The first airline to release first-quarter earnings could be the worst.

Delta Air Lines ( DAL) Wednesday releases results before the start of trading, leading the parade of airline earnings to come over the next two weeks. Some of Delta's comments, especially with regard to fuel costs, ticket prices and low-cost competition, will be a harbinger of things to come at other carriers. But the carrier's company-specific issues -- namely deep losses, its falling credit rating and difficult contract negotiations with pilots -- will take center stage.

Wall Street expects the company to lose $2.95 a share in the first quarter, a number that has been on the rise since March 15, when Delta first warned that it would lose $400 million, worse than an earlier forecast of a $300 million to $350 million loss. At the time of the warning, analysts expected Delta to lose $2.51 a share, and in the month since, investors have punished the stock, dropping it 8.1%.

As a result, much of the bad news is priced in and few analysts expect Delta's results to surprise. With CEO Gerald Grinstein negotiating pay cuts with pilots and working on a plan to overhaul Delta's business, due sometime in June, investors will be more interested in Delta's future than its quarterly results.

Fear of Chapter 11

Concerns that the company may have to file for bankruptcy are on the rise.

Pilots, represented by the Air Line Pilots Association, don't have to renegotiate their contract until 2005, but if they don't act soon, Delta could face a cash crunch. The carrier continues to post losses and has $3 billion in debt coming due over the next three years. Last week, Fitch Ratings downgraded Delta's debt rating to "CCC+" from "B" citing "growing concerns over the carrier's ability to reduce pilot costs quickly enough to avoid an intensification of liquidity pressures in 2005."

Few on Wall Street expect Delta shares to see much upside until this critical labor situation is either resolved or more guidance is given.

"We do not hold high expectations for Delta equity over the near term, based primarily on unresolved labor costs that will likely play havoc on longer-term viability," said Daniel Hemme, analyst at Prudential Equity Group, in a note. "Its cost structure continues to place the airline at a competitive disadvantage and remains the chief culprit behind investor disinterest."

Furthermore, with a new CEO at the helm and the recent departure of company President Fred Reid to helm Virgin Airways' low-cost U.S. unit, Delta management will need a convincing plan to show Wall Street that it can become competitive again. Currently, only five analysts rate Delta a buy. Twice as many have a buy rating on AMR ( AMR), parent of American Airlines, and Continental Airlines ( CAL).

"This June, Grinstein will present his findings to the board and at that juncture there could be an opportunity for a radical change," said David Strine, analyst at Bear Stearns, in a note. "Perhaps the only move left is to begin to shrink the company where losses are prodigious."

The Delta Oracle

While Delta's many company-specific issues will take the spotlight, its results could help investors handicap releases from other carriers, specifically in the areas of fuel costs, ticket prices, pension risk and the overall state of the industry.

In January, airlines showed 2.6% year-over-year improvement in traffic, a key revenue metric, but the trend has picked up steam in February and March due to easy comparisons against last year. On a surface level, Delta -- and other carriers -- could announce solid traffic growth and big load factor increases.

But with airlines restoring flights they cancelled a year ago because of the war in Iraq, anxiety is growing that the industry has too much capacity, forcing another round of price cuts to spur demand, thereby weakening the overall recovery. If Delta's traffic and capacity are up, but revenue is flat, ticket prices have been slashed to keep planes full -- a sign that airlines are adding back too much too soon.

But after Delta's warning, Wall Street already expects the worst, which means there could be upside surprises in store. The few airlines expected to be profitable have seen their estimates clipped, while the rest have seen loss estimates deepen, due to the transcontinental fare wars and high cost of fuel. Over the last month, Bear Stearns has dropped its EPS estimates on the airlines it covers by 16%. In the month heading into the release of fourth-quarter numbers, the broker's estimates rose by 4%.

"Within our coverage, we believe Northwest Airlines ( NWAC), Southwest Airlines ( LUV) and American have the greatest likelihood to beat the Street, although we are not expecting major surprises," said Strine.

Indeed, Northwest, which releases earnings on April 21, is emerging as something of a sleeper pick among analysts. While Wall Street expects the company to lose $3.20 in the first quarter, 30 cents more than four weeks ago, eight analysts rate it a buy -- the same as Southwest.

Analysts are hopeful that the return of international travel can offset Northwest's high costs. In 2003, 22% of Northwest's revenue came from Asian routes over the Pacific, more than any other airline. In the first three months of 2004, Pacific traffic was strong, making double-digit percentage point gains due to easy comparisons with last year, when the SARS outbreak discouraged travel.

While Northwest is best positioned to capitalize on the Pacific travel recovery, other network carriers may talk up their international results -- especially if competition over low-cost domestic routes keeps revenue and pricing weak.

The First Is the Worst

Ultimately, the first-quarter results will be bad, but they may not get any worse. Credit Suisse First Boston expects the industry to lose nearly $900 million in the first quarter -- but just $650 million over the rest of the year. "The industry's weak yields and disappointing revenue are likely to be as bad as we see for the year," said Jim Higgins, analyst at CSFB, in a note.

If oil stays stable and the economic recovery continues apace, strong-stomached investors may want to keep an eye on airline stocks during earnings season -- especially if they plunge.

"Earnings expectations remain quite favorable," said Satya Pradhuman, small-cap strategist for Merrill Lynch. "If we are correct about the cyclical backdrop, then it is unlikely that earnings estimates continue to plummet to secularly low levels. ... If the economy remains healthy, the cyclical winds are likely to play favorably."