Irish airline Ryanair on Monday posted a better-than-expected 550 percent rise in first quarter profit thanks to a large reduction in fuel costs but said its outlook remained cautious for the rest of the year.

Ryanair, one of the world's biggest airlines by market value, said net profit for the three months to June 30 came in at 136.5 million euros ($193.8 million). That compared with 132 million euros on average expected by three analysts surveyed by Reuters.

Thanks to a 13 percent reduction in average fares we grew traffic by 11 percent, a robust performance in a deep recession, when many of our competitors were cutting flights, losing traffic and reporting increased losses, Chief Executive Michael O'Leary said in a statement.

While rivals exposed to the weak premium sector shrink in the face of falling demand, Ryanair is hoping to mop up business from cost-conscious travelers during the global recession.

Ryanair, which started out in 1985 with a 15-seater plane, plans to keep cutting fares aggressively to snatch business from those struggling in the economic downturn, with average fares expected to fall by 20 percent or slightly more this year.

Europe's biggest low-cost airline, which prides itself on its no-frills, bottom-price tickets, reduced profit forecasts toward the lower end of the 200-300 million euros previously guided for the year to March 2010.

That compared to rival airlines BA and Virgin which are both expected to make heavy losses.

O'Leary said Q2 yields -- the industry's main yardstick measuring average revenue per mile per customer -- will be significantly lower than last year, at or slightly above the minus 15 to 20 percent range previously guided for the carrier's key profitable quarter.

Traffic growth is strong but at much weaker yields due to the recession and the impact of tourist tax in Ireland and the UK. We have limited visibility beyond the next two months but expect passengers to be very price sensitive for the rest of the year, O'Leary said.

The Dublin-based airline, which had already taken a hedge for 90 percent of its fuel needs for the first three quarters of 2010 and 5 percent for Q4, further hedged for 60 percent of fuel for Q4 at an average $610 per ton.

O'Leary, who said Q1 results were distorted by a 42 percent reduction in fuel costs, added that should Ryanair hedge the balance of FY2010 fuel at $620 per ton, it would give full year fuel cost saving of around 460 million euros.

($1=.7043 euros)

(Reporting by Padraic Halpin; Editing by Mike Nesbit)