(Reuters) -Australian flag carrier Qantas Airways on Friday lifted revenue expectations from its domestic operations for the first half of the financial year, while forecasting lower fuel costs after a drop in global prices.

The airline is now expecting revenue per available seat kilometre for its local business to increase by 3% to 5% for the first half ended Dec. 31 compared to a year ago, up from the 2% to 4% range it provided in August.

Domestic capacity is expected to rise by 1% in the first half, it said, down from its August forecast of a 2% rise.

"The Group continues to perform in line with expectations, with both Qantas and Jetstar seeing stable demand," Qantas CEO Vanessa Hudson said in a speech at the airline's annual meeting.

"Jetstar saw stronger than anticipated demand, while Qantas Domestic load factors and demand for corporate travel continues to improve year on year," she said.

The firm's shares gained as much as 1.6% to A$8.04 to hit a record high for the second time in the week.

Under Hudson the flag carrier is working to rebuild a reputation that was battered over the last 18 months amid legal, regulatory and customer issues.

The airline's new chairman, John Mullen, said Qantas also remained on track to reinstate fully franked dividends from the second half of the current financial year.

"With the progress we have already made on restoring our reputation, supported by a strong balance sheet, the outlook for Qantas and Jetstar is really positive," Mullen said in his address to shareholders.

The airline is now expecting first-half jet fuel costs of about A$2.55 billion ($1.69 billion), lower than the A$2.7 billion it had estimated earlier.

Qantas' current fuel cost estimate is on the basis of current jet fuel price of A$140 a barrel, lower than A$150 when it was previously estimated.

The firm said its A$400 million share buyback was currently 45% complete at an average price of A$7.23. The airline anticipates its finalisation by the end of the year.

Trading at Qantas' loyalty programme was in line with expectations, the company said, following the launch of a new flight rewards scheme.

The loyalty division continues to expect at least 10% growth in underlying earnings before interest and taxes in the current financial year, Qantas said.

($1 = 1.5060 Australian dollars)