* Net income falls 21.7 pct; predictions were split
* Financial expenses surge, weigh on net income
* TAM cuts demand, supply estimates in new outlook
SAO PAULO, May 11 (Reuters) - TAM Linhas Aéreas, Brazil's largest airline, reported a 21.7 percent decline in first-quarter net income, reflecting the impact of surging financial expenses and rising fuel costs.
The São Paulo-based carrier, which is being taken over by Chile's LAN Airlines, also trimmed its estimates for growth in demand and available seats per kilometer, in an indication that conditions in the industry will remain challenging despite record expansion last year.
Profit fell to 100.9 million reais (US$51.5 million) in the quarter from 128.8 million reais, according to a securities filing. Three analysts surveyed by Reuters predicted earnings between 41 million reais and 129 million reais, while one expected a loss of 41 million reais.
Financial expenses quintupled to 1.01 billion reais, after the company lost 884 million reais with the weakening of the Brazilian real in the period. Higher borrowing costs for some debt also drove expenses higher, the company said.
The numbers underscore the perverse impact of currency and fuel price volatility on the balance sheet of local carriers. Gol Linhas Aéreas, TAM's closest rival, reported a net loss of 41 million reais in the first quarter, compared with a profit of 54 million reais a year earlier.
TAM cut its forecast for demand growth in Brazil to a range of 7 percent to 9 percent, compared with a previous forecast of 8 percent to 11 percent. Seats available per kilometer, a gauge of supply, may contract by 1 percent or expand by as much as 1 percent this year.
Net revenue rose 6.1 percent to 3.228 billion reais, while expenses rose 10.9 percent to 3.25 billion reais. The company saw spending on fuel rise 19 percent to 1.27 billion reais, while plane rental costs soared 26 percent year-on-year.
Earnings before interest, tax, depreciation, amortization and lease rentals, a measure of operational profitability known as EBITDAR, fell 21.6 percent to 298.2 million reais from a year earlier.
The poll of four analysts predicted EBITDAR of 400 million reais.