Qantas says its first-half underlying profit could rise as much as 11.5 per cent, but warns rising fuel costs will then begin to weigh on earnings.
The airline's shares plunged seven per cent at the start of trade following the soft second-half outlook, but quickly regained some of that ground and ended the day 1.4 per cent lower at $6.31.
Qantas said revenue rose 5.1 per cent to $4.19 billion in the three months to September as trading conditions in both domestic and international improved over the same period a year ago.
It expects its first-half underlying profit to rise from the previous year's $852 million to between $900 million and $950 million, though chief executive Alan Joyce warned the domestic market remains highly competitive.
"The high rate of revenue growth we've seen so far this year is likely to slow when compared with what was a strong second half last year," he said.
"There's been a welcome easing of capacity growth in the international market but the indications are that it is likely to pick up pace again in the second half."
Qantas also warned higher fuel costs will weigh on second-half earnings, forecasting full-year fuel costs of $3.21 billion, up from $3.04 billion in 2016/17.
Goldman Sachs analysts Owen Birrell and Joseph Horbec said Qantas delivered a solid first quarter and the airline's outlook was "overly cautious".
"While Qantas appears to talk down the second half outlook due to ongoing sector competition, rising fuel costs and lower rates of year-on-year growth, that appears based on a view that there is limited recovery in passenger demand," they said.
Qantas' capacity in the first half of the financial year is expected to be up by two to three per cent on the prior corresponding period, despite a two to three per cent decrease domestically.
Mr Joyce said the benefit of international route changes were significant and the full benefits will become apparent in 2018/19.
"We're making good progress towards our annual target of $400 million in cost and revenue improvements, with the Dreamliner and domestic wi-fi two examples of projects that will make us more efficient and deliver a revenue premium," he said.
Qantas made a net profit of $852 million in 2016/17, and a $1.4 billion underlying profit.
That came after a $2 billion turnaround plan that included 5,000 job cuts, major fleet changes and new routes.
