Shares of several U.S. airline stocks are in focus after a JPMorgan analyst shook up his ratings in the group, upgrading United Continental Holdings (UAL) and JetBlue Airways (JBLU), while downgrading Southwest Airlines (LUV) and Alaska Air (ALK). 

INDUSTRY MANAGING ITSELF: On Tuesday, JPMorgan analyst Jamie Baker said the U.S. airline industry is now managing itself through the combination of cost convergence, fare unbundling, broad consolidation, reduced new entrant activity, and return-oriented management teams. The airlines have shifted from a "historical tendency to wage wars of attrition," he said, in a research note reviewing fourth quarter earnings for U.S. airlines, adding the industry will continue efforts to ensure profitability and sustain balance sheet repair.

UNITED UPGRADE: Baker double upgraded United to Overweight from Underweight and raised his price target for the shares to $83 from $60. The shares are the "cheapest in the sector and among the most washed out, having declined the most from recent highs," Baker said. The analyst believes United's current plan to improve hub connectivity and increase share in mid-continent hubs makes sense and is credible for margin improvement. Baker added the plan necessitates accelerated capacity growth and the company has suggested a 4%-6% capacity forecast for 2018-2020.

JETBLUE UPGRADE: Baker also upgraded JetBlue to Overweight from Neutral and raised his price target for the shares to $26 from $22. The company's costs are "gradually coming under control" and its balance sheet is "sound," as the airline pursues a more returns-oriented strategy, Baker said. He also believes JetBlue's network appears the least exposed of any to United Continental's mid-continent hub efforts.

SOUTHWEST DOWNGRADE: Meanwhile, Baker downgraded Southwest to Neutral from Overweight and raised his price target for the shares to $70 from $67. The analyst said that while Southwest has a track record of profitability and a loyal customer base, current industry strength is being driven by international travel and corporate demand. Southwest is less exposed to these areas than its peers, the analyst notes, adding the rating reflects a "better risk-to-reward at the legacy carriers".

ALASKA AIR DOWNGRADE: In addition, Baker downgraded Alaska Air to Underweight from Neutral and lowered his price target for the shares to $67 from $74. The analyst notes that Alaska Air is the only name where he had to cut his 2019 estimates. He said while he sees a path to enhanced market share and profitability, there have been a number of execution missteps. He also believes the company "remains in the United crosshairs in San Francisco."

AMERICAN, DELTA, SPIRIT: Baker maintained his Overweight rating on American Airlines (AAL) and raised his price target to $69 from $65, citing its work on several revenue-accretive initiatives which he believes will drive increased returns and stronger unit revenue. Baker also kept on Overweight rating on Delta Air Lines (DAL) and increased his price target to $79 from $70, saying the company has a compelling valuation, a best-in-class management team and has been most rational in competition with ultra low cost carriers. In addition, the analyst retained his Underweight rating on Spirit Airlines (SAVE) and raised his price target to $42 from $36. Baker said the airline continues to market low end fares dilutive to its unit revenues and its "lack of willingness" to adjust its strategy gives him reason for caution.

PRICE ACTION: In late morning trading, United Continental rose about 1% and JetBlue was up nearly 3%, while Alaska Airlines was down 1.5% and Southwest dropped fractionally.