Are These Airline Rallies Real or Just Another Product of Short Squeezing By Investors?

To kick off today’s trading, it seemed as if two major stocks within the reeling airline industry could finally be on the road to recovery, just when it appeared things were getting worse.

Despite posting record quarterly losses, a 64% decline in revenue compared to a year earlier, a continued uphill climb with new travel restrictions and a slow rollout of vaccines, shares of American Airlines (AAL) popped nearly 23% this morning, once the market opened.

Likewise, Southwest Airlines (LUV) reported its first annual loss since 1972 and promised to remain conservative with capacity through March, citing weak demand. The airline also forecast January revenue will be down 65% to 70% compared with 2019, slightly better than the 75% decline it had previously forecast. Regardless, investors saw shares of Southwest pop over 3% this morning.

Could it be that investors are finally banking on a recovery? Not so fast, according to some analysts.

Today’s gains occurred amidst the frenzy of retail buying of stocks with heavy interests in shortening short interests, and some analysts believe the airlines are a product of the same wild activity we’ve seen all week.

Cowen analyst Helane Becker, who warned investors that prices were “dislocating from fundaments,” says:

“We believe the move is due to the de-risking going on in the market and American remains one of the most consensus short airlines in our coverage (~25% short interest as of 1/15/21).”

While many investors have been looking to pluck ailing stocks up off the floor, ahead of their eventual recovery, it appears airlines may still have a long road ahead before they’re on the up and up.

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