Airlines set for a smoother 2026, BMO says

Investing.com -- BMO Capital Markets has initiated coverage on the U.S. airline sector with a constructive outlook for 2026, arguing that the industry is finally emerging from “a challenging 2024–2025” marked by excess domestic capacity and weak corporate travel.

Analyst Michael Goldie said conditions are now improving, with “normalizing supply/demand and recovering corporate travel.”

BMO launched with Outperform ratings on Delta Air Lines (NYSE: DAL) and United Airlines (NYSE: UAL), and Market Perform ratings on American Airlines (NYSE: AAL) and Southwest Airlines (NYSE: LUV).

The firm sees an opportunity for carriers capable of “durable margin expansion” and reduced cyclicality, supported by “diversified revenues; brand loyalty; and balance sheet health.”

Margin pressure has been especially acute among discount airlines, BMO noted, as “cost inflation has outpaced unit revenue,” worsened by labour shortages that pushed up wages and a lack of premium products.

But a turning point is said to be in sight. “Improving market conditions should benefit all carriers in 2026,” as the sector moves beyond both overcapacity and corporate demand weakness, said Goldie.

BMO highlights Delta as best positioned for re-rating potential. The carrier has reduced its reliance on main cabin seats and now generates “$8 billion in annual remunerations” from its American Express partnership, which delivers margins “multiple times that of the airline business.”

The bank sees “a path for the stock to more than double over the medium-term.”

United could also re-rate if it executes on cost initiatives and monetises its customer base.

Meanwhile, BMO sees Southwest’s limited leverage as de-risking its outlook, while American’s higher leverage offers torque but also “increases risk if [conditions] deteriorate.”

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