Southwest Airlines (LUV) reported a much larger than expected first-quarter loss Thursday as the carrier’s chief executive described the current environment as the toughest ever for his company.

The airline announced it was freezing hiring and offering buyouts to employees to scale back costs. 

And Southwest predicted the second quarter would be no better. The airline’s shares were battered by all the bad news.

Southwest said it lost $91 million in the first quarter, or 12 cents a share, including $71 million due to the falling value of its fuel hedges.

Without the fuel-hedges item, the airline would have lost $20 million, or 3 cents a share, on $2.36 billion in revenue. A year ago, the company earned $43 million, or 6 cents a share, excluding special items.

Analysts, who usually exclude items from their forecasts, had expected Southwest to lose a penny a share on revenue of $2.4 billion in the first quarter, according to a survey by Thomson Reuters.

Over the first three months of the year, Southwest’s traffic fell 4%, a smaller decline than at most other U.S. airlines. And traffic seemed to stabilize in March, when it declined only 0.4% from March 2008.

But the more-lucrative business travel remained weak, contributing to the loss at Dallas-based Southwest, which went 17 years without a losing quarter until last fall, but now has posted three straight losing periods.

“Our first quarter 2009 financial results are disappointing but not surprising given the current economic environment,” Chief Executive Gary C. Kelly said in a statement. “We face the toughest revenue environment in our history.”

Kelly noted that plunging traffic, particularly among business travelers, means that Southwest is “not immune to the challenges the worldwide recession is having on air travel.”

Southwest, which told employees Thursday it would offer voluntary buyouts to reduce its work force, didn't say how many jobs it plans to eliminate.