As UBS Asset Management boss Paul Fiani contemplates whether to sell a 5% stake in Qantas to Airline Partners Australia, he’ll no doubt be interested by this morning’s profit upgrade from the UBS aviation analyst:

We are raising our Qantas EPS forecasts by 6% in FY07 and 9% in FY08 to take account of stronger than expected traffic numbers, changes to our fleet plan, and a review of our yield assumptions. Our new forecasts sit around 5% ahead of management guidance but not far off consensus.

The key issue impacting our FY08 forecasts is whether Qantas can sustain its current 15% growth in international unit revenue. We are forecasting a drop off to 4% growth in FY08, but given the dearth of international capacity for Qantas and the whole industry, our assumption could be too low. Each 1% additional unit revenue growth growth equates to 5% extra EPS.

It’s surprising the UBS analyst is allowed to say anything about Qantas given that the Swiss investment banking giant is one of the advisers to the APA bid and stands to pocket an estimated $40 million in fees if it succeeds.

For all the doom and gloom coming out of APA and the Qantas board, the facts of the matter are that Qantas is entering a period of unprecedented profitability. The failure to break down the performance of the domestic and international operations has still not been addressed but never before have they both simultaneously enjoyed such fat margins.

The other interesting aspect of yesterday’s announcement is that there will now be two distinct debt piles associated with the airline – the $7.5 billion lent to APA and the $3-5 billion in debt that will sit inside Qantas itself once it has paid back $4.5 billion to shareholders.

Andrew Sisson says he doesn’t want to cash in his $450 million Qantas stake but under this new proposal he will be forced to accept about $150 million in special dividends and capital returns if Qantas does remain listed with APA in control.

If Qantas is booted out of the various indices and loaded up with debt, it may become less attractive to various fund managers. However, the smoke signals suggest a higher mop-up bid from APA is coming, so why would you sell at $5.45?

Assuming Qantas returns $2 a share to all its ongoing investors, a mop-up bid of $4 in 2008 would be the equivalent of $6 in today’s terms.