Australia's flagship carrier today reported a record $1.6 billion in profit before tax for fiscal 2018, up 14 per cent on 2017 and broadly in line with Morningstar's expectations.

The positive result came despite burgeoning fuel costs of $3.23 billion in fiscal 2018, a cost that's expected to blow out more than 20 per cent to $3.29 billion next year.

Though some commentary has suggested the airline will "absorb" rising fuel costs, Morningstar equity analyst Daniel Ragonese says this can be misleading.

"They're not absorbing these increases, that would imply the business will take the hit. It will instead be offsetting these costs by passing them on to airline passengers wherever possible," he says.

 Qantas jet image

 Qantas should be able to at least offset the domestic effect of rising fuel costs

Ragonese expects it will be able to recover most of these costs to its domestic passenger operations, "but international will be more challenging, given the more intense competitive environment and higher exposure to fuel prices".

The group's domestic operations delivered earnings before interest and tax of $1.1 billion, up 25 per cent. Qantas' (ASX: QAN) international division increased earnings by 7 per cent to $399 million, despite an $11 million hit, including from the Bali ash cloud disruptions in June and the opening of new routes to Melbourne and Ho Chi Minh.

While chief executive Alan Joyce lauded the result as reflecting the strong market as well as the benefits of its latest ongoing transformation program, he warned of challenges ahead.

The airline's increasing fuel bill is the main headwind, along with a $250 million increase in overall group expenditure.

Qantas' transformation program is targeting $400 million in benefits in the current financial year, and Ragonese says the airline is on target.

Management also flagged the return of $500 million to shareholders during fiscal 2019, through the announced share buy-back and other capital return measures.

"That's consistent with what they have been doing for the past three years, having reduced the number of shares on issued by around 26 per cent during this time," Ragonese says.

The airline declared a fully-franked final dividend of 10 cents a share, up 3 cents from a year earlier, as well as a fresh on-market share buyback of up to $332 million.

Qantas shares were trading at $6.60 at time of publication, up from a midday low of $6.30 – versus Morningstar's most recent $4 fair value estimate from 7 May.

 

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Glenn Freeman is senior editor, Morningstar Australia

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