Since Virgin Australia Holding Ltd (ASX: VGN) made a high-profile return to the S&P/ASX 200 Index (ASX: XJO) last month, all eyes are on the travel giant and its arch rival Qantas Airways Ltd (ASX: QAN).

The two aviation heavyweights control the majority of Australia's domestic aviation market and investors are watching closely to see how the competition unfolds.

So when it comes to investing in ASX travel shares, which is the better option?

Outlook for Qantas shares

The Qantas share price is trading 0.23% lower this afternoon at $10.875 a piece. Over the past year, the airline's share price has surged a whopping 83.7%.

The airline's strong rally is mostly thanks to strong domestic travel demand and increasing overseas travel in FY 2025. Falling global crude oil prices also means Qantas has benefitted from lower fuel costs. 

Investors have also benefited from Qantas' decision to resume dividend payments. The airline halted dividend payments in 2020 due to the COVID pandemic.

The airline paid an interim dividend of 16.5 cents per share plus a special dividend of 9.9 cents per share in April. This totalled 26.4 cents in annual dividends with 100% franking for FY25.

Qantas' dominant performance makes it an attractive option for investors.

Data shows that analysts are optimistic about the stock too. Out of 16 analysts, 10 have a buy or strong buy rating on the shares. The maximum target price is $12.20 and the average is $11.10. This represents a potential maximum upside of 12.1% from the trading price at the time of writing.

In a 14 July research note, Macquarie Group Ltd (ASX: MQG) raised its price target on Qantas to $10.40. The broker maintained its neutral rating. This would represent a 4.36% decrease. 

The broker warned that there are several potential risks that could see Qantas' share price decline. It noted high operating leverage to travel demand, challenges associated with navigating volatility in the jet-fuel market, which accounts for around 30% of the cost base, and strong market competition. 

Outlook for Virgin Australia shares

The Virgin Australia share price is 0.94% higher this afternoon at $3.23. Since launching its initial public offering (IPO) last month, the airline has experienced an 11.38% uptick in its share price.

Virgin Australia's IPO was priced at $2.90 a share. The airline began trading on the ASX on 24 June, with shares opening at $3.12 each. It closed its first day at $3.23.

Data shows analysts are divided about the stock. Out of seven analysts, three have a buy or strong buy rating. Meanwhile, three have a hold rating, and 1 has a sell rating.

The average target price for Virgin Australia shares over the next 12 months is $3.46, while the maximum target price is $3.90. This represents a potential 7% to 20% upside for investors from the trading price at the time of writing.

UBS initiated coverage on Virgin Australia shares with a buy rating, a $3.90 price target, and a positive outlook. It sees a strong growth outlook for the company and is optimistic about its focus on lower risk domestic and short-haul routes. UBS also notes that its shares are trading at a reasonable discount to its main rival, Qantas.

But not everyone is as optimistic about the ASX travel share. Catapult Wealth's Dylan Evans is cautious on the airline's outlook and warns the business is vulnerable to shocks outside of its control. "Virgin's return to the ASX is well timed, recently listing against a favourable backdrop of lower fuel prices," he said. 

Baker Young's Toby Grimm also issued a sell rating, warning that recent post-IPO gains – boosted by lower oil prices – might fade as aviation margin pressures return.