Southwest (LUV) - Get Report CEO Gary Kelly issued a glum second-quarter outlook, saying May unit revenue declined 9% and June "doesn't show any improvement at all.

"I'm not expecting things to improve based on what we're seeing right now," Kelly said at the Bank of America/Merrill Lynch Global Transportation Conference.

The industry faces not only a continuing recession, which is forcing fares down, but also rising fuel costs.

"Given current trends, a modest loss for the industry is the most likely outcome" for the full year 2009, said FTN Midwest Securities analyst Mike Derchin. Early in the year, Derchin had expected an industry profit of several billion dollars, but rising oil prices have shaken that analysis.

Derchin noted that the industry is in better shape than a year ago, when it posted an operating loss of $3.7 billion and net loss of $9.4 billion, according to the Air Transport Association. A modest loss this year, he said, would come in spite of "the recession, swine flu, credit crisis and oil pressures.

"If oil prices continue to move higher, the network airlines are more vulnerable than the low-cost carriers to downward earnings revisions," Derchin noted. In a report issued Thursday, he calls

Alaska

(ALK) - Get Report

"the best play in a rising oil environment" due to a favorable fuel hedging strategy that uses call options to cap fuel costs.

Alaska "is the only airline without collateral associated with its hedges since it has no cash outlays other than the premiums to enter the contracts," Derchin wrote.

For Southwest, Kelly said April was solid, with flat revenue per available seat mile and traffic up 4%, partially because Easter fell this year in April rather than March. In May, he said, Southwest saw the impact of the H1N1 virus, with traffic down 3.6% and RASM down 9%.

Kelly also seemed to indicate that Southwest may consider implementing baggage fees, which it has eschewed so far. "We think that is working," he said, but, "we'll look at this question very carefully. If it's the right thing to do for Southwest and its customers, we'll do that."