Ryanair will plunge into the red this year after launching a high-risk price war in an attempt to increase demand and drive competitors out of business.

Michael O'Leary, chief executive of Europe's biggest budget airline, said that consumer spending in the UK had dropped significantly in the past six weeks and that fares would be cut in an attempt to stimulate bookings.

Two months ago Ryanair announced that its fares would have to rise by 5 per cent to cope with the sustained high price of oil but that has been reversed and fares will now fall by 5 per cent.

Ryanair said that the price war would result in a loss of up to €60 million (£47 million) this year, compared with a profit of €481 million last year. Profits fell 85 per cent in the first quarter to €21 million as the airline's fuel bill nearly doubled.

The airline's decision to maintain market share at the expense of profitability stunned the markets and the airline's share price fell 20 per cent to €2.58. The shares are down more than 50 per cent on a year ago.

Mr O'Leary said: “We are seeing a collapse in consumer confidence and spending. We think the sentiment in the UK and Ireland has worsened significantly in the last six to eight weeks and that has caused us to be much more aggressive in pricing.”

Ryanair's decision to launch a price war will put even greater pressure on its competitors. Airlines are struggling to cope with record fuel bills and once the summer travel boom ends, many carriers are expected to collapse. A price war will hasten this and should help Ryanair to fill some of the extra seats it will take on later this year when its fleet grows by an extra 32 aircraft.

Mr O'Leary said: “If there is not going to be growth in demand we have to take share from our competitors.”

However, the combination of increased supply, falling demand brought about by worsening economic conditions and high costs has worried analysts. One said: “Creating a price war will help drive some carriers out of business but this is a very high-risk strategy because Ryanair is blowing up its own business in the process.”

Howard Wheeldon, senior strategist at BGC Partners, the brokerage, said: “Unless this is all bluff intended to frighten other airlines, Ryanair's management does not intend to reverse its growth strategy one jot. So be it - a busy fool it intends to be!”

Ryanair will reduce capacity at Stansted and Dublin airports this winter but still plans to grow by 14 per cent this year. The airline hopes that bankruptcies elsewhere will create new opportunities and it is talking to airports about starting operations should rival carriers be forced to shut down.

The rapid rise in the price of oil has forced Ryanair to alter its hedging strategy. Airlines such as British Airways and Lufthansa have been partially sheltered from recent record prices because of their hedging but Ryanair has paid nearly the full market rate. The budget carrier has now decided to hedge 90 per cent of its fuel requirement for September at $129 a barrel and 80 per cent for the third quarter at $124.

Ryanair's profit fall affected market sentiment towards other airlines and BA's shares fell 12p to 234p, while easyJet fell 26p to 308p.

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