On Wednesday, Citi analysts downgraded Air France-KLM (LON:0LN7) stock from Buy to Neutral, adjusting the price target to €9.50 from the previous €10.00. The downgrade comes amid expectations of increased margin pressure on KLM due to a significant tariff hike and potential capacity reductions.
The airline is facing a 41% increase in tariffs starting April 2025, along with a forecasted capacity decrease of 4.4% into 2025, which could lead to higher unit costs and hinder productivity.
The analysts at Citi highlighted that these factors are likely to impede the margin improvements that were anticipated from the company's restructuring efforts. They also noted the added uncertainty stemming from the French aviation tax, which could further influence the airline's financial performance into the following year.
Previously, the stock's rating was based on the potential for a margin turnaround, largely driven by cost management at KLM. However, recent developments, including the enforced capacity reduction by Amsterdam airport in December 2024, have raised doubts about the airline's near-term financial prospects.
The report from Citi also removed Air France-KLM from its Catalyst Watch list, suggesting that the capacity cap at Amsterdam's airport could postpone the expected recovery in KLM's operations.
The analysts now consider the stock to be High Risk, in light of the anticipated share price volatility. The revised outlook reflects a cautious stance on the company's ability to achieve a margin turnaround in the near term, which is now seen as a "show-me" story by investors, according to Citi's analysis.
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