Research firm Atlantic Equities started coverage of the airlines sector with a favorable outlook. The firm says that it's "encouraged" by the sector's ability to maintain its profitability above the peak levels of prior cycles. Atlantic Equities started coverage of Delta (DAL) and United Continental (UAL) with Overweight ratings, but it initiated coverage of American Airlines (AAL) with an Underweight, its equivalent of a sell rating. The firm started coverage of Southwest (LUV) with a Neutral rating.

SECTOR: Airlines are benefiting from several positive macro trends, including "moderating capacity additions," an improving economy, and the launch of "branded fares," wrote Atlantic Equities analyst Lindsay Bettiol. As a result of these factors, the outlook for the sector's unit revenues has improved, according to the analyst, who noted that the industry's revenue per available seat mile increased last quarter for the first time in over two years. Meanwhile, most of the companies in the sector have already implemented price increases, and fuel prices are falling, so "cost pressures appear subdued," according to Bettiol. Consequently, the sector's margins should rise in the second half of this year and into fiscal 2018, she predicted.

DELTA: The airline has "the correct balance" of exposure to improving margins and protection from any economic weakness, the analyst stated. Additionally, Delta has a "dominant position at its major hubs" and its free cash flow generation is above the sector average, according to the analyst, who placed a $68 price target on the stock.

UNITED CONTINENTAL: The airline has the greatest operating leverage in the sector, making its results more likely to improve than Delta, but also making it riskier than the latter company, according to Bettiol. However, since the sector's dynamics look positive, United Continental's risk/reward ratio is also favorable, she believes. The analyst set a $100 price target on the shares.

AMERICAN AIRLINES: Although American Airlines has some positive attributes, United Continental offers the same positive catalysts at lower risk, since its financial leverage is much lower than that of American, according to Bettiol. The analyst set a $56 price target on American.

PRICE ACTION: In morning trading, United Continental slid 0.6% to $78.19, Delta fell 0.8% to $52.12, and American dropped 2% to $48.68.