Qantas (ASX: QAN) has reported a 19.8% decline in annual net profit, as the conflict in the Middle East drove a $610 million increase in fuel costs, offsetting strong demand for premium and international travel.

The Middle East conflict pushed up jet fuel prices and disrupted international flying during the year, although continued appetite for premium travel helped cushion the impact on the airline's earnings.

Profit down despite higher revenue

The airline recorded net profit of $1.3 billion for the 12 months to June 30, down 19.8% from the previous year. Underlying pre-tax profit fell 13.8% to $2.06 billion, while revenue rose 7.1% to $25.5 billion.

Fuel bill and conflict impact

Fuel was the largest source of pressure on the result, a pressure point familiar across global aviation, where fuel typically ranks among airlines' largest single operating costs. Qantas said its fuel bill increased by $610 million during the year, with the conflict involving Israel, the US and Iran driving a sharp rise in jet fuel prices. The disruption also affected routings, as carriers avoiding Middle Eastern airspace in some cases flew longer paths that burn more fuel.

After accounting for measures including fare increases, capacity changes and the redeployment of aircraft, the airline estimated the conflict had a net impact of $420 million on earnings.

Chief executive Vanessa Hudson, who has led the airline since late 2023, said the final four months of the financial year were particularly challenging, with weaker business and consumer confidence weighing on travel demand.

Premium demand cushions the hit

Despite the pressure, Qantas continued to benefit from strong international demand, particularly among premium customers. Premium cabin revenue is growing at twice the rate of economy revenue across the airline's international network, a trend that supports its strategy of investing in newer aircraft configured with a greater proportion of premium seating. The strength in premium cabins mirrors a broader pattern across global aviation since the pandemic, with carriers worldwide reporting sustained demand from high-value travellers.

Jetstar also remained a key part of the group, with Hudson highlighting continued strength at the low-cost carrier as households remain under financial pressure. The dual-brand structure pairs a full-service carrier with a low-cost airline, spanning both ends of the travel market.

Fares, hedging and fleet renewal

In response to the higher fuel environment, Qantas has adjusted fares and capacity while maintaining substantial fuel hedging. The airline said it remains highly hedged against Brent crude, although hedging does not completely shield it from movements in the cost of converting crude oil into jet fuel. Qantas has long maintained one of the most heavily hedged fuel positions among the world's major carriers, in contrast to large US airlines, which generally do not hedge.

The airline is also positioning its fleet for a longer-term shift towards more fuel-efficient aircraft. Qantas plans to begin retiring its A380 fleet from 2028, with the aircraft to be phased out progressively. The superjumbo is already a shrinking presence in global fleets after Airbus ended production in 2021, and Qantas operates more fuel-efficient widebodies such as the Boeing 787, with Airbus A350s on order for long-haul routes.

The FY26 result underscores the sensitivity of Qantas' earnings to fuel prices and geopolitical disruption, while also pointing to areas of resilience across the business: international and premium demand remains strong, and Jetstar continues to serve more price-conscious travellers.