Qantas absorbs a Middle East fuel shock without derailing its turnaround

Qantas Airways has moved through one of the more volatile stretches of its turnaround this year, with a Middle East conflict driving a sharp fuel cost shock, before jet fuel prices retraced just as sharply as tensions eased.

L1 Capital used a Presentation in July 2026 to frame the broader arc of the recovery. The manager said that around 2023 Qantas was heavily criticised and under a lot of public pressure, much of which was justified, and the share price had fallen below $5. Over the following twelve months the company, to its credit, addressed a number of pain points and the management team delivered, with the share price more than doubling to over $10 under chief executive Vanessa Hudson and chair John Mullen.

The Middle East fuel shock, and its unwinding

That longer turnaround narrative was tested in the March and April quarter, when the Iran conflict drove jet fuel prices sharply higher. Pendal Group said in a Newsletter in April 2026 that Qantas delivered an FY26 profit update on the key cost and revenue metrics resulting from the conflict, with applying near-peak jet fuel pricing seeing an additional $700 million in fuel costs for FY26, partly offset by around $200 million in additional revenue, for a net impact to profit before tax of about $500 million, taking consensus from $2.5 billion to $2 billion.

Pendal said Qantas responded by trimming fourth-quarter capacity, cutting domestic and Jetstar growth and slowing international growth from 9% to 7%, noting capacity from Middle Eastern carriers had fallen 77% and overall European route capacity was down 31%.

L1 Capital described the same period in a Quarterly Report in March 2026, saying Qantas shares were weaker as investors focused on the near-term earnings impact from sharply higher fuel costs and the uncertainty created by disruption in global fuel markets due to the war in Iran, though the manager noted demand had remained resilient and concluded the share price declines appeared to reflect near-term earnings volatility rather than any deterioration in the group's underlying competitive position.

As tensions eased, the fuel headwind unwound quickly

By the June quarter, the picture had turned. L1 Capital said in a Quarterly Report in June 2026 that Qantas shares strengthened 27% during the quarter as jet fuel prices retraced sharply, down around 50%, following the easing of Middle East tensions, leaving fuel costs still around 20% above pre-war levels but materially below the peak. The manager said oil refining margins, which are generally unhedged, remain the key residual headwind, sitting at roughly double pre-war levels despite falling from extremes.

The manager also pointed to a positive investor trip to the Airbus factory in Toulouse, where management reiterated a $400 million EBIT opportunity from Project Sunrise ahead of the planned Sydney-London non-stop service, scheduled to launch in October 2027, supported by a premium-heavy A350-1000ULR configuration and network flexibility from 787 redeployment.

Valuation: a rare-franchise argument at a cyclical low multiple

Even during the worst of the fuel shock, several managers argued the valuation had become compelling. Ausbil Investment Management said in an Article in May 2026 that with recent market volatility in 2026, a number of stocks had seen heavy falls, and the market had priced an assumption that oil prices remain elevated, but the manager believed investors need to look through the current geopolitical crisis. At the time, Ausbil said Qantas was trading at an FY28 price-earnings ratio of approximately seven times, extremely low versus the market average, and could be set for a significant re-rate on improving operating conditions.

Pendal Group's head of Australian equities, Crispin Murray, made a related point in an Article in February 2026 after the stock fell nearly 10% on demand concerns, saying in this era where capital intensity is back and people want franchises that are impossible to replicate with AI, you've got an airline trading on eight times earnings with the ability to generate cash flow to improve and overhaul its fleet, calling the prospects very interesting.

Sage Capital struck a similar balance in an Article in April 2026, with portfolio manager Fenton remaining constructive on Qantas, citing the supportive domestic duopoly structure and pricing power, while cautioning that near-term earnings pressure is likely given elevated jet fuel costs, noting that demand for travel is very resilient to recessions but that an earnings hit was coming in the short term.

Operational turnaround and the Frequent Flyer engine

Ahead of the fuel shock, the operational turnaround itself was the dominant theme. L1 Capital said in a Webinar in October 2025 that during the September quarter, whilst Qantas shares rose by a small amount, what was pleasing was the continuation of the turnaround story, with management reaffirming 2030 targets and providing 10% to 12% FY26 EBIT guidance for the Frequent Flyer division.

The manager pointed to a supportive industry backdrop with post-COVID supply constraints at Boeing and Airbus, reduced aircraft utilisation due to an aging fleet, and a grounding of A320 aircraft for engine maintenance, alongside robust consumer travel demand supporting higher yields, and drew a parallel between Qantas in late 2023 and Mineral Resources now, both early-stage turnaround stories in the manager's view.

What managers are watching next

With Middle East tensions easing and jet fuel prices retracing, the managers most invested in Qantas say the residual watch-items are whether refining margins, still roughly double pre-war levels, normalise further, and how the Project Sunrise Sydney-London launch and continued Frequent Flyer growth progress toward the 2030 targets management has reaffirmed through the volatility.