Southwest Airlines (LUV) could surprise in a challenging year with multiple internal initiatives, a robust balance sheet, and buyback plans, Morgan Stanley said in a late Thursday research report.

Q2 guidance was below consensus on lower revenue per available seat mile assumptions amid soft leisure and corporate demand, but impacts from weak demand could be mitigated as the company remains on track with its internal policies, the brokerage said.

Management refuted skepticism about its rapid internal policy changes, citing positive customer surveys, the analysts noted.

The Wall Street firm said Southwest "seems to have transformed from a consensus short into a consensus long in recent weeks," as the stock has held up better than peers.

The carrier plans to focus its capital use on aircraft deliveries, debt paydown, and to complete the remaining $1.5 billion of share repurchases in its authorization by end of July, the analysts said.

Morgan Stanley reiterated its overweight rating on the stock and lowered its target price to $38 from $41 per share.

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