Investor/An insider's guide to the market: The poor finish from equity markets in the last few days of April meant that the gloss was taken off the strong share price gains that were recorded in the early part of the month. Despite the late setback, most Irish-based equity portfolios should have enjoyed a positive return during April.

The monthly return was 2 to 3 per cent for many European equity markets, including the Irish market. In the US, the S&P 500 index fell by 1.7 per cent although, for a euro-based investor, recent dollar strength will have mitigated any losses from US shares.

There is currently a two-way tug-of-war across global financial markets occurring between interest rate trends and economic growth. The medium-term issue for interest rates is the question of when - and by how much - rates will rise.

Markets are particularly sensitive to the timing and extent of interest rate rises in the US. Uncertainty regarding US monetary policy is acting to dampen enthusiasm for both US equities and US long-term bonds.

On the other hand, steadily improving prospects for real economic growth are allowing companies to increase their profits, which is a positive influence on share prices.

This tug-of-war between interest rate trends and economic performance could well last for most of this year.

On balance, the benign impact of strong growth should just outweigh the negative impact on sentiment from rising interest rates. However, the upward trend in share prices will continue to be modest and erratic.

The low-cost airline sector has been extremely volatile in recent months. Erratic share price movements have been the order of the day for the full service carriers such as British Airways, Lufthansa and the US long-haul airlines for decades. Low-cost airlines such as Easyjet and Ryanair seemed to have been able to buck this historical volatility.

However, the collapse in the Ryanair share price in response to its first-ever profits warning has dented investor confidence in the low-cost airline model.

In fact, Easyjet also went through a very weak patch in late 2002 and early 2003 when its share price collapsed from a level of 370p to a low of just under 170p. At the time, Easyjet was digesting a large acquisition (GO) and had been expanding its fleet at a rapid rate.

In early 2003, it was clear that Easyjet was expanding too fast and could not sell enough seats to fill all of its expanded fleet. However, by the summer of 2003 the rate of expansion in Easyjet's fleet had slowed considerably. This enabled it to fill more seats on each plane at slightly higher prices. Easyjet's share price recovered smartly and has recently been trading around 300p.

However, Easyjet's cautious outlook statement earlier this week sent shudders through the market as the company confirmed that competitive pressures continued to drive down air fares. Easyjet's share price fell by 25 per cent and further declines are likely as stock brokers have rushed to reduce their profit forecasts.

There are clear similarities between Easyjet's experience in early 2003 and Ryanair's experience in late 2003 and early 2004. Ryanair has had to digest its acquisition, Buzz, a relatively small low-cost airline, while at the same time rapidly expanding its own fleet network.

Ryanair discovered it had to cut average fares in order to fill the extra seats. This pressure on its revenue yields has been compounded by a significant increase in competition across the low-cost European airline sector.

Many of these new entrants will undoubtedly go to the wall over time. The latest collapse came from a little known airline, Duo, that operated out of Birmingham and Edinburgh.

Duo operated nine planes and served only 12 destinations from its main base in Birmingham. Its demise will have little impact on the European competitive landscape, but it does highlight the difficulties facing smaller operators.

There are about 50 low-cost airlines in Europe - all of which are dwarfed by Ryanair and Easyjet.

In the US, there are only five large low-cost carriers and Southwest remains the largest US carrier by a wide margin. (Southwest is the airline on which Ryanair has modelled itself.)

If the European low-cost airline industry develops in a similar fashion to the American experience then, in the medium to long term, Europe should end up with between four and six substantial low-cost carriers.

Ryanair is clearly best placed to emerge as the largest of these carriers - given its low-cost structure, strong balance sheet and extensive route network.

However, it is likely to be several years before the industry consolidates and, in the meantime, competition will remain intense.

Easyjet's warning earlier this week and statements from Ryanair boss Michael O'Leary confirm that the battle for Europe's skys is only beginning. Lower air fares are good news for consumers but will be at the expense of profits, which suggests that airline share prices will remain under pressure. Many weaker airlines will go to the wall and profitable companies such as Ryanair will suffer profit declines.

In this turbulent climate trends in load factors and fare pricing during the summer season will be scrutinised carefully by investment analysts and investors to determine how much damage will be inflicted on profit margins. However, from the shareholder's perspective, the real crunch will come in the weak winter season and therefore the share prices of European airlines are likely to be volatile for the foreseeable future.