UPDATE 1-Southwest Airlines expects Q2 revenue softness

* Revenue decline offsets fuel cost drop

* Sees swine flu hurting demand

* Shares slip

NEW YORK, May 20 (Reuters) - The large drop in Southwest Airlines (LUV.N) fuel bill in the second quarter has been offset by an "almost dollar-for-dollar" decline in revenue, the airline's chief executive told investors on Wednesday.

The Dallas-based company is also planning for continued revenue softness as the recession and the new flu virus cut into travel demand, CEO Gary Kelly said at the company's annual shareholders' meeting.

"2008 was one of the most difficult years in one of the most challenging decades in aviation," Kelly said. "This year could be even more challenging."

The announcement comes a month after Southwest reported its third straight quarterly loss, hurt by the dwindling number of travelers. The company cut its two-year capital budget, slowed fleet expansion plans and froze hiring.

Still, the company is also expanding its reach. It will commence service from a handful of additional airports, including New York's LaGuardia Airport and Boston's Logan International.

The new service will add tens of millions in incremental revenues in the first year, Kelly said.

He also added the airline fully repaid a $400 million line of credit that it drew last October. Southwest recently obtained a $332 million bank loan at an interest rate below 6.5 percent.

Southwest earlier this month reported its April traffic rose 4.1 percent from a year earlier. [ID:nN07354402]

Shares edged down 5 cents to $7.03 in afternoon trading on the New York Stock Exchange. Since the start of 2009, the company's stock has slipped 1.6 percent. (Reporting by Deepa Seetharaman; Editing by Brian Moss)