The Australian Competition and Consumer Commission had sued the airline in the Federal Court after alleging Qantas engaged in false, misleading or deceptive conduct by continuing to sell the tickets.
The competition watchdog announced on Monday the parties had agreed to ask the court to impose a AU$100 million (NZ$110m) penalty after Qantas admitted the conduct went on for a year longer than the ACCC alleged.
A total of 86,597 customers, who between May 2021 and August 2023 were sold tickets Qantas had already decided to cancel, will share about $20 million in compensation.
Qantas will pay $225 to domestic customers and $450 to international customers.
ACCC chair Gina Cass-Gottlieb said the fine would send a strong message to Australian companies.
"This was egregious and unacceptable conduct by Qantas," Ms Cass-Gottlieb told reporters.
"Many customers will have made holiday, business and travel plans after booking on a phantom flight that had been cancelled."
The early settlement was preferable to spending years going through court, Ms Cass-Gottlieb said.
The commission alleged Qantas advertised tickets for more than 8000 cancelled flights between May 2021 and July 2022.
It further alleged that for more than 10,000 flights scheduled to depart between May and July 2022, Qantas did not promptly notify customers the flights were cancelled.
Qantas now admits the behaviour went on until August 26, 2023, affecting flights scheduled to depart between May 2022 and May 2024.
The ACCC announced it was suing Qantas on August 31.
Qantas has agreed not to repeat the conduct and make the payments to affected customers as soon as possible.
It has also undertaken to notify customers of cancelled flights as soon as practicable and no more then 48 hours from deciding to cancel a flight and stop selling tickets for such journeys within 24 hours.
The undertaking applies to subsidiary Jetstar too.
"When flying resumed after the COVID shutdown, we recognise Qantas let down customers and fell short of our own standards," Qantas CEO Vanessa Hudson said.
"The return to travelling was already stressful for many and we did not deliver enough support for customers and did not have the technology and systems in place to support our people."
Payments will be available through a dedicated online portal facilitated by Deloitte and will be independently audited.
Qantas will be notifying impacted customers via email from June.
Opposition transport spokeswoman Bridget McKenzie and Liberal senator Dean Smith welcomed the fine and called on the government to do more to address anti-competitive behaviour by Australian airlines.
"Everyday Australian travellers receive a win today as Qantas has waived a white flag," they said in a joint statement.
"Australians deserve a more affordable, reliable and safe airline industry where their flight arrives on time and their bags show up with them."
