WRAPUP 3-Delta drops profit forecast, Southwest debt rating cut

* Delta sees no meaningful recovery in coming months

* Southwest credit rating one level above junk

* AirTran capacity cuts help fuel $78.4 mln gain

* Delta shares off, Southwest falls after hours
(Recasts to add southwest downgrade)

By John Crawley and Karen Jacobs

WASHINGTON/ATLANTA, July 22 (Reuters) - Delta Air Lines Inc
(DAL.N), the world's biggest carrier, said on Wednesday it no
longer expects to make money this year and Southwest Airlines
Co's (LUV.N) debt fell to near junk, while AirTran Holdings
AAI.N 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
UAUA.O, and Continental Airlines CAL.N this week posted
losses and promised cutbacks in jobs and service.

Southwest Airlines Co (LUV.N), 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."

DELTA, AIRTRAN RESULTS

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)