(Adds Point72 declining to comment, updates prices)
MILAN, Feb 25 (Reuters) - Shares of heavily-shorted airline Air France KLM rallied by as much as 10% on Thursday as early signs of easing travel restrictions lured investors to a sector hard hit by the COVID-19 pandemic downturn.
Traders said a short squeeze was driving gains in the Franco-Dutch group, which last week reported a 7.1 billion-euro ($8.7 billion) annual loss and warned of further pain ahead.
Air France KLM shares have risen by as much as 25% since last week’s results announcement, tracking a sector rally that has taken Europe’s travel and leisure index to just below pre-pandemic levels. Lufthansa also rose on Thursday.
“Air France-KLM and Lufthansa outperforming the rest of the sector today may reflect some short positions unwinding given they are some of the most heavily-shorted names in the sector,” Credit Suisse analyst Neil Glynn said.
“They are among the most sensitive to changing sentiment on traffic recovery prospects given high financial leverage and traditionally high operating leverage to revenue fluctuations. However, we think this must be considered alongside restructuring challenges,” he added.
Travel restrictions within the European Union have fallen to 78% of routes as of Feb. 1 from 87% two weeks before, providing an early sign of relaxation that bodes well for summer bookings, UBS said on Monday.
By 1503 GMT, Air France KLM shares had pared some of their earlier gains but were still up 3.4% on the day. The travel and leisure index also retreated after hitting a 12-month high.
Other travel stocks, such as TUI, cruise operator Carnival and hotelier Accor have all risen nearly 20% in the last two months, but fell on Thursday.
With 91% of shares available for shorting out on loan, according to data provider FIS Astec, Air France KLM has been a favourite target of hedge funds seeking to profit from a fall in the stock price.
The recent gains could expose short sellers to potential losses.
According to regulatory filings, hedge fund Point72 Europe LLP has a 1.4% bearish bet against Air France KLM, up from 0.8% last month, and Helikon Investments has lifted its short bet to 2.8% from around 2.5%. Point72 declined to comment and Helikon did not respond to a request for comment.
Short sellers typically borrow and sell shares they expect to fall in value, hoping to buy them back at a lower price to pay back the loan and pocket the difference.
$1 = 0.8177 euros Reporting by Danilo Masoni in Milan and Sarah Morland in Gdansk; Editing by Elaine Hardcastle and Barbara Lewis
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UPDATE 1-Short squeeze lifts Air France KLM as travel stocks fly - Reuters
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