Ryanair fares will have to rise by 5 per cent this year, but that could still fail to prevent the budget airline crashing into the red, chief executive Michael O'Leary warned today amid the crisis of soaring fuel prices.

In the most serious profit warning ever from Europe's biggest budget carrier, O'Leary today moved from his prediction four months ago that profits would halve to admitting crude at current prices will wipe out earnings.

Ryanair today reported record profits of €481 million (£380 million) for the year to 31 March. But O'Leary conceded: "This is as tough as it has been, and is tough as it is going to get. Our profits are going to get hammered. It's a war out there.

"The outlook is entirely dependent on fares and fuel prices. With average fares rising by 5% and if oil remains at $130 a barrel, then we expect to break even [in 2008-9]."

Fares are already rising at around 5% this summer as Ryanair pushes through increases, taking advantage of what it says are passengers defecting from airlines such as British Airways, which have been hitting customers with fuel surcharges.

Services will be cut, with 20 aircraft or 10% of the fleet grounded later this year to save money. Frequencies will be reduced on popular routes, and flights halted to some French destinations.

O'Leary also warned the five million passengers a month who fly Ryanair that they will continue to be hit by rising baggage and check-in charges. Dozens of call-centre staff have been laid off, and pilots and crew could be jobless during the service cuts.

O'Leary admitted his plans to quit the airline he has transformed over the past decade have been put on hold.

"There is no way I am going in the midst of all this," he said. "Frankly, it's a lot more interesting like this. We are going to see a string of bankruptcies in the coming months, and airlines disappearing at a rate of knots. As far as I am concerned, oil can stay at $130 a barrel because it will see off more of our competitors more quickly."

In a swipe at BA chief Willie Walsh, who last week said record fuel prices meant the end of budget travel, O'Leary countered: "High oil prices do not mean the end of low-fare airlines.

It actually means the end for high-fare airlines - you have already seen it with the failure of all these business class-only carriers - because passengers will continue to search for the lowest fares."