Ahead of reporting season, the team at Jarden has run the ruler over the aviation sector and come to the conclusion that both Qantas Airways Ltd (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VGN) are good buys at current levels.
Looking at Qantas first, the Jarden team notes that the share price has underperformed the S&P/ASX 200 Index (ASX: XJO) since reporting its FY25 result, "following concerns around the earnings outlook from weaker demand and higher oil prices''.
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A win-win in "rational" sector
But the Jarden team says that according to their analysis, the Australian aviation sector "remains in the best competitive rationality setting'' for the past 20 years or so.
With this in mind, we think any near-term demand weakness can have its impact on operating earnings moderated by capacity rationality (lower growth) and yield management (improved pricing). We see the 1H26 result as a key catalyst for the Qantas share price to outperform near term. As a result, we reiterate our Buy rating and maintain our 12-month $12.70 target price.
Jarden is expecting a dividend yield of 3.1% from Qantas, and if its price target is achieved, this would represent a 24.2% return for investors.
The Jarden team said Qantas had so far only modestly changed its capacity settings, reducing them by about 1%, to reflect a changing demand environment, "and focus, we think, on load factor and yield preservation''.
From here, we see the revenue available per seat kilometre outlook as potentially more driven by ticket price movements than by load factor changes. Importantly, this could also provide additional support for earnings through 2H26E, should the fuel cost environment overall prove better than feared.
The Jarden team also noted that jet fuel prices have fallen about 47% since November.
Looking into 2H26, we see scope for adjustments to fuel price expectations, which could provide near-term upward support for earnings estimates for Qantas, all else remaining equal.
Qantas is expected to report its first-half results on February 26.
The company was worth $15.87 billion at the close of trade on Wednesday.
Virgin also cheap at current levels
Jarden also has a bullish price target on shares in Virgin, with a target price of $4, compared with $3.29 currently.
Virgin is set to deliver its first interim result since being relisted on the ASX, with that to happen on February 27.
Jarden said they believed it was too early for the company to start paying dividends, but nonetheless, they expected a solid result.
We see the fundamentals as remaining strong for Virgin Australia in the near term and maintain our Overweight rating and lift our 12-month target price from $3.90 to $4.00 following changes in the Virgin share price impacting its capital structure.
