Airline Shares’ Price Targets Trimmed, Which Has The Better Upside? (VGN, QAN)

It has been a rocky year for holders of ASX airline shares, with the Middle East conflict, and the ‘closure’ of the Strait of Hormuz putting plenty of pressure on oil prices, and all those heavy consumers of the black gold. As case in point, Virgin Australia shares have fallen 17.82% YTD, yet are 32% higher than where they began May, around six short weeks ago. It has been a similar story for holders of Qantas Airways shares, down 5.05% YTD after bouncing 22% from it’s own low point back in late March, three months ago.

With plenty of change over the past few days, and with an agreement now said to be in place between the United States and Iran to reopen the Strait to traffic, an analyst update sheds some light on what we could expect through the second half of the year.

UBS has cut price targets for both Qantas (QAN) and Virgin Australia (VGN) while maintaining Buy ratings, citing deeper capacity reductions and a deteriorating domestic economic backdrop that the market may be underestimating.

Qantas shares are currently trading at A$9.96, leaving 11.5% upside to UBS’s revised target of A$11.15, down from A$11.25 previously. Virgin Australia’s share price sits at A$2.86, offering a more substantial 40% potential gain to the broker’s new A$4.10 target, trimmed from A$4.15. With plenty of volatility in both of the stocks this year, they have become highly active across many trading platforms, and with both having underperformed broader markets as markets shift on rising fuel costs and weakening consumer sentiment across the Australian economy.

The modest target reductions reflect what UBS describes as a recalibration rather than a fundamental reassessment, with the broker explicitly looking through near-term turbulence to fiscal 2028 earnings power.

Despite the cuts, UBS frames current valuations as offering meaningful downside protection, with Qantas trading on 7.6 times and Virgin on just 4.6 times estimated FY28 price-to-earnings multiples.

What To Expect From Airline Shares

The target adjustments stem from a few key factors weighing on near-term earnings. First, both carriers are implementing deeper-than-anticipated capacity reductions, with year-on-year declines already evident in the December half results. UBS singles out Jetstar, Qantas’s low-cost subsidiary, as particularly exposed to softening domestic demand as price-sensitive leisure travellers pull back on discretionary spending.

Then we have jet refining margins which have climbed sharply even as crude oil prices remain relatively stable. UBS now models jet crack spreads at US$54 per barrel in the current half, gradually declining to US$40 in the first half of fiscal 2027 and US$30 in the second half. These elevated margins, driven partly by Middle East supply disruptions and refinery constraints, directly increase operating costs for carriers that typically allocate roughly one-quarter of their expense base to fuel.

To round things off, the Australian domestic macroeconomic picture has deteriorated more than many anticipated.

Inflation remains sticky above the Reserve Bank of Australia’s target band, interest rates show little sign of imminent cuts, and consumer confidence indicators have rolled over. UBS argues that markets have become overly fixated on Middle East geopolitical risks while underweighting these domestic headwinds, which pose a more persistent threat to discretionary travel demand.

The capacity discipline both airlines are exhibiting could prove a double-edged sword. On one hand, pulling supply from weaker routes supports yield management and prevents destructive fare competition in a duopoly market structure. On the other, it signals management concern about underlying demand strength and limits top-line growth potential in the near term.

Outlook

UBS’s decision to maintain Buy ratings despite lowering targets reflects confidence that current valuations adequately compensate for elevated near-term risks. The broker’s multi-year earnings lens suggests it views the confluence of higher fuel margins, capacity constraints, and macro softness as cyclical rather than structural challenges.

The valuation argument carries particular weight for Virgin Australia, where the 4.6 times FY28 earnings multiple implies either significant earnings upside as conditions normalise or substantial room for forecast downgrades without destroying equity value. Qantas’s premium to Virgin reflects its stronger balance sheet, international network diversification, and dominant domestic market position, yet still trades at a historically attractive multiple.

However, the bear case centres on whether FY28 earnings estimates themselves prove too optimistic. If the Australian consumer remains under pressure longer than anticipated, or if jet refining margins fail to mean-revert as UBS models, current multiples may represent value traps rather than genuine opportunities. The airlines also face structural questions around labour cost inflation, fleet renewal capital expenditure, and regulatory constraints on pricing power that low headline multiples may partially reflect.

Capacity trends bear close monitoring in coming quarters. Should domestic travel volumes deteriorate further, airlines may face uncomfortable choices between defending yields through additional capacity cuts or stimulating demand through fare discounting that compresses margins. Jetstar’s performance will serve as a key bellwether for the health of price-sensitive leisure demand. Keeping the Buy rating on the shares suggests a view that Australia’s airline duopoly retains pricing power and that current headwinds will eventually abate, yet the modest downgrades concede that the path to normalised earnings may prove longer and bumpier than previously anticipated.

Bull Case:

• FY28 P/E multiples of 7.6x and 4.6x offer substantial downside protection
• Jet refining margins expected to normalise toward US$30 by late 2027
• Capacity discipline should support yields and prevent destructive fare wars
• Duopoly market structure provides long-term pricing power in domestic routes
• Current sell-off overweights geopolitical fears versus underlying business fundamentals

Bear Case:

• Australian macro deterioration may persist longer with sticky inflation and rates
• Elevated jet margins could remain entrenched if Middle East tensions continue
• Capacity cuts signal weakening demand particularly in price-sensitive leisure segment
• Low valuations may reflect structural issues rather than cyclical mispricing
• Jetstar exposure to softening domestic consumer creates near-term earnings risk