Ryanair , Europe's biggest budget airline, raised its full-year profit forecast on Monday as a 17 percent rise in fares made up for more expensive fuel and reduced capacity.

Underlining the resilience of the low-cost sector as legacy carriers struggle, Ryanair soared past analyst forecasts with a net profit of 15 million euros ($20 million) in its third quarter to December 31.

Its shares, which have gained 35 percent in the past five months, outpacing the broader Irish market, hit a four-year high initially and closed 0.9 percent higher at 4.19 euros.

The higher fares made up for a 2 percent fall in passenger numbers as the airline grounded 80 of its 270 planes over the winter due to high fuel costs.

Ryanair is doing so well because it can increase its fares and still be lower than the competition, said Gerard Moore, an analyst with Merrion stockbrokers in Dublin.

Cutting capacity more aggressively than its rivals gives it even more scope to increase average fares and this strategy is paying off.

Ryanair followed British peer EasyJet in posting strong revenue growth as higher-priced rivals are battered by fuel costs and a struggling global economy.

German group Lufthansa (LHAG.DE) and Air France-KLM (AIRF.PA) have cut profit forecasts after being hit by fuel cost rises and slashed plans to expand in 2012.

Ryanair's revenue was 844 million euros in the quarter, ahead of an average forecast of 819 million in a poll of 21 analysts compiled by the company. Quarterly net profit of 15 million euros was well ahead of a 16 million loss forecast.

It increased its full-year net profit forecast by 9 percent to 480 million euros.

RISING FUEL BILL

The EU recession, higher oil prices, the unfolding failure of the package tour operator model, significant competitor fare increases and capacity cuts, has created enormous growth opportunities for Ryanair, Chief Executive Michael O'Leary said in a statement.

Ryanair is examining opportunities in Spain following the collapse last week of loss-making rival Spanair, Chief Financial Officer Howard Millar told Reuters.

We certainly see it as an opportunity to expand our base, he said.

One cloud on the horizon is the fuel bill, which Ryanair is forecasting will increase by 350 million euros in its next financial year, which runs from April 2012 to March 2013. That poses a significant cost challenge, but does not necessarily mean profit growth will slow, Millar said.

So far we have been able to pass on higher fuel charges to passengers in the form of higher fares. So far so good, but one never knows, he said.

The company's annual report puts its fuel bill for the 12 months to March 31 2011 at 1.2 billion euros.

Ryanair expects passenger numbers to grow to 80 million passengers in 2011 from 76 million in 2010.

Ryanair, which in 2010 paid its first dividend since being floated 15 years ago, has not changed its plans to dish out a substantial dividend of up to 500 million euros next year but O'Leary said he was nearly certain that if that proved to be the case, another payment would not be forthcoming in 2014.

I am very reluctant that we don't get ourselves into this having an annual dividend policy and listening to shareholders whining on about our dividend not being significant enough, he told an analyst call.

($1 = 0.7615 euros)

(Reporting by Conor Humphries; Editing by David Cowell)