UPDATE 1-Air France-KLM Jan traffic down 1.6 pct, cargo up

* Jan passenger traffic down 1.6 pct, average revenue down

* Cargo traffic up 2 percent

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PARIS, Feb 8 (Reuters) - Passenger traffic at Air France-KLM (AIRF.PA) fell 1.6 percent in January but there were fewer spare seats as reductions in capacity continued to cut deeper than the fall in bookings, the Franco-Dutch airline group said on Monday.

It also became the latest airline to report an upward flicker in cargo volumes after a prolonged slump in the air freight sector, which closely mirrors trends in the economy.

The passenger load factor, or proportion of seats sold, improved by 1.4 percentage points to 78.0 percent as Air France-KLM held capacity down 3.4 percent, the group said.

Traffic fell 0.5 percent on Americas and Asian networks.

"Depsite an improvement in long-haul, unit revenue per available seat kilometre (RASK) remained below last year's level," the airline, formed from a 2004 merger of French and Dutch flag carriers, said in a statement.

Cargo saw a 2 percent increase in traffic on 11.4 percent lower capacity, lifting the load factor -- or proportion of space sold in passenger jet cargo holds and dedicated freighters -- by 8.5 percentage points to 64.3 percent.

Air France-KLM is expected to announce losses in its fiscal third quarter results, covering October to December 2009, on Wednesday. Passenger traffic fell over 4 percent in the period.

A gradual recovery in air travel and freight demand, as capacity cuts remain in place, is offsetting a rise in fuel prices which markets now expect to moderate, the International Air Transport Association said last week. [ID:nLDE61210N]

British Airways BAY.L reported January traffic down 7 percent compared with a 8.3 percent drop in the number of seats, lifting its load factor 1 percentage point. [ID:nWLB6887]

Lufthansa (LHAG.DE) will announce January data on Tuesday.