News Releases
Airline increases first quarter net earnings 75.9 per cent
CALGARY, April 29 /CNW/ - WestJet (TSX:WJA) today announced record first
quarter net earnings of $52.5 million, a 75.9 per cent increase over the
$29.9 million in the first quarter of 2007. The airline's diluted earnings per
share (EPS) for the first quarter was 40 cents compared to 23 cents in the
same period last year, an increase of 73.9 per cent.
First quarter revenue was $599.3 million compared to $470.7 million in
the first quarter of 2007, an improvement of 27.3 per cent. Operating margin
for the quarter was 13.8 per cent.
"Our strong start to 2008 is a direct reflection of the efforts of our
people," commented Sean Durfy, WestJet President and CEO. "These results once
again demonstrate our ability to deliver on our strategic plan. In this
quarter, our capacity deployment strategy, which sees a portion of our fleet
repositioned to sun destinations, benefited from our expansion into six new
international destinations. Our performance was further improved by the first
quarter strength of both the Canadian economy and exchange rate."
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Operational Highlights
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Q1 2008 Q1 2007 Change
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Load Factor 81.9% 81.1% 0.8 pts.
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ASM (available seat miles)
billions 4.065 3.449 17.9%
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RPM (revenue passenger miles)
billions 3.331 2.797 19.1%
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RASM (revenue per available
seat mile) cents 14.74 13.65 8.0%
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Yield (revenue per
passenger mile) cents 17.99 16.83 6.9%
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CASM (cost per available
seat mile) cents 12.71 11.89 6.9%
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CASM excluding fuel cents 8.58 8.69 (1.3%)
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>>
Sean Durfy continued, "Oil and refining costs for jet fuel were
substantially higher in the first quarter of 2008 compared to this time last
year. We saw the price of fuel increase 30 per cent to 83 cents per litre. The
impact to our costs resulted in an overall CASM increase of 6.9 per cent. Fuel
prices will continue to be one of the airline industry's greatest concerns.
Our low-cost structure, fuel-efficient fleet and the strength of the Canadian
dollar throughout the first quarter improved our ability to cope with rising
fuel prices.
"For the quarter, CASM excluding fuel was down 1.3 per cent to 8.58
cents, demonstrating our commitment to our low-cost, high-efficiency operating
model. With our continued capacity growth, we were able to dilute our fixed
costs over a larger asset base and achieved cost efficiencies through our
increased block-time utilization that improved to 12.4 hours in the period.
"In the second quarter, we will take delivery of two additional aircraft
bringing our fleet size to 75. Our second quarter capacity will increase 20
per cent compared to the same period in 2007. We will once again use this
period to transition a portion of our capacity out of transborder and
international and into our domestic schedule, as we prepare for the busy
summer demand period and begin service to Quebec City in May and New York, via
Newark, in June."
WestJet also reported first quarter operational performance. The airline
calculates operational performance based on the US Department of
Transportation's standards of measurement for the U.S. airline industry.
<<
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Q1 2008 Q1 2007 Change
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On-time performance 69.0% 75.3% (6.3 pts.)
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Completion rate 98.1% 98.4% (0.3 pts.)
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Lost baggage ratio 5.15 5.33 (3.4%)
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>>
On-time performance represents the percentage of flights that arrived
within 15 minutes of their scheduled time. Completion rate represents the
percentage of flights completed from what was originally scheduled. Baggage
ratio represents the number of delayed or lost baggage claims made per 1,000
guests.
Sean Durfy commented, "On-time performance is a key indicator in
measuring our guest experience. During the first three months of 2008, harsh
winter weather in Eastern Canada contributed to the decline of our on-time
performance. The hard work and dedication of our people allowed us to operate
98.1 per cent of our scheduled flights with only 5.15 reports of lost luggage
per 1,000 bags.
"Thanks to our unrivaled guest experience, the strength of our brand and
the collaborative commitment of our entire WestJet team, we feel we can
continue to achieve the strong results that have made us an industry leader.
We are confident in our business strategy and the commitment of our over 7,000
WestJetters."
