Shorts flying high in some U.S. airlines
A mismatch exists between consumers’ ratings of major US airlines and investors’ perceptions, which are clearly impacted by macro factors such as the price of oil and weak consumer sentiment. Stand out names include JetBlue Airways Corp (NASDAQ:JBLU), US Airways Group Inc (NYSE:LCC), United Continental Holdings Inc (NASDAQ:UAL) and Southwest Airlines Co (NYSE:LUV).
Message:
Screening short interest across the global sector using the Bloomberg EQS function shows that a number of airlines exceed the sector average of 3.15% of shares out on loan.
A recent Consumer Reports survey of nearly 15,000 passengers, reported by CNN, revealed that Southwest Airlines topped the rankings for overall satisfaction, with JetBlue Airways coming in second. The airlines also scored highest in seat comfort whilst the remaining eight of the 10 airlines scored low marks in this category. Despite their popularity with consumers, both companies have consistently appeared in our list of companies at an annual high in short interest. However, there is more to this than meets the eye.
Ranked as the second most shorted airline, JetBlue sees a substantial 22% of its total shares outstanding on loan, although shorts covered a little at the end of March. The stock has consistently appeared amongst the names seeing an annual high in short interest, and demand to borrow remains high with 60% of the supply on loan. The airline currently has several convertible bonds in issue which implies the stock is subject to convertible arbitrage, yet directional short selling remains prominent.
Despite cracks having been discovered in a number of Southwest Airlines aircrafts, shorts have halved their positions this month from the annual high of 3% of total shares to 1.5%.
US Airways was ranked bottom of the Consumer Reports survey for overall satisfaction and also received the lowest marks for cabin-crew service. The airline was also ranked lowest in 2007, when the last Consumer Reports airline rankings were released. It is the fourth most shorted airline stock with 18% of its shares outstanding on loan (blue line), which is just off a two year high and represents over 40% of the lendable supply (orange line). This stock may also be subject to a degree of convertible arbitrage.
Short interest in United Continental Holdings has recently increased to 11%, having remained fairly static at around 9% of total shares this year. Almost 40% of the lendable supply is out on loan. While there are convertible bonds in issue, the short interest appears to be driven by directional short selling.
Bottom line:
While the average short interest across the sector is not especially high, investors in some airlines are concerned about the impact of rising oil costs and question whether they can be passed on to consumers who have already had to deal with several ticket price hikes over the past year.
