Delta Air Lines Inc posted a smaller quarterly loss on Tuesday as business traffic began to recover and said it expects a profit in the current period despite disruptions to transatlantic travel caused by ash from an Iceland volcano.

Things are slowly and steadily improving and the numbers (that Delta reports) have been encouraging, said Jim Corridore, an analyst with Standard & Poor's equity research.

Corridore cited cost savings from the 2008 purchase of Northwest, and said that Delta, as the world's largest carrier, stands to benefit from an improving global economy.

Delta said it had canceled about 400 flights between the United States and Europe because of the ash cloud and estimated losses of $20 million through Monday.

In Europe, flights resumed on Tuesday as some airports reopened after five days of closures. Britain announced that it would reopen most of its airspace [ID:nLDE63I2FA].

Delta said it was operating 50 percent of flights from Europe to the United States on Tuesday and expected its schedule to recover over the next few days.

AWAITING RECOVERY

The ash incident, which has cost global airlines an estimated $250 million a day, comes as the industry anticipates recovery after the recession led to job cuts and capacity reductions over the last two years.

Delta said solid advanced bookings and rising business contract revenues gave it confidence even as it eyes fuel prices with caution. Oil rose past $83 a barrel on Tuesday as the volcano threat receded.

We're a bit optimistic as we head into the busy summer season, Chief Executive Richard Anderson said during a conference call. He added Delta expects to be solidly profitable in the second quarter.

The airline's first-quarter loss narrowed to $256 million, or 31 cents a share, from $794 million, or 96 cents a share, a year earlier.

Excluding items such as a $10 million charge tied to the Venezuela currency devaluation, the loss came to 23 cents a share, in line with analysts' average forecast according to Thomson Reuters I/B/E/S.

Operating revenue rose 2 percent to $6.85 billion despite a $65 million hit from flight cancellations tied to snowstorms earlier this year. Passenger revenue rose 4 percent in the first quarter while unit revenue climbed 8 percent from a year earlier, helped by fuller planes.

Having acquired Northwest, Delta it was not concerned about speculation on further U.S. industry consolidation.

UAL Corp's United Airlines is reported to be in separate merger talks with both Continental Airlines and US Airways . A combined United-Continental would surpass Delta in terms of revenue. Neither of the carriers have confirmed the talks.

Delta will clearly benefit from any further industry consolidation, J.P. Morgan analyst Jamie Baker said in a note to clients.

Baker added that if a merger comes to pass, Delta will face increased competition down the road, but would benefit in the short to medium term from capacity adjustments.

Shares of Delta fell 2 cents to $13.16 in a mixed market for airline stocks. The Arca Airline index <.XAL> ended the day up about 0.5 percent.

Among other carriers, UAL rose 12 cents to $21.78, US Airways gained 3.6 percent to $7.14, and Continental slid 4 cents to $21.94.

Delta's stock is up about 16 percent this year, while UAL has risen 69 percent and US Airways is up 47 percent. Continental shares have climbed 22 percent so far this year.

(Reporting by Karen Jacobs; Additional reporting by Deepa Seetharaman; Editing by Dave Zimmerman, Richard Chang and Bernard Orr)

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