Investing.com -- Citi upgraded JetBlue to Neutral/High Risk from Sell/High Risk and put Allegiant Travel on a 90-day positive Catalyst Watch, as the bank argues that airline shares need conservative 2027 capacity plans to sustain a rally.

Shares in JetBlue and Allegiant rose 3.7% and 2.8% in premarket trading.

The JetBlue upgrade is "primarily on valuation," Citi analysts said. At about $4, the stock has less downside than when Citi downgraded it above $6 two months ago. Citi said its structural view is unchanged, with the largest carriers, which it calls supermajors, expected to keep outperforming the legacy low-cost carriers.

Significant declines from summer peaks have improved risk/reward across airlines, but fuel prices are near prior highs and not all stocks are at prior lows, so the improvement "may not be as significant as stock prices alone suggest," the analysts wrote. They stressed that "now more than ever, all airlines are not equal."

Demand has been strong, the analysts said, yet stocks have generally faded even as fuel prices tracked lower. Citi argues the growth rate of unit revenue has peaked and will slow in 2027, leaving its estimates below 2027 consensus for most airlines it covers. The bank is above consensus for 2028 at Delta, United, American and Allegiant.

For a sustained rally, airlines must commit to conservative 2027 capacity growth, not just talk up demand, the analysts argued. "Capacity is being trimmed but is far from appropriately corrected," they wrote, noting that low-single-digit growth exiting the fourth quarter makes high-single-digit growth by mid-2027 "far too likely."

Citi suspects Delta, which reports first on Oct. 9, will offer the most conservative 2027 capacity outlook. It is concerned that United and American may struggle to separate themselves from competition in Chicago.

For Allegiant, rated Buy/High Risk, Citi reiterated its $156 price target, which implies about 100% upside. Analysts called the Allegiant-Sun Country merger potentially "one of the best deals in the industry’s history" and said they are positive into third-quarter results and a December investor day.

Citi updated its estimates for recent fuel prices, demand signals and company commentary. It also pushed its target valuation out to year-end 2027, based on 2028 estimates.

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