Goldman Sachs Raises Airline Sector Coverage; Delta Offers Best Risk/Reward

On Monday, Goldman Sachs raised their view on the airline sector from Neutral to Attractive.

Airlines have been hot the past year, and analyst Tom Kim sees the trend continuing. “Improving traffic, the primary lever for pricing” will sustain the outperformance, said the analyst.

“Banking revenue, which leads by five quarters, implies accelerating airline revenue growth for 2H14-2015,” according to Kim.

“Current load factors suggest that carriers are positioned to push up yields more than at any other time in the last 30 years,” said Kim.

The Goldman analyst raised earnings per share estimates by 12 percent on average for 2015 “assuming +3.8% yields on stable load factors of 84%.”

Kim upgraded shares of JetBlue Airways JBLU from Sell to Neutral on “better pricing prospects in the domestic market.” Price target bumped from $8.20 to $10.50.

The analyst reiterated Buy on Delta Air Lines DAL and offers “the greatest risk/reward proposition in airline coverage, given its advanced stage of integration.” Price target raised from $43 to $53.

The Buy rating on United Continental UAL was reiterated and “the cycle will provide a nice earnings uplift and boost margins more than the market expects,” according to Kim. Price target raised $1 from $59.

Southwest Airlines' LUV price target was raised from $24.20 to $26. The analyst remains Neutral on the stock as it appears to be “fairly valued.”