UPDATE 4-Southwest posts net loss, cites macro challenges

* Records charges for buyout program, hedges

* Q3 EPS ex-items 3 cents vs average 2-cent estimate

* Business demand still not improving- CEO

* Shares fall 5.8 percent on NYSE (Adds comments from conference call)

By Deepa Seetharaman

NEW YORK, Oct 15 (Reuters) - Southwest Airlines Co (LUV.N) reported a third-quarter loss and said lackluster corporate travel and the prospect of rising fuel costs meant recovery was not yet at hand, sending its shares down nearly 6 percent.

The low-cost carrier said its net loss narrowed to $16 million, or 2 cents per share, from $120 million, or 16 cents per share, a year earlier.

Revenue fell 7.8 percent to about $2.7 billion, while total operating expenses fell 5.7 percent.

Without one-time items, the airline reported a profit of 3 cents per share, exceeding the average estimate of 2 cents from analysts polled by Thomson Reuters I/B/E/S.

"A profit is a profit, and in this terrible environment, we'll certainly take it," Chief Executive Gary Kelly said during a conference call with analysts.

The U.S. airline industry has suffered from a drop in travel demand in the past year. Lower fares and a decrease in capacity have helped keep planes full, but revenue has still declined.

RISING CRUDE

Airlines have benefited from cheaper fuel this year, but oil prices have started to climb. On Thursday, crude oil soared above $77 a barrel.

Southwest shares fell 58 cents, or 5.8 percent, to $9.46 in afternoon New York Stock Exchange trading, and other airline stocks sold off. The Arca Airline index .XAL was down 1.7 percent.

"I don't believe the worst is behind us if for no other reason (than) because of higher energy costs," Kelly said. "There's no reason to think that business travel will return any time soon to help bail us out."

Analysts have noted signs of improved demand in the past month, which a run-up of airline stocks has reflected. But sales have been largely driven by discounting, and there has been no evidence of a significant change in full-fare demand, Kelly said.

Jesup & Lamont analyst Helane Becker, who has a "sell" rating on the shares, said investors might want to take some money off the table, given the stock's gains. Southwest shares have jumped nearly 21 percent since September.

The company's revenue per available seat mile fell 2.2 percent in the third quarter. Load factors -- a measure of how full a plane is -- rose 8 points to 79.6 percent.

Southwest has cut 10 percent of its most unprofitable and least popular flights in the past year and plans to reduce fourth-quarter capacity by 8 percent.

NEW REVENUE STREAMS, CHARGES

Southwest unveiled a $10 charge to board flights early last month, a move that generated $2 million in revenue during September, said Chief Financial Officer Laura Wright.

Another $10 million during the quarter came from new pet fares, unaccompanied minor service charges and fees for excess and heavy baggage.

On the cost side, Southwest had a $27 million charge for its employee buyout program, which has about 1,400 participants.

There were also charges of $12 million for a portion of the company's fuel-hedge portfolio. Southwest saw about $78 million in unfavorable cash settlements from derivative contracts in the third quarter. The Dallas-based carrier has hedged more than 45 percent of its estimated fourth-quarter fuel consumption.

"We think most of the problems with the hedging program are largely behind it due to expirations and higher oil prices," S&P analyst Jim Corridore wrote in a note. (Additional reporting by Karen Jacobs; Editing by Lisa Von Ahn and Maureen Bavdek)