All eyes on Virgin now

Virgin Australia has been in and out of the media for the past six months, but is it worthy of a spot in your portfolio?

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Virgin Australia (ASX: VAH) has been in and out of the media for the past six months, but is it worthy of a spot in your portfolio?

Virgin has seemingly made all the right moves when it comes to proving to investors that its ready to make tough decisions to increase market share and return to shareholders. However, the recent trading pattern of the company has been nothing short of boring.

Since mid-2009, the company has struggled to keep its share price above 50 cents and has only twice managed to exceed that level. For a company that pays no dividend and has a very turbulent share price, it certainly seems like it might not be worthwhile.

However, yesterday Air New Zealand (ASX: AIZ) announced it increased its stake as the top shareholder and could continue to cement that position in the near future with even more purchases. Previously, Air New Zealand had a 19.99% stake but upped it 3%, taking its total holding to a greater proportion than rival Singapore Airlines, who currently has 20%.

Under Australian takeover rules, companies that own greater than 20% of a company are allowed to increase their stake by 3% every six months without having to make a full takeover bid. The company has said it has no plans to take control of the airline.

This move seems positive for shareholders, showing the investing community that Virgin is still a sought-after company. Another positive move was the airlines’ takeover of low-cost carrier Tiger Airways. Although the flying tiger may have been hurtling into the red, Virgin must see the value in it, particularly when it already has a debt to equity ratio of over 180%.

Foolish takeaway

Qantas (ASX: QAN) and Virgin both offer too much debt and not enough return for many investors. If you took the flight over to New Zealand’s premier airline a year ago, you would have been sitting on a profit of over 90%. What’s more, if you’re thinking that Qantas and Virgin might be undervalued, think again — both operate on P/Es over 20. So if you want some exposure to local airlines without the debt laden risk and little return, at current prices Air New Zealand offers a P/E of only 7 and returns a 5.8% dividend.

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Motley Fool contributor Owen Raszkiewicz owns shares in Air New Zealand.

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