Qantas’ (ASX.QAN) fiscal 2026 underlying pretax profit was $2.1 billion, down 14% on last year despite 7% revenue growth. Fuel costs have surged too quickly for higher ticket prices to meaningfully offset, and Qantas’ Brent crude hedges were insufficient amid spiking refining margins.

Why it matters: Pretax profit was about 6% lower than our forecast. But demand is strong, and prices are set to stay elevated this year while fuel prices are high. We lower our fiscal 2027 pretax profit forecast by 15% to $2.2 billion, 8% higher than this year, mostly on lower capacity.

  • We forecast full-year price growth of about 5%, offset by flat capacity. Prices are high as a result of strong demand, and prioritization on flying fuller, profitable planes. We expect capacity growth to be constrained while fuel prices are high.
  • But we expect ticket prices to fall, and capacity to grow again, alongside the fuel bill as Brent crude reduces to our midcycle forecast of USD 65 per barrel, from about USD 90 per barrel currently.

The bottom line: We maintain our $10 fair value estimate for shares in no-moat Qantas. Our lower earnings forecasts are broadly offset by lower capital expenditure forecasts with the accelerated retirement of its A380 fleet. Shares screen roughly fairly valued.

  • Fuel prices are elevated currently. But the impact on long-term earnings is less pronounced as all operators share the cost almost equally. We think movements in fuel costs will be passed through to customers over time.

Between the lines: Fuel prices have been elevated since the Iran war, supporting higher ticket prices. While Brent crude is still about 25% higher than when the Iran war began, kerosene is about 65% higher, as refiner margins are more than double prewar levels.

  • Jet fuel typically moves in tandem with crude, and like most airlines, Qantas was only hedged to Brent.

We Expect Qantas to Pass Fuel Bill Fluctuations Through Over Time

Since the covid-19 pandemic wreaked havoc on the global airline industry, Qantas has rebounded stronger than ever. The domestic business, of which Qantas typically captures around a two thirds market share, returned to pre-covid-19 levels by the end of fiscal 2023.

The international recovery was more gradual, returning to pre-covid-19 levels by the end of fiscal 2025.

We expect that Qantas’ loyalty program, Qantas Frequent Flyer, to some extent cushions earnings volatility in the flying business. Amid a lack of flying activity, the loyalty business remained profitable and delivered stable cash flows. Qantas Frequent Flyer is essentially a capital-light business attached to a capital-intensive flying business. Consumers want to earn loyalty points when they fly, and status benefits are important to corporate passengers. The program generates earnings from the sale of points to hundreds of partners, including banks, supermarkets, telephone companies, and department stores. This offers more ways to redeem and earn points, attracting more customers, which in turn attracts new partners—a network effect but not enough to warrant a moat for the group.

Bulls Say

  • Qantas’ earnings are highly leveraged to improving macroeconomic conditions and unrestricted air travel.
  • The two-brand Qantas and Jetstar strategy provides flexibility to align capacity and costs with prevailing demand and economic conditions, without affecting the Qantas brand and service perception.
  • The Qantas Frequent Flyer program continues to deliver strong earnings and cash flow, underpinning dominant domestic market share.

Bears Say

  • Qantas is exposed to cyclical factors outside management’s control, including passenger demand, fuel prices, and exchange rates.
  • Qantas operates in a highly competitive industry and spare industry capacity can lead to downward pressure on fares and profitability.
  • Competition is set to increase. Virgin is back flying domestically, and set to become a more formidable international competitor through a partnership with Qatar Airways.