Is this as good as it gets for Qantas, given it just reported its biggest profit in history? The answer is almost certainly no. But make no mistake - Qantas is certainly in a sweet spot.
Despite the big numbers it produced in the 2016 financial year result - a 57 per cent boost in pretax earnings to more than $1.5 billion - this outcome was achieved amid a domestic aviation environment that is still pretty patchy.
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Qantas cash splash
Qantas has broken a seven-year dividend drought and is splashing cash with staff and investors.
For the most part, Qantas was able to post its record profit on the back of what it calls a transformation, which has been in progress for a couple of years, and a very strong tail wind from low fuel prices.
Put simply Qantas has nearly completed an overhaul of its operations that puts in place a structure and cost regime that should allow it to make even more money if the domestic market gets a bit stronger and it achieves better pricing power for its airfares.
Qantas had already warned investors that their earlier expectations for 2016 would not be met because of some softness in the domestic market, and even after downgrading their forecasts analysts had still been expecting 2016 profit to be a bit higher.
There was no post-election bounce back.
Putting profit first
And Qantas is not suggesting market conditions in the current year have improved domestically. In order to combat these sluggish conditions, it says there will be no additional capacity put into the market, and it may actually take some out.
This is just what shareholders want to hear - a confirmation that the airline will be putting profit ahead of domestic market share.
![Making shareholders happier again: Qantas boss Alan Joyce has announced the first dividend in seven years.](/web/20160827070654im_/http://www.brisbanetimes.com.au/content/dam/images/g/q/z/u/m/v/image.related.articleLeadwide.620x349.gqzu2v.png/1472010248495.jpg)
While airfares are still relatively low on many domestic and international routes it's clear that the two major local players, Qantas and Virgin, are responding by keeping a lid on - or reducing - capacity and waiting for travel demand to catch up.
Qantas forecast that "unit revenue is expected to be below the first half of the financial year 2016 with competitive industry pricing and resource sector weakness".
Ironically the pressure on revenues - which was more evident in the second half of 2016 - was the result of falling airfares (in particular on international routes) thanks to all airlines receiving the benefits of lower fuel prices.
So while internationally Qantas has reported a huge bounce in profit, the yields are being crunched.
Qantas is able to weather this storm relatively well, thanks to the additional $450 million it expects to get in 2017 from its company transformation program while paying no more for fuel.
If one takes all this into account - and the local economy doesn't deteriorate - the conditions will be set for an even better result.
Good news for shareholders - and staff
The good news for shareholders is that Qantas will institute a new share buyback in 2017 following the completion of a $500 million buyback in 2016 (this was in addition to a $505 million capital return).
Qantas boss Alan Joyce also announced a 7 cent a share dividend for 2016 - the first since 2009 - which suggests a level of confidence in future earnings as there will be an expectation that will be a more permanent feature. This payment used up almost all of Qantas' franking credits, so future dividends could be unfranked or partly franked.
The largesse was extended to the majority of Qantas ordinary workers who have been operating in pay-freeze conditions. Full time employees will get $3,000 each.
Thanks to a recent recapitalisation by Virgin shareholders and Qantas' strong internally generated cash flow the airlines' new competition battle field is services - like lounges, wifi, newer aircraft and and better seats.
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