When it comes to Australia's aviation industry, arch-rivals Qantas Airways Ltd (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VGN) dominate investor attention. Both airlines compete fiercely for passengers, routes, and market share.
The two businesses are closely aligned, and both benefit from upticks in demand for travel and tourism. But in terms of outlook over the next 12 months, there is one clear winner. Here's the travel airline stock I'd buy and the one I'd sell.
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I'd sell Qantas shares
Aviation heavyweight Qantas Airways has dominated the Australian domestic aviation market for decades. It currently accounts for around 60% of the domestic market, and it's still growing.
Qantas is adding capacity to its routes to mainland US, New Zealand, Singapore, and Hawaii. Jetstar is adding capacity to its routes to Bali, New Zealand, Thailand, South Korea, and Singapore. Jetstar is also entering the Philippines.
It looks like the company's operational momentum is improving, but I'm concerned that the airline still has its work cut out to be able to grow at the rate it expects. Cost pressures are still a risk, demand for travel can change quickly, and competition is heating up from rival Virgin and other airline newcomers.
When it comes to Qantas stock, its share price has been relatively volatile this year. At the time of writing, its shares are 1.81% higher at $9.82 a piece, but over the past 12 months, they have fluctuated anywhere between $7.55 and $12.62 a piece. For the year, the shares are 10.64% higher.
UBS has a buy rating on the business, with a price target of $11.50. At the time of writing, this implies that a potential 17.1% upside is ahead.
But the team at Sanlam Private Wealth has put a sell rating on the shares. The broker is concerned about the airline's earnings growth outlook and thinks it is vulnerable to possible downgrades.
I'd buy Virgin Australia shares
Since its relisting on the ASX 200 in June this year, the airline has repositioned itself under a simpler, leaner business model, shedding many of its old inefficiencies. And I like what the business has done.
The Virgin Australia share price is storming higher in lunchtime trade on Thursday. At the time of writing, the shares are 4.84% higher at $3.25 a piece. The latest uptick has helped recover gains lost over the past year. The shares are now 9.62% higher than this time last year.
Analysts are optimistic that the aviation stock will take off soon. The team at Ord Minnett recently said it is impressed with the company's near-term outlook. The broker has a buy rating and $4 target price on Virgin Australia shares. At the time of writing, that implies a potential 23.1% upside ahead for the stock.
Data shows that some analysts are even more bullish. Out of 7 analysts, 5 have a buy or strong buy rating, and the maximum target price is $4.20. That implies that the shares could increase another 30.03%.
