Ryanair, Europe's biggest budget airline, has refused to accept that high oil prices mean an end to the era of low-cost travel despite predicting that its own fares would rise by about 5 per cent this year.

Michael O'Leary, the airline's chief executive, said that rising fuel bills would force competitors to increase fares sharply, driving passengers to the no-frills carriers. British Airways increased its fuel surcharge last week for the second time in a month and is now £218 return for its longest flights.

Mr O'Leary said that Ryanair would increase its additional charges such as the checked-baggage fee but its fares would remain substantially cheaper than rivals.

He said: "The era of low-cost air travel is not over. Rather, the era of high-fare air travel is over. Consumers will become more price sensitive and people will recoil from BA's fuel surcharges."

However, Mr O'Leary gave warning that if oil prices stay at $130 a barrel or more then the carrier will only breakeven with a 5 per cent fare increase this year. This compared to a record net profit of €480.9 million (£380.9 million) in the year to the end of March, up 20 per cent rise on the previous year.

Mr O'Leary's comments this morning followed yesterday's warning from the International Air Transport Association (IATA) that if oil prices remained at current levels airlines could face a combined loss of $6 billion (£3 billion). It has estimated that combined losses will be $2.3 billion if oil stays over $105 a barrel.

Mr O'Leary, Ryanair's chief executive, said that despite the expiry of the airline's hedging facility, it remained "committed to a policy of no fuel surcharges" and fare price rises this year would be no more than 5 per cent.

"We will continue to absorb these higher oil costs, even if it means that our profits will fall in the short term, while we continue to deliver lower fares," he said.

He added that the company would continue to mitigate the impact of oil prices by cutting costs in all other areas. It recently imposed a company-wide pay freeze and announced redundancies at its Dublin call centre.

He said the airline would ground 20 aircraft, or about 10 per cent of its fleet, this winter. The planes will be grounded mainly at London Stansted and Dublin airports, where Ryanair said high airport charges makes it more profitable to ground aircraft than fly them through the winter.

Mr O'Leary also warned customers that they faced higher charges for baggage and airport check-in as Ryanair sought to persuade passengers to check in over the internet and bring only hand luggage.

The outspoken Irishman said the outlook for the coming year remained "entirely dependent on fares and fuel prices", adding: "Based on forward bookings, we now believe it likely that average fares for the coming year will rise by approximately 5 per cent and, if oil prices remain at $130 per barrel, then we expect to accordingly break even."

Unadjusted net profit fell by 10 per cent to €390.7 million after the inclusion of exceptional items, including a €91.6 million writedown in the value of its stake in Aer Lingus.

The number of passengers carried rose by 20 per cent to 42.5 million helped by the addition of 30 new aircraft and the opening of three new bases at Bournemouth, Edinburgh and Belfast, allowing the airline to add 201 new routes.

Average fares, including baggage charges, fell by 1 per cent, while unit costs rose by 2 per cent on the back of a doubling of airport charges by BAA at Stansted and higher charges at Dublin airport.

Mr O'Leary renewed his call for BAA's "abusive airport monopoly" to be broken up by splitting its London and Scottish airports into separate competing companies.

He added: "The CAA's recent proposal to allow Stansted to raise prices by up to 150 per cent on top of last year's doubling airport charges proves yet again that the UK's airport regulatory regime has failed abysmally."

He dismissed the CAA as “haplessly useless and incompetent” and claimed that BAA's airports were “inefficiently designed, inefficiently built and abominable”.

His comments were echoed yesterday by Giovanni Bisignani, the director-general of IATA, who criticised the CAA and BAA for being a "national embarrassment" to Britain.

IATA predicted that the global airline industry would make losses of $2.3 billion in 2008, but that could spiral to $6 billion if oil stayed at current levels.

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