Qantas said jet fuel prices have more than doubled since its first-half results because of the Iran war. Second-half fiscal 2026 fuel costs are now expected to be AUD 3.1 billion-AUD 3.3 billion, which the airline is partially offsetting by increasing airfares and flying fuller planes.

Why it matters: We largely expected the higher fuel costs, but ticket pricing has surprised us positively. We lift our fiscal 2026 pretax profit forecast by 10% to AUD 2.2 billion, though this is still 10% below our preconflict forecast. Our long-term forecasts are little changed.

  • International performance is the standout. Demand has held up despite hiking airfares, with customers seeking Qantas’ alternative routes to Europe. The airline guided to second-half revenue per available seat kilometer growth of 4%-6% internationally, double previous guidance.
  • We increase our fiscal 2026 fuel bill forecast by 4% to AUD 5.9 billion, before moderating to our unchanged midcycle Brent assumption of USD 65/barrel. We expect higher ticket prices to offset the fuel bill if prices stay elevated for longer, notwithstanding potentially lower demand.

The bottom line: We maintain our AUD 10 per share fair value estimate for no-moat Qantas. Shares are slightly undervalued. While fuel volatility can lead to short-term earnings swings, carriers’ long-term profitability has little to do with fuel, given that all players bear the cost almost equally.

  • Fluctuations in the fuel bill, both fuel savings and fuel costs, are passed through to customers, reflecting competition in the airline sector and our view that airlines globally lack economic moats.
  • Still, competition in Australian air travel is likely near a trough. Including Jetstar, Qantas commands about two-thirds of Australia’s domestic market, with Virgin Australia the remainder, supporting current pricing outcomes. We believe strong returns are likely to attract new entrants over time.

Jet fuel spike weighs on Qantas’ fiscal 2026 profit

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.

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