An indication that profit growth over the year may not continue at the stronger than expected first quarter rate resulted in a fall in the Ryanair share price after the company announced a 26 per cent rise in pre-tax profits to €22.7 million (£17.88 million).

Ryanair shares closed at €9.30 as the company reported a 29.5 per cent jump in post-tax profits to €18.1 million for the three months to end June.

Reporting a strong 37 per cent rise in revenues to €115 million and a 32 per cent increase in passenger volumes to 1.7 million, Ryanair chief executive Mr Michael O'Leary seemed to sound a note of caution.

"I remain somewhat cautious about the general market outlook. Whilst current traffic growth and trading performance is good, there are some factors outside our control which are artificially enhancing this performance at present, not least of which continues to be the strength of sterling and our successful fuel-hedging policy." But Mr O'Leary said he remained comfortable with analysts' forecasts of profits growth of 17 to 20 per cent for the year.

Ryanair finance director Mr Howard Millar said the company was on target to produce a 25 per cent rise in passenger numbers this year and strong profit growth. Concerns about sterling and fuel prices were more medium than short-term issues, he said. With about 60 per cent of revenue and 50 per cent of costs in sterling the company has a net 10 per cent exposure to any weakening in the currency.

Higher fuel costs will not impact until the next financial year at the earliest because the company has hedged forward until the summer of 2001, he explained. But Ryanair is taking steps to offset any negative impact from a fall in the value of sterling and higher fuels costs. These steps include using new aircraft which require less fuel and reducing operating costs by, for example, using the Internet and the telephone directly to target customers rather than the more costly travel agent or reservation services options.

The Internet now accounts for 35 per cent of all bookings with the telephone contributing another 40 per cent, compared with four years ago when travel agents generated about 70 per cent of bookings, Mr Millar said. Costs have been reduced by cutting commission paid to travel agents from 7.5 per cent to 5 per cent, while the company terminated its relationship with the Galileo central reservation system from August 1st.

Despite these cost-cutting measures the results show that costs rose faster than revenue in the first quarter, reducing operating margins. Revenue grew by 37 per cent to €115 million with a 40 per cent rise in scheduled revenues to €103.3 million and a 13 per cent rise in ancillary revenues to €11.8 million. But costs were 39 per cent ahead at €92.8 million, pushed by a 62 per cent jump in airport and handling charges to €15.2 million and increases of 30 per cent or more over all headings. Operating margins fell to 19.35 per cent from 20.6 per cent. Mr Millar attributed the fall mainly to a number of "one-off costs" in the quarter including opening 10 new routes, new aircraft costs and pilot recruitment and training. Margins would be maintained around the 20 per cent level, he said.

After adding 10 new routes to bring its total to 45 in the first quarter, Ryanair is looking at adding up to 35 more routes over the next three to five years. But none of these routes will involve Dublin because Aer Rianta is not prepared to negotiate a low-cost passenger volume deal, Mr Millar insisted. "In the last three years we have put no new seat capacity on the Ireland/UK routes and we have no plans to add capacity because the cost per passenger has doubled from £4 to £8 this year," he said. He described Aer Rianta's rejection of Ryanair's offer to launch up to 10 new low-fare routes from Dublin to continental Europe as "a strategic blunder" by the airport's operator. But in Shannon, where the company had "a good deal", the new Shannon/Frankfurt route was performing ahead of expectations, he said.

Ryanair planned to open "mini-bases" for its aircraft in mainland Europe to "spread the risk and start flying domestically throughout Europe", Mr Millar said. Germany, France, Italy and Belgium were under consideration as possible bases.

Mr Millar said the passenger load factor was ahead of Ryanair's annualised 70 to 72 per cent level. With a strong cash flow from operations - up to €63.6 million from €25.8 million - relatively low gearing and cash resources of €420 million up from €355 million, Ryanair is well placed for continued expansion.