Short squeeze boosts Air France KLM as travel stocks fly

MILAN: Shares of heavily-shorted airline Air France KLM rallied as much as 10% on Thursday as early signs of easing travel restrictions lured investors to a sector heavily hit by the COVID-19 pandemic downturn.

Traders said a short squeeze was helping drive the gains in the cash-burning carrier even though last week the Franco-Dutch group warned of more pain to come after suffering a 7.1 billion-euro ($8.7 billion) annual loss.

Despite the grim update Air France KLM shares have risen as much as 25% since then, tracking a sector rally that has driven Europe's travel and leisure index to just below pre-pandemic levels. Lufthansa also rose on Thursday.

"Air France-KLM and Lufthansa outperforming the rest of the sector today may reflect some short positions unwinding given they are some of the most heavily shorted names in the sector," Credit Suisse analyst Neil Glynn said.

"They are among the most sensitive to changing sentiment on traffic recovery prospects given high financial leverage and traditionally high operating leverage to revenue fluctuations. However, we think this must be considered alongside restructuring challenges," he added.

Travel restrictions within the European Union have fallen to 78% of routes as of Feb. 1 from 87% two weeks before, providing an early sign of restrictions loosening that bodes well for summer bookings, UBS said on Monday.

By 1123 GMT, Air France KLM shares had pared some of their earlier gains but were still up 3.5% on the day. The travel and leisure index also pulled back after hitting a fresh 12-month high.

Other travel stocks like TUI, cruise operator Carnival and hotelier Accor have all risen nearly 20% in the last two months, but fell on Thursday.

With 91% of shares available for shorting out on loan, according to FIS Astec, Air France KLM has been a favourite target of hedge funds seeking to profit from a fall in the stock price.

The recent gains could expose short sellers to potential losses.

According to regulatory filings, Point72 Europe LLP has a 1.4% bearish bet against Air France KLM, up from 0.8% last month, and Helikon Investments has lifted its short bet to 2.8% from around 2.5%. Neither responded to a request for comment.

Short sellers typically borrow and sell shares they expect to fall in value, hoping to buy them back at a lower price to pay back the loan and pocket the difference.