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UPDATE 3-Airline shares tumble on Southwest, Spirit Air results

(Adds Spirit Airlines, details, background)

July 27 (Reuters) - Airline shares tumbled on Thursday as investors were discouraged by quarterly results and forecasts from Spirit Airlines Inc and an "uninspiring" third-quarter outlook by rival Southwest Airlines Co.

Shares of Spirit Airlines nosedived 17 percent in midday trading to $40.49 as it reported the full impact of 850 pilot-related flight cancellations early this summer, which translated to lost revenue of an estimated $25 million.

"Unfortunately, given the level of operational disruptions and the associated financial impact, the second quarter 2017 performance overall was disappointing," Spirit Chief Executive Bob Fornaro said in a statement.

The company also blamed cheaper fares across the industry for stalling its ability to raise average fare prices.

"It is surprising to see our competitors resort to the unusual level of discounting we are currently seeing," Chief Financial Officer Edward Christie said on a conference call to discuss its earnings on Thursday.

Based on the current pricing environment, Spirit forecast its third-quarter total revenue per available seat mile would fall between 2 percent and 4 percent on the year.

"Unfortunately, the recent pricing developments coupled with the lingering hangover associated with our poor second-quarter operational results puts us in a position to advise our view on third quarter (total revenue per available seat mile) performance," Christie said.

Meanwhile, a lackluster forecast for the third quarter sent shares of rival Dallas-based Southwest tumbling as much as 9.5 percent in early trading, even as the company reported solid results for the second quarter through June 30.

"Southwests uninspiring (unit revenue) guide and anticipated decline in consensus forecasts offers little, if anything, in terms of potentially arresting the sector's current correction," JPMorgan analyst Jamie Baker wrote in a research note.

Unit revenue, which compares sales to flight capacity, increased 1.5 percent in the second quarter, amid some pressure from the implementation of a new reservation system.

Southwest said it expects the negative impact from the transition to the new reservation system to continue into the third quarter, with unit revenue growing just 1 percent on the year.

In midday trading, Southwest shares recouped some losses to trade down 3.12 percent at $57.66.

Both Southwest and Spirit have built reputations on offering threadbare fares at much lower prices than the larger, legacy U.S. carriers.

Increased competition for the business of budget-conscious passengers has intensified in recent months, with carriers trimming fare prices by slashing built-in amenities, a method that has helped low-cost carriers to succeed.

(Additional reporting by Arunima Banerjee in Bengaluru; Editing by Bernadette Baum)