* Flood of capacity, Brexit hammer airline valuations
* Ryanair cuts fares 15 pct, adds 1 mln seats per month
* Airlines face choice between profit and market share
* easyJet top shareholder criticises growth drive
By Conor Humphries and Sarah Young
DUBLIN/LONDON, Oct 18 (Reuters) - When Ryanair boss MichaelO'Leary promised on Tuesday to pump a million seats a month intoa weak winter market and slash fares by 15 percent, he wasramping up pressure on rivals -- and on investors struggling tosee an end to Europe's price wars.
Since Britain voted in June to leave the European Union, theenvironment for the continent's airlines has been rapidlydeteriorating, wiping a quarter off the sector's marketcapitalisation and triggering a string of profit warnings.
But executives across the sector have stubbornly resistedcutting the number of tickets on offer to raise prices, tellinginvestors that short-term profitability is a price worth payingto maintain and grow market share.
With analysts forecasting capacity increases this winter ofeight percent - the highest in a decade - the pressure is likelyto keep rising in the coming months.
"There's more supply coming on this winter and next summerand that's why the market's got very scared," said a top-30shareholder in easyJet, speaking on condition of anonymity. "Andthat's just not going to change any time soon."
"This is a tough year and you've just got to wait it out."
On Tuesday Ryanair followed rivals including low-costcarrier easyJet, British Airways-owner IAG andGermany's Lufthansa in issuing a profit warning,saying its profits would grow 7 percent rather than the 12percent previously guided.
But company shares climbed on the news as investors focusedon O'Leary's promise to ramp up capacity growth and grab marketshare.
"In every market we are competing with other incumbents,whether they be allegedly low cost carriers or legacy carriers.We are taking very significant traffic away ... and we see thatcontinuing," O'Leary said.
Low prices will last "two years if not more," he warned.
CAPACITY
Ryanair, which hopes to lift its European short-haul marketshare to around 20 percent by 2024 from 14 percent now, said itwould add 6 million seats over the six months to the end ofMarch, up from an earlier forecast of 4 million.
The airline intends to add 50 planes in the year to July2017, up from 36 in the previous year. O'Leary said the companymay add more than 50 planes in 2018 and 2019.
It says its business model, which fills planes irrespectiveof ticket price to minimise passenger costs and boost spendingon extras, is uniquely suited to a period of low fares.
"There's never been a worse time to be a competitor ofRyanair," O'Leary said.
Investors in some rival airlines fear he may have a point.
The founder of easyJet, Stelios Haji-Ioannou, whose familyremains the airline's biggest shareholder with a 34 percentstake, believes the airline should start cutting capacity at thenext available opportunity in 2018, revisiting his publicopposition to easyJet Chief Executive Carolyn McCall's 2013 dealto buy 135 new Airbus planes.
"Stelios has been very firm about this ever since 2013 thatthe fleet growth plan would be destructive of total shareholdervalue and it looks like he's right," his spokesman told Reuters.
easyJet's earnings per share will fall by more than 20percent for the 12 months ended Sept. 30, a year in which it hasgrown its fleet by 16 planes, followed by a further forecastdrop of 10 percent this year, according to Reuters data, as itadds 20 planes. Fleet growth is anticipated to continue at asimilar rate in 2018 and 2019.
McCall has said the current tough environment is the righttime to take advantage of its bigger scale and lower costoperations.
"History shows that at times like this the strongestairlines become stronger," McCall said earlier in October.
But the collapse in fuel prices, which typically accountsfor around a quarter of airline costs, has thrown a lifeline tomany airline owners, and there has been precious little sign ofcapacity leaving the market.
Holiday airline Monarch was last week kept alive by abailout from investors. Lufthansa agreed to lease40 planes from loss-making Air Berlin, keeping capacity in themarket.
Despite repeated failures in the past, Air France-KLM andLufthansa are investing heavily in their respective low-costarms, Transavia and Eurowings, extra capacity that is pushingdown prices whether they make a profit or not.
"The problem is that at the moment the incumbents are inabsolutely no mind to shrink," said Barclays analyst OliverSleath. "I think that investors need to be braced for a toughyear or two."
BREXIT FACTOR
easyJet is hoping its luck will turn after a year in whichIslamist militants have staged attacks in France and northAfrica, key markets to which it has been much more exposed thanRyanair. It is also far more exposed to Britain, which has beenhit by a steep fall in sterling since the June 23 Brexit vote.
It sees Ryanair's decision to pull planes out of the UnitedKingdom - its largest market, where it has cut its growth rateto 6 percent from 15 percent this year due to uncertainty aroundBrexit - as a sign of weakness.
An easyJet source said the airline wants to take advantageof Ryanair's withdrawal in the UK, helping to get shareholderson board with its growth plans.
"When we update the market in November we will provide moregranularity of where we are adding capacity, at places likeLuton, Manchester, Berlin and Toulouse, and we believe that thiswill help reassure them (investors)," said the source.
Some analysts feel Ryanair has had some luck on its sidethis year. O'Leary admitted that recent decreases in the numberof empty seats on planes had likely ended, which may deprivethem of a tailwind on costs.
And its high proportion of early bookings means more thanhalf of its summer tickets were sold before Brexit hit the valueof sterling.
But overall, analysts appear more confident in Ryanair'sability to withstand the pressure, with just one out of 20polled recommending investors sell the company's shares comparedto five out of 25 at easyJet.
Shares in easyJet, half of whose passengers originate in theUK, are down 40 percent since the Brexit referendum compared toa fall of 11 percent at Ryanair.
The question to be answered in the coming months is whetherthe inevitable retrenchment will start to hurt easyJet orRyanair too or whether it will mainly affect their weaker,smaller rivals and less lean carriers at the higher price point.
"Taking a longer term view, probably it's still the casethat easyJet is in a better position than a lot of the legacyairlines," said Jonathan Wober, chief financial analyst atCAPA-Centre for Aviation.
"It's just about getting the balance right and that reallydoes depend on how long the over-capacity remains."
(Additional reporting by Giulia Segreti in Milan; Editing byGareth Jones)