Since fuel prices began falling late last summer, the airline industry has taken advantage of these lower fuel costs like none other. Considering whether oil and fuel prices may or may not go up in the near future, one key analyst still sees upside to airlines. Ultimately, Credit Suisse rates U.S. airlines as Overweight, despite some near-term headwinds, where estimates might take a hit.

The firm lowered its estimates to take into account higher fuel prices, as well as modest adjustments to unit revenue forecasts. Considering weak investor sentiment, Credit Suisse lowered its target multiples by about one to two turns. Even with lower multiples on lower earnings, the industry still looks attractive, based on valuation with the firm’s new target prices, which yield on average a 28% potential upside. Credit Suisse does worry that the industry may be range bound until messaging improves and capacity and pricing concerns are alleviated, but the firm thinks that solid second-quarter results and large buybacks could help this valuation as well.

According to Credit Suisse, May unit revenue growth will be worse than April’s, giving investors yet another reason to hesitate on buying the sell-off. May, and the second quarter, are firmly believed to mark the trough in unit revenue declines. Given recent capacity and escalating pricing concerns, investors will need to see more evidence of the trough to believe it.

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The international market is not showing improvement. The domestic market, which is the key part of the firm’s bullish thesis, is at risk of weakening if American Airlines Group Inc. (NASDAQ: AAL) makes good on its threat to compete aggressively against low-cost carrier (LCC) capacity growth in its markets. In the second and third quarters, American Airlines faces about 10% competitive capacity growth on its routes, with the bulk coming from LCCs and ultra-low-cost carriers (ULCCs). Note that about 45% of American Airline’s domestic network overlaps with LCC/ULCCs, compared to 35% for Delta Air Lines Inc. (NYSE: DAL).

In the report, Credit Suisse analyst Julie Yates said:

Delta will likely tighten down its (2%)-(4%) range with its traffic update for the 2nd month of the quarter, as it has the last 3 quarters; commentary on Domestic will be key (recall guidance is for flat domestic and it was called “stable” in April). Our estimate for May is (4.5%)-(5%) and we look for the range to be tightened to (3%)-(4%) either with the release or when Delta’s President Ed Bastian presents at a competitor conference on the 4th, where we anticipate an updated June Quarter forecast incl. op margin (we expect 16-17% from 16-18%), fuel price (we expect ~$2.45-$2.50 from $2.35-$2.40), PRASM, CASM-ex 0-1%, capacity +3%, FCF (~$1.5 billion), & cash to S/H (we expect ~$800 million–$1 billion).

Until the second-quarter investor updates and earnings in July, Credit Suisse sees a few meaningful catalysts that may materially improve sentiment as May traffic is likely to underwhelm. Three airlines are making presentations at next week’s competitor conference: United Continental Holdings Inc. (NYSE: UAL), Delta and Alaska Air Group Inc. (NYSE: ALK) on June 4, with JetBlue Airways Corp. (NASDAQ: JBLU) presenting the following week.

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