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* Fares down 17 pct in 3 months to Dec 31
* Q3 profit down 8 pct on lower fares
* Ryanair reaffirms FY profit forecast
* Says it will use weak market to expand (Adds quotes from CEO, analyst; Adds details on fares)
By Conor Humphries
DUBLIN, Feb 6 (Reuters) - Ryanair's average faresfell more than expected in the last three months of 2016 amid aglut of capacity in Europe's short-haul aviation market, but thelow-cost giant said it remains on track to post a modestincrease in annual profits.
Europe's short-haul carriers have struggled in recent monthswith overcapacity and Britain's vote to leave the EuropeanUnion, with low-cost rivals Wizz and easyJet both trimming their annual profit forecasts in recent weeks.
Ryanair, Europe's largest airline by passenger numbers, saidaverage fares fell 17 percent in the three months to Dec. 31 andcould fall up to 15 percent in thee months to March 31. That isworse than its earlier forecast of a fall of between 13 and 15percent over the six-month period.
Weak fares knocked its profit in the final three months of2016, the third quarter of its financial year, by 8 percentcompared to last year to 95 million euros ($102.2 million),compared to a forecast of 99 million euros in a company poll ofanalysts.
But it said it remained confident of meeting its profitguidance for its financial year to March 31 of 1.3-1.35 billioneuros, which would imply an increase of around 7 percent on lastyear.
"It seems clear that pricing [in the year to end-March 2018]will continue to be challenging and we will respond to theseadverse market conditions with strong traffic growth and lowerunit costs," chief executive Michael O'Leary said in astatement.
"We expect our ... strategy will win market share from allhigher cost EU competitor airlines, while we continue to opennew markets," he said.
The Irish airline, which is focusing on market share ratherthan profit per passenger, increased its passenger numbers inthe last three months of 2016 by 16 percent and further cut thenumber of empty seats on its planes.
It plans to grow capacity by 13 percent this winter comparedto an industry average increase of around 9 percent - thehighest level of capacity growth in the industry in a decade.
Ryanair said its costs per passenger were down 12 percent inits third quarter, half of that due to fuel. Unit costs for thefull year to March 31 will fall by around 4 percent, it said.
Ryanair has outperformed the wider European airline marketin recent months, closing on Friday at 14.77 euros, 41 percentahead of its post-Brexit low of 10.46. The ThomsonReutersEuropean Airlines Index is up 23 percent from its post-Brexitlow.
"The Q3 results came in marginally light of our forecastsand consensus...However, we expect Ryanair's peers to facegreater pressure given their narrower margins," said Liberiumanalyst Gerald Khoo, adding that he expected no change inanalysts' consensus forecasts for Ryanair's full-year profit.($1 = 0.9295 euros) (Reporting by Conor Humphries; Editing by Adrian Croft)
