Outspoken Ryanair boss Michael O'Leary yesterday shocked the airline industry after tabling a surprise £1 billion offer to buy fellow Irish airline Aer Lingus.

Some 20 years after Ryanair began competing with Aer Lingus on the Dublin to London route, Mr O'Leary unveiled a plan for his airline to take over the carrier, which was privatised in a stock market flotation only five days ago.

Mr O'Leary, who became chief executive in 1993, described the proposed tie-up as a "unique opportunity" to form one strong airline group for Ireland with more than 5 0 million passengers annually.

Although Mr O'Leary has continually said he has no interest in the long-haul market, Ryanair has already acquired a 16 per cent stake in Aer Lingus and made an offer for the rest in a move valuing the carrier at 1.48 billion euros (£1 billion).

The budget airline would retain Aer Lingus's staff and management and Aer Lingus would keep its own branding and continue to operate its mixed long-haul and short-haul business - but Ryanair said it would help it to drive down costs.

In turn Ryanair would benefit from Aer Lingus's superior earnings yield, which is better than the returns Ryanair can currently get on its cash deposits.

Any deal would also give Ryanair ownership of the Heathrow landing slots of Aer Lingus, although it insisted that both airlines would "compete vigorously" on the 17 routes on which they both operate.

Both carriers fly out of Birmingham International Airport.

Any takeover is expected to go through a rigorous competition inquiry, with one airline analyst forecasting that Rya-nair was unlikely to be successful.

The Irish Government still owns around 25 per cent of Aer Lingus after selling down its 85 per cent stake in a listing on the London and Dublin stock markets.

Ryanair said its offer of 2.80 euros a share would realise more than 500 million euros (£337.2 million) for the Irish Government, while Aer Lingus staff stood to pick up an average of 60,000 euros (£40,468) from the sale of shares.

The offer is at a premium of 27 per cent on the Aer Lingus share price on the day of its flotation. Ryanair added that its offer was conditional, among other things, on obtaining at least a majority of the shares in Aer Lingus.

In terms of competition issues, Ryanair said there were numerous precedents across Europe for two airlines of similar nationality coming together to form a stronger, more diversified airline group.

But a note from ABN Amro expressed surprise at the bid and said at first glance there seemed limited chance of it succeeding.

ABN Amro said: "From a regulatory standpoint, we see huge competition policy issues, with Aer Lingus plus Ryanair having 78 per cent of the UK Ireland market. We imagine to continental Europe the percentage would be similar or higher.

"Ryanair's proposal to keep competition between a commonly-owned separatelybranded Aer Lingus and Rya-nair would not be accepted by competition authorities in the UK, Ireland or the EU in our view."

The City bank added that the Irish Government was likely to be concerned about leaving Irish aviation reliant on Mr O'Leary, who it said would have the ability to influence transport and labour policy.

However, Collins Stewart analyst Andrew Fitchie said strategically the logic was "infallible" for Ryanair and would create "a fantastic Irish champion in terms of the combined entity".

Aer Lingus said in a statement it had noted the announcement by Ryanair.

"The board is considering this announcement and will make a statement in due course," it said. "In the meantime, Aer Lingus Group shareholders are strongly urged to take no action."

In a statement, the Irish Government insisted it had no intention of selling its stake of at least 25.1 per cent in Aer Lingus.

It said: "The Minister for Finance, Brian Cowen, and the Minister for Transport, Martin Cullen, have stated that the Government remains committed to competition in aviation markets.

"It will not sell its shares in Aer Lingus."

The short-haul operation of Aer Lingus comprises 11 routes to the UK and 57 routes to continental Europe. The long-haul network includes up to nine routes to the United States and one route to the United Arab Emirates.

Aer Lingus, which has undergone major restructuring in the wake of the September 11 attacks, also provides cargo services on its fleet of 35 aircraft.

Ryanair operates 750 scheduled short-haul flights per day serving 115 locations in Europe, based on an operating fleet of 107 aircraft.

The company notched up a turnover of 1.69 billion euros (£1.14 billion) in the year to March 31, against one billion euros (£674,500) for Aer Lingus last year.