Business-class air fares are set to fall by as much as 40 per cent from Friday as Virgin Atlantic launches a price war.

British Airways, Virgin's main rival, is expected to follow the price reduction as both airlines vie to keep the front of their aircraft full.

In an attempt to secure bookings as the economic downturn deepens, Virgin will announce that it is slashing Upper Class fares. A return to New York will drop by 40 per cent to £1,099 and a return to Boston by 38 per cent to £1,199.

The price war comes as all airlines struggle to fill their premium seats. BA reported two days ago that it carried 12.1 per cent fewer premium passengers in December, compared with the same month in 2007, as corporate customers reduced their travel budgets. Virgin is hoping that its price cut will encourage tourists and executives from small and medium-sized companies to upgrade.

Most carriers have already slashed economy fares but have resisted making significant cuts to the lucrative premium market. BA has been particularly insistent that it will not drop business-class fares because it wants to maintain the yield, or revenue, it makes from each seat. However, Virgin's decision to cut prices will almost certainly force BA to respond.

Andrew Fitchie, an aviation analyst at Collins Stewart, the broker, said: “It is a bit unnerving to see this level of discounting going on because they wouldn't be doing it without reason. Most of this cut is marketing and advertising driven, but if it feeds through to real price disruption, then that will start to affect margins.”

Airlines frequently offer discounts on their premium seats but it is rare for a carrier to cut all prices on all routes. Virgin believes that its discounts will encourage business executives to travel again, which will in turn boost the economy.

Steve Ridgway, the chief executive of Virgin Atlantic, said: “As a leading global airline, we have a responsibility to help pump-prime the economy.”

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