U.S. airline investors may see the three legacy carriers perform differently in the near future, Morgan Stanley analyst Rajeev Lalwani wrote in a note.

United Continental Holdings Inc. is likely to see upside to earnings, while American Airlines Group Inc. may observe a cost reset from labor, Lalwani said. Meanwhile, shares of Delta Air Lines Inc.'s has finally started getting some credit for its leadership and the stock has outperformed peers, he added. He upgraded United to a buy-equivalent rating and downgraded American to a sell-equivalent. He stepped away from a bullish call on Delta and now rates it equal-weight.

"Over the last 12-18 months, United has done a solid job of executing on its mid-continent strategy, which we foresee continuing as the competitive backdrop remains benign in a high-cost environment," Lalwani said, raising the price target to US$110 from US$101.

For American, the analyst said the airline faces the most labor risk within the group, and slashed the price target to US$26 from US$40. On Delta, Lalwani cut the price target by US$1 to US$61, noting that the shares are off to a good start this year, and that the free cash flow yield is falling below double-digit levels of recent years.

Overall, U.S. airline stocks have underperformed the broader market this year, with the S&P Supercomposite Airlines Industry Index gaining 6.4% so far in 2019, while the S&P 500 Index rose 14%. United and American are the biggest decliners on the airline index this year.

On Monday, United shares gained as much as 0.9%, American dropped 4.8%, and Delta fell 2.1%. The airline index sank as much as 1.6%, while the S&P 500 was down 1%.