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* Lufthansa cuts Q4 capacity plans by 1 percentage point
* Lufthansa CEO says looking ahead with confidence to 2017
* Ryanair to start flying from Frankfurt next summer
* Lufthansa shares flat, outperform blue chips (Recasts with Ryanair and Frankfurt announcement)
By Victoria Bryan and Maria Sheahan
PARIS/FRANKFURT, Nov 2 (Reuters) - Ryanair announcedplans to move into Lufthansa's home hub of Frankfurt,stepping up its push into bigger airports and ratcheting uppressure on the German carrier which is expanding its own budgetflights.
Lufthansa said earlier on Wednesday it would offer fewerseats than planned this quarter as it seeks to offset pressureon ticket prices, following on the heels of British Airwaysowner IAG.
European airlines are grappling with falling fares ascarriers, especially low cost ones, put more seats onto themarket to try to take advantage of low fuel prices and gainmarket share.
Lufthansa has been driving growth at its Eurowings budgetbrand to compete, signing deals with Air Berlin and taking overpart-owned Brussels Airlines. That will make it Europe's thirdlargest point-to-point carrier next summer, behind Ryanair andeasyJet.
Ryanair, meanwhile, has been expanding in Germany, where itwants to grow its market share to 20 percent from 8 percent, andis expanding at primary airports across Europe in a drive formore passengers and to attract business travellers.
The Irish carrier said it will start flying from Frankfurtairport, Germany's largest, from next summer to four touristdestinations in Spain and Portugal, with plans for strong growthin winter 2017/18.
Frankfurt airport, operated by Fraport, has fewlow cost carriers due to its high fees and long turnaroundtimes.
Lufthansa has around a 60 percent market share at Frankfurt.Historically it has also had close relations with Fraport, inwhich it owns an 8 percent stake, but Fraport now plans to offerincentives and adjust the way passengers move through theairport to meet the demands of low-cost carriers.
"It's already an affront just to hold a joint Ryanair andFraport press conference on the same day as the Lufthansathird-quarter results," fund manager Michael Gierse at Lufthansainvestor Union Investment, said.
Lufthansa CEO Carsten Spohr said he expected the airlinecould save up to 300 million euros ($332.5 million) a year if itwere to be offered the same conditions as Ryanair and also saidit could start Eurowings flights from Frankfurt.
"That shows Lufthansa won't take the Ryanair move lyingdown," one Frankfurt-based trader said.
Lufthansa is struggling to bring down costs, with strikes atits budget units last week and a deal with its pilots on pay andpensions still outstanding.
Independent aviation consultant John Strickland saidRyanair's arrival in Frankfurt would have little direct impacton Lufthansa's network but could help the German carrierunderline to unions and staff the need to cut costs onshort-haul services.
"At its current cost levels it would not be possible forEurowings to compete profitably on a head to head basis withRyanair should that scenario arise," Strickland said.
Ryanair currently flies to Frankfurt-Hahn airport, which isaround 120 kilometres (75 miles) from the city - promptingmockery from Lufthansa on Twitter on Wednesday: "Welcome to thereal Frankfurt airport, dear Ryanair. In case you get lost onsuch a big airport, just give us a call!"
MARGIN TRICK
Germany's biggest airline now expects capacity growth of 8.7percent in the fourth quarter, taking a further 1 percentagepoint off previous plans. That takes its total growth for 2016to 5.2 percent, from a previous 5.4 percent.
Ryanair can afford to add more seats to the market than itsolder rivals because of its low cost base and business model,whereby it fills planes irrespective of ticket price to minimisepassenger costs and boost spending on extras.
"Anyone can produce a low fare, producing a low fare with amargin is the trick," Ryanair's Chief Commercial Officer DavidO'Brien said at a conference last week.
Lufthansa said capacity growth next year will be 3 percentfor its network airlines and 20 percent at Eurowings, for atotal of 4 to 5 percent.
Spohr said he expected the decline in unit revenues to slownext year, confirming a forecast for a drop of 7-8 percent inthe fourth quarter.
Lufthansa's shares were down 0.3 percent, slightlyoutperforming German blue chips after it also signalledrestraint on spending.
($1 = 0.9023 euros) (Additional reporting by Peter Maushagen and Annika Ross;Editing by Tina Bellon and Susan Fenton)
