Ryanair said today it was having to cut ticket prices aggressively to fill seats after it launched 50 new routes in a tough economic climate.
The budget airline posted a 12 per cent jump in underlying first-quarter net profit - a modest rise after soaring profit growth in previous quarters - as the extra routes and a strong euro put a brake on earnings momentum.
Half of Ryanair's sales are denominated in sterling, so the euro's recent rise against the British currency has weakened yields, or average fares, when translated back into euros.
"It's been a particularly bad quarter for launching all these new routes in a difficult aviation market post-Iraq war, but the positive aspect is that they have kept down costs," said Mr Stephen Furlong, analyst at Davy Stockbrokers.
Ryanair said average load factors - a measure of how successful an airline is at filling its planes - dropped by five percentage points to 78 per cent.
But Ryanair's chief executive Mr Michael O'Leary predicted a swift bounce back.
"We expect load factors to come back up five points from 80 per cent this year to 85 per cent next year simply because we're not opening up as many routes or increasing frequencies, and therefore (we see) traffic growth of 25 per cent (in 2004/05 compared with this year)," he told reporters in London.
Mr O'Leary also dismissed the suggestion the airline would simply respond to improved market conditions by jacking up fares. "We want to keep reducing air fares because it's the best guarantee of filling flights," he said.
Ryanair reported underlying net profits of euro43.8 million in the first quarter, in line or slightly ahead of expectations.
"The company is restating the guidance it gave in June and most people will be happy with that," said Mr Shane Matthews, analyst at NCB Stockbrokers.
Ryanair shares were up 0.67 per cent at euro5.95 in a weaker Dublin market .
Although the euro's strength against the pound was hitting profits, Mr O'Leary said it would also push down dollar-denominated costs, particularly as the airline added new Boeing 737-800s to its rapidly expanding fleet.
The only cloud on the horizon was a continuing European Union probe into whether the airline received unfair state subsidies at its Brussels hub. A decision is not expected before October.
If the airline lost, Mr O'Leary said he will appeal "and we will win the appeal".
Ryanair is already appealing a French court ruling that financial aid to help it set up a service between Strasbourg and London was illegal.
Mr O'Leary threatened to switch to private airports if European courts ruled that Ryanair could not receive incentives when setting up at publicly owned airports. "The regulators have to understand - if you screw around with us, we will move," he said.
Budget operators have fared better than higher cost flag carriers in the economic downturn but analysts are concerned they are expanding too quickly in the race to capture market share, and will have to cut prices to fill seats - squeezing profit margins.