Air France-KLM shares slump as costs take shine off profits

* Shares (Berlin: DI6.BE - news) fall sharply

* Analysts express concern over cost management

* Stock still up some 150 pct since start of 2017 (Releads with share price fall, analyst comment)

By Cyril Altmeyer and Victoria Bryan

PARIS/BERLIN, Nov 3 (Reuters) - Shares in Air France-KLM (LSE: 0LN7.L - news) , Europe's second-biggest airline, retreated on Friday as concerns about its cost cutting targets overshadowed higher third quarter profits.

The shares initially rose more than 5 percent on news that operating profit was up 38.7 percent, but the stock was nursing a 6.4 percent loss by mid-session trading after the company's conference call with analysts failed to reassure them on costs.

Airlines have benefited this year from a return of U.S. and Asian passengers travelling to Europe after terror attacks had deterred them last year. Lower oil prices have also helped, but pressure from low-cost rivals remains a challenge.

Air France-KLM has said it aims to cut unit costs by 1-1.5 percent this year, but on Friday gave some caveats.

A London-based trader said management refused to comment on the cost outlook for 2018 during the call.

"Management's new target on costs no longer includes load factor and profit sharing effect, and is a negative," commented a second trader.

Third quarter profit of 1.022 billion euros ($1.2 billion), had beaten the average analyst expectation of 953 million in a Reuters poll.

"Overall, this is a good set of numbers from AF-KLM (Shanghai: 600686.SS - news) but we view the miss on costs as one negative," wrote analysts at brokerage Goodbody.

Air France KLM shares remain about 150 percent above where they started in 2017.

Meriem Mokdad, fund manager at Roche Brune Asset Management, said there was an element of profit-taking behind the slide in Air France KLM's shares, and said her firm would look to buy up the stock on the back of its fall on Friday.

"The company has done some good restructuring work, and has strengthened its growth in areas such as maintenance services," she said.

COSTS VS RIVALS

Unit revenues - a closely watched measure of how much income is generated - increased 4.1 percent in the quarter and Air France-KLM said it expected an increase in the fourth quarter as well, driven by long-haul bookings.

"Unit revenues in October were positive, forward bookings for November and December are ahead of last year," said Air France KLM finance chief Frederic Gagey said.

Lufthansa (Xetra: LHAB.DE - news) , Europe's biggest airline, last week said its unit revenues rose 4.5 percent in the third quarter, outpacing British Airways-parent IAG, which saw a 2.2 percent rise as it added capacity from Aer Lingus and low cost unit Level to transatlantic routes.

Air France-KLM's French brand has lagged rivals on the cost-cutting front, leading to lower profitability. Air France (Paris: FR0000031122 - news) reported a Q3 profit margin of 11 percent, with KLM at 18.5 percent. That compares with an operating profit margin of 18.1 for the Lufthansa brand and 21.5 percent for British Airways.

Air France has set up a new lower cost airline Joon, which it hopes will attract a younger generation of customers and make it more competitive against leaner Gulf-based rivals and low cost carriers.

The group also said on Friday it would be introducing an 11 euros one-way surcharge on bookings made via third-party GDS systems, such as Amadeus, Travelport and Sabre from April 1, 2018. It is following the example of Lufthansa and British Airways as airlines use new technology to gain more control over ticket sales.

Air France-KLM did not give a profit outlook for the year. Analysts forecast on average 1.519 billion euros, which would be a 45 percent jump on last year.

($1 = 0.8573 euros) (Reporting by Cyril Altmeyer and Victoria Bryan; Additional reporting by Alan Charlish and Sudip Kar-Gupta; Editing by Elaine Hardcastle)