* Tax provision hurts earnings
* Government shutdown cuts into October bookings
* Shares off 2.5 percent
Oct 23 (Reuters) - US Airways Group Inc reported lower third-quarter profit on Wednesday as it set aside more money for taxes, and its shares fell 2.5 percent.
The carrier, which hopes to fend off a U.S. Justice Department lawsuit challenging a proposed merger with American Airlines parent AMR Corp, had a higher-than-expected profit excluding merger costs and other special items, as the average airfare rose and revenue jumped to a record level.
US Airways said travel demand was recovering from the two-week U.S. government shutdown, which hurt bookings. Revenue per available seat mile, an important measure, would rise just 1 percent in October, down from a prior view of 4 percent to 5 percent growth, because of the shutdown, the company added.
"Demand and bookings snapped back to pre-crisis levels literally beginning on the morning the government funding legislation was signed," US Airways President Scott Kirby said during a conference call.
US Airways posted net income of $216 million, or $1.04 a share, in the third quarter, down 12 percent from $245 million, or $1.24 a share, a year earlier.
Adjusted for items, profit was $1.16 a share, while analysts estimated $1.12, according to Thomson Reuters I/B/E/S.
US Airways recorded a non-cash provision of $120 million for income taxes in the latest quarter, up from $1 million a year earlier. The airline was required to set aside the provision because it used up an allowance for operating losses carried over from prior years.
Yield, a measure of the average airfare paid per mile flown, rose 4 percent to 16.75 cents.
Quarterly revenue rose 9 percent to $3.86 billion. Passenger unit revenue, the amount garnered for each passenger flown one mile, was up 5.1 percent. Operating costs were up 5 percent, with expenses tied to salaries up nearly 12 percent.
"From an operational performance standpoint, it's been a continuing great story," said Robert Mann, an airline consultant based in Port Washington, New York. "On that basis, US Airways can certainly add a lot of value to where American has recently been."
U.S. airlines have pared money-losing routes and gained new revenue sources such as baggage fees to help boost profits. Delta Air Lines Inc and American both reported higher-than-expected earnings for the third quarter, which includes summer vacation travel.
A combination of US Airways-American would form the world's biggest carrier and cap the latest round of airline consolidation that has put the industry on sounder financial footing.
The Justice Department sued to block the merger in August, saying it would hurt competition and lead to higher ticket prices. A federal court trial is set to start Nov. 25.
American, which is looking to emerge from Chapter 11 protection, and US Airways contend their merger is needed to compete with Delta and United Continental Holdings Inc, both the products of mergers.
On Wednesday, the mayors of Charlotte, Philadelphia, Phoenix, Chicago, Dallas, Fort Worth and Miami, all current American or US Airways hubs, sent a letter to U.S. Attorney General Eric Holder expressing support for the deal.
US Airways said strong financial results from it and American did not undercut support for the merger. The Justice Department has argued both carriers can survive independently.
"Strong companies merge all the time," Kirby said. "The point of this merger is that we will be stronger, we will be able to attract more customers, we will be able to offer more benefits to customers if we are allowed to merge."
US Airways shares fell 2.5 percent to $21.40. Other major U.S. airline stocks were mixed, with United down 0.7 percent at $30.95 and Delta up 0.5 percent at $25.61.