Management's Discussion and Analysis of Financial Results
Advisories
The following Management's Discussion and Analysis of Financial Results
(MD&A), dated April 28, 2008, should be read in conjunction with the unaudited
consolidated financial statements and notes thereto as at and for the three
months ended March 31, 2008 and 2007, as well as the audited consolidated
financial statements, notes thereto and MD&A included in the Annual Report as
at and for the year ended December 31, 2007. For a detailed description of
risks, uncertainties and critical accounting estimates, please refer to the
"Risks and Uncertainties" and "Accounting" sections in the 2007 annual MD&A
dated February 22, 2008. The consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles
(GAAP). Certain prior-period balances in the consolidated financial statements
have been reclassified to conform to current period's presentation. Additional
information relating to WestJet Airlines Ltd. (WestJet, we, us or our),
including Annual Information Forms and financial statements, is located on
SEDAR at www.sedar.com. An additional advisory with respect to forward-looking
information is set out below, and the use of non-GAAP measures is set out at
the end of this MD&A under "Non-GAAP Measures".
Forward-looking Information
Certain information set forth in this document, including management's
assessment of WestJet's future plans and operations, contains forward-looking
statements. These forward looking statements typically contain the words
"anticipate", "believe", "estimate", "intend", "expect", "may", "will",
"should" or other similar terms. By their nature, forward-looking statements
are subject to numerous risks and uncertainties, some of which are beyond
WestJet's control, including the impact of general economic conditions,
changing domestic and international industry conditions, volatility of fuel
prices, terrorism, currency fluctuations, interest rates, competition from
other industry participants (including new entrants, and generally as to
capacity fluctuations and pricing environment), labour matters, government
regulation, stock-market volatility and the ability to access sufficient
capital from internal and external sources. Readers are cautioned that
management's expectations, estimates, projections and assumptions used in the
preparation of such information, although considered reasonable at the time of
preparation, may prove to be imprecise and, as such, undue reliance should not
be placed on forward-looking statements. WestJet's actual results, performance
or achievements could differ materially from those expressed in, or implied
by, these forward-looking statements.
Definition of key operating indicators
Our key operating indicators are airline industry metrics and are useful
in assessing the operating performance of an airline.
Available seat miles (ASM): A measure of total passenger capacity,
calculated by multiplying the total number of seats available for sale by the
total distance flown.
Revenue passenger miles (RPM): A measure of passenger traffic, calculated
as the number of revenue passengers, multiplied by the total distance flown.
Load factor: A measure of total capacity utilization, calculated as the
proportion of total available seat miles occupied by revenue passengers.
Yield (revenue per revenue passenger mile): A measure of unit revenue,
calculated as the gross revenue generated per revenue passenger mile.
Revenue per available seat mile (RASM): Total revenue divided by
available seat miles.
Cost per available seat mile (CASM): Operating expenses divided by
available seat miles.
OVERVIEW
In the first quarter of 2008, we continued the momentum gained in 2007
with strong financial results and our most successful January to March period
to date. Our record net earnings and improved margins were driven by
significant RASM increases, increased fleet utilization and strong cost
control (ex-fuel); offset somewhat by record jet fuel prices.
Financial Highlights
<<
- Increased total revenues to $599.3 million, an increase of 27.3 per
cent over the same period in 2007.
- Notwithstanding capacity growth of 17.9 per cent in the quarter, we
recorded RASM of 14.74 cents, up 8.0 per cent over our 2007 first
quarter.
- Increased load factor by 0.8 points to 81.9 per cent compared to 81.1
per cent in the first quarter of 2007.
- Decreased CASM, excluding fuel and employee profit share, by 2.9 per
cent to 8.26 cents compared to 8.51 cents in the first three months
of 2007.
- Recorded an earnings before tax margin of 12.4 per cent, up 2.6
points from the first quarter of 2007.
- Realized net earnings of $52.5 million, an increase of 75.9 per cent
compared to the same quarter in 2007.
- Increased diluted earnings per share by 73.9 per cent to $0.40 from
$0.23 in our 2007 first quarter.
- Assumed delivery of three new aircraft, increasing our total
registered fleet to 73.
- Generated cash flows from operations of $189.8 million.
>>
The dedication, drive and actions of every WestJetter contribute to the
success of our airline. Through our people, we continue to thrive. As we
continue to grow, our brand remains strong and is synonymous with exemplary
guest service and experience.
