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Qantas has lifted its profit forecast for the December half as rampant consumer demand continues to buoy the sector’s COVID-19 recovery despite capacity restraints and inflated fuel costs.

The airline now expects to book between $1.35 billion and $1.45 billion in underlying profit before tax in the first half of its financial year, up $150 million from a previous guidance given in October. Net debt is now expected to fall to an estimated $2.3 billion and $2.5 billion by 31 December, around $900 million more than previously predicted, the company said in a statement to the ASX.

“Consumers continue to put a high priority on travel ahead of other spending categories and there are signs that limits on international capacity are driving more domestic leisure demand, benefiting Australian tourism,” the statement said.

The carrier’s share price surged by more than 5 per cent to $6.19 after market opened on Wednesday morning.

Qantas shocked the market in October when it predicted a return to profit by the end of June 2023. Its shares surged to by 12 per cent following that announcement.

The carrier expects fuel costs to reach $5 billion by the end of the financial year in June 2023, a record for the country’s biggest carrier despite international capacity remaining about 30 per cent down on pre-pandemic levels.

About $800 million in customer travel credits issued over the pandemic have still not been redeemed, but total credit usage has reached about $70 million per month. Qantas has committed to announcing new initiatives so all of the remaining credits can be used by the end of this financial year.

Just under 80 per cent of the group’s $400 million share buyback announced in August has been completed at an average price of $5.66 per share. The group flagged the board is poised to consider future shareholder returns in February based on its low level of debt.

UBS analysts said the update shows Qantas is more resilient since emerging from the pandemic with a “better domestic market structure, lower gearing, more flexible aircraft orders, and greater contribution from Loyalty.”

UBS did not change its 12-month target share price of $7.20 after the update. The analysts expect the carrier to continue to use on-market buybacks until it re-enters a tax paying position to allow franked distributions and said it was likely another buyback will be announced soon.

Gerry Harvey, executive chairman of retailer Harvey Norman, says recent wet weather has resulted in fewer sales of outdoor furniture and air conditioner units, but he still expects to have a good Christmas, while next year is more opaque.

Mr Harvey told The Australian Financial Review that consumers were still spending on big-screen televisions and energy saving products with no sign of any slowdown, despite rising cost-of-living pressures.

“We’ll have a really strong Christmas, but next year is a great unknown,” Mr Harvey said. “I don’t think there’s any doubt as retailers we will be affected, it’s just as a matter of some sectors more than others. We have 65 per cent of our stores in regional areas, and because agriculture and mining is so strong they shouldn’t be affected as much.

“Sale of big screen TVs are very strong ... but things like airconditioning is not good, but in WA they had one of their hottest days [on Thursday]. Outdoor furniture is slower than we like because of weather, those are two big categories we will not get the sales we would have hoped for.”

He added that the whitegoods, home and electronics retailer is looking to cut out $300 million to $400 million worth of stock in stores, after a major expansion of inventory over the past 24 months from manufacturers. Mr Harvey said Australia is nowhere near a recession with the unemployment rate still very low, and it was tough finding shop floor assistants.

Mr Harvey’s comments came after the company posted a 6.9 per cent global sales jump in the first four months of the financial year, and his wife and chief executive, Katie Page, showed off plans to open 52 stores in Malaysia over the next six years.

Same-stores sales gained 6.3 per cent in the four months to October 31 at its company-owned stores and its independent Harvey Norman, Domayne and Joyce Mayne branded franchised sites.

Australian franchisees sales surged 9.1 per cent over the period, or 8.8 per cent on a same-stores sales basis, showing no signs of consumers pulling back on spending despite multiple interest rate hikes.

Ms Page told shareholders in Sydney on Thursday at the annual meeting the company would fund the Malaysia expansion through operating cash flows and existing cash reserves in Malaysia. For the four months, sales in Malaysia surged 44.5 per cent.

Harvey Norman opened its first Malaysian flagship store in 2003 at IPC shopping centre in Kuala Lumpur. It has 28 stores there, but plans to take the total store network to 80 by 2028.

“We have doubled the number of Malaysian stores over the past five years,” Ms Page said.

