The figure was driven by a $2.6 billion write-down on its international fleet along with other restructuring charges. The underlying pre-tax loss - the figure examined most closely by investors - was $646 million. That was better than expectations of a $750 million loss because the airline managed to cut costs faster than expected.

Qantas shares surged to close 7 per cent higher at $1.385 after the airline forecast it would report an underlying profit in the first half of the financial year amid a more benign outlook for increases in domestic and international capacity, the removal of the carbon tax and further benefits from its cost-cutting program.

It also ruled out the sale of a minority stake in its $2.5 billion frequent flyer program but said it would split off its international division to attract more foreign investment.

"Everyone is seeing there is light at the end of the tunnel," Mr Joyce said.

"I think the market also saw through the headline number, the $2.6 billion is a paper change, a non-cash item which just puts the international fleet back on market values rather than the elevated levels that they had when we bought them at low Aussie dollar rates."

Ratings agency Standard & Poor's said the impairment charges would not affect the airline's credit rating, which remains BB+, or one notch below investment grade. The write-downs will cut down the airline's depreciation charges by $200 million a year, in a move that will help it return to profitability faster.

"The outlook suggests the worst is past," UBS analyst Simon Mitchell said.

Qantas will also benefit from the apparent end of a damaging capacity war against Virgin Australia Holdings in the first half. Qantas will extend its capacity freeze, first promised only for the first quarter, for the entire half and expects the overall domestic market will grow by only 1 per cent during that period.

Colonial First State head of Australian equities, Marcus Fanning, whose fund is the second-largest shareholder in Qantas with a 8.5 per cent stake, warned the capacity battle had "destroyed industry profitability."

Qantas Domestic's earnings before interest and tax fell to $30 million from $330 million the prior year, and the domestic business was loss-making in the second half.

Qantas has not ruled out adding more capacity if needed to maintain its network and frequency advantages over its rival, so Mr Fanning said the decisions Virgin's board takes on capacity would prove key to the outlook.

Virgin will unveil its full-year results on Friday, with analysts forecasting an underlying loss before tax of $206 million, excluding additional losses from its 60 per cent stake in budget carrier Tigerair Australia. Virgin's board now includes representatives from shareholders Air New Zealand, Singapore Airlines and Etihad Airways.

Mr Joyce warned the demand environment remained weak, despite the airline's forecast for a first half profit.

"There is still weakness out there," he said. "That is obviously built into our outlook."

He said lucrative traffic from the resources and government sector were down significantly, affecting Qantas proportionally with its 80 per cent revenue share in the corporate market.

"But we are seeing stability come into the market now with 1 per cent capacity growth," he said. "That stabilised yields [or returns on fares]. Yields aren't declining as much as they were in the past. It gives us confidence there is now a chance maybe for the weak demand environment to catch up with the oversupply of capacity."

Mr Joyce said it was too early to say whether Qantas would maintain its capacity freeze in the third and fourth quarters.

Qantas expects international carriers will add only 2.4 per cent to capacity in the first half - much slower than in recent years - as a result of the weaker Australian dollar, overcapacity in the market and better market conditions in other global destinations like Europe.

Merrill Lynch analyst Matthew Spence said he was hopeful that Qantas had reached the bottom of the cycle.

"At the end of the day yields aren't rising but they seem to have stabilised," he said. "You can take a positive and a negative out of that."

Regional rival Regional Express Holdings (Rex), which on Thursday reported a 45 per cent fall in annual profit to $7.7 million, was also hopeful the aviation market would begin to improve.

"There are already some very preliminary signs that we are near the bottom of the economic downturn and the recent removal of the carbon tax should give the economy a further boost," Rex chairman  Lim Kim Hai said.