By Laurence Frost and Cyril Altmeyer
PARIS (Reuters) - Air France-KLM <AIRF.PA> posted strong quarterly earnings and an upbeat outlook despite rising fuel costs, as new Chief Executive Ben Smith prepares to seek pilots' approval for plans likely to include an expansion of the group's low-fare operations.
Revenue rose 4 percent to 7.55 billion euros(6.74 billion pounds) in the third quarter, the group said on Wednesday. Recurring operating profit fell 6.7 pct to 1.07 billion euros - still beating analysts' expectations, according to a Reuters poll.
Describing the results as a "solid performance", the new Air France-KLM boss pledged to "build an ambitious and innovative strategy" for the group in coming months.
Smith joined the French company last month from Air Canada, and within weeks struck a pay deal with staff unions to end a dispute that had led to protracted and costly strikes, grounding hundreds of flights earlier this year.
But he has yet to secure a separate agreement with the all-powerful French pilots on their own specific compensation packages and development plans for the Air France business.
As Air Canada second-in-command, Smith pushed through new labour deals, a global network expansion and the launch of separately branded low-fare operations which together cemented the carrier's rebound from a 2009 brush with bankruptcy.
He may try a similar approach at Air France-KLM - where previous attempts to expand the low-cost Transavia brand have proven controversial, and the affordable long-haul Joon business remains embryonic.
Presenting quarterly results on a call with reporters, Chief Financial Officer Frederic Gagey refused to confirm any low-cost expansion plans but did little to dampen expectations.
"Considering the profit margins at Transavia, it's only natural to want to develop the activity further," Gagey said. "It would be a pity to be unable to meet strong demand from price-sensitive passengers for certain destinations."
Smith is due to open negotiations with Air France pilots' unions next week, the company said.
Unit revenue, a measure of proceeds in relation to capacity, rose 2 percent even as the group increased services by 2 percent, and unit costs fell 1 percent. Traffic was up 2.3 percent at 28.5 million passengers.
Gagey predicted that load factors - or seat occupancy - would continue to rise until February, helping to offset a fuel bill that jumped 20 percent to 1.38 billion euros for the quarter. Net income rose 22 percent to 786 million euros.
Passenger network revenues will rise further in the fourth quarter, Gagey predicted. For the full year, unit costs are expected to increase by no more than 1 percent, excluding the effects of fuel, exchange rates and pensions.
Capacity is projected to increase by 2-2.5 percent in 2018, a more modest gain than the 2.5-3.5 percent predicted in August.
Air France-KLM also adjusted its expected fuel bill increase to 500 million euros from 450 million - an impact seen worsening to 900 million next year in response to higher oil prices.
($1 = 0.8817 euros)
(Reporting by Laurence Frost; Editing by Gareth Jones)