Ms Page said the flagship continues to be the No 1 store in Malaysia, and they first looked at entering Malaysia in 1996. It opened the latest store on Monday at the 1 Utama shopping centre – the largest shopping mall in Malaysia.

“If I’m a shareholder the thing that I will ask, is what is the team like because it’s a considerable jump of 52 stores over that period of time,” Ms Page said. “And you can see there that we’ve put up the strength of our bench. We have an amazing team there. It doesn’t matter whether it’s manpower, infrastructure, property, retail, or IT we are absolutely ready for this.”

In future, Ms Page said Harvey Norman will open in Sabah, on the island of Borneo, and has been testing the water route between mainland Malaysia and Sarawak, where it already has stores.

“We have got that transport down to three days across that piece of water. So, it means that we can expand there as well,” she said.

Shares in the $5.2 billion company fell 2.13 per cent to $4.14 by 3pm AEST. Year to date, the stock is down about 18 per cent.

The company said on Thursday that translated sales from its markets around the globe had been negatively affected by currency movements, although this was somewhat offset by the appreciation of the Malaysian ringgit and Singaporean dollar.

Northern Ireland was the worst performing, with sales tanking 26.4 per cent in the four months; Ireland sales were down 7.4 per cent; New Zealand sales fell 3.8 per cent, while Slovenia & Croatia inched up 3.6 per cent and Singapore gained 7.5 per cent.

Harvey Norman’s offshore expansion started in New Zealand in 1997, and now has over 270 Harvey Norman stores in eight countries. Mr Harvey and the late Ian Norman founded the chain in 1982.

Ms Page said the group is constantly dealing with different global issues. “We didn’t at that point (in February) think that China would still have their borders closed by now. So, it’s a very complex world. We’ve also still got the Brexit issue with Northern Ireland and Ireland with border issues,” she said.

“But you can see from our results that we actually take those knocks pretty well. We’re very nimble. We have an experienced team.”

Five of Australia’s biggest companies will pay a premium to offset the cost of their air travel through investing in sustainable aviation fuel rather than traditional carbon offsetting programs.

Australia Post, KPMG, Macquarie Group, Woodside Energy and Boston Consulting Group are the first corporate partners of Qantas’s fledgling “sustainable aviation fuel coalition”, in which members will reduce about 900 tonnes of their air carbon emissions through contributing to reducing the cost of the in-demand fuel.

Qantas boss Alan Joyce, who challenged the government to invest in local development of the biofuel last month, said the corporate commitment was a “key step” to creating the industry.

“The demand for SAF [sustainable aviation fuel] has never been higher, but supply is lagging well behind, particularly without a local industry in Australia, and that’s keeping prices several times more expensive than traditional jet kerosene,” Joyce said on Friday. “The more leading corporates that join our program/coalition the more feasible a local industry becomes and the more cost-effective the fuel becomes.”

Sustainable aviation fuel is considered to be the industry’s ticket to neutralising its carbon footprint, but there’s only enough produced to replace less than 1 per cent of the world’s flying, at more than double the price of jet fuel. As it stands, Australia does not have a local supply of the fuel – made from bio feedstock including used cooking oil, animal tallow and other waste products – but Qantas has invested $307 million into developing the industry with Airbus, and has committed to transitioning to 10 per cent sustainable fuel by 2030 and 60 per cent by 2050.

The five companies will initially contribute to the cost of up to 10 million litres used by the carrier on flights out of London’s Heathrow Airport. This investment translates to about 15 per cent of the fuel burden the airline consumes on the route.

In 2025, members of the corporate program will subsidise a further 20 million litres a year on flights out of Los Angeles and San Francisco. Qantas would not comment on how much the investment would cost each company due to market sensitivities.

Australia Post is the first government business that has formally supported the federal government’s commitment to net-zero by 2050 and chief executive Paul Graham said joining the fuel program was “critical” to meeting this target.

Many airlines around the world offer voluntary offset schemes which involve paying more to offset the carbon emission of your travel but only about 1 per cent of travellers use them globally, leading many climate experts to encourage carriers to invest in other decarbonisation measures, including purchasing more fuel-efficient or hydrogen-powered aircraft as well as sustainable aviation fuel.

