Can you believe this? Since early February, Australia's two largest listed airlines Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) have been two of the best performing companies in the top 300 Australian-listed stocks.
What?
Shares in Virgin are up nearly 37% and Qantas up over 30% since lows posted on 6 February. Virgin shares have risen from 28 cents to 43 cents, and Qantas from $1 to $1.34 over the last 20 weeks.
So What?
Virgin and Qantas are the two largest carriers in Australia and have been fighting an all-out war for the best part of the last 12 months to gain market share from each other. Virgin's strategy has been to increase supply to the market, driving down per-seat cost for customers to levels that Qantas theoretically cannot sustain.
Qantas chose to sustain the low prices and subsequently warned the market in 2013 that it expected to make a huge loss for the 2014 financial year. The war has been detrimental to both companies profitability, and Virgin, backed by powerful international airlines such as Etihad, Singapore and Air New Zealand, appears to have won the most recent battle, after Qantas recently announced a change in strategy away from increasing supply to the market.
What Now?
Investors appear to be satisfied that Qantas and Virgin have put away their swords for now to focus on providing an appropriate amount of supply for the market's demand. Virgin has a lower cost-base than Qantas and consequently is in a better position to trade profitably in the near term.
I believe the 30% bounce in the share price of both companies is purely a reaction to both becoming oversold towards the end of 2013. Until they can demonstrate growing margins, consistently profitable trading, and a reduction in excess capacity, I doubt we will see the share prices continue to climb.
