Qantas: Fuel Shock Absorbed, Fleet Renewal Intact

The Middle East Fuel Shock: Actual vs. Our April 2026 Estimate

In our April 2026 note, we estimated that even under an elevated jet fuel scenario (Brent USD100 + crack spread USD69, approx. AUD236/barrel) and a conservative approach, Qantas would stay profitable, with the profitability buffer compressing from 1.83 to roughly 0.36 cents per ASK (available seat kilometres). That held up well, with full-year TRASK (total revenue per available seat kilometer) came in at 16.15 c/ASK against a total unit cost of 14.84 c/ASK, leaving a positive buffer of 1.31 c/ASK for the year, with most of the pressure landing in the second half as the conflict escalated.

Table 1: FY26 Middle East conflict – net impact (2H26)

Table 2: Group unit revenue and unit cost

Despite the gross scale of the shock, the net hit to Qantas's earnings was proportionally modest, and this was not incidental, but the direct output of a deliberate hedging architecture. Qantas's Treasury Risk Management Policy runs a "declining wedge" hedge profile, carrying disproportionately heavy cover in the near term specifically to blunt sudden spikes, and this positioning was already in place before the conflict-driven surge hit: the Group entered 2H26 90% hedged in crude oil, right as the shock materialised.

The program is built around options and collars rather than outright swaps, that cover absorbed the bulk of the spike while preserving participation upside had prices instead fallen. The result was a $400m hedging benefit.

The second line of defence was operational, mirroring what we flagged in April: international fares were raised on a rolling basis, domestic capacity was trimmed to protect load factors, and capacity was redeployed toward Europe as Middle East hubs closed, Qantas added ~16,000 seats to/from Europe in 4Q26 alone, with combined seat factor on the London, Paris and Rome routes reaching 90%, evidence the redeployed capacity found demand rather than diluting yields. Premium cabin revenue on Qantas International grew 15% for the year, roughly double the Economy growth rate, underscoring resilient high-yield demand and giving fare increases room to land without hurting load factors.

Hedging first, then pricing and capacity discipline, meant the profitability buffer (TRASK less TCASK) never turned negative even at the point of pressure, holding at 1.31 c/ASK for the full year versus 1.54 c/ASK in FY25.

Diversification Thesis Validated

The central argument of our prior note was that Qantas' diversified earnings base, specifically the higher margin Loyalty division would cushion a weaker international result. That played out in FY26, with Qantas International's share of group segment EBIT fell from roughly 24% in FY25 to just 14%, while Jetstar's share climbed to 28% and Loyalty's to 24%, more than making up the difference.

Table 3: Segment revenue and operating margin, FY22–FY26

Table 4: Contribution of each segment as a share of the group total, FY26 vs FY25

International long-haul is structurally the most fuel-intensive segment and most exposed to the crack-spread spike, so it absorbed most of the shock. Domestic (protected by pricing power), Jetstar (lower fuel intensity per seat, resilient value-conscious demand) and Loyalty (largely fuel-insulated) all held up or grew.

Qantas Loyalty: The Stabiliser

Loyalty's role as earnings stabiliser only strengthened in FY26, delivering double-digit EBIT growth despite the group-wide fuel headwind. It's still the most capital-light, highest-margin segment in the portfolio, and continue to provide earnings stability and resilience for the group at a time when the flying operations were impacted by record-high jet fuel costs and Middle East disruptions.

Table 5: Qantas Loyalty – key FY26 metrics

Roughly 70% of points are still redeemed for Flight Rewards within the Group, which keeps that stickiness dynamic intact, and new partnerships (Bunnings, expanded Uber engagement, David Jones) keep broadening the earn base beyond travel into everyday spend, lowering the segment's correlation to fuel and the aviation cycle further.

Structural Pricing Power Unchanged

Our prior read on Australia's domestic aviation duopoly (Qantas Group ~65% combined share with Jetstar, Virgin Australia ~33%) and the continued absence of viable high-speed rail hasn't changed – nothing in FY26 alters that structural backdrop.

FY26 offered a test of that pricing power rather than a clean demonstration of it: Qantas Domestic RASK rose in the mid-single digits even as capacity growth slowed, and management pointed to capacity/fare adjustments in March–June lifting domestic unit revenue by 5% in direct response to the fuel cost spike. The fact that Qantas could pass the cost shock through to fares without triggering a competitive undercut from Virgin is itself consistent with the duopoly holding under stress – but margin still compressed to 11.3% from 13.9%, so this reads as pricing power cushioning the blow rather than pricing power driving margin expansion.

Fleet Renewal: Project Sunrise on Track

Capital expenditure commitments as at 30 June 2026 is at AUD20.6 billion (down from AUD 21.7 billion in FY25), as the group is in the midst of its largest fleet renewal in its 105-year history.

Per our previous estimation, we should see the group to have its peak capital expenditure at around FY27, and plateau at FY28, followed by lower capex in FY29 and onwards. This is because FY27 will be the year where the deliveries of widebody and narrowbody intersects, while in FY29 Project Sunrise will complete their deliveries. 

Table 6: Fleet delivery, FY26-FY28

Nonetheless, the group continues to support its capex using its robust operating cash flow, except for the difference in 2026, it have free cash flow after accounting for the payments for PPE.

Table 7: Operating cash flow against capex

Balance Sheet and Leverage

Credit metrics didn't deteriorate materially despite the fuel shock. Net debt rose to $6.2b (from $5.0b), landing mid-range within the group's $5.5–$6.9b target for the year.

Table 8: Leverage ratio

The group also has several measures to contain its leverage ratio further that we have mentioned previously, namely

1) The group has AUD5.6 billion in unencumbered aircraft that can serve as a collateral pool for emergency liquidity. This is excluding the AUD3.3 billion cash and cash equivalents the group holds and the AUD2.1 billion undrawn facilities.

2) The majority of the AUD20.6 billion order book is with Airbus (Boeing accounting for only around 15% of total orders). This provides the group with flexibility to negotiate delivery deferrals with Airbus. The group has exercised such flexibility in the past, notably in 2014 and 2020. As management previously highlighted, “the group has certain rights within its aircraft purchase contracts which can defer the capital expenditure commitments”.

Conclusion

FY26 backs up the core thesis from our April note. Qantas' combination of domestic pricing power, diversified earnings and balance-sheet/capex flexibility let it absorb a genuine fuel shock (~AUD 420m net hit), while keeping credit metrics comfortably within target and still funding the largest fleet renewal in the group's history.

Hence, we continue to hold a positive stance on Qantas and its bonds.

For investors preferring shorter duration, the QANAU 3.150% 27Sep2028 offers a yield of 5.9% with just 1.79 years to next call (2.04 years to maturity), a good fit for those wanting exposure to the credit while minimising duration risk.

For investors comfortable with longer duration, the QANAU 5.900% 19Sep2034 offers a higher yield of 6.6%, compensating for the extended 7.77-year call / 8.02-year maturity profile. This suits investors seeking to lock in a higher yield, backed by Qantas's resilient balance sheet.

Table 9: Qantas Airways bonds (AUD)

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.