"We see FY16 as peak profit, aided by transformation gains and a lag in passing on fuel savings," he said. Mr Mitchell has raised his 12-month price target on the stock to $4 from $2.80 and now has the most bullish profit forecasts in the market. Qantas shares were trading 7c higher at $2.45 at 11:30am on Wednesday. The consensus among other analysts that have issued relatively recent forecasts is for a pretax profit of more than $600 million. That represents a major improvement from last year's pretax underlying loss of $646 million. Qantas expects to report a $300 million to $350 million underlying pretax profit in the first half, which is usually its better half. But it will reap the majority of the benefits from the fall in the oil price in the second half this year. Mr Mitchell expects Qantas will focus on returning cash to shareholders through share buybacks rather than dividends in part because it is short on franking credits. Qantas has not paid a dividend since 2009, but it last bought back shares in 2013.

Mr Mitchell forecasts the ratings agencies, which do not rate Qantas as investment grade, will lift their negative outlook after the airline's first-half results in February. But he believes it will take until the next financial year before Qantas regains its investment grade credit rating. Qantas on Tuesday confirmed it would be keeping the vast majority of the savings from the falls in the oil price rather than lowering fares for customers. The airline will gradually eliminate fuel surcharges on commercial fares but it will instead wrap that component into the base fare. It also plans to lower fuel surcharges on some of routes for frequent flyer redemptions. However, the Australian Competition and Consumer Commission is querying why any fuel surcharge should remain for frequent flyer redemptions if it is being removed for commercial fares. Mr Mitchell said Qantas was also benefiting financially from a return to normal in the Australian domestic market, after a period where Qantas and Virgin Australia Holdings had added capacity ahead of demand. "We see this driving an 8 per cent domestic revenue recovery over the next two years," he said.

However, he expects Virgin will emerge with a greater share of the domestic revenue pie than it had in the past as it narrows the gap with Qantas. Mr Mitchell has also raised his earnings forecasts for Virgin as a result of the fall in the oil price. He now expects Virgin, including its Tigerair Australia subsidiary, to report an underlying pretax loss of $23 million this year, which is better than his prior forecast of a $116 million loss. Mr Mitchell has raised his 12-month target price on Virgin to 53c from 45c. "Virgin's return to profitability will continue to lag Qantas by one year, reflecting lagging performance on costs and less net leverage to a lower Australian dollar fuel price," he said.