Ryanair said yesterday that the worsening economic environment in Europe combined with high oil prices could result in a 50 per cent fall in profits next year.

The no-frills carrier faces a squeeze in two directions as its costs rise while consumer demand falls. In typical Ryanair fashion, the airline plans to respond by cutting fares to stimulate consumer interest.

Ryanair, Europe's largest airline, said that the high oil price, longer routes and an increased number of flights would lead to “significantly higher costs” in the next financial year. It is particularly vulnerable to a sustained high oil price - at present oil is about $90 a barrel - as it is largely unhedged, which will force it to pay the market rate for fuel.

Its best-case scenario for 2008-09 was a 6 per cent increase in profits to about €500million (£375million), but the carrier also said that there could be a 50 per cent fall in profits if oil stayed high and consumer spending declined.

In the three months to the end of December, Ryanair reported a fall in income from €48million to €35million, despite a 21 per cent increase in passenger numbers and a 16 per cent rise in revenue. The airline has cut some fares to keep its aircraft full over the winter, but it has been hit by higher costs, including a doubling of charges at Stansted, the carrier's main base, as well as an 18 per cent increase in crew costs.

Michael O'Leary, the chief executive of Ryanair, said: “The Civil Aviation Authority stood idly by last year while Stansted airport doubled passenger charges and at the same time delivered abject service to airlines and passengers.” He repeated his calls on the Government to end BAA's monopoly control of London's airports.

Ryanair carried 12.4million passengers during the third quarter and ancillary revenues - money raised from extra charges - rose 30 per cent to €111million. Overall revenue was €569million. The company had a one-off gain of €12.1million from the disposal of five aircraft. The low-cost carrier expects net income of €470 million for the full year, roughly in line with analysts' forecasts.

Mr O'Leary said: “There can be only one competitive response to any consumer uncertainty, and that is for Ryanair to slash fares and yields, stimulate traffic, encourage price-sensitive consumers and promote new routes. The airline business is highly cyclical and we have seen these downturns before. They pose unique long-term opportunities for the lowest-cost producer - Ryanair - to grow rapidly.”

Ryanair's gloomy outlook for the aviation sector forced UK airline shares lower. British Airways fell 6p to 312p and easyJet slipped 13p to 453p. Ryanair closed down 9 euro cents at 352 cents.

Despite the worsening profit figures, Ryanair announced a €200million share buyback, equivalent to 3 per cent of the company's stock. This is in addition to the €300 million buyback announced last year.

Meanwhile, Ryanair will begin testing a system in April and May that will allow passengers to use their mobile phones inflight. The carrier is waiting for regulatory approval before testing the system on 25 aircraft.

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