Ryanair sent the Irish stock market into a spin yesterday with its announcement that it expected profits to rise in the current year by just 5 per cent and that, depending on its winter bookings, it could even record a loss in the second half of the year.

The airline's share price nosedived by 7 per cent. Aer Lingus was caught in its slipstream, losing 4.5 per cent of its value while EasyJet took a hammering in London. To some analysts, it was simply a case of Ryanair cleverly managing investor expectations. Some London-based analysts are rumoured to have been pencilling in profit increases of more than 40 per cent for this year. Ryanair wanted to rein these in and temper expectations.

"This time last year, Ryanair swore blind that profit growth would be 5-10 per cent at best and it might even struggle to make that, and yet it achieved 33 per cent," said one fund manager, who asked not to be named. "I think what you'll find is that as the year goes on, [ Michael] O'Leary will start telling us that the business is in better shape."

A price war is under way among the leading low-cost carriers in Europe. Ryanair has already given away 1 million free seats, and even paid the taxes. Mr O'Leary has put it up to the competition to match him on price knowing that virtually no other airline can do this. Ryanair has the lowest cost base of all the budget carriers and by far the most comprehensive network of routes.

Ancillary revenues, which includes hotel bookings, car hire, travel insurance and web check-in, continue to grow at a faster pace than passenger revenues. They rose by 40 per cent last year to €362 million.

The airline has also hedged 90 per cent of its fuel requirement at about $63 a barrel. It was paying up to $10 a barrel more last year.

Ryanair also has a healthy balance sheet with net cash balances at the end of March of €336 million. This places the airline in a much stronger position than most competitors. The weak dollar has also made it cheaper to buy aircraft and reduced its maintenance costs. However, staff costs last year increased by 32 per cent to €226.6 million. A further rise is expected this year as the EU working time directive kicks in and the airline increases its crewing ratio from four to five for each flight.

It will also sell fewer seats per flight - about 81 per cent this year compared with 83 per cent in the year to the end of March 2007. This is bad news at a time when Ryanair is to introduce about 125 new aircraft. Then again, if its price war gamble pays off there might be fewer competitors left.