Is this as good as it gets for Qantas?

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Long-serving Qantas boss Alan Joyce is leaving behind a quite substantial parting gift for his fans, with investors set to enjoy the spoils of a record profit flagged for this financial year.

It is yet another reminder of just how lucrative the insatiable demand for travel has been for Australia’s airline duopoly in the post-pandemic era.

But as Joyce prepares to hand over the baton to Vanessa Hudson this year, some investors are also questioning how long the earnings purple patch can last amid signs airfares are gradually retreating from eye-popping levels.

After a surge in airfares boosted Qantas coffers, Joyce has lately been promising relief is in sight for customers. Last week, he said there would be “downward pressure” on airfares through new services to key international routes, and on Tuesday he was reiterating a similar message in a market update.

At the same time, however, the underlying numbers in the market update highlighted how Qantas’ bottom line has been reaping the benefits of a lack of capacity in aviation.

Qantas beat market forecasts and estimated it would make underlying profit before tax of up to $2.48 billion for this financial year, helped by strong demand for flights and falling fuel costs.

The surge in profits – which will easily exceed a previous record from 2018 – is primarily a product of strong demand for flights, combined with insufficient capacity, after services were cut back deeply during COVID-19.

As is well known by now, this combination of buoyant demand for travel, and a lack of available flights, has allowed the airlines to jack up fares steeply. Customers may be miffed at the high prices, but overall flight bookings have remained strong.

It also helps Qantas that its biggest domestic competitor, Virgin Australia, is being prepared for a sharemarket float by its private equity owners Bain Capital.

Between them, the two companies (including Qantas-owned Jetstar) had market share of about 95 per cent on domestic routes at the start of this year, the competition watchdog said in March. With preparations in full swing to list Virgin in the second half of this year, its owners are hardly in the mood to start slashing fares to compete.

Alan Joyce will be departing Qantas on a high.Credit: Rhett Wyman

Qantas says its capacity on domestic routes is finally returning to pre-COVID levels as more aircraft are put into service. But on international routes, the airline’s capacity is still well below where it was before the pandemic, and it’s expected to remain there in the first half of next financial year.

Joyce says lower fuel costs are assisting too, and he expects this “mismatch” between supply of capacity and demand for travel to continue for a while.

All up, it’s a highly favourable market backdrop for the airline that received extensive government support during COVID-19. Qantas expects yields – a gauge of prices paid – to remain “materially above pre-COVID levels” throughout the 2024 financial year, especially on international flights.

It also said forward bookings were strong, suggesting consumers were still keen on travelling despite the high fares. As a sweetener for investors, it lifted its $500 million share buyback to $600 million.

Even so, Qantas shares had fallen by 2 per cent in afternoon trade, in a sign some investors are wondering if this is as good as it gets for the national carrier as extraordinarily profitable trading conditions start to fade.

While sky-high airfares have boosted Qantas profits, high ticket prices have caused customer angst, and there’s also a risk that a weaker economy starts to chip into households’ discretionary spending on travel.

And while Qantas profits are buoyant today, when Hudson starts as CEO in November she faces the longer-term prospect of a growing capital expenditure bill of $10.1 billion to update the fleet.

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