Ryanair announced plans today to hand cash back to shareholders for the first time as it gave warning that a fierce price war and higher airport charges would hit profits in the coming year.

Michael O’Leary, the chief executive, said that profit growth would be “more modest”, at about 5 per cent - the lowest for four years - given softer market conditions and a possible 5 per cent fall in yields.

Shares in the airline plunged 6.5 per cent to €5.01 despite Mr O'Leary insisting that Ryanair would be the most successful airline in the market by continuing to win passengers from its rivals.

He said: “As has always been the case, Ryanair will lead and win every fare war in Europe, because Ryanair has the lowest costs and the lowest fares.”

The gloom overshadowed another set of record results which revealed Ryanair made a net profit of €401.4 million (£271.5 million) in the year to March 31, an increase of 33 per cent. Passenger numbers soared 22 per cent to 42.5 million, making Ryanair the biggest international airline in Europe above Lufthansa.

Shareholders were promised up to €300 million in buybacks, a decision which follows mounting pressure on the airline to pay a dividend.

Andrew Fitchie, analyst at Collins Stewart, cut his Ryanair profit forecast for 2008-2009 by €90 million to around €425 million.

He added: "Ryanair remains one of our favourite airlines from a fundamental perspective, however, given the short term uncertainty over the trading outlook, we do not see the shares performing."

EasyJet first sparked concerns about market conditions in the airline industry last month when it revealed plans to reduce fares by up to 10 per cent.

Ryanair has launched a series of aggressive promotions, including £20 off all return fares and a high-street style “lowest price” guarantee — vowing to match the cheapest fare on the market.

Today's annual results showed that Ryanair’s average fare in the 12 months to March 31 rose 7 per cent to €44. However, much of the 32 per cent rise in revenue, to €2.2 billion, was fuelled by passengers paying excess baggage charges or buying travel insurance.

Michael O'Leary stuck to his target of growing passenger numbers by another 10 million in the current financial year to 52 million, which could make Ryanair Europe's biggest airline, in time for his rumoured retirement date.

It currently carries more cross-border traffic than Lufthansa, but the German carrier flies a total of 51 million passengers a year.

Mr O'Leary added that he expected the European Union to reject Ryanair's protracted takeover bid for the Irish rival Aer Lingus when the competition authority meets to discuss the deal on July 4.

The Irish Government, which retained a 25 percent Aer Lingus stake in September when it floated the previously state-controlled airline on the Irish and British stock exchanges, opposes the Ryanair approach.

Mr O'Leary said that he would refer any block on the deal to the European courts, adding that he believed that any such referral would have a "high prospect of success".

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