Airline Stocks Index Will Likely Remain Gross Underperformer across All Industry Indices for Weeks

The Dow Jones U.S. Airlines Index (DJUSAR), has been showing greater than average weakness compared to other Dow Jones industry groups. Airline stocks underperformed the S&P 500 for the third consecutive month in December and underperformed the index in 8 of the 12 months of 2021. The recent underperformance is particularly disappointing for investors given the holiday travel season usually makes the fourth quarter the strongest of the year for airlines.

There are plenty of newly imposed stringent lockdown efforts made by European and the U.S. authorities as the latter, for example, reported close to 1 million omicron infections surpassing the record number for delta variant. According to FT, China is more likely to keep its current strategy of strict lockdowns and closed borders until the end of 2022. Stringent controls in China will thus keep influencing financial markets globally.

As a result, airline stock investors that hoped for recovery to their holdings in 2022 got some very bad news in late November when WHO announced discovery of the omicron variant of Covid-19. The omicron variant news in general became a bad Christmas gift for airline stock investors, but those were the very gloomy omicron projections that apparently boosted airline stocks’ short interest.

Short sellers certainly seem to see an opportunity in the near term. Didora added that short interest across his airline stock coverage was up 30.1% in December compared to November. Among the Big-4 U.S. airline stocks, American Airlines (AAL) saw the largest jump in short interest at 41.3% followed by United Airlines Holdings (UAL) at 34.6%. Mesa Air Group (MESA) saw the largest increase in short interest among all airline stocks at 86%. American Airlines reportedly has the highest percentage of its float held in short positions at 16%.

Many investors scooped up airline stocks in 2H 2020 and the 1H 2021 betting on a pent-up travel demand once the pandemic abated. But in reality many airline stocks are now trading at the high end of their historical valuation range even though travel demand remains depressed.