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Apr 13, 2017

S3 Research: United Airlines’ Tarred Public Image Not Increasing Negative Bets Against Company or Industry

Short interest in the Airline sector decreased by $188.7 million over the last 30 days, including a decrease by $85.2 million over the last week, bringing total short interest to $5.1 billion. The top 5 shorts in the sector are seen in the above chart.

United Airlines Continental Holdings (UAL US) has had couple of very serious public relations issues over the past few weeks after barring two girls wearing leggings from boarding a flight in March to forcibly removing a passenger from an overbooked flight this week.

Although there has been non-stop coverage of the most recent passenger incident at UAL from CNN-to-The New York Times and from Fox News-to-the-New York Post (among others), the company’s stock price is down only 1.27% in the last week and down 3.98% for the year.

While both of these incidents went viral on social media, the reality is that consumers might not have much choice but to fly UAL due to airline consolidation, which has reduced competition over most routes. As a result, with passengers having fewer options these days when it comes to carriers, UAL’s revenues may not suffer as much as expected unless passengers opt for longer and more expensive flights.

Case in point, UAL short interest, having increased since 2016, is actually down since hitting a historic high of $1.3 billion in February. Average short interest was $653 million in 2016 and is averaging $1.1 billion in 2017, up 70%. UAL’s stock price was up 27.2% in 2016, slightly below the NYSE ARCA Airline Index’s increase of 27.5%. With UAL’s stock price up in 2016, short sellers lost $196 million in mark to market P/L, or -30.01%, on their $653 average position.

UAL has underperformed the NYSE ARCA Airline Index in 2017, with the index down 0.26% year-to-date and UAL down 3.98%. Short sellers increased their positions quickly in 2017, hitting $1.3 billion by mid-February and slowly covered their positions over the last two months. UAL short interest is now $982 million, up $228 million, or 30%, on the year, but down $189 million, or 16%, since the end of February. Short interest has been relatively flat in April, down $31 million, or 3%. Short sellers have recouped $62 million of their 2016 losses this year, making a return of +5.95% on an average short position of $1.04 billion in 2017.

Repercussions, both monetary and reputational, will continue to overhang UAL’s stock performance in the months ahead. But at this point, shorts are being disciplined and continuing to reduce their short exposure to UAL this week at the same rate as they have been buying to cover since February. If passenger demand tapers off because of negative brand sentiment at UAL, shorts may reverse course and increase their short exposure in the company once again.   

Want deeper insight into the above analysis? Contact: 
Head of Research, S3 Partners
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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