UPDATE 2-Air France KLM, Veolia in rail alliance talks

(Recasts with Air France confirmation, stock reaction)

By Dominique Vidalon

PARIS, July 4 (Reuters) - Air France KLM (AIRF.PA), the world's biggest airline by revenues, confirmed on Friday it was considering offering high-speed rail travel and will adjust its winter seat capacity in the face of soaring jet fuel costs.

The Franco-Dutch airline pulled out of a bid to rescue Italy's Alitalia earlier this year and competes with the emerging transatlantic partnership of British Airways Plc, AMR Corp's (AMR.N) American Airlines and Spain's Iberia (IBLA.MC).

On Friday, it confirmed media reports it was discussing a high-speed rail alliance with Veolia (VIE.PA) -- a French utility that runs several rail connections but is not yet active in high-speed travel, which is dominated by state-owned railways SNCF, Deutsche Bahn and the equally state controlled Thalys and Eurostar firms.

"As part of the opening to competition of rail transport in 2010, Air France and Veolia are looking into the possibility of a partnership to create a new high-speed rail player on the European scene," an Air France-KLM spokesman said.

"We are reviewing the feasibility and possibility of such a project, but it is too early to discuss its terms," he added.

Veolia Transport, part of French water utility Veolia, could run trains under the Air France brand from the airline's hub at Paris Charles de Gaulle airport to destinations across Europe, the Financial Times said on Friday.

The move could mark the beginning of a decline in short-haul air travel on routes such as Paris-Frankfurt, which now enjoy good high-speed links, the paper said.