Airline stocks, which have been among the best performers since markets bounced off their March lows, were rallying again on Monday, thanks to a bullish note from Goldman Sachs.

In a sign of how far sentiment has come in two months, Goldman Sachs upgraded AMR ( AMR), parent of American Airlines, to outperform from in line, telling investors that the risk of bankruptcy has passed and that the industry is on the verge of recovery. Besides issuing the upgrade, analyst Glenn Engel also raised his earnings estimates on a number of airlines.

"As liquidity fears fade, we believe airline stocks will continue to significantly outperform the market, especially if business travel turns up as our leading indicators are starting to suggest," Engel said in a research note.

Shares also got a boost from news that lucrative business travel may be picking up heading into the busy summer travel season. The Amex airline index jumped 5.4% around midday, led by AMR's gain of 68 cents, or 10.7%, to $7.02. Continental ( CAL) rose $1.21, or 11%, to $12.23, while Delta Air Lines ( DAL) gained 67 cents, or 5%, to $14.03, and Northwest ( NWAC) added 27 cents, or 3%, to $9.20.

One reason why Engel sees upside in airline stocks is that revisions to airline earnings estimates appear to have bottomed. Excluding last week, consensus airline estimates were revised upward for five consecutive weeks from late April to late May. It's the first time that has happened in three years. Furthermore, Engel said some recent positive comments about business travel and an uptick in the purchasing manager's index show that business travel demand could be returning.

"For airlines to achieve substantial profits, the business sector must show a better-than-anemic recovery," said Engel. "However, most airline stocks are still below their post-9/11 lows, indicating that assured survival alone could move stocks up meaningfully."

In the near term, the analyst said that Continental and AMR will provide the best trades, while regional airlines are the best long-term bets. Specifically, Engel singled out Atlantic Coast Airline Holdings ( ACAI), a code-share partner with UAL ( UALAQ) unit United, flying out of hubs in Washington D.C. and Boston, as his favorite long-term play.

The mention helped boost Atlantic Coast shares 63 cents, or 6.7%, to $10.10.

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