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* Avg yields fall by over 3 pct in 2014 - management letter
* Cost cuts in 2014 nowhere near enough to compensate
* Rising competition from low-cost and Mideast carriers (Adds more comments, background on strikes, meeting date)
FRANKFURT, Feb 6 (Reuters) - More savings need to be made atLufthansa's main airline business to prevent toughcompetition on fares and rising external costs from driving itinto "a dangerous red zone," according to management atGermany's biggest airline.
Average yields -- a measure of ticket pricing -- fell bymore than 3 percent in 2014 and cost cuts within the group werenowhere near enough to compensate, Lufthansa board members KarlUlrich Garnadt and Bettina Volkens said in a Feb. 5 letter tostaff seen by Reuters on Friday.
In addition, staffing costs look set to increase, and thegroup is facing other rising costs beyond its control such asairport fees and air traffic control charges.
"The bottom line is that these twin trends will take us intothe dangerous red zone if we do not take action to correctthem," they wrote in the letter.
Lufthansa has undergone repeated cost-cutting programmesover recent years but costs at the airline remain high incomparison with low-cost rivals such as Ryanair oreasyJet and Middle East-based carriers includingEmirates.
"The competition knows our cost position and knows that thisis an area where we are vulnerable ... Our cost level is now 30to 40 per cent higher than that of our direct competitors suchas easyJet or Turkish Airlines," the executives wrotein the letter.
Under CEO Carsten Spohr, Lufthansa is planning to expandregional airline Eurowings into a budget carrier and has beennegotiating with staff to reduce costs on someLufthansa-operated routes that are popular mainly withprice-sensitive tourists and not business travellers.
Plans to expand Eurowings have drawn criticism from pilots,who went on strike ten times in 2014 in a row over earlyretirement benefits and do not want to see pay and conditionsbeing eroded.
"In the long term our staff costs cannot, of course, besubstantially higher than those of our competitors. There is noeasy answer to this," the managers said.
The executives added there were no plans to lay off pilotsand that rumours some 50 aircraft were to be withdrawn fromLufthansa German airlines -- which include the Lufthansa,Germanwings and Eurowings brands -- were false.
They said they would give more details of plans in a staffmeeting on Feb 19.
The letter to staff was first reported by German magazineSpiegel. (Reporting by Peter Maushagen; Writing by Victoria Bryan;Editing by Kirsti Knolle and Mark Potter)
