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UPDATE 2-France's Zodiac sees full recovery in three years, shares fall

* Jet interiors supplier maps out recovery plan

* Pledges return to historic profitability levels by 2020

* Shares fall 7 pct as 2016/17 forecast lags analysts'

* CEO deflects questions on Zodiac as takeover target (Recasts after analyst meeting)

By Cyril Altmeyer and Tim Hepher

PARIS, Nov 22 French jet interiors supplier Zodiac Aerospace pledged on Tuesday to return to traditional levels of profitability by 2019-20, but its forecast for next year fell short of analysts' expectations, driving its shares down more than 7 percent.

It was the latest bumpy reception for the French group which has struggled to convince investors that a two-year crisis in seats and cabin output is fully under control, though analysts welcomed signs that it is still bringing in new business.

Zodiac projected a 10-20 percent increase in 2016/17 operating profit after a 14.1 percent decline in the year to end-August.

"The forecast for 2016/17 is one quarter below consensus. The following year is in line, but experience has taught the market to distrust the group's mid-term predictions," a Paris-based analyst said, asking not to be named.

By midday, Zodiac's shares were down 5.1 percent at 20.255 euros, having fallen as much as 7.3 percent against a slightly firmer stock market.

Chief Executive Olivier Zarrouati set out a recovery plan which he described as a "three-stage rocket," designed first to erase delivery delays and quality problems, then underpin the company's operational performance and finally restore margins.

The last stage will involve some restructuring to remove costs related to the turnaround, which saw cost overruns increase by 98 million euros ($104 million) in the past year.

Zodiac said this would bring its operating margins to what it described as the historical level of mid-double digits by 2019/20. Margins previously peaked at 14.5 percent in 2012/13.

However, Zarrouati said it was taking longer than expected to reduce excess costs, with overheads also above forecasts.

"It is taking a long time because we are transforming industrial operations across the group," he told analysts.

For the financial year that ended in August, core operating profit fell to 269.6 million euros, matching expectations, as the operating margin fell 1.2 percentage points to 5.2 percent.

The company has approximately halved the number of contractors brought in to resolve a crisis at its Santa Maria seat shells plant in California and added alternative supplies.

In another troubled project, Zodiac said it was increasing production of toilets which have delayed deliveries of the Airbus A350.

Although new airplane orders have peaked, the market for supplying seats for new jets or replacing seats on old ones is growing.

Zodiac said it had received a draft deal from an unnamed airline for its largest ever business-class seats order.

Zarrouati said plans by Rockwell Collins to buy competing cabins supplier B/E Aerospace highlighted the importance of connectivity in modern aircraft cabins.

He deflected questions about whether Zodiac could itself become a takeover target.

"The purpose of this management team is to run our plan and it is a standalone plan. Does it mean that we are ... not able to take any good opportunity that would come? For sure not, but any opportunity would have to be better than we are able to deliver on our own."

There have been recent reports that France's Safran was interested in buying Zodiac, but a source familiar with the matter said in June that this was not on the agenda. (Reporting by Cyril Altmeyer and Tim Hepher; Editing by Biju Dwarakanath and Susan Fenton)

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