Morgan Stanley analyst Rajeev Lalwani upgraded American Airlines (AAL) to Overweight, saying the company continues to have the best revenue story in the industry. Lalwani remains bullish on the U.S. airlines sector, keeping a rating equivalent to buy on Delta Air Lines (DAL) and United Continental (UAL) as well.

UNIT REVENUE STABILITY TO COME: Morgan Stanley's Lalwani remains positive on U.S. airlines. Even though outlooks clearly disappointed, he noted that the airlines' stocks are down and unit revenues do "have hope" for stability. The downside surprise to the guides were the result of supply exceeding demand, which includes corporate bookings being flattish, leisure travel strength from lower fares, and the domestic supply deceleration not keeping pace, the analyst told investors.

AMERICAN UPGRADE: Morgan Stanley upgraded American Airlines to Overweight from Equal Weight, saying the company continues to have the best revenue story in the industry, with opportunities that include yield management, credit card initiatives, cabin segmentation, and merger synergies. Additionally, the company's fleet reinvestment cycle is maturing and should result in free cash flow yields in the mid-teens over the coming years, Lalwani told investors. The analyst lowered his price target on the shares to $46 from $48.

PEERS: Morgan Stanley kept an Overweight rating on both Delta Air Lines and United Continental, but trimmed the price target on both shares. Between above-average margins and an investment grade balance sheet, Lalwani believes Delta to be the best in class. However, risks to this narrative have been on the rise given its Europe exposure. The analyst also cites higher supply, a likely rising capital expenditure profile from potential aircraft orders, and its indefinite positive PRASM timeline as risks and lowered his price target on Delta's shares to $59 from $65. Regarding United Continental, Lalwani said he still sees a long-term opportunity to close the margin gap, and noted that the airline is still positioned to be the industry leader on free cash flow even post higher capital expenditure. The analyst lowered his price target on United Continental's shares to $58 from $67.

EARNINGS REPORT: On April 22, American Airlines reported first quarter adjusted earnings per share of $1.99, above consensus of $1.19, and in-line first quarter revenue of $9.44B.

PRICE ACTION: In afternoon trading, shares of American Airlines slipped about 0.5% to $36.53 and Delta dipped about 1% to $43.29, while United Continental's shares were fractionally up to $49.10.