* Full-year profit down 8 pct at 523 mln euros
* Average fares set to rise 6 pct over summer, fall up to 8 pct in winter
* Delivery of new planes to give airline more seats to sell
* Shares climb 10 percent (Adds Breakingviews link)
DUBLIN, May 19 (Reuters) - European low-cost airline Ryanair reported its first fall in profits in five years on Monday, blaming tougher competition, but said prospects of strong demand this summer would help lift profits by up to 20 percent in the coming year.
The Irish airline earned 523 million euros ($717 million) after tax in the year ended March 31, a fall of 8 percent on the previous year but investors were relieved the result was better than the airline had predicted and the shares rose 10 percent after it said this year's profit could climb to 620 million euros.
Rivals said last year's first profit warnings by Ryanair in a decade were the result of it being forced to cut ticket prices after losing business to competitors seen as being more friendly to customers.
In response Chief Executive Michael O'Leary in September called an end to decades of famously austere service, adding seat allocations, easing restrictions on hand luggage and cutting penalty charges such as for failing to print out online boarding passes.
With forward bookings for the summer 5 percent ahead of last year, the strategy appears to be working, O'Leary told a results conference call on Monday.
"While disappointing that profits fell 8 percent ... we reacted quickly to this weaker environment last September by lowering fares and improving our customer experience," O'Leary said.
"We expect this combination of a strong first half but a weaker second half will generate a significant rise in after-tax profits", he said.
Ryanair shares were up 10 percent at 6.98 euros by 1249 GMT, though that was still 10 percent below their all-time high of 7.82 euros, hit before last year's two successive profit warnings.
Ryanair had predicted its after-tax profit for last year would be between 500 and 520 million euros, while analysts had on average expected the result to be around 515 million euros according to a company poll of more than 20 analysts.
"The bottom line is Ryanair are telling us the summer revenue performance is going to be very strong," said Stephen Furlong, an analyst with Davy Stockbrokers in Dublin, which increased its price target to 8 euros from 7.50.
Investors did not appear to be very concerned about the possibility of fares weakening year on year in the winter as there was currently no information on bookings, Furlong said.
O'Leary said profit in the current year should be between 580 million and 620 million euros, an increase of between 11 and 19 percent.
That was below the average of 634 million given in the Ryanair poll but many analysts see Ryanair as being routinely cautious in its forecasts.
Ryanair expects average fares to increase 6 percent in the key summer months compared with the same period a year earlier. Rival easyJet last week forecast growth in revenue per seat yields "in the low single digits" for the same period.
But Ryanair's average fares are expected to then fall by between 6 percent and 8 percent in the six months to March as the first of 180 new Boeing jets are delivered, Chief Financial Officer Howard Millar said.
Millar said the airline would like to take five or six extra jets next summer, but that it appeared unlikely that Boeing would have the spare capacity.
The airline expects passenger numbers to increase 4 percent to 84.6 million in the current year, consolidating its position as Europe's largest airline by passenger numbers.
The percentage of seats left empty on flights should fall by about 2 percentage points per year over the next three years from its current level of 17 percent, O'Leary said. (Editing by Greg Mahlich)