Should you buy Qantas Airways Limited or Virgin Australia Holdings Ltd shares today?

Credit: Joits

In the last 12 months the shares of Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) have seen contrasting performances. One is up over 26% during the period, the other is down almost 26%.

There are no prizes for guessing that the airline which has been flying high is Qantas Airways and not Virgin Australia. Qantas Airways has posted a fantastic 18 months after producing a staggering turnaround led by CEO Alan Joyce.

Whilst Virgin Australia produced a good half-year result, it still has many investors worried over its balance sheet following a recent $425 million loan from its big four shareholders. The company advised that the loan will be used to provide it with short-term flexibility while it undertakes a review of its capital structure.

This really makes you wonder what the state of affairs would be had the oil price not dropped. Both airlines have seen a remarkable reduction in operating costs thanks to a drop from $3.29 per gallon of jet fuel in January 2014, to $1.36 per gallon today.

Qantas Airways has really benefitted from the drop in jet fuel price. Its operating margin has lifted from 6.5% in fiscal 2014, to 14.8% in fiscal 2015. During the same period Virgin Australia only managed to increase its operating margin from 3.8% to 6.8%.

This for me makes Qantas Airways the clear winner here. As long as oil prices remain low I would expect it to continue to produce strong results.

The turnaround of its international segment has been very impressive and its alliance with China Eastern should be a great way to tap into the incredible rise of Chinese tourism. Over 1 million Chinese tourists visited Australia in 2015, and this is expected to grow strongly over the next decade.

Airlines have a tendency to trade at low multiples compared to the broader market. Qantas Airways is currently priced at just over 6 times estimated forward earnings. This is a significant discount to Virgin Australia which is priced at a much higher level of over 21 times estimated forward earnings.

Foolish takeaway

Right now, it seems as though Qantas Airways is finding all the tailwinds, whereas Virgin Australia faces headwind after headwind. For this reason I would consider an investment in Qantas Airways, but avoid Virgin Australia.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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