The United Nation’s aviation body estimates the sector will need to invest $4 trillion in offsets and sustainable fuel through to 2050 to achieve emissions reductions compatible with a 1.75 degree carbon cap, which works out to an annual investment of $192 billion.

Qantas has sold its remaining 12.4 per cent stake in travel agency Helloworld for $33 million.

Since 2008, the national carrier had held a stake in the travel agency when it was spun off as a merger of Qantas Holidays and Jetset Travel. Qantas subsidiary QH Tours sold the shares at $1.71 each on Tuesday night.

Qantas Group CFO, Vanessa Hudson, said now is the “right time” to make an exit since the carrier’s stake in Helloworld had reduced over several years.

“We’ve announced some major investments this year as we focus on what is core to the group going forward, including fleet renewal, growing our network and a successful expansion into the e-commerce holiday booking space with TripADeal.

She said Qantas would maintain a strong relationship with Helloworld as a trade partner and travel agency.

Trans-Tasman travel company Flight Centre is set to reopen 35 retail stores from hibernation with a nationwide recruitment drive planned to fill vacancies.

Flight Centre’s GM for Australia, Brent Novak, said the reopening will particularly help customers in regional areas who rely on face-to-face consultations for travel purposes.

“At a time when regional and suburban communities in Australia are witnessing services such as banking and telecommunications closing branches and becoming available only online, Flight Centre will continue to provide customers with the choice.”

He added the retailer will continue to focus on enhancing its customer channels instead of sacrificing its retail stores for online or call centre services.

“While we continue to enhance our online booking experience for customers, we know how vital it is to have real people in real buildings providing expert customer service with a human touch.”

The retailer is also on the lookout for travel agents as there are currently 179 travel consultant vacancies and 25 store team leader vacancies across the business.

Once the 35 stores are operational, the company will serve customers across 338 stores as well as online. Flight Centre stores in Brisbane’s Cleveland and Bulimba opened yesterday while the third store in Greenslopes will reopen on November 14.

CEO Alan Joyce says Qantas’ financial recovery is well ahead of plan because demand is so strong that the under-fire airline is able to raise its seat prices for customers by more than enough to recover sharply higher fuel, staff and inflationary costs.

Qantas expects to post a $1.3 billion pre-tax profit in the half year to December, more than double what some analysts had expected as recently as last month. The update pushed Qantas shares to their highest point in almost a year as investors bet that Qantas’ COVID-19 reset primed it for higher margins after the crisis.

This is a significant turnaround from a pre-tax loss of $1.86 billion last financial year and comes after months of flight delays, baggage handling mishaps and widespread customer complaints over poor and disrupted services.

“Inflation and interest rates haven’t made a dent in people’s need or desire to travel,” Qantas boss Alan Joyce said.

“Demand keeps on strengthening. This demand supports our ability to fully recover higher fuel prices which are higher than they were in August and are likely to stay higher for longer based on world events,” he said.

Qantas shares marched 8.7 per cent higher to $5.62 by the end of trade. They had earlier popped as high as $5.82 – a level the stock has not hit since last November – before falling back.

Mr Joyce said the carrier’s financial recovery was tracking well ahead of schedule, as travel demand far outpaced the impact of jacked-up fuel prices and runaway inflation on its bottom line. The turnaround was so sharp that Qantas promised staff higher wages, as some of them consider industrial action.

Mr Joyce said Qantas did not have issues with workers, instead attributing problems to a few unions holding a “grudge” and “making a lot of noise” as he refused to bring forward retirement plans.

“The feedback I’m getting continuously as I fly and meet people is a huge thank you to management of Qantas for getting the company through the COVID-19 period,” Mr Joyce, who has pledged to see Qantas through its pandemic recovery efforts, said. “There is no change to my plans out there.”

Qantas workers are still facing a two-year wage freeze in their new industrial agreements, but the offer for the third-year pay rise has been increased from 2 per cent to 3 per cent.

Qantas has offered staff a $5000 one-off bonus, on the condition they accept the wage freezes and derided as a “bribe” by unions, and offered staff 1000 share rights, which it says is to recognise the work done in the pandemic.

