Ireland's flag carrier Aer Lingus has confirmed that it will shed 2,500 jobs - 40% of its permanent workforce.

The company is now putting together a survival plan, following the downturn in the aviation industry.

Earlier on Wednesday, Irish Prime Minister Bertie Ahern said it was determined to save the troubled national airline, as management and unions began talks on Wednesday to form a rescue strategy.

And public enterprise minister Mary Rourke said she was exploring ways of helping the cash-strapped state-owned company, despite an EU ruling setting strict limits on member government aid packages.

Bookings slump

The fallout from the terror attacks in Washington and New York on 11 September has hit Aer Lingus particularly hard.

The transatlantic route is crucial to the Irish national airline - half its flights operate between the United States and Ireland.

Bookings are down 80% on last year and it is estimated that the airline is currently losing 2.5m euros (�1.56m, $2.3m) a day.

On Tuesday, the airline said that it would slash its ticket prices by between 50% and 70% as it attempts to keep attracting customers on its European and transatlantic routes.

Fierce competition

As well as slashing prices on routes to America, Aer Lingus has gone into head-to-head competition with the other major Irish airline, Ryanair.

The discount carrier has taken a large chunk of the market for flights to the UK and continental Europe.

Aer Lingus has now cut prices to these destinations, offering tickets for IR�59 (�47, $69) return.

Ryanair has responded by lowering its prices on these routes to just IR �29.99 return and re-iterating its commitment to a 'lowest price guarantee'.

Budget airline Ryanair is one of the few airlines to be almost unaffected by the terrorist attacks in the United States.

Aer Lingus' recovery fizzles out

Aer Lingus' fortunes had improved in recent years.

In 2000, the company posted profits of 80m euros, and there was a plan for the state airline to be floated on the stock exchange in the near future.

However the foot and mouth crisis, industrial relations disputes, as well as the tragic events in the US have put an end to this privatisation plan.

Cut-backs are already in place, with meals no longer served on flights under 2 hours in duration, and temporary staff being let go.

The major headache for Aer Lingus will be how to fund the redundancy packages.

The company is expected to lose almost 90m euros this year, and the cost of the redundancy package for its staff will run to well over 125m euros.