Following the bankruptcy of UK-based airline Monarch Airlines, analytics firm S3 Analytics has cautioned short sellers in the airline sector that less competition could possibly put more short selling in the industry at risk.

Short interest in the global airline industry is $7.6 billion, with short interest increasing by $851 million over the last month, the firm noted. But with increased bankruptcies encompassing the sector, including at Monarch, Alitalia in May and Air Berlin in August, competition is shrinking.

Nonetheless, airline short interest in Europe has risen by 23%, twice the rate of the U.S. airline sector, with Air France-KLM (AFLYY) and SAS drawing the largest increases in the industry. But, as S3 points out, the competition in the region that these major European carriers are facing is diminishing because they deny the opportunity of region-wide scales of efficiency.

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"In order to survive and become profitable, the European airline industry will probably follow the U.S.'s history of bankruptcy and consolidation," S3 noted. "Over the long term short sellers will have to decide which of weaker airlines to go long or short - some will be taken over and others will cease operations."

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