The airline said it would be extending the share scheme to 3600 new staff who joined the company after the original cut-off date.

Still, Australian Services Union assistant national secretary Emeline Gaske said the 3 per cent offer still trailed inflation.

“With Qantas returning to record profitability, workers have drawn a line in the sand – they have shared the pain during the pandemic, and it is now fair that they share in the company’s success with well-paid, fair, secure jobs for all workers,” Ms Gaske said.

Mr Joyce said the operating environment remained complex, with fuel costs still elevated and inflation running at 6.1 per cent, but these factors “haven’t made a dent” in demand yet.

Demand drives rapid financial improvement

Though airfares must remain high to account for these issues and push Qantas’ improving financial position, Mr Joyce said.

“Airfares have to be up because we are seeing fuel this quarter is 76 per cent higher than pre-COVID ... it is still very volatile, so we do have to recover that, and we are also recovering the contingency with the lag in capacity we have in the system to maintain operational stability,” Mr Joyce said.

Qantas said it expected to post an underlying pre-tax profit of $1.2 billion to $1.3 billion in the six months to December 31. It did not provide any full-year guidance.

Net debt will fall between $3.2 billion and $3.4 billion as well in the first half.

JP Morgan analyst Anthony Longo had last month predicted Qantas would post a half-year pre-tax profit of $464 million. He said on Thursday that the new guidance showed demand was far “stronger” than anybody had estimated.

Mr Longo told The Australian Financial Review the strength was driven by supply-side constraints – such as the need to recover higher fuel prices and fewer flights to ensure service levels are better. He believed travel would remain a “defensive” stock pick in the longer term.

“Aussies hadn’t travelled and there was a build up of savings, so people were more inclined to travel when things relaxed, but I think going forward local travel will remain pretty defensive,” he said. “Contrary to other regions, Australia hasn’t seen as big a toll on demand from inflationary pressures.”

Qantas says service levels improving

Steve Johnson, chief investment officer at Forager Funds Management, said people had underestimated how profitable Qantas could be after a big cost-cutting exercise during COVID-19. The airline sacked a third of its staff, and worked to strip $15 billion of costs out of the business under a plan revealed in 2020.

“Qantas’ update this morning confirms Forager’s thesis that pent-up travel demand is offsetting any consumer weakness,” Mr Johnson said.

“We will look back on [the pandemic] as a chance to fix some long-standing problems ... that old workforce for Qantas was expensive. There are issues in-terms of training people, but I think in the medium term it is a positive.”

Mr Joyce reiterated the operational issues which have plagued Qantas for much of the year were no different to any other global airline and argued service, like the company’s financial position, was improving drastically.

“We are performing better than our competition here in Australia. Eight of the last 12 months, Qantas has been ahead of Virgin in on-time performance, and this month we are way ahead of them,” Mr Joyce said.

Qantas has averaged 75 per cent with its on-time performance in October, it said, compared to 69 per cent in September and 67 per cent in August. The cancellation rate is 1.7 per cent in October and was 2.4 per cent last month.

Mr Joyce said this was due to reduced capacity, admitting “maintaining our pre-COVID service levels requires a lot more operational buffer” than it did previously. “That means having more crew and more aircraft on standby and adjusting our flying schedule to help make that possible,” the CEO said.

As such, domestic capacity will be cut again by 6 per cent – it will linger at around 94 per cent of pre-pandemic flying in the first half of the financial year before growing to 100 per cent by the end of June next year.

International capacity was, however, upped to 61 per cent in the first half of the financial year and 77 per cent in the second half, reflecting strong demand and the introduction of new long-haul jets to the Qantas fleet.

Virgin Australia boss Jayne Hrdlicka is confident the current boom in travel demand is not just a “sugar-hit” and is preparing to expanded its international operations as the COVID-19 pandemic capacity kinks start to ease.

Hrdlicka told Flight Centre’s Illuminate conference on Thursday the carrier was close to completing its post-administration revamp but did not give any hints into the airline’s potential initial public offering.

“This isn’t a short-term sugar hit but a practical reconnection. Reconnection is based on physical relationships,” Hrdlicka said, adding the current travel surge is on track with expected growth trends before the onset of COVID-19 and will only increase as capacity improves.

