(Reuters) - A pilots' strike grounded more than half of Lufthansa's (LHAG.DE) lucrative long-haul flights on Thursday, the latest action to pile pressure on management in a protracted row over early retirement benefits and cost cuts.

Lufthansa is trying to cut costs to levels nearer those of its rivals as it is squeezed by budget carriers Ryanair (RYA.I) and easyJet (EZJ.L) on European routes and by airlines such as Turkish (THYAO.IS) and Emirates [EMIRA.UL] on long-haul flights.

Including Thursday's strike, pilots have walked out 13 times since last April, affecting almost one million passengers. Other Lufthansa employees are starting to worry the row could damage the business for good.

"We fortunately have very loyal customers, but if this continues in the long run and we aren't able to offer the reliability we need, then it could become a problem for our customers," Peter Gerber, chief executive of Lufthansa Cargo, told Reuters.

Lufthansa Cargo said all its freight-only flights would operate on Thursday, but the strike would affect the freight it carries in the holds of long-haul passenger planes.

Lufthansa cancelled 84 of its planned 153 long-haul flights for Thursday, affecting 18,000 passengers, a spokesman said.

Pilots' union Vereinigung Cockpit (VC) is extending the strike to short- and medium-haul Lufthansa flights on Friday and said it would strike again on Saturday on long-haul and cargo flights.

Lufthansa said it was cancelling 700 short- and medium-haul flights on Friday, equivalent to about half its scheduled flights, while another 90 were being cancelled because of a strike by Italian air traffic controllers.

It said it would still be able to fly about a third of its scheduled flights on Saturday, but said the additional strike represented a new escalation of the conflict, which it feared was having a long-term impact on the reputation of the company.

Pilot strikes cost Lufthansa more than 200 million euros ($213 million) in lost operating profit last year. Experience so far shows that bookings drop sharply after a strike is announced, stay low for a couple of days and then recover fairly quickly, a Lufthansa spokeswoman said.

However, continuing strikes could force corporate travel managers to push travelers onto other airlines, especially as Lufthansa mainly serves transfer passengers who could just as easily fly via hubs in London, Amsterdam or the Gulf, independent aviation consultant John Strickland said.

"The only winners are Lufthansa's competitors, whether long-haul or short-haul," Strickland said, adding that it was still crucial for Lufthansa management to push through structural changes to keep up with rivals.

The row involves early retirement benefits that VC wants to keep but which Lufthansa wants to change for new starters.

The pilots also want Lufthansa to enter joint mediation on other outstanding issues, such as pay and bringing costs down on flights to tourist destinations. Lufthansa has rejected the demand.

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