Shorts in Airlines Flying Higher

Despite a broad rally in the stock market since its March 9 low, short positions for some of the largest US airlines are on the rise. Short interest, the total number of shares of a security that have been sold short by investors expressed as a percent of total outstanding shares, has increased significantly for some of the largest US carriers in 2009.

The chart below depicts the change in short interest for some of the largest US airlines.

Afflicted by some of the most challenging economic times in decades, the airline industry has seen sharp capacity reductions, pricing pressures, and overall falling air-travel demand. United Airlines, Southwest Airlines and Continental Airlines, for example, reported significant drops in quarterly revenues this week, citing a weak operating environment and volatile energy prices.

Even though fuel costs are significantly lower from a peak of $147 per barrel in 2008 to around $67 today, higher volatility in the energy complex has made it increasingly difficult for US carriers to minimize the impact of one of their largest overhead costs. "We came to the conclusion last year that it wasn't in our best interest to be in hedging. Indeed, it was increasing the risk of the firm, not decreasing it" said Doug Parker, CEO of US Airways, when asked about the impact of volatile energy prices on the industry.

US carriers' efforts to reduce expenses by adding passenger fees, decreasing travel schedules, and slashing jobs, helped US Airways, Jetblue and Alaska Airlines lessen the impact of falling demand in the months of April-June, leading all three companies to report a profit for the second quarter on Thursday.

However, the industry's long-term outlook continues to be uncertain, which could explain the jump in short interest in the shares of some of these companies, as the broad market has rallied.

Consider UAL Corp., for example, whose principal subsidiary is United Airlines, the company's short interest has increased 8% since early January. Shares of UAL , which emerged from Chapter 11 protection on February 2006, are down ~69% year-to-date.

According to Thomson Reuters data, other companies such as US Airways and Continental Airlines have also seen an uptrend in short interest. Shares of both companies are down about 68% and 47% respectively in 2009.

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