Ryanair yesterday admitted its bid for Aer Lingus faced defeat and tried to refocus the markets on its financial performance as it announced a 38 per cent rise in interim pretax profits and an upgrade in expectations for the full year.

The airline has also indicated it is likely to give cash back to shareholders, possibly in the form of a special dividend, probably at the end of 2007 or later. The airline said it was looking at doing this regardless of its Aer Lingus bid. Michael O'Leary, himself a 5 per cent shareholder in Ryanair, would be a key beneficiary, gaining millions of euro in such a process.

In the six months to September 30th, 2006, the low-cost airline posted pretax profits of €372 million, up from €269 million for the same period of 2005. Profit after tax came in at €329 million, a 39 per cent jump on the €237 million the year before. The airline's net profit margin rose one percentage point to 26 per cent, one of the highest in the airline industry worldwide.

The airline carried 22.1 million passengers in the period, a 23 per cent increase on 18 million passengers in the year ago period. In terms of revenues, the airline managed €1.2 billion, up 33 per cent on the comparable period.

The airline is now increasing its net profit guidance for the second half of its financial year. It expects a 16 per cent in net profits to €350 million, up from previous guidance of 11 per cent. Increased bookings in eastern Europe and a 27 per cent rise in ancillary revenues, including car hire and in-flight food and drink, provided a significant boost to profitability.

Increasingly, Ryanair has started to talk about what will happen if its €1.4 billion Aer Lingus bid fails.

"If our offer is not accepted by a majority of Aer Lingus shareholders, we will continue to be a significant minority shareholder, and will exercise whatever influence we can to encourage Aer Lingus to reduce costs and offer lower fares which is, we believe, its best strategy for the future," said chief executive Michael O'Leary yesterday in London.

In a conference call, the Ryanair chief executive said he believed Aer Lingus had no "long-term future" on its own, but he said the chances of Ryanair getting majority control of the former State-owned airline were becoming more distant. He said if the Employee Share Ownership Trust (Esot) voted in a ballot against the offer, it was unlikely to succeed.

He said a "no" from the Esot would effectively mean 47 per cent of shareholders were unlikely to back its takeover. "It's unlikely, though clearly not impossible for our offer to succeed if only 53 per cent of the shareholders are left," he commented.

As a result, he said, he wanted to refocus the minds of investors and the media on Ryanair's financial performance which was going "gangbusters".

He denied the Aer Lingus transaction had become a distraction or that it meant a switch in strategy. "People have been asking is this some kind of back way into the transatlantic market; no it isn't," he told investors. He said Ryanair was still committed to growing organically but would consider acquisitions like Aer Lingus or Buzz from time to time.

Despite the strong results, costs at the airline grew in the period, with fuel now accounting for 39 per cent of operating costs. Unit costs rose by 5.7 per cent with fuel, staff costs and airport charges the main drivers.

Deputy chief executive Michael Cawley said the airline was using more pilots and cabin crew as its journey lengths increased. The airline said it regarded the fare or yield environment as "benign", with its main competitors relying on fuel surcharges to offset higher fuel bills.

Mr O'Leary said: "Based on a reasonable level of visibility, it now appears likely that yields in quarter three will be up 2 per cent to 3 per cent, compared to our original forecast of a 5 per cent decline."