The new venture is an effort to undermine Airtours' pounds 750m bid for First Choice and to protect Thomson's leadership of the UK package tour business. "We cannot stand by and let a competitor increase its compet-itiveness," said a spokesman.
"We believe there is some good potential in the low-cost area. We have the objective of increasing volume, because it gives us efficiencies of scale. We do not want market leadership for its own sake."
But shareholders, fearful that the move will cause a disastrous price war, reacted angrily to the news. Some accused Thomson of betraying the promises made when it floated last year.
The new cut-price company, which has yet to be named, would sell one- to two-star holidays. Other moves are planned, including the aggressive growth of the Thomson brand, which is the market leader in the three- to four-star market.
Since the announcement, Thomson shares have fallen sharply on fears of a price war. On Friday, the shares were 128p, compared to last year's flotation price of 175p.
"Flooding the market with cheap holidays would bring the industry to its knees," said Anna Barnfather, an analyst with WestLB Panmure. "It would be irresponsible to upset the balance of supply and demand. Thomson has the most to lose. It would have to cut its prices to its premium brands."
The value of Airtours' shares has also fallen, reducing the value of its all-paper offer. David Crossland, chairman of Airtours, tried to play down the threat to profits. He said there was a shortage of accommodation in the main resorts and denied there was much opportunity for downmarket breaks. "One- to two-star accommodation is difficult to sell," he said. "The vast majority of clients are looking for three- to four-star holidays."
Thomson's belligerence results from fears of being squeezed by Airtours, should its bid for First Choice receive the green light from the European Commission. Thomson believes that the pounds 35m in cost savings Airtours would obtain from acquiring First Choice would be used to cut prices and improve marketing.
Thomson's plans relate to the 2000 season, for which brochures will be released next month. All the plans for the current summer season were confirmed in February.
Over 40 per cent of First Choice shareholders back the Airtours bid. But if Brussels decides that the takeover has to be fully investigated, the bid will lapse. This would leave the way clear for First Choice to complete its pounds 1.5bn merger with Kuoni, assuming it meets with shareholder approval.
However, the merger is worth significantly less to First Choice shareholders than the Airtours bid. Mr Crossland is confident that the bid will go through. He said: "Thomson has 25 per cent of the market; with First Choice we would have 25 per cent, and Thomas Cook has 20 per cent."
These figures are open to dispute, however, because they take in the entire UK holiday business. Statistics based on package holidays suggest that Airtours/First Choice would have 33 per cent of the UK market.