Virgin collapsed in 2020 when flights were grounded at the start of the COVID-19 pandemic. Bain Capital beat out a host of private equity funds to buy the airline out of voluntary administration for $3.5 billion in November 2020. Market speculation is mounting that Bain could look to list Virgin on the ASX as soon as 2023, in what would be a highly anticipated sharemarket float.

Hrdlicka on Thursday flagged the carrier was working to expand its international network and is looking at “the world’s possibilities” but did not provide a timeline.

Bain Capital retired Virgin’s international budget subsidiary Tiger Airways following the group’s voluntary administration. Since then, Virgin’s international offering has been contained to short-haul destinations including Fiji, Bali, New Zealand, Vanuatu and Samoa. Qantas and Virgin are both in the process of bidding for additional seats on the Indonesia route with a decision expected in the near future.

Financial statements lodged with the corporate regulator last month show Virgin’s operational loss ballooned to $386.7 million last financial year, compared with $76.8 million in 2021. Hrdlicka has flagged a return to profitability this financial year.

The airline has reduced its costs by $300 million since November 2020 to facilitate its price restructure and grow its fleet by more than 50 per cent since February last year.

“We’re very focussed on our 737 aircraft footprint. We’ve got 737-700s and 737-800s as well as 737-MAX 8s and 737-MAX 10s coming into the fleet which gives us more reach, and we’re committed to continuing to extend that reach,” she continued.

The carrier has experienced an increase in leisure travellers but the number of people travelling for work remains down on pre-COVID-19 levels. Hrdlicka said the airline’s capacity is tracking at 2019 levels to account for the industry’s current volatility, adding the capacity will fully recover when the work attendance rates return to 2019 levels.

“Domestic leisure travel is a lot more important than it was previously,” Hrdlicka said, “People may trade down on how much they’d like to spend on experiences, but I don’t think they’re going to reduce how many experiences they take.”

The aviation sector has been rocked by a string of operational issues this year including staff shortages, the soaring cost of jet fuel and widespread cancellations which have threatened the industry’s razor-thin margins.

Hrdlicka said the Virgin’s cancellation rates have since dropped to well below 2019 levels and on time performance has returned to pre-COVID levels.

“We expected the market to come back and come back big, but we didn’t know when that would happen,” Hrdlicka said, adding the number of employees at Virgin has grown from 4000 to 7000 people since November 2020.

Ground handling workers at Emirates-owned Dnata have called off a protected strike action that would have disrupted three major Australian airports after securing a pay increase and overtime entitlements.

After more than two years of negotiations, Dnata agreed to deliver a 17 per cent pay increase to all Australian employees over a four-year period, protect overtime entitlements as well as increase opportunities for part-time employees to convert to full-time roles and casuals to permanent positions.

Dnata services 30 airlines including Ethiad and Qantas at six airports across Australia with a team of 17,000 employees. The strike action on Monday would have caused significant disruption to international flights to and from Sydney, Brisbane and Adelaide airports.

The company will backpay employees with an immediate increase of 12.6 per cent with a further 4.6 per cent in 2023.

Transport Workers Union national secretary Michael Kaine said the deal showed the power of uniting workers but “it shouldn’t be so hard for workers to achieve pay increases above bare minimums and job security”.

“After more than two years of turmoil for Dnata workers denied JobKeeper, they’re thrilled to have locked in greater financial security and the possibility of converting casual and part-time roles to secure, full-time positions. It’s a relief for hard-working families that last-resort strike action is no longer necessary,” Kaine said.

Dnata Australia chief Burt Sigsworth said he was pleased to have reached an agreement and thanked each employee for their “hard work, loyalty and relentless commitment to Dnata and our customers in these challenging times”.

Ground handlers at Menzies, another company contracted to a number of airlines including Virgin Australia and Qantas, are also expected to come to an agreement with Kuwait-based owner Agility.

The first direct flight between Australia and southern India took off on Wednesday, under a new route supported by funding by the NSW government in an effort to boost visitation with the country’s fifth-biggest trading partner.

