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Should you buy Qantas or Sydney Airport shares?

There are a lot of options in the transportation sector for investors to choose from.

But according to Goldman Sachs, investors should look beyond airport operators such as Auckland International Airport Limited (ASX: AIA) and Sydney Airport Holdings Pty Ltd (ASX: SYD), and focus on airline operators instead.

Which airline should you buy?

According to a note out of the investment bank this morning, its analysts believe the Qantas Airways Limited (ASX: QAN) share price has the most upside potential.

In light of this, Goldman has Qantas on its conviction buy list with a price target of $6.74. This price target implies potential upside of almost 23% for its shares over the next 12 months. If you include dividends and the broker’s share buyback estimate, this total return increases to over 33%.

As a comparison, the broker has downgraded Sydney Airport to neutral with a $7.35 price target and has retained its sell rating on Auckland International Airport with a NZ$6.89 price target. This implies a total shareholder return of 1% and -17.3%, respectively, according to the note.

Why buy Qantas shares?

Following recent trading updates from Qantas and Virgin Australia Holdings Ltd (ASX: VAH) which revealed plans to cut capacity, the broker believes airlines are better positioned to benefit than airports.

Goldman said: “In what should become an increasingly benign competitive environment, capacity cuts should lead to improved pricing power, which should in turn deliver industry-wide margin improvement.”

The investment bank added: “For the airports, the overarching dynamic is less favourable. The past decade of capacity expansion has seen them benefit as airlines discount capacity to incentivize increased passenger volumes. With their largely fixed cost base and leverage to international volumes, we expect the unwinding of this discounting to be negative to near-term earnings.”

Goldman has a preference for Qantas over the other airlines, “given it has displayed the greatest degree of network control, and its ability to deliver further utilisation and RASK improvement will, in our view, benefit from further capacity reductions by its regional peers.”

I think that Goldman Sachs is spot on with its assessment and would be a buyer of Qantas’ shares right now.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited. 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 Scott Phillips.

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