Qantas' key domestic operations have suffered a steep drop in first half earnings as the battle for market share forces down airfares.
However, an improved performance from Qantas international, and growth in the frequent flyer business, supported a strong rise in first half net profit to $111 million, more than double the $42 million achieved in the prior corresponding period.
The result, which was a little below market expectations, also included a $125 million payment from Boeing as part of changes to Qantas' 787 Dreamliner orders announced in August 2012.
Meanwhile, underlying earnings at Qantas domestic fell 34 per cent to $218 million, with yields - an industry measure of average airfares per passenger - down as the airline sold extra seats as competition with rival Virgin Australia heated up.
"Clearly this reflects the elevated levels of capacity growth into the market as the competitor tries to claim market share from Qantas domestic," chief executive Alan Joyce said.
"But Qantas has maintained its leading 84 per cent share of the corporate market."
Mr Joyce said Jetstar's 13 per cent drop in underlying earnings to $128 million, was largely driven by domestic market conditions and start-up costs for offshore ventures in Japan and the yet-to-be-approved Jetstar Hong Kong.
Qantas expects to increase capacity in the Australian domestic market by five to seven per cent during the second half of 2012/13 across both Qantas and Jetstar.
Mr Joyce said the overall result demonstrated the airline's progress in a challenging competitive environment.
"The operating environment remains complex and volatile, but we are now beginning to realise the benefits of the tough decisions that we have made over the past 18 months," Mr Joyce said.
Qantas' international operations posted an underling loss of $91 million, an improvement from the $262 million loss in the prior corresponding period.
Mr Joyce said Qantas international was on track to break even by 2014/15, as the full benefits of a restructure plan - cutting loss-making routes, retirement of older aircraft and alliances with foreign carriers such as Emirates - were realised.
"These measures provide a platform to return Qantas international to profit and, over the long term, target growth opportunities," he said.
The Emirates tie-up was awaiting a final decision from the competition regulator, due in March.
Investors welcomed the signs of improvement in Qantas international, with the stock closing up 4.5 cents at $1.66.
"No doubt the international strategy is beginning to yield some positive results," White Funds Management investment Peter Borkovec said.
"They are still losing money, but it is travelling in the right direction and the market is reacting to that."
The frequent flyer business posted a 42 per cent rise in underlying earnings to $137 million.
Qantas said underlying profit before tax - its preferred measure of financial performance - was $223 million in the half, above consensus forecasts of $209 million and at the top end of company guidance.
The airline, which did not declare a dividend, said conditions were too volatile and uncertain to offer profit guidance for the full 2012/13 year.