The new Qantas route between Sydney and Bengaluru received funding from the state government’s $60 million Aviation Attraction Fund. An A330 aircraft will take off from Sydney to Bengaluru’s Kempegowda International Airport four times per week on a Wednesday, Friday, Saturday and Sunday.

In 2019, India was the fastest growing market to NSW, with 175,000 visitors spending an estimated $444 million. In July, India was the third-largest source of visitors to the state, with the NSW government expecting that number to surge over the coming months due to pent-up demand.

Treasurer Matt Kean said the service hopes to support more than 100 jobs and generate more than $19 million in delivering more than 44,000 inbound international seats to Sydney up to June 30, 2023. Many Australian companies have operations in Bengaluru, and the new route cuts the current travel time between the two cities by three hours.

Tourism minister Ben Franklin said the grant was key to the state’s goal of making NSW the premier visitor economy of the Asia Pacific, “our airports are the gateway to our state, so supporting the return of airlines to them through the Aviation Attraction Fund is key to achieving our goal,” he said.

The new route means Qantas is the only carrier offering direct services between Australia’s two largest cities and the south and north of India.

“The addition of Bengaluru to our route map deepens our ties with India and follows the launch of direct services from Australia to Delhi last year which have also proven popular,” Qantas domestic and international chief Andrew David said.

In August, the Aviation Attraction Fund secured similar partnerships with Japan Airlines and Singapore Airlines in an effort to deliver more than 1000 jobs and boost the trade relationship between NSW, Japan and Singapore.

Qantas is opening a multimillion-dollar purpose-built pilot training centre in Sydney’s south, as it gears up to run a range of new routes and aircraft to meet the renewed appetite for global travel.

The national carrier, along with the broader aviation industry, has been weighed down by staff shortages and flight disruptions, and Qantas chief executive Alan Joyce said the new training facility would ensure the company’s high training standards remain in place.

“Qantas has trained its pilots and crew in Sydney for more than half a century, and we look forward to bringing this critical function back to New South Wales with this custom-built facility,” Joyce said in a prepared statement.

“Sydney will be the launch city for our non-stop flights to London and New York, and will now be the home of pilot training for the A350s, which will operate these flights from 2025.”

The training facility, at St Peters, will offer simulators for the new fleet of aircraft including for the long-haul flights announced in the carrier’s recent Project Sunrise. The centre will also have mock-up cabins, emergency procedure equipment and classrooms.

Upon completion, the facility will alleviate the need for Sydney-based pilots to travel interstate for training. Qantas relocated its simulators from Sydney to Melbourne and Brisbane in 2021.

Senior Qantas and Jetstar training captains will train pilots from the two airlines, while global training provider CAE will maintain the simulators and manage the day-to-day operations of the centre as part of a long-term partnership.

CAE, which will enter into a 20-year lease for the site, may also provide training for other airlines in the region at the facility.

Industrial property giant LOGOS bought the 7946 square metre site to develop the specialised facility, which is said to have an end value of about $100 million. It is next to the 13.8 hectares of land that LOGOS acquired from Qantas in October 2021 for $802 million.

Qantas has trained its pilots and crew in Sydney for more than half a century, and we look forward to bringing this critical function back to New South Wales with this custom-built facility

Qants CEO Alan Joyce

LOGOS head of Australia & New Zealand Darren Searle said the property is located within a “premium industrial precinct on the doorstep of Sydney airport”.

“This development provides the ideal location for Qantas’ new training centre, and the long-term commitment provided by CAE reflects the unprecedented level of demand for industrial land stocks that we’re currently seeing,” Searle said.

“This is particularly so in South Sydney given its proximity to Australia’s two main international gateways, the Port of Botany and Sydney Airport.”

The development is subject to planning approvals. The transaction was introduced by Michael Crombie of Colliers.

The NSW Minister for Planning and Minister for Homes, Anthony Roberts, said the NSW government was a proud supporter of Australia’s aviation industry and the proposal had been declared as “state significant, in recognition of its potential widespread economic benefits and importance to the aviation industry”.

Searle said the centre would be focused on being sustainable with green star certifications, including indoor air quality, energy generation and efficiency, and water use. Construction is scheduled to begin in December 2022, with the facility expected to be operational by early 2024.