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Virgin Australia Holdings Ltd shares flat as profit soars

Shares in airline Virgin Australia Holdings Ltd (ASX: VAH) traded flat today at 49 cents after the company revealed some rocketing profit growth for the quarter ending 31 December 2015.

The group posted an underlying profit before tax of $73 million, which is up 32% on the prior corresponding period as the group’s  Tigerair Australia business in particular enjoyed improved performance and strong passenger growth.

Virgin did not reveal how much any reduction in its fuel bill due to the oil price falls may have helped operating margins, although given that total passenger revenue was marginally down on the prior corresponding period it appears cost savings played a significant part in the result.

Virgin shares are up 11% over the past year, while rival Qantas Airways Limited (ASX: QAN) has soared 51% over the same period as it also enjoys the benefits of huge operational cost savings.

Both airlines have previously been engaged in price wars in the competitive domestic market, while Virgin also has international alliances with Air New Zealand (AIR N.Z. FPO NZ (ASX: AIZ)) and Abu Dhabi-based Etihad Airways.

This as the airline industry continues to consolidate as a result of its fiercely competitive nature, which alongside the large fixed costs and leverage to the volatile oil price mean the sector does not generally offer good investing returns.

For example Virgin Australia shares are up just 18% over the past five years, despite the backing of several big-hitting investors including Air New Zealand and Singapore Airlines. Given that the oil price looks more likely to trend higher than lower over the medium term then Virgin shares may be best avoided for now alongside the other airlines listed on the ASX.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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