Ryanair promotion signals a price war

Ryanair has kicked off a summer price war with a new promotion that will offer three million seats for an inclusive price of £10, a move that sent shares across the airline sector lower.

Ryanair's latest promotion is unusual in that it covers July, August and September - peak season for European holidaymakers. Michael O'Leary, the chief executive of the Irish low-cost airline, dismissed concerns that the promotion suggested that the company was struggling to sell seats over the crucial summer period, arguing that bookings for July and August are already ahead of expectations.

However he said that the promotion, which could cost the airline up to £45m, was designed to meet its growth targets for carrying customers this year. He said that a combination of higher taxes, rising airport charges and longer queues at London airports has led to some softness in the UK. He vehemently denied that increasing concerns over the environmental impact of the airline industry was hitting bookings and mocked rival easyJet's plans to develop aircraft engines that use less fuel as "designed by easyJet's toy department".

Shares in Ryanair closed 3.7 per cent lower at €4.98 (£3.36) but the promotion also spooked investors in other airline stocks. British Airways shares slipped 2.6 per cent to 424.5p while easyJet shares lost 2.7 per cent to close at 533.5p.

Ryanair said earlier this month that it expects growth this year of about five per cent, the lowest it has reported for four years. Mr O'Leary dismissed concerns that the company's latest promotion could further reduce growth this year. "The market hasn't collapsed. We're running about two per cent behind where we should be," he said.

However Mr O'Leary predicted a "big downturn" in the airline sector in the winter. Although he could not name a specific factor that would trigger a downturn, he said the industry was due a slip. "The business is cyclical and down cycles tend to be very deep. There will be blood on the walls this winter," he said.