Trouble applying rotation locally instead of globally

Hi all, could use a fresh set of eyes as I have been struggling with this script.

I am trying to have a ship control like an aircraft, where when it is rolled 90 degrees and the stick is pulled back the ship’s nose will follow the horizon parallel instead of perpindicular towards the zenith. However, if I pull the stick back while in a roll my nose will go towards the sky not pull my jet into a turn.

I believe my problem in the script is the world rotation values are being changed instead of local but I cannot figure out where.

Thanks for any input you have.

using UnityEngine;
using System.Collections;

public class PlayerScript : MonoBehaviour {

	private Rigidbody m_Rigidbody;
	private Vector3 euler;

	public float speed = 5.0f;
	private float trueSpeed = 0.0f;
	public float turnSpeed = 5.0f;
	public float strafeSpeed = 5.0f;
	
	public Vector3 strafe;
	private float roll;
	private float pitch;
	private float yaw;
	

	public float sensitivity = 10.0f;
	public float yawSmooth = 0.5f;
	public float rollSmooth = 0.75f;
	public float pitchSmooth = 0.55f;

	public GameObject bullet1;
	public Transform bulletSpawn;


	void Start (){
		m_Rigidbody = GetComponent<Rigidbody>();
		

		euler = transform.localEulerAngles;
		

		roll = Input.GetAxis("Roll");
		pitch = Input.GetAxis("Pitch");
		yaw = Input.GetAxis("Yaw");
		
	}

	// Update is called once per frame
	void Update () {
		strafe = new Vector3(Input.GetAxis("Horizontal")*strafeSpeed*Time.deltaTime, 
		                 Input.GetAxis("Vertical")*strafeSpeed*Time.deltaTime,
		                 0);

		var power = Input.GetAxis ("Power");

		//Truespeed Controls
		if(trueSpeed < 10 && trueSpeed > -3){
			trueSpeed += power;
		}
		if(trueSpeed > 10){
			trueSpeed = 9.99f;
		}
		if(trueSpeed < -3){
			trueSpeed = -2.99f;
		}
		if(Input.GetKey ("c")){
			trueSpeed = 0f;
		}

		if(Input.GetKey ("f")){
			m_Rigidbody.freezeRotation = true;
			m_Rigidbody.freezeRotation = false;
		}

		roll = Input.GetAxis("Roll");
		pitch = Input.GetAxis("Pitch");
		yaw = Input.GetAxis("Yaw");


		if(Input.GetMouseButtonDown(0)){	
			Debug.Log("Boom");

			var temp = Instantiate(bullet1, 
			                       bulletSpawn.transform.position, 
			                       bulletSpawn.transform.rotation);
		}

}


	void FixedUpdate(){
		//apply ship forces
		GetComponent<Rigidbody>().AddRelativeForce(0.0f ,0.0f, trueSpeed*speed*Time.deltaTime);
	

		//////////////////////////////////////////////////////////////////////////////////////////
		
		
		// Yaw over time smoothed		
		euler.y += yaw * turnSpeed * Time.deltaTime / yawSmooth;
		

		// Roll over time smoothed
		euler.z += roll * turnSpeed *Time.deltaTime / rollSmooth;
		
	
		// Pitch over time smoothed
		euler.x += pitch * turnSpeed * Time.deltaTime / pitchSmooth;

		
		// Apply rotation and apply some smoothing
		Quaternion rot = Quaternion.Euler(euler);
		//transform.rotation = Quaternion.Lerp (transform.rotation, rot, sensitivity);
		transform.localRotation = Quaternion.Lerp (transform.localRotation, rot, sensitivity);
		//////////////////////////////////////////////////////////////////////////////////////////
		
		//apply strafing
		GetComponent<Rigidbody>().AddRelativeForce(strafe);

	}
}

transform.localRotation?