The Airline Sector's Turnaround: Why Southwest and Delta Are Poised for 2026 Gains

The U.S. airline sector, long battered by cyclical volatility and macroeconomic headwinds, is showing signs of a durable turnaround. Two industry titans-Southwest Airlines (LUV) and Delta Air Lines (DAL)-stand out as prime beneficiaries of this shift, driven by improving earnings momentum, strategic reinvention, and a surge in analyst optimism. As 2026 approaches, investors are increasingly positioning these carriers as cornerstones of a sector poised for growth.

Southwest: Strategic Overhaul Fuels Analyst Optimism

Southwest's recent performance has been a study in resilience. Despite a 42% decline in first-nine-month 2025 profits compared to 2024, the carrier's Q3 2025 results exceeded expectations, with record operating revenue of $6.9 billion and an adjusted net income of $58 million. This came amid a challenging backdrop: a 43-day government shutdown, elevated fuel costs, and a soft demand environment. Yet, the company's strategic pivot-introducing assigned seating, extra legroom options, and free Wi-Fi for Rapid Rewards members-has sparked investor confidence.

Analysts are taking notice. JPMorgan upgraded Southwest to "overweight" in late 2025, raising its price target to $45.00, while UBS followed suit with a $45.00 target. These upgrades reflect anticipation of a post-2026 revenue boost, with management projecting $1.5 billion in incremental EBIT from premium product offerings by 2027. Even as Southwest cut its full-year 2025 EBIT guidance to $600 million–$800 million, the stock gained 24% year-to-date in 2025, outperforming broader market trends.

Delta: Premium Strategy and Margin Expansion Lead the Way

Delta's Q3 2025 results underscore its dominance in the premium and corporate travel segments. The carrier reported $15.197 billion in adjusted revenue, a 4.1% year-over-year increase, and an operating margin of 10.1%-well above Southwest's 1.7% margin in the same period. Premium revenue grew 9%, driven by Delta One and Comfort Plus cabins, while corporate sales rose 8% as business travel demand rebounded.

Analysts have responded with a bullish consensus. The average price target for Delta stands at $79.03, with a high of $90 and a low of $65. UBS's recent $90 target and Delta's updated full-year guidance- projecting $6 in adjusted EPS and $3.5 billion–$4 billion in free cash flow-highlight its financial discipline. CEO Ed Bastian emphasized Delta's "differentiated customer experience" as a key differentiator, noting that its loyalty program and revenue per available seat mile (TRASM) metrics are outpacing peers.

Earnings Momentum and Analyst Upgrades: A Sector-Wide Trend

Both carriers are benefiting from a broader industry rebound. Delta's Q3 operating margin of 10.1% and Southwest's Q3 adjusted EPS of $0.11 (beating a $0.04 loss forecast) signal improved cost management and demand resilience. For 2026, Southwest expects 5–7% RASM growth in Q1, driven by capacity rationalization, while Delta's full-year free cash flow targets align with long-term targets.

Analyst ratings further validate this optimism. Delta's "Buy" consensus contrasts with Southwest's mixed ratings (Wells Fargo's "hold" vs. UBS's upgrade), but both stocks have seen price target increases. JPMorgan's "overweight" call on Southwest and UBS's $90 target for Delta reflect confidence in their ability to navigate macroeconomic risks and capitalize on structural trends like business travel recovery and premium product demand.

2026 Outlook: Strategic Divergence, Shared Potential

While Delta's premium-focused model and higher margins position it as the sector's current leader, Southwest's strategic overhauls-particularly its 2026 rollout of assigned seating and ancillary revenue streams-offer long-term upside. Delta's $3.5 billion–$4 billion free cash flow forecast and Southwest's $1.5 billion EBIT projection by 2027 suggest both will prioritize shareholder returns, with Southwest returning $439 million to shareholders in Q3 2025 alone.

However, risks remain. Both carriers face exposure to fuel volatility and potential demand softness in leisure travel. For Southwest, the success of its product overhaul hinges on customer adoption of paid seating and ancillaries. Delta, meanwhile, must sustain its premium revenue growth amid rising competition from United and American Airlines.

Conclusion: A Sector on the Rise

The airline sector's 2026 outlook is bright, with Southwest and Delta leading the charge. Southwest's strategic reinvention and Delta's premium dominance-coupled with analyst upgrades and improving earnings trends-position both as compelling long-term investments. While Delta's current financials and margin discipline give it an edge, Southwest's transformative initiatives could unlock significant value in 2026. For investors, the key takeaway is clear: the sector's turnaround is no longer speculative-it's a reality backed by earnings momentum and institutional confidence.