Severe winter weather and higher fuel costs pinched Continental Airlines Inc's first-quarter results on Thursday and the company posted a larger-than-expected loss despite a jump in revenue.

The No. 4 U.S. airline by traffic is the second major carrier to miss expectations this week after American Airlines, a unit of AMR Corp reported on Wednesday. Continental also posted a larger loss than the previous year.

Separately, low-cost carrier Southwest Airlines and Alaska Air Group Inc posted first-quarter profits in line with estimates as revenue rose from higher demand and tighter capacity.

The widening of Continental's loss is a sign of the challenges facing the airline industry as it attempts to recover from two years of financial turmoil triggered by volatile oil prices and the recession.

Still, airlines have made headway in recent months, indicating that corporate demand is rebounding. Southwest said during the first half of April that unit revenue rose 19 percent.

Despite these encouraging trends, we have not recovered to the pre-recession levels, Chief Financial Officer Laura Wright said on a conference call. Nonetheless, the trends appear to be moving in the right direction.

Continental was able to raise fares 5.7 percent in the first quarter and the company projected a 12 percent jump in unit revenue for April.

CAL should benefit in Q2 and the rest of '10 from improving demand, higher prices and additional ancillary fees, said Standard & Poor's analyst Jim Corridore, who recommends buying the stock. But rising oil prices remain a challenge and an ongoing risk.

CONTINENTAL CUTS CAPACITY OUTLOOK

Continental shares fell as much as 7.3 percent early on Thursday. The stock rebounded briefly after rival US Airways said it was pulling out of merger talks with UAL Corp's United Airlines.

During a conference call with analysts, Continental Chief Executive Jeff Smisek said they were studying their options. He declined to comment on the US Airways decision.

Continental trimmed its consolidated capacity increase forecasts for 2010 to between 0.5 percent to 1.5 percent.

We are pleased to see the company is not increasing capacity despite a 'modest improvement in business demand,' Stifel Nicolaus analyst Hunter Keay said in a note.

By late afternoon, Continental shares were 6 cents lower at $21.40 in a down market for the airline sector <.XAL> on Thursday.

Continental posted a wider loss of $146 million, or $1.05 per share, from $136 million, or $1.10 per share, a year earlier, when there were fewer outstanding shares.

The airline saw a loss of 98 cents per share, excluding $10 million of severance and aircraft-related special charges. Analysts, on average, had expected the company to report a loss of 86 cents, according to Thomson Reuters I/B/E/S.

Revenue rose 7 percent to $3.17 billion.

Heavy snowstorms that hit the East Coast of the United States forced the airline to shut down operations at its Newark Liberty International Airport hub twice in February. This cut first-quarter consolidated revenue by about $25 million.

SOUTHWEST SHARES DROP

Southwest, which recently ended a code-share agreement with Canada's WestJet Airline , said it is not actively seeking new code-share partners, during a call with analysts.

Southwest CEO Gary Kelly said the company preferred organic growth, but would consider mergers if they were a fit for the company. The stock slumped 12 cents to $13.46.

Maybe the market is realizing that Southwest's organic prospects will likely be limited during the next cycle as compared to the last since the domestic market is mostly saturated, said Morningstar analyst Basili Alukos.

Kelly said the company would continue to seek new sources of revenue and raise awareness for fees the company already has. He called the awareness of the Early Bird program among regular customers amazingly low.

Southwest posted net income of $11 million, or 1 cent per share. A year ago, the No. 5 airline by traffic posted a net loss of $91 million, or 12 cents per share.

The airline reported a 3 cent-per-share profit, excluding one-time items, in line with the average analyst estimate.

Revenue rose almost 12 percent to $2.63 billion.

Alaska Air Group, parent of Alaska Airlines, reported a profit of 36 cents per share, besting analysts' average estimate of 35 cents.

(Reporting by Deepa Seetharaman; Editing by Lisa Von Ahn, Maureen Bavdek and Richard Chang)

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