Qantas has increased its full year profit by 44.1 per cent as the airline benefited from strong demand for international and domestic flights.
But Qantas is starting to feel the effect of higher fuel costs amid an uncertain economic outlook.
It expects pre-tax profit this year to be in line with the analyst consensus forecast of $825 million, equivalent to a 41 per cent fall on 2007/08.
Net profit for the year to June 30 rose to $969 million, from $672.6 million the year before, Sydney-based Qantas said in a statement. The result was a little below the consensus forecast of $1.02 billion.
Its pre-tax profit was $1.41 billion, up from $965.1 million the previous year.
"This time last year was one of the sweetest spots in aviation," chief executive Geoff Dixon told a media conference.
"The business, particularly at the leisure end, is soft ... and there is a downturn.
"Despite all of that we're a very strong company and it's a very strong airline compared to many of its peers around the world."
Qantas's strength was in its flexibility as it used its two brands, Qantas and budget airline Jetstar, and its fleet to adjust as the environment changed, Mr Dixon said.
"The biggest determinant in this industry without a doubt is fuel and who would know where fuel could be in three years time," Mr Dixon said.
"The rapid rise in fuel costs since December last year is unprecedented and the impact has been felt across the aviation industry and the world economy."
At current prices, Qantas expects its fuel bill to rise by more than $1.6 billion in 2008/09. Mr Dixon said Qantas had hedged 81 per cent of its fuel at $US118 per barrel for the 2008/09 year, and it was in options so the company could benefit if the price fell.
Chief executive designate Alan Joyce said the flexibility of the airline, with its two brands Qantas and budget carrier Jetstar, would help Qantas to overcome the challenges.
"What's important is to have the flexibility and the plans to cope with the situations as they eventuate," Mr Joyce said.
"The structural advantages that we have ... with the choice of growing one brand or the other depending on market conditions gives us huge flexibility."
Qantas' results for 2007/08 for the first time included separate reporting for the Qantas Frequent Flyer (QFF) and Qantas Freight businesses.
This follows it announcement in 2007 that it was positioning its portfolio for greater growth and potential alternative ownership options.
Qantas said its board will next month decide whether a proposed partial initial public offer (IPO) of shares in its loyalty business will go ahead.
"Regarding the loyalty business, Qantas is well advanced in its preparations for a partial Australian IPO subject to market conditions," Mr Dixon said.
The airline's frequent flyer business made a pre-tax profit of $234 million in the year.
Revenue of $850 million came from the redemption of Qantas Frequent Flyer points for flight and other awards, Qantas said. Costs for the segment were $721 million with the majority being the purchase of airline seats from Qantas group airline businesses.
Its freight business, including Qantas Cargo, Express Freighters Australia and the group's equity investments in Star Track Express and Australian air Express made a pre-tax profit of $64 million, down $1 million from the previous year.
Net passenger revenue, including ticket fuel surcharges, increased 6.2 per cent to $12.1 billion.
Total group revenue increased 7.5 per cent to $16.192 billion.
Traffic, measured in revenue passenger kilometres, rose five per cent while yield improved by 1.2 per cent.
Excluding unfavourable foreign exchange rate movements, net passenger revenue was up 8.4 per cent, with yield improving 3.3 per cent.
Mr Dixon said Qantas had confronted a number of challenges in recent months, including the QF30 decompression incident in the Philippines.
"We understand the level of scrutiny we are being subjected to at present," he said.
"We will work through these issues and implement any changes that may be required, but our commitment to safety should never be questioned."
The company will pay a final dividend of 17 cents per share fully franked, taking the full-year payment to 35 cents, compared with 30 cents for the year before.