<<
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Operational Highlights Three Months Ended
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Mar. 31 Mar. 31 Change
2008 2007
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ASMs 4,064,991,801 3,449,047,814 17.9%
RPMs 3,330,813,443 2,797,170,289 19.1%
Load factor 81.9% 81.1% 0.8 pts
Yield (cents) 17.99 16.83 6.9%
RASM (cents) 14.74 13.65 8.0%
CASM (cents) 12.71 11.89 6.9%
CASM, excluding fuel and
employee profit share (cents) 8.26 8.51 (2.9%)
Fuel consumption (litres) 202,155,666 172,158,303 17.4%
Fuel costs/litre (cents) 82.96 64.02 29.6%
Segment guests 3,469,405 3,040,589 14.1%
Average stage length (miles) 917 858 6.9%
Number of full-time equivalent
employees at period end 5,939 5,134 15.7%
Fleet size at period end 73 65 12.3%
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>>
Our continued strong financial results are reflected in net earnings of
$52.5 million and diluted earnings per share of $0.40, both record results.
Revenue grew this quarter by 27.3 per cent over the first quarter of 2007
to $599.3 million. This increase was driven by improved yield, increased load
factors and additional capacity. Our RASM for the first quarter of 2008 was
14.74 cents, up 8.0 per cent when compared to the same period in 2007, which
was particularly impressive given the 17.9 per cent capacity increase in the
quarter.
Our capacity increase in the first quarter of 2008 was matched with a
corresponding increase in demand for our service. This was demonstrated by a
load factor of 81.9 per cent, up 0.8 points from 81.1 per cent in the same
quarter of 2007. Similarly, yield improved this quarter by 6.9 per cent to
17.99 cents from 16.83 cents in the first quarter of 2007. This increase in
demand was due to our successful seasonal deployment strategy and the
continued commercialization of our domestic and transborder schedule.
To see the Quarterly Load Factor chart, click here:
http://media3.marketwire.com/docs/429wja_quarterlyloadfactor.pdf.
The first quarter of 2008 was the first full season for our new
transborder and international routes into Montego Bay, Puerto Plata, Punta
Cana, St. Lucia, Mazatlan, Cabo San Lucas and Kona. Our ability to optimize
load factor and yield through diligent network management during peak demand
periods has directly contributed to our operating margin performance during
the period ended March 31, 2008.
During the first quarter of 2008, we announced two additional routes to
New York City (via Newark) and Quebec City. Service to these destinations will
commence in the second quarter of 2008. As well, we received permission to fly
to Barbados during the first quarter; however, there is no confirmed service
commencement date for this destination.
With fuel prices reaching record highs during the first quarter of 2008,
cost control remains a key priority for us. For the first quarter of 2008,
CASM increased by 6.9 per cent to 12.71 cents from 11.89 cents in the same
quarter of 2007 due almost entirely to increased fuel costs. However, we
continue to drive down our CASM, excluding fuel and employee profit share, as
demonstrated by a decrease of 2.9 per cent from the first quarter of 2007 to
8.26 cents. This decrease is attributed to a longer average stage length,
increased aircraft utilization, dilution of costs over a greater number of
available seat miles and a strong Canadian dollar.
We continued to maintain a strong financial position in the first quarter
of 2008. Our cash and cash equivalents balance grew by 20.0 per cent to
$784.4 million as at March 31, 2008. Our current ratio improved to 1.25,
compared to 1.22 as at December 31, 2007, and our adjusted debt-to-equity
ratio was reduced to 1.99 from 2.07 as at December 31, 2007. Our healthy
balance sheet will assist us to weather potential downturns in the airline
industry.
During the quarter, we assumed delivery of two 737-700s and one 737-800,
increasing our total fleet to 73 aircraft. WestJet's fleet remains one of the
youngest operated by any large North American commercial airline at an average
age of 3.4 years.
