Investing.com -- Air France-KLM has been downgraded by Bernstein to "market-perform" from "outperform," with a revised price target of €11.50.

Shares of the airline were down 3.7% at 07:17 ET (11:17 GMT).

The decision reflects persistent cost pressures, a weaker position in the transatlantic market compared to European competitors, and a lack of meaningful cost reductions despite previous commitments.

The airline reported a fourth-quarter EBIT beat, surpassing consensus expectations by €236 million.

The stock surged by 33% in response, fueled by strong yield performance, which is expected to remain stable.

However, unit costs continue to climb, with a projected increase in 2025 despite the company’s stated intention to pursue cost-cutting initiatives. This ongoing trend is a key reason for Bernstein’s downgrade.

Air France-KLM lags behind peers in the lucrative North Atlantic market, allocating just 29% of its long-haul capacity to transatlantic routes compared to Lufthansa and IAG’s 46-47%. Given the strength of this market, Bernstein suggests a higher presence would be more favorable.

The airline previously set ambitious cost-reduction targets at its 2023 Capital Markets Day, but execution has fallen short. Initially guiding a 1-2% increase in unit costs for 2024, the final result came in at 3.2%.

For 2025, costs are still expected to rise, casting doubt on the company’s ability to achieve its targeted €2 billion EBIT improvement by 2028.

KLM, historically the stronger performer within the group, faces challenges. In 2024, Air France reported a 5.1% EBIT margin despite yield pressures linked to the Paris Olympics, while KLM trailed at 3.3%.

The Dutch carrier is undergoing a restructuring aimed at achieving a €450 million EBIT improvement, including €200 million from labor productivity gains and €120 million from new revenue streams. The extent of progress will become clearer in 2025.

Air France-KLM targets 4-5% capacity growth in 2025, with a network expansion of 3-5% and similar expectations for Transavia.

However, new cost pressures, including a €90-170 million impact from the French government’s aviation tax and €65-110 million from increased Schiphol airport tariffs, have forced the airline to revise its EBIT improvement forecast from €500 million to €300 million.

Capital expenditure is projected to rise to €3.2-3.4 billion, up from €3 billion in 2024, as part of the airline’s fleet modernization strategy.

The transition to newer aircraft like the Airbus A220, A320neo, A350, and Boeing (NYSE: BA ) 787 is expected to reduce fuel and maintenance costs over time, but it will delay cash returns to shareholders.

Bernstein’s valuation for Air France-KLM is based on a 10-year average EV/EBIT ratio, adjusted for market trends within the Stoxx 600 Travel & Leisure sector.

The €11.50 price target reflects the airline’s need for more aggressive cost reductions and better transatlantic positioning before investors regain confidence in its profitability trajectory.

Despite recent improvements, the airline still faces hurdles. With unit costs projected to rise in 2025, challenges at KLM, and increasing operational expenses, sustaining recent share price gains remains difficult.