MILAN, Feb 25 Reuters Shares of heavilyshorted airline Air France KLM rallied as much as 10 on Thursday as early signs of easing travel restrictions lured investors to a sector heavily hit by the COVID19 pandemic downturn.

Traders said a short squeeze was helping drive the gains in the cashburning carrier even though last week the FrancoDutch group warned of more pain to come after suffering a 7.1 billioneuro 8.7 billion annual loss.

Despite the grim update Air France KLM shares have risen as much as 25 since then, tracking a sector rally that has driven Europes travel and leisure index to just below prepandemic levels. Lufthansa also rose on Thursday.

Air FranceKLM 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 restrictions loosening that bodes well for summer bookings, UBS said on Monday.

By 1123 GMT, Air France KLM shares had pared some of their earlier gains but were still up 3.5 on the day. The…