Hedge funds bet against airlines as coronavirus spreads

Hedge funds including Citadel and Marshall Wace have ramped up their short positions against airlines disrupted by the spread of a deadly coronavirus in China, as carriers cancel flights to the country.

So-called short interest in the shares of Air France-KLM and Lufthansa has risen this week as speculators placed bets that their market value would head lower. The airlines’ share prices have already tumbled this month — both falling about 13 per cent — on concerns over their exposure to the Chinese market.

Disclosed short positions in Franco-Dutch Air France-KLM represented 4.55 per cent of the total shares outstanding on Monday, the highest since mid-2018, according to data from analytics company Breakout Point. At Germany’s Lufthansa they hit 3.86 per cent on Tuesday, the highest since mid-2017.

Chinese authorities are racing to control the virus that has swept through the country and killed more than 130 people. The prospect of people reducing travel to and from China, either by choice or because of travel bans, has shaken the airline industry.

Lufthansa said on Wednesday that it would suspend flights to mainland China until February 9, following a similar move by British Airways and a decision by Hong Kong’s Cathay Pacific to halve the number of its flights to and from the Chinese mainland.

Air France has cancelled flights to Wuhan, the epicentre of the outbreak, but said it planned to continue operating on routes to Shanghai and Beijing for now.

Many analysts have compared the new virus to the 2003 Sars outbreak that also emerged from China, and which Lufthansa’s then-chief executive described as aviation’s “worst-ever crisis”. That disease cost airlines billions of dollars in revenue and sent passenger numbers plummeting, especially at Asia-Pacific and North American carriers.

Air France-KLM and Lufthansa are the European airlines most exposed to the Chinese market, according to analysts at Citigroup. Air France-KLM relies on mainland China for 3.6 per cent of total revenues, according to FactSet, while at Lufthansa, the figure is 1.9 per cent. But as a result of its lossmaking operations in its domestic market, Air France-KLM is particularly dependent on Asia for its profits, according to analysts.

Chicago-based hedge fund Citadel disclosed a new short position of 1.43 per cent against Air France-KLM, with Marshall Wace and Sandbar Asset Management — both based in London — increasing their positions to 1.49 per cent and 1.04 per cent respectively. Marshall Wace increased its short of Lufthansa to 0.61 per cent, while Citadel pushed its own up to 3.25 per cent.

The World Health Organisation said it was first alerted to several cases of pneumonia in the central Chinese city of Wuhan at the end of December. In early January, the Chinese authorities confirmed they had identified a new virus.

Citadel could not be reached for comment. Marshall Wace and Sandbar declined to comment. Air France-KLM and Lufthansa both declined to comment on the shorting of their stocks.


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