Delta Air Lines Inc , the world's biggest carrier, said on Wednesday it no longer expects to make money this year and Southwest Airlines Co's debt fell to near junk, while AirTran Holdings turned a profit and saw its shares jump 10 percent.

Delta's pullback on profits accelerated the industry's negative turn heading into the second half of the year, unless airlines are able to shrink faster and somehow maximize revenues beyond expectations.

Shares of major airlines traded broadly lower on Wednesday.

Major carriers United Airlines, a unit of UAL Corp , and Continental Airlines this week posted losses and promised cutbacks in jobs and service.

Southwest Airlines Co , an industry bellwether that was profitable in the second quarter, said on Tuesday it could lose money in the June-September period, usually the industry's strongest.

Moody's on Wednesday downgraded about $3 billion of Southwest debt to one notch above junk status. Southwest is the only U.S. airline with an investment grade credit rating. The company's outlook, according to Moody's, was stable.

After hours on Wednesday, Southwest stood at $6.87 and had erased a gain of nearly 1 percent in regular trading on the New York Stock Exchange.

AirTran Chief Executive Robert Fornaro said in an interview that an airline's ability to cut costs in a weak revenue environment is more critical than ever.

Our low costs give us latitude, Fornaro said.

Delta executives also said that they had flexibility in managing costs, partly due to the number of planes the airline owns outright and favorable terms on aircraft leases.

Investors are most concerned about the recession's deteriorating effect on business travel. Other worries include volatility in fuel prices, liquidity at struggling airlines, and whether the industry can quickly take unsold seats out of the market and squeeze more revenue from fares and fees.

If business traffic comes back, the capacity reductions will stop, said Helane Becker, an analyst with Jesup & Lamont. If it doesn't come back, the industry has no choice but to keep cutting capacity until it reaches an equilibrium level where supply matches demand.

One analyst asked Delta's chief executive, Richard Anderson, on a conference call how the management would respond if a weaker competitor sought government help to stay in business. Anderson earlier in the call noted the industry received aid after the September 2001 attacks, but said Delta currently does not favor that approach.

We don't think the government should pick winners or losers in (the airline) industry, Anderson said. The marketplace ultimately has to determine that and since deregulation, it's done a pretty good job of that.


Anderson told analysts that Delta was continuing to take a hard look at its business. The Atlanta-based airline said it would continue to right-size capacity and reiterated that it may need to cut more jobs.

We may face some tough choices, Anderson told analysts in promising more aggressive action and expressing no regret for pursuing a merger with Northwest Airlines in 2008 during the leading edge of recession.

Delta reported a quarterly loss of $257 million, or 31 cents per share. It said the weak economy drove down revenue more than $3 billion in the first half.

By contrast, its cross-town Atlanta hub rival AirTran swung to a profit from a year-ago loss for the second-straight quarter. AirTran said it was recalling staff it had furloughed last year.

Net income at AirTran, which is based in Orlando, Florida, was $78.4 million, or 56 cents a share, for the second quarter, compared with a loss of $14.8 million, or 14 cents a share, a year earlier.

Excluding items, profit came to 34 cents a share, better than the 32 cents a share expected by analysts, according to Reuters Estimates.

Bank of America/Merrill Lynch analyst Michael Linenberg said in a research note that AirTran's underlying results were very strong and are likely to rank among the best in the industry.

AirTran operating revenue was down but costs were lower than Wall Street estimates. Capacity, measured in available seat miles, declined 7.6 percent.

Over the past year, AirTran has moved to reduce debt and revamped fuel hedge contracts, a plus noted by analysts. AirTran expects a small profit for the third quarter.

Delta shares fell 4.7 percent to $5.77, while AirTran rose 10.7 percent to $6.37. UAL shed 9.6 percent, while US Airways and AMR were off modestly. Continental was down 2.1 percent.

(Additional reporting by Deepa Seetharaman in New York; Editing by Brian Moss, Matthew Lewis and Bernard Orr)