Aer Lingus is expected to report profits of more than €50 million next month, but faces pay demands of up to 17 per cent, the airline's chief executive has warned.

The higher-than-expected operating profit will be included in the airline's annual results for 2002, to be released in mid-March.

However, staff last night said the airline's improved position meant all pay rises under the last national pay agreement and the new deal must be paid "as of right".

Chief executive Mr Willie Walsh previously said profits would come in at about €45 million, but the airline will comfortably surpass this.

The decision last year to offer cheaper fares via aerlingus.com, plus a major assault on the company's cost base, appear to have restored the airline's financial health.

The only serious threat to the company's profitability this year is a war on Iraq.

But Mr Walsh told a meeting of Cork Chamber of Commerce yesterday that Ryanair's cost base was now the benchmark in the Irish aviation industry and Aer Lingus needed to achieve similar margins to its rival.

However, Mr Owen Reidy, SIPTU Aer Lingus branch secretary, said the staff at the airline had suffered a lot of pain during the period of the survival plan.

He said a pay freeze imposed as part of that plan would soon end and this represented a chance for the company to pay workers what they deserved.

He said this meant paying two tranches, worth a total of 9.7 per cent, due under the PPF, the last national pay agreement. "The chief executive wants to talk about further changes in work practices in relation to some of this, but we believe it should all be paid as of right."

He said depending on votes among the wider union membership, Aer Lingus workers would also be expecting the 7.2 per cent increase envisaged under the new pay deal, Sustaining Progress.

Mr Walsh said, however, the company would take several measures to reduce costs further this year. One of these was to simplify the airline's fleet structure.

Mr Walsh said there was "enormous potential" in the development of further US gateways, but Irish airlines were restricted to just four gateways - New York, Boston, Chicago and Los Angeles - under a US/Ireland bilateral agreement.

"Aer Lingus would open a number of further gateways in the US if this situation were to change with major benefit to Irish business and tourism. This could lead to a doubling of transatlantic visitors to Ireland within a short timescale," he said.

Addressing the potential effects of an Iraqi war on the company, Mr Walsh said he would take urgent action to protect the business.

"We have a range of contingency plans and in the event of a crisis we will act quickly and decisively," he said.

According to sources, the airline will react to a war in Iraq with further low fares and attempt to trade out of any trouble. Up to 50 per cent of the company's profits come via transatlantic routes so the willingness of US passengers to travel is a major concern.

In relation to airport infrastructure, Mr Walsh said he welcomed the development of a new terminal in Cork, but said somebody had to pay for it.

"In this case it is the end user - in other words our customers who want lower and lower fares. Aer Rianta has already indicated that costs will increase as a result of the building programme at Cork.

"It is imperative that any airport development is cost-efficient, simple and geared to the basic needs of the customer, to facilitate access to air travel," he said.