BUDGET airline Ryanair raised its annual profit predictions today after a sharp fall in fuel costs helped it narrow its quarterly losses.

Ryanair reported a shortfall of 11 million euros (£9.6 million) in the three months to December 31, from 102 million euros (£88.8 million) in the same period a year earlier.

Fuel costs were down 37% in the quarter, while average fares dropped 12%.

The carrier, which said it has benefited in the recession as its competitors struggle, aims to increase passenger numbers by 10% to 73 million in 2011 as it moves into routes vacated by its rivals.

Ryanair, which launched a series of low promotional fares in the quarter, said passenger numbers rose 14% to 16 million.

The airline - led by flamboyant boss Michael O’Leary - said fares had dropped in the period due to the recession, price promotions and currency fluctuations between the pound and the euro.

Ancillary revenues - such as charges for extra services - grew more slowly than passenger numbers at 6% as customers avoided excess baggage costs.

Ryanair now expects to make a full-year profit in the region of 275 million euros (£239 million) - higher than previously thought after yields fell by less than expected.

This drop was driven by "deep cuts" in loss-making winter capacity at higher cost airports like Dublin and Stansted.

Ryanair dived into the red by 169.2 million euros (£147 million) in the year to March last year amid huge rises in the cost of fuel.

Today’s profit forecast hike comes after rival easyJet also predicted a substantial improvement in performance after passenger numbers jumped 9% in its most recent quarter.

Ryanair said costs were down 4% even without the impact of lower fuel.

The firm said capacity cuts by European competitors have caused overall passenger numbers to fall and this has seen airports "vigorously competing against each other to win Ryanair’s growth".

In December Ryanair said it had called off negotiations with Boeing over the delivery of up to 200 aircraft between 2013 and 2016, indicating the carrier might move to slower growth in the future.

But it will still take delivery of 112 planes up to the end of 2012.

It said it had no plan to reopen the talks, but added any future deal would have to be on "materially improved terms".