem impervious to the discontentment so deeply felt by many of their people. 

As always, glassdoor.co.uk is revealing. Ryanair positives are staff travel and pay in summer; the main complaint is again about being kept on an agency contract for years, nominally self-employed but in reality full-time employees. Cabin crews resent having to pay the high cost of training, of having neither basic salary nor sick pay, and being pressured to sell rather than worry about passengers’ well-being. They complain about hectic working hours, being taken for granted by management and, tellingly, the poor quality of some newly recruited colleagues. Admittedly, the poor rating is a collection of anecdotal evidence from just 170 past and present staff, but it is consistent with the impression pilots recently gave to the media – surely sufficient for independently minded directors to demand to know what is really going on.

Dominant, free-talking chief executives always present a tough dilemma for fellow directors. It is particularly hard in a company such as Ryanair, where Mr O’Leary has led its growth from single plane airline in 1985 to one that now carries more passengers than any other in Europe. And yet challenges happen. In 2010, for example, the directors at rival easyJet fell out with its founder Sir Stelios Haji-Ioannou over its strategy – and won. And ownership is no impediment: while Mr O’Leary owns less than 4 per cent of Ryanair, Sir Stelios still owns about a third of easyJet.

Three years ago, faced with allegations that his “bullying, macho” style was driving potential custom away, and with a delivery of 175 new planes to fill, Mr O’Leary publicly resolved to give passengers a better deal. There was a softening in his apathy towards climate change. Based on CO2 emissions per passenger, Ryanair now claims to be the cleanest, greenest airline. (A tautology, environmentalists say:  reduced emissions per plane helps, but an ever increasing number of flights pump ever more noxious gases directly into the upper atmosphere, the growth fostered by the zero tax on aviation fuel.) And although Mr O’Leary also hinted that he would be less sensitive to criticism, his recent robust defence of Ryanair has proved counter-productive. Ryanair still lacks the partnerships and alliances that other airlines have. These might have helped it ease its current pressures but a potential deal with Norwegian has gone the way of the Norwegian Blue, the deceased parrot in the legendary Monty Python sketch, thanks to Mr O’Leary’s abrasive retaliation. Norwegian has recently formed an alliance with easyJet.

 

Firefighting

Mr O’Leary has rushed through retention payments for pilots who stay on board for the next 12 months. Pay increases have been agreed at four out of Ryanair’s 86 bases and others are under negotiation. He has promised better employment conditions and more disciplined rosters and, yes, Ryanair did “mess up”. A head needed to roll so Ryanair’s long-serving chief operations officer was sacked. But are these panic measures or swift, decisive actions that will nip the problem in the bud? Only time will tell.

The real problem is that the dispute within Ryanair is less about pay and more about treating people as mere functions. It is about working conditions and job security. Pilots say that they have been taken for granted for too long. They object to Mr O’Leary and his insults. Ah, but he was only defending them against criticism from competitors, he says. His comments were directed at pilots of other airlines and their unions, not to Ryanair’s, whom he now says are the best in the business. Pilots see this as a coded reference to the Ryanair Pilot’s Group, a body set up by Ryanair pilots and which claims to have more than half their number as members. But Ryanair’s terms of employment exclude union representation so, fearing for their jobs, they invited pilots from other airlines to form its committee. This has allowed Mr O’Leary to dismiss the whole body as a plot to undermine Ryanair. As far as he is concerned, local employee councils (but not local employment contracts) work far better than pan-company collective bargaining. Precisely, say the pilots. Divide and exploit has gone on long enough. They want the safeguards that local employment contracts will bring.

There comes a point where deep-seated grievances become a matter for the board. Mr O’Leary has been the driving force behind Ryanair’s phenomenal growth and many think Ryanair would be a lesser airline without him. But the pace of this growth is slowing and investors have had to peg back their expectations. The next stage is consolidation and Mr O’Leary is not so enthusiastic about that. He has said that his succession has been planned and there is only an evens chance that he will want to renew his contract when it expires in 2019. So it’s time to take stock. For all involved, Ryanair’s future boils down to a matter of trust. For Mr O’Leary, over-sensitivity to criticism has brought its own backlash.