Can Virgin Succeed This Time?

This story features VIRGIN AUSTRALIA HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: VGN

Three Brokers initiating coverage of a resurrected Virgin Australia compare Australia's second airline to arch-rival Qantas.

?-Virgin Australia is back post a private equity-led transformation
-'New' Virgin has abandoned long-haul international ambition
-Favourable outlook for domestic airlines
-Citi less enthusiastic, prefers Qantas, the local market leader

By Greg Peel

Virgin Australia ((VGN)) is back for another go (which brings the name into question), having entered administration as a result of covid before being revived under private equity ownership.

Australia’s second airline has returned to listed life with a simplified portfolio and strategy that, Ord Minnett believes, should resonate well with investors attracted to the relatively high quality/low risk Australian domestic aviation market. The broker sees a compelling earnings outlook into FY26, with relatively stable fares, falling fuel expenses, and transformation benefits.

The difference between the new Virgin and the old include abandonment of previous loss-making long-haul international flights. Other benefits identified by UBS include no further third airline competition (Tiger Airways went the way of all predecessors), an almost single fleet type, more differentiation versus domestic competitors, market share no longer the priority, and lower gearing.

 The transformation has happened, but UBS believes further opportunities are ahead.

Stacking up to Qantas

UBS posits domestic and short-haul operations are lower risk and higher returning than long-haul international. The Australian domestic market is particularly attractive with three differentiated value propositions (including Jetstar), and centralised populations separated by long distances with no high-speed rail.

Meanwhile, long haul international flying equals higher risk greater capital investment, longer lead times for planning and marketing, more sensitivity to the oil price and exchange rate, plus other macro volatility. Airlines with significant long-haul operating mix have historically achieved lower returns and traded on lower multiples.

Even if you believe that Virgin’s segments warrant a discount to Qantas Airways’ ((QAN)) like-for-like segments, the mix benefit of no long haul international provides a meaningful offset, in UBS’ view.

Ord Minnett also picks up on Australia’s lack of high-speed rail that other countries enjoy, which provides a market for air travel supported by a lack of long-distance alternatives. Hence, Australians are averaging 3.5 flights per annum, around double the developed world average.

This is underlined by 10% growth in passenger numbers since 2019 (pre-covid) but only a 2% increase in seat capacity, Ord Minnett notes, which has pushed load factors to record high levels. Ord Minnett expects those strong load factors, along with its shrunken cost base, to continue supporting Virgin’s earnings outlook.

Yet, Citi suggests the two growth pockets in Australia appear to be international and the low-cost carrier market (i.e. Jetstar). Compared to Virgin, the Qantas group has better options in both segments and generates a higher relative return on this capacity as well.

Additionally, Western Sydney airport appears the most probable source of a step-change in capacity in the near term. As it stands, Jetstar and Qantas are committed, unlike Virgin, increasing their ability to capture any growth and/or be better able to offset any cannibalisation.

Virgin is nonetheless well-placed in terms of fleet renewal requirements, Ord Minnett notes, its aircraft having an average age of 13 years, versus 16 years for Qantas and a typical commercial aircraft life span of around 24 years.

But Virgin’s limited lease liability disclosures imply an average duration of 4-5 years, Citi points out. This suggests circa 15-20% of its fleet may be up for renewal each year in a rising rate/plane price environment.

Virgin does have sufficient balance sheet capacity as gearing sits at 1.2x, the bottom end of the company’s 1-2x target range to fund any new aircraft and expansion. Ord Minnett’s expectation is for capital expenditure of -$800-900m over FY26-FY28 that would drive growth in seat numbers of 3% per annum.

State of Play

UBS’ Australian fare purchase data showed a positive trend in growth for both the domestic and international markets, signalling solid demand through capacity increases. Bookings observed now more likely provide a lead indicator on fare growth to start FY26.

Revenue per average seat kilometre (RASK) is also supported by higher load factors, UBS notes, a highlight of Qantas’ most recent results. Brent oil has been volatile, pressuring A$ fuel on refining margin and currency in June-July although still down year on year, which UBS thinks will provide some margin expansion for domestic airlines.

Ord Minnett believes a resurrected Virgin can grow unit revenue at a faster rate than inflation as it makes the most of low oil prices and a structurally lower cost base post its administration, in what is a favourable broader environment for Australian airlines.

Yet, Citi again takes a more circumspect view. While the domestic market remains robust with strong load factors and disciplined capacity, higher-than-historical fare growth intuitively implies passenger volumes may slow below trend rates Citi warns.

In this regard, Virgin’s forward flight schedule is largely equal to its historical cancellation rate, which may suggest the market may not be able to have both price and volume growth at or above average.

Differing Views

In this environment, Citi is attracted to Qantas’ international and low-cost carrier exposure, which should support a stronger top line while benefitting from the same fuel tailwinds. As a result, Qantas is Citi’s preferred airline in the space, and the broker has upgraded to Buy.

Citi’s initiation of coverage of Virgin Australia starts off with a Neutral rating and a price target of $3.30.

On UBS’ estimates, Virgin’s valuation looks appealing relative to Qantas, with Virgin currently trading on a PE of 6.5x (-29% discount to Qantas) and enterprise value to earnings multiple of 2.9x (-30% discount), but with a stronger growth outlook and a portfolio mix benefit of predominantly higher return on invested capital domestic operations.

UBS has initiated with a Buy rating on Virgin and a $3.90 target, and has a Neutral rating on Qantas.

Ord Minnett also initiated with Buy, and has arrived at a $3.65 target by valuing Virgin on a one-year forward price-earnings multiple of 8x, which aligns with the airline’s global comparable peer valuations.

Ord Minnett has an Accumulate rating on Qantas (which sits between Hold and Buy).

Virgin Australia originally listed in 2002 but the covid pandemic forced the board to voluntarily call in administrators in April 2020. Investors holding the equity at that time, or high yielding corporate debt, were left licking their financial wounds (both assets shrank to zero value).

Following restructuring and recapitalisation, the airline relisted on the ASX on 24 June 2025, raising $685m in its IPO. All of Goldman Sachs Australia, UBS Securities and Barrenjoey Markets were joint lead manager and underwriter of the float.

Ord Minnett whitelabels Barrenjoey research.

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