Regulatory authorities grounded Boeingâ€™s 737 MAX airplanes worldwide on March 19th after two fatal crashes within five months. According to a March 11th FAA memo, there are three airlines with a total of 74 737 MAXâ€™s registered in their fleets, United Continental (UAL), American Airlines (AAL) and Southwest Airlines (LUV). All three airlines have recently canceled all 737 MAX flights till January 2020.
Total short interest in the U.S. Airline Sector is $4.80 billion, an increase of $591 million since the March 19th grounding. The $591 million increase is made up of $432 million of additional short selling and $159 million of mark-to-market appreciation. Initial short selling after the news, which topped out at the end of April and declined through May, has been on the rise since the end of August even though October saw a decrease of -$77 million in short interest, primarily due to mark-to-market depreciation. In October, Delta Airlines (DAL) did see an additional +$29 million of short selling while LUV saw -$38 million in short covering.
UAL, DAL and AAL continue to be the top three most shorted stocks in the U.S. airline sector with 69% of the overall short interest in the sector. But after the March 19th 737 MAX grounding, DAL has been the most shorted stock in the sector with +$389 million of new short selling over the last seven months, with zero 737 MAXâ€™s in their fleet. Only two of the three airlines with 737 MAX exposure had increased short selling after the FAA worldwide grounding, UALâ€™s shares shorted increased by +$62 million and AALâ€™s short interest increased by +$218 million. While LUV, which has the most 737 MAXâ€™s in their fleet compared to UAL and AAL, had -$176 million of short covering since the grounding.
Overall, short selling in the U.S. Airline sector was not a good bet in 2019, with short sellers in the sector down -$84 million in year-to-date mark-to-market losses. Although recently, short sellers have made up some of their losses with +$82 million in mark-to-market profits in October. Since the March 19th FAA grounding, U.S. Airline Sector shorts are down -$83 million in mark-to-market losses.
Overall, the three U.S. carriers with 737 MAX exposure have not had the negative price moves that short sellers expected with only AAL shorts being profitable with +$57.5 million of profits since the grounding. LUV and UAL shorts were down a total of -$124.9 million of mark-to-market losses. In fact, LUV which has the most 737 MAXâ€™s in their fleet (31 registered deliveries from Boeing) incurred the largest loss for short sellers, -$110.5 million in mark-to-market losses.
If Boeing continues to have issues and delays with its 737 MAX recertification short sellers may have to re-evaluate their U.S. airline short thesis. More cancelations beyond January 2020 will most certainly affect future revenues and the over 451 unfilled 737 MAX plane orders by the three airlines (as per Natasha Frost of Quartz), 249 for LUV alone, that may affect future fleet capacity and profitability metrics.
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Managing Director Predictive Analytics, S3 Partners, LLC
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