The Franco-Dutch group, which last week failed to win a key ballot of cabin unions, said operating losses fell in the second quarter to 66 million euros from 145 million a year earlier as it managed to squeeze non-fuel costs.

Revenues grew 4.5 percent to 6.5 billion euros.

Shares in the airline, formed from a merger of French and Dutch carriers in 2004, shot up 13 percent to 4.40 euros as management stuck to its guns on restructuring and issued forecasts implying smaller then expected losses for the year.

Analysts said the tough stand on restructuring after the cabin crew vote lifted shares alongside forecasts of an improved operating profit of at least 195 million euros in the second half. Some Air France unions say the measures are excessive.

"The on-going union discussions are critical to a successful turnaround and Air France-KLM, but see value at current levels based on these better than expected result," analysts at Goodbody said.

"These results demonstrate how crucial the success of the Transform 2015 plan is to the turnaround of the group," Chairman and Chief Executive Jean-Cyril Spinetta said in a statement.

Net losses widened to 895 million euros from 197 million, hit by a 365 million euro restructuring charge and a drop in the value of the airline's fuel hedging contracts.

Snared between low-cost rivals in Europe and Gulf carriers taking chunks of its long-haul premium business, Air France-KLM is urging staff at its strike-prone French network to swap greater efficiency for a pledge to avoid compulsory job cuts.

Cabin crew unions last week rejected proposals to cut 5,122 posts through voluntary measures, but Air France-KLM said it still expected to meet its target of boosting productivity 20 percent between 2011 and 2014 by imposing savings.

Ground staff have already accepted the plan, leaving crucial decisions in the hands of pilots who are due to vote in August.

"What is clear is that we don't have a choice: the measures we proposed are meant to ensure the survival of the company and its recovery in coming years," Finance Director Philippe Calavia told reporters.

"The majority of our colleagues have understood this."

Air France-KLM (AIRF.PA), 15 percent owned by the French government, faces a delicate task pushing through its proposals as the country's new Socialist government wades into a series of industrial disputes to try to prevent redundancies.

Air France-KLM kept investors guessing over a possible codeshare arrangement with Abu Dhabi's Etihad, which announced a similar deal with Irish airline Aer Lingus on Monday.

"We are looking at how we can co-operate with Etihad," Spinetta said. He declined to comment in detail on the talks but told Reuters any deal would not involve exchanging stakes.

Ryanair (RYA.I), Europe's largest budget carrier which is bidding for Aer Lingus, disappointed its investors with a slide in second-quarter profits, highlighting the fragile economic backdrop as traditional carriers try to stem losses.

In Dublin, Ryanair shares fell 2 percent .

Passenger business has improved and summer bookings are "positively oriented" but cargo suffered from the weak global economy, Air France-KLM said.

Its unit costs declined 1.3 percent after stripping out currency and fuel prices.

Analysts were on average expecting operating losses of 216 million and a net loss of 211 million on revenues of 6.45 billion, according to Thomson Reuters I/B/E/S consensus data. (Additional reporting by Tim Hepher; Editing by Mike Nesbit)

• A Permanent Economic Emergency