The outbreak of foot-and-mouth disease on both sides of the Irish Sea will mean a fall in profits this year for ferry operator Irish Continental Group (ICG), the company has stated. The market, however, had expected a downbeat statement from ICG and the shares responded by falling just 15 cents on €5.55.

ICG reported a sharp increase in first-half losses and warned that the fall-off in traffic would mean the group's profits for the year would fall below last year's €19 million (£15 million).

In a separate development, ICG has warned that it may reflag its fleet of ferries under the British flag unless the Government agrees to allow ICG operate under the EU's "tonnage tax", regime rather than under domestic corporation tax.

ICG usually has substantial losses in its first half, which covers the off-peak winter period. But in this year's first half to the end of April, losses rose to €7.2 million from €4.7 million, while turnover rose only fractionally to €124.2 million. ICG had actually begun the half-year well but was hit by a severe downturn in March and April when foot-and-mouth took its toll on passenger numbers.

The ferries division moved from a €300,000-operating profit to a €2.4-million operating loss with passenger numbers down 9.3 per cent to 551,000 and cars down 6.7 per cent to 120,000.

There was a better performance in the freight divisions, where there was a 5 per cent fall in container volumes to 180,000, mainly as a result of the elimination of unprofitable routes. As a result, operating profits rose from €200,000 to €1.4 million.

On the possible reflagging of the ICG fleet, chief executive Mr Eamon Rothwell warned that the group would not be able to continue as an Irish-flagged fleet if its tax treatment was less favourable than its European competitors, who effectively pay no corporate tax.

While ICG's current tax charge is very small, Mr Rothwell said changes in accounting standards would require ICG to make provision for future corporate taxation and that this would hit earnings per share. He would not say when ICG would make a decision on whether to reflag its fleet.

Despite the weakness in the first half and the warning of lower profits, ICG is giving its shareholders a 20 per cent increase in their dividends to 5.7 cents per share.