Shares of American Airlines (NASDAQ: AAL) Are Taking Off Again

On Thursday, shares of American Airlines (NASDAQ: AAL) came within a couple of cents of their post COVID high, as they jumped as much as 30%. While they gave back most of the gains into the close, they still finished up a respectable 9% with their second highest daily volume of the year.

So what’s gotten airline investors so hot and bothered? It looks like a combination of both fundamental and not so fundamental factors are at play here, and with shares up another 7% in Friday’s pre-market trading, it doesn’t look like those factors are going away anytime soon.

Tough Year

The big news on Friday was American’s Q4 earnings. Both topline and bottom line numbers beat expectations, although both remained in ugly contraction mode. Revenue shrank 64% on the year, while EPS came in at a loss of -$3.86. It was without a doubt the final chapter in what has probably been their toughest year ever.

CEO Doug Parker said as much with the report; “our fourth-quarter financial results close out the most challenging year in our company’s history. However, we couldn’t be prouder of the American Airlines team and the great things they accomplished last year. The American team flew more customers than any other airline in 2020, and they did so safely and with the utmost care. As we look to the year ahead, 2021 will be a year of recovery. While we don’t know exactly when passenger demand will return, as vaccine distribution takes hold and travel restrictions are lifted, we will be ready. We are confident that the actions we have taken to improve our customer experience, enhance our network and increase our efficiency position us well for the future.”

Parker struck on a few points here that are worth noting. American flew more passengers than any of the other majors which suggests they’re in prime position to take advantage of a post-COVID recovery. And that recovery is well underway, with TSA passenger numbers growing consistently since last summer and international vaccine programs already being rolled out.

It will be a bumpy ride in the meantime though, with fresh restrictions announced this week on international travel. President Biden is said to be mulling a ban on non-U.S. citizens arriving from the U.K., Ireland and the Schengen region today. Still, it feels like the darkest days of 2020 are behind us which helps explain the consistent bid that’s been present in American shares since November.

Short Squeeze Potential

The other big factor in play right now is irrational exuberance, which can often do a stock no harm at all in the short-term at least. We’ve all heard about GameStop (NYSE: GME) by now and the Reddit fuelled short squeeze that’s underway. Well, for better or for worse American Airlines has found itself on the list of possible next targets for a similar push.

The reason is down to its high short interest as a percentage of the float, which at 28% is well below GameStops triple digit number, but is very much 10 times higher than the short interest of Delta (NYSE: DAL) and Southwest (NYSE: LUV), and 6 times higher than United’s (NASDAQ: UAL).

It remains to be seen how this grand social and market experiment plays out, but for now American Airlines investors are reaping the rewards. As a strong bid flows in with heavy volume and the stock jumps, the big funds that are short see their positions coming under pressure. If the pain is bad enough, they’re forced to exit their short positions by buying the stock back, which of course only fuels the bid further.

While the rally won’t last forever, it’s sure to be a welcome jump for investors of the beaten down name, which for all its woes is still up around 150% from last May