Ryanair hikes profit forecast after eclipsing rivals in bumper summer

* Ryanair ups FY profit forecast by 25 pct

* Cites European weather, weak short-haul capacity growth

* Still sees fare war this winter

* Shares (Berlin: DI6.BE - news) up 10 percent at all-time high (Rewrites first paragraph, adds comment from management and analysts, also adds background and updates shares)

By Conor Humphries

DUBLIN, Sept 9 (Reuters) - Ryanair raised its full-year profit forecast by an unexpectedly strong 25 percent on Wednesday, as it exploited its low-cost model and growing capacity to eclipse rivals in a bumper summer for European aviation.

Its shares leapt 10 percent to an all-time high.

Poor summer weather in northern Europe has helped boost demand for flights from everyone from budget carriers such as easyJet and Norwegian to traditional carriers British Airways (part of IAG ) and Lufthansa.

But the scale of Ryanair's outperformance, with fares up 2 percent even as it increased capacity by 13 percent in the six months to September, came as a surprise even to the airline itself, which brought forward its statement from Sept. 24.

Ryanair has the lowest cost base of any airline, around 60 percent below Lufthansa, according to the CAPA-Centre for Aviation, and operates a fleet of more than 300 Boeing 737-800 planes, with hundreds more on order.

The Irish carrier, Europe's largest by passenger numbers, said it now expects net profit of between 1.18 billion euros ($1.3 billion) and 1.23 billion in the 12 months through March 2016, up from an earlier forecast of 940 million to 970 million.

Ryanair shares hit an all time high of 14.27 euros in early trade, up 10 percent, and were up 7.1 percent by 1410 GMT. Its main rival easyJet opened up 2.6 percent, but then fell to be down 1.1 percent.

EasyJet (Other OTC: EJTTF - news) last week raised its annual profit forecast after record demand for beach holidays and city breaks, but by a much lower 7 percent.

Lufthansa, Europe's largest aviation group by revenue, is meanwhile struggling with a two-day pilot strike stemming from its efforts to cut costs.

The German airline has said it would comfortably reach its 2015 profit targets after a better than expected July and August, yet a forecast operating profit margin of around 5 percent compares with around 20 percent for Ryanair.

CUSTOMER SERVICE

Ryanair, whose hub at Stansted in eastern England serves destinations including holiday hotspots such as Alicante, Corfu and Ibiza, said it was boosted by European weather and a strong British pound.

But it said it was also helped by a two-year old drive to improve customer service that has allowed it to compete with easyJet for premium economy passengers.

"They had probably got an edge on us on the customer service stuff, but we've clearly closed that gap in terms of perception in the customer's mind," Ryanair Chief Financial Officer Neil Sorahan said of easyJet in an interview with Reuters. "Customers are clearly voting with their feet."

Ryanair said in a statement it expected fares to be higher than previously forecast in the three months to December, but forecast "sustained fare wars" in the spring, with Germany and Lufthansa a key target.

"The likes of Air Berlin (Xetra: AB1000 - news) , Germanwings etc will probably try to hang on to the market share that they have, which will lead to share pressure across the winter," Sorahan said.

Ryanair increased its full-year capacity growth target from 14 to 15 percent, with annual growth planned to hit 20 percent in the three months to March. It (Other OTC: ITGL - news) is now "the key player" in capacity growth in Europe, Goodbody analyst Mark Simpson said in a note.

Industry experts say Lufthansa is having a hard time dealing with its unions because its forecast of improving results runs counter in the eyes of some workers to its stated need for savings.

Lufthansa may even have helped Ryanair by expanding its Germanwings budget brand in Germany, where low-cost carriers have been slow to take market share, said Jonathan Wober, chief financial analyst at CAPA-Centre for Aviation.

"Lufthansa, through expanding Germanwings, has warmed up customers to the idea of no-frills flying and having unbundled fares," Wober said. "Now Ryanair, with its lower cost base, can come in and undercut on price." (Additional reporting by Victoria Bryan in Berlin; Editing by David Holmes)