BRISBANE - [AAP] Qantas (ASX: QAN) says first-half underlying profit could rise as much as 11.5 per cent, but has warned rising fuel costs will start to weigh on earnings after that.

The airline's shares fell dramatically at the start of trade following Thursday's soft second-half outlook, before recovering to sit 0.9 per cent lower at $6.34 by 1313 AEDT.

In a first quarter trading update, Qantas said revenue rose 5.1 per cent to $4.19 billion as trading conditions in both domestic and international improved over the same period a year ago.

It forecast first-half underlying profit to rise from $852 million to between $900 million and $950 million, but chief executive Alan Joyce warned that the domestic market remained highly competitive.

"The high rate of revenue growth we've seen so far this year is likely to slow when compared with what was a strong second half last year," he said.

"There's been a welcome easing of capacity growth in the international market but the indications are that it is likely to pick up pace again in the second half."

Qantas also warned higher fuel costs will weigh on second-half earnings, forecasting full-year fuel costs of $3.21 billion, compared to $3.04 billion in 2016/17.

The group made an $852 million net profit in 2016/17, with a $1.4 billion underlying profit.

That came after a $2 billion turnaround plan that included 5,000 job cuts, major fleet changes and new routes.

Qantas' first-half capacity is expected to be up by 2 to 3 per cent on the prior corresponding period despite a 2 to 3 per cent decrease domestically.

Mr Joyce said the benefit of international route changes were significant and the full benefits will become apparent in 2018/19.

"We're making good progress towards our annual target of $400 million in cost and revenue improvements, with the Dreamliner and domestic wi-fi two examples of projects that will make us more efficient and deliver a revenue premium," he said.

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