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* Lufthansa, Air France-KLM report better than expected Q3results
* Shares drop on continuing labour issues
* Management say low fuel price benefit only temporary
By Victoria Bryan and Cyril Altmeyer
BERLIN/PARIS, Oct 29 (Reuters) - Lufthansa and AirFrance-KLM reported better than expected third-quarterresults on Thursday, thanks to cheaper fuel and strong seasonaldemand, but warned they still needed to cut costs to competewith more nimble rivals.
Lufthansa also raised its profit forecast for the full year,predicting its highest ever adjusted operating profit of between1.75 and 1.95 billion euros ($1.92-2.14 billion) this year.
But shares in both airline groups dropped after the results,with traders citing profit-taking after a recent strong run andconcerns over continuing disputes with labour over their costcutting programmes.
"Given the highly competitive nature of the industry,structural changes and self-help measures carry much higherimportance than any short term favourable market environment,"Commerzbank analyst Johannes Braun said.
Both groups are battling to bring costs down to a levelwhere they can compete with budget carriers like Ryanair and easyJet in Europe and with more efficient Gulfcarriers and other rivals in their mainstay long-haul markets.
But the improved results threaten to make the task ofwinning their workforces round to making more cuts that muchmore difficult, analysts say.
IAG's boss Willie Walsh has been praised formanaging to cut costs at both British Airways and Iberia, buttravel markets at the time were still weak and Iberia was struggling to survive.
In contrast Lufthansa has already been hit by over a dozenpilot strikes over 18 months while Air France has had to lowerits sights on cost cuts after recent stormy negotiations endedwith managers fleeing a meeting and scrambling over fences.
Lufthansa's main cabin crew union was quick to point out onThursday that the biggest improvements in the results came fromthe core Lufthansa brand. The union has set a deadline of thisSunday for Lufthansa to make an improved offer in wide-rangingtalks covering pay, pensions and working conditions.
"We think the pay department should take a look at theprofit and loss sheet before Nov. 1," union head NicoleyBaublies tweeted.
However, both Lufthansa and Air France-KLM said theirthird-quarter results were flattered by temporary factors andwarned of fare competiton hotting up.
"It's something that can't last, not least because we don'thave enough visibility for the winter season when we see quitesignificant increases in (industry) capacity on Europeanlong-haul, and even more so intra-Europe," Pierre-FrancoisRiolacci, finance director of the Franco-Dutch carrier said.
He was speaking after the airline reported a third-quarter operating profit that almost quadrupled to 898 million euros onrevenues that rose 10.8 percent to 7.415 billion euros, ahead ofthe average of analysts' forecasts for a profit of 694 millionand revenue of 7.24 billion.
Results for the comparable quarter last year had been hit bya pilots' strike.
Meanwhile Lufthansa Chief Executive Carsten Spohr said hisgroup was facing 700 million euros of headwinds in terms ofadditional costs each year, due to inflation and expenses suchas airport user charges, and that the reason why results thisyear had improved at its core airlines business was because ithad restricted growth.
"We are at a turning point in the industry," he said. "Wewill require decisions that will be difficult for unions. We areaware of that and we respect it." ($1 = 0.9121 euros)
(Editing by Greg Mahlich)