<<
SELECTED QUARTERLY UNAUDITED FINANCIAL INFORMATION
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Three Months Ended
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($ in thousands, except Mar. 31 Dec. 31 Sept. 30 Jun. 30
per share data) 2008 2007 2007 2007
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Total revenues $ 599,348 $ 552,004 $ 606,242 $ 498,200
Net earnings $ 52,506 $ 75,360 $ 76,070 $ 11,549
Basic earnings per share $ 0.40 $ 0.58 $ 0.59 $ 0.09
Diluted earnings per share $ 0.40 $ 0.57 $ 0.58 $ 0.09
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Three Months Ended
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Mar. 31 Dec. 31 Sept. 30 Jun. 30
2007 2006 2006 2006
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Total revenues $ 470,710 $ 446,720 $ 497,339 $ 419,709
Net earnings $ 29,855 $ 26,651 $ 52,810 $ 22,355
Basic earnings per share $ 0.23 $ 0.21 $ 0.41 $ 0.17
Diluted earnings per share $ 0.23 $ 0.21 $ 0.41 $ 0.17
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>>
Our business is seasonal in nature with varying levels of activity
throughout the year. We experience increased domestic travel in the summer
months (second and third quarters) and more demand for sun destinations over
the winter period (fourth and first quarters). With the introduction of
transborder and international destinations, we have been able to alleviate
some of the effects of seasonality on our net earnings.
In the quarter ended December 31, 2007, our reported net earnings of
$75.4 million were positively impacted by a non-cash adjustment in the amount
of $33.7 million, or 25 cents per share, to future income tax expense as a
result of the enactment of income tax rate reductions.
In the quarter ended June 30, 2007, our reported net earnings of
$11.5 million were negatively impacted by a non-cash write-down of
$31.9 million ($22.2 million after tax or 17 cents per share) for the
capitalized costs associated with WestJet's aiRES reservation system project.
<<
RESULTS OF OPERATIONS
Revenue
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Three Months Ended
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Mar. 31 Mar. 31 Change
($ in thousands) 2008 2007
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Guest revenues 525,700 390,732 34.5%
Charter and other revenues 73,648 79,978 (7.9%)
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599,348 470,710 27.3%
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RASM (cents) 14.74 13.65 8.0%
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>>
The first quarter of 2008 saw total revenues, which include guest
revenues, charter, ancillary and WestJet Vacations non-air revenue, increase
by 27.3 per cent as compared to the same quarter in 2007, from $470.7 million
to $599.3 million. This increase was driven by increased load factor and
yield. Our first quarter RASM increased by 8.0 per cent to 14.74 cents, from
13.65 cents in the same quarter of 2007. In the quarter, capacity grew by 17.9
per cent over the first quarter of 2007.
Guest revenues from our scheduled flight operations increased in the
first quarter by 34.5 per cent as compared to the same quarter in 2007, from
$390.7 million to $525.7 million. We saw strong demand for our service in both
the domestic and transborder markets. We continued our effective seasonal
deployment strategy, allocating almost 40 per cent of our capacity to
higher-demand transborder and international routes during the Canadian winter
months without sacrificing our strong domestic schedule. Approximately 50 per
cent of our 17.9 per cent increase in capacity in the first quarter of 2008
was allocated to charter and scheduled transborder and international routes.
This allowed us to better match domestic capacity to demand while growing
total capacity. In addition, our first quarter results benefited from the fact
that the Easter holiday in 2008 fell in the month of March versus April in
2007 and there was an additional day in February 2008 versus 2007 due to the
leap year.
Our charter and other revenues decreased by 7.9 per cent to $73.6 million
in the first quarter of 2008 from $80.0 million in the same quarter of 2007.
This decrease was mainly due to a reduction of flying for third party carriers
in favour of our own scheduled flights to sun destinations. As a result,
available seat miles related to charter flights decreased by 26.3 per cent in
the first quarter of 2008 compared to the same quarter of 2007. This was
partially offset by an increase in WestJet Vacations non-air revenue.
To see the Charter and Scheduled Transborder and International as a
Percentage of Total ASMs chart, click here:
http://media3.marketwire.com/docs/429wja_charter.pdf.
Other revenue sources in this section are from ancillary and
miscellaneous sources including service fees, onboard sales, partner and
program revenue and ad-hoc revenue. On a total basis, ancillary revenue and
fees increased to $23.6 million in the first quarter of 2008 from
$21.9 million for the same period of 2007. Compared to the first quarter of
2007, ancillary revenue declined $0.64 per guest to $7.16. The majority of the
decline can be attributed to lower revenue from partner programs and foreign
exchange adjustments.
