Morgan Stanley upgrades Air France-KLM to Overweight as Lufthansa falls out of favour
Shares in the French-Dutch holding company rise to €11.57 following the rating change, though geopolitical disruptions continue to weigh on KLM’s Middle East operations.
Morgan Stanley has upgraded its recommendation for Air France-KLM from Market-Weight to Overweight, raising its price target from €9.40 to €11.50. The investment firm’s decision, announced on 26 May 2026, highlights a divergence in sentiment towards European aviation peers, coinciding with a downgrade of competitor Lufthansa to Underweight.
The analyst group pointed to the airline’s recent earnings performance, alongside significant cost and capacity reductions, as primary drivers for the bullish outlook. Morgan Stanley also noted that the stock trades at a "cheap" valuation relative to other European carriers, particularly when compared to Lufthansa, which has faced multiple downgrades from major institutions including Barclays and Goldman Sachs.
Market reaction was immediate, with Air France-KLM shares trading at €11.57 on 27 May 2026. The stock had previously peaked above €13 in February before tumbling below €9 in March, a volatility that Simply Wall Street analysis attributed to rapid shifts in investor sentiment. Despite the recent recovery, the firm’s discounted cash flow model suggests a valuation of €48.31 per share, implying a substantial discount to current market prices.
Supporting the upgrade, Morgan Stanley cited slight declines in crude oil prices and the integration of the Bilt rewards programme into the FlyingBlue loyalty scheme as factors that could bolster profit growth. These operational efficiencies are expected to help the carrier maintain its summer flying schedule, despite the broader industry headwinds.
However, the airline’s outlook is not without risk. KLM has been forced to cancel over 160 flights to Middle Eastern cities, including Doha, Abu Dhabi, Riyadh, and Amman, scheduled between May and September 2026. The disruptions stem from the US-Israeli strike on Iran in February, which has severely impacted route viability in the region.
The broader aviation sector remains under pressure, with high jet fuel costs and economic uncertainty weighing on profitability. Since the start of 2026, shares of major US carriers United and American Airlines have fallen approximately 5%, while Spirit Airlines has faced bankruptcy. In contrast, Delta and JetBlue have seen their stock prices trade significantly higher, reflecting a fragmented market landscape.
Air France-KLM, formed by the 2004 merger of the national carriers of France and the Netherlands, has seen its shares rise 27% over the past year. Yet, the five-year total return remains down more than 50%, underscoring the long-term challenges inherent in the industry. Investors are now weighing the firm’s cost-cutting measures and valuation discount against the persistent geopolitical risks affecting its network.
