Thursday Southwest Airlines announced its first quarter earnings. Clearly the big headline grabber here was the fact the airline posted its first loss (no ifs, ands, or buts, much less special charge excuses) in 17 years.

The airline lost $91 million in the first quarter, or $0.12 a share. That amount included a loss of $71 million due to the falling value of its fuel hedges.

Without the fuel hedge losses, the airline posted a loss of $20 million or 3 cents a share.

Analyst consensus had the airline posting a loss of a penny, so the loss was more than analysts had expected.

Worse, CEO Gary Kelly said in the airline’s earnings call that RASM, which declined 2.9 points in the first quarter, could take an even bigger hit in the second quarter.

The airline also announced that it was offering a buyout to virtually all employees, had instituted a hiring freeze and was freezing pay for its top execs.

A couple of observations. One, I know more than one Southwest Airlines Captain who, for the most part, sat around eating bon-bons for much of the first quarter. And yet, the pilots at the airline were just given a tentative agreement that, if anything, sweetened the pot. It doesn’t take a mathematician to figure out that the costs involved in having more pilots than the airline needs right now is costing the airline a pretty penny.

Two, while the airline can offer buyouts to employees — the timing is not exactly the best for this kind of move, as the airline’s employees have seen the value of their Southwest Airlines‘ shares in their 401(k) accounts fall precipitously over the last year.

So while I applaud the airline for attempting to right the downsizing ship by natural attrition and voluntary departures, I’m afraid I have to wonder if these measures are going to be enough.

Three, I still think the airline’s growth plan is too aggressive, it’s capital spending plans too ambitious for 2009.

Third, I’m not the only one.

This morning Standard and Poor’s put the airline’s debt ratings on Credit Watch with negative implications. As we all know, this move is usually a precursors to a ratings cut.

S&P put Southwest’s “BBB+” rated long-term corporate credit rating on negative Credit Watch because of 1) the airline’s first quarter performance, 2) it’s forecast for its second quarter revenue and 3) the fact that the airline has added more than $700 million in debt since just late last year, increasing its interest expense.

This increase in debt is a direct result of the airline having engaged in aircraft sale-leasebacks in an attempt to increase its liquidity.

I would add that this amount is only going to increase in the second quarter. As I reported in a recent PBB, there is yet another traunche of sale-leaseback financing in the works with BOC Aviation that is set to close in the second quarter. BOC has handled the bulk of the airline’s recent sale-leaseback transactions.

Note that anything below “BBB” is no longer considered “investment” grade. It then falls into the “junk category.”

My gut feeling is that we will see Southwest lose its lofty “investment grade” debt rating status before this downturn is finished.