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Oct 3, 2017

S3 Analytics: European Airline Shorts after Monarch Insolvency

On the heels of the largest airline insolvency by privately held Monarch Airlines Ltd we can expect short covering in airlines that will benefit from less competition in the airline sector and possibly more short selling in airlines that are at risk of following in Monarch’s footsteps. Monarch is the third bankruptcy in the European Airline Sector this year, following Alitalia in May and Air Berlin in August. Short interest in the worldwide airline sector is $7.6 billion, with short interest increasing by $851 million over the last month.

Over capacity is the biggest problem in the European Airline Sector, with the glut of low-cost short-haul airlines driving prices, and margins, down to levels that not even the low cost of fuel can offset. The number or airlines servicing the European customer base has grown but shorter-haul air travel miles have been shrinking due to fear of terrorism and government instability in Middle East, African and Eastern European countries. 

Airline short interest in the European region has increased by 23%, twice the rate of the U.S. Airline sector, with Air France-KLM (AF FP) and SAS AB (SAS SS) representing the largest increases in the sector. There are no European airlines with material decreases in short interest.

From the 1980’s to the present, airline consolidation and liquidation in the U.S. reduced the overcapacity that plagued the industry’s bottom line for years. Airlines such as Republic, American, Aloha, Delta, Northwest, U.S. Airways, United, Eastern and Continental either ceased operations, consolidated with more stable partners or emerged from bankruptcy proceedings to operate in less crowded but still ultra-competitive market. Today, there are four major airlines in the U.S. market (American, Delta, SouthWest and United) that fly the vast majority of domestic shorter-haul miles and effectively price fares at levels that are not self-destructive.

In Europe, the largest airlines (Ryanair, Lufthansa group, International Airlines Group, Air France-KLM and EasyJet) are competing with country specific carriers which deny the possibility of region-wide scales of efficiency. Airlines such as Turkish Air, Aeroflot, SAS Group, Norwegian Air, Wizz Air, Aegean, Turkish Air and Finnair inflate seat capacity and deflate pricing. In addition, the same carriers that are battling low-cost short haulers must also battle deep pocketed long-haulers from the U.S. and the Middle East.

In order to survive and become profitable, the European airline industry will probably follow the U.S.’s history of bankruptcy and consolidation. Over the long term short sellers will have to decide which of weaker airlines to go long or short – some will be taken over and others will cease operations. But in the meantime, shorts are looking for weakness in Air France-KLM and SAS AB.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
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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