UPDATE 3-Strong real lifts TAM net; fares may be hiked 2010

* TAM reverses year-earlier loss, posts profit in Q3

* Gains pricing power; may raise fares early 2010-CEO

* Surge of real leads to financial gains, lower costs

* Shares fall 2.2 percent (Adds possible increase in airfare prices, shares)

By Guillermo Parra-Bernal

SAO PAULO, Nov 12 (Reuters) - TAM Linhas Aereas (TAMM4.SA)(TAM.N), Brazil's biggest airline, posted a third-quarter net profit on Thursday as a rally in the local currency helped put a lid on costs.

The Sao Paulo-based carrier, controlled by the Amaro family, reported net income of 348 million reais ($202 million), compared with a year-earlier net loss of 663.6 million, according to a securities filing.

A strengthening real (BRBY), which rallied about 11 percent in the quarter, allowed TAM to reduce fuel, maintenance and selling expenses by 23.5 percent, as measured by available seats per kilometer. That gauge, known as CASK, fell to 0.14 reais from 0.19 reais.

Total costs and expenses fell 14.8 percent to 2.32 billion reais. About 40 percent to 50 percent of operational costs at the company are linked to foreign currencies.

The results come a few weeks after David Barioni Neto stepped down as chief executive officer, a decision that media in Brazil reported was due to disagreements with the Amaros over cost-cutting strategies. Chief Financial Officer Libano Barroso is the acting CEO of TAM.

Barroso told analysts on a conference call that travel demand was rapidly improving in Brazil, which may lead the company to raise airfare prices as early as the start of 2010 by around 10 percent.

The company is sensing a "strong" recovery in demand in the domestic market, which grew 26 percent from a year earlier, the filing said.

"Depending on the market response, we could witness double-digit increases in ticket prices, hovering around 10 percent or so, during the first quarter," Barroso said.

TAM shares were down 2.2 percent at 27.80 reais after rising for seven straight sessions.

Revenue rose 5.2 percent from the second quarter, helped by a 13.6 percent jump in international ticket sales and an 11 percent rise in cargo revenue.

"Part of that growth was caused by the return of business passengers, related to the economic recovery," TAM said in the filing. "Demand was stimulated by the competitive landscape, especially during the month of September."

A rising real should, in the medium and long term, help entice travel abroad by Brazilians, helping widen operational profits, the company said.

FINANCIAL INCOME

Financial income, which is investment gains and nonoperating revenue minus debt-servicing and other nonoperating expenses, rendered a surplus of 406.3 million reais, compared with a shortfall of 1.16 billion reais a year earlier, TAM said.

The financial gain was "mainly due to the positive impact of the exchange rate ... which affected our balance sheet," the filing said.

But gross revenue fell 16.4 percent to 2.51 billion reais, driven by lower fares and a tumble in cargo revenue as the global economy struggles with the impact of the recession in the developed world.

EBITDAR, a gauge of operational profitability and cash generation widely used by analysts, slumped 10.6 percent to 377.1 million reais from 421.8 million reais a year earlier.

Yet attendance indicators kept underperforming in the third quarter.

TAM's load factor, or the average proportion of seats it fills, fell to 69.7 percent from 72.2 percent a year earlier, although it jumped 5.2 percentage points from 64.4 percent in the second quarter.

(Editing by Lisa Von Ahn)