<<
Expenses
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Three Months Ended
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Mar. 31 Mar. 31 Change
CASM (cents) 2008 2007
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Aircraft fuel 4.13 3.20 29.1%
Airport operations 2.06 2.17 (5.1%)
Flight operations and
navigational charges 1.66 1.81 (8.3%)
Marketing, general and
administration 1.17 1.12 4.5%
Sales and distribution 0.99 0.88 12.5%
Depreciation and amortization 0.81 0.90 (10.0%)
Inflight 0.62 0.56 10.7%
Maintenance 0.48 0.53 (9.4%)
Aircraft leasing 0.47 0.54 (13.0%)
Employee profit share 0.32 0.18 77.8%
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12.71 11.89 6.9%
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CASM, excluding fuel and employee
profit share 8.26 8.51 (2.9%)
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>>
The first quarter of 2008 saw significant cost pressure related primarily
to substantial increases in jet fuel prices. Our low-cost focus and high
efficiency operational model are critical in helping us mitigate the impact of
fuel price increases. CASM, excluding fuel and employee profit share, dropped
by 2.9 per cent for the first three months of 2008 as compared to the same
period in 2007.
One of the key drivers in improving our CASM, excluding fuel and employee
profit share, in the first quarter of 2008 was a longer average stage length,
which increased by 6.9 per cent to 917 miles from 858 miles in the same period
of 2007. Average stage length, defined as the average distance of a flight
between take-off and landing, has a significant impact on our unit costs. As
average stage length increases, cost efficiencies are gained, and we achieve a
lower cost per mile because our fixed costs of operations are allocated over
an increasing number of miles flown. Likewise, longer-haul routes typically
achieve higher fuel economy, as we are able to absorb the higher costs of fuel
for take-offs and landings over a longer trip length.
We continued to optimize our fleet in the first quarter of 2008 to
increase productivity of our airline. We increased our aircraft utilization by
24 minutes in the first three months of 2008 to 12.4 operating hours per day
from 12.0 operating hours per day in the same period of 2007. Due to the
increased utilization of our aircraft, cost efficiencies were gained.
Capacity, measured in available seat miles, increased this quarter to
4.1 billion ASMs compared to 3.4 billion in the same period of 2007. The
dilution of costs over a greater number of available seat miles, as well as
the strengthening Canadian dollar, drove down our CASM, excluding fuel and
employee profit share, in the first quarter of 2008 compared to the same
period in 2007.
Aircraft fuel
Fuel remains the most significant cost to WestJet, representing
approximately 32 per cent of total operating expenses, up from 27 per cent in
the first quarter of 2007. During the month of March 2008, jet fuel prices
reached US $146 per barrel. The average market price for jet fuel during the
first quarter of 2008 was US $119.85 per barrel compared to US $74.89 per
barrel in the same quarter of 2007, an increase of 60.0 per cent, as depicted
in the graph below. The dramatic increase in fuel prices raised our fuel cost
per ASM to 4.13 cents from 3.20 cents, or 29.1 per cent when compared to the
same period of 2007. On a per litre basis, WestJet fuel costs increased by
29.6 per cent, to 82.96 cents per litre in the first quarter of 2008 from
64.02 cents per litre in the same period of 2007. The increase in our fuel
costs per litre was offset by approximately 35 per cent due to the strong
Canadian dollar relative to the first quarter of 2007.
To mitigate our exposure to fluctuations in jet fuel prices, we
periodically use short-term financial and physical derivatives and account for
these derivatives as cash flow hedges and as normal purchase and sale
agreements. As at, and for the period ended March 31, 2008, we had no
outstanding fuel hedges.
To see the Average Market Price of Jet Fuel chart, click here:
http://media3.marketwire.com/docs/429wja_jetfuel.pdf.
Airport operations
Airport operations expense consists primarily of airport landing and
terminal fees and ground handling costs for our scheduled service and charter
operations. These expenditures typically fluctuate depending on the
destinations, aircraft weights, inclement weather conditions and number of
guests. Transborder flights are more expensive than domestic flights due to
increased charges from domestic airports for higher terminal and pre-clearance
fees from inbound transborder flights. Also included in airport operations are
costs relating to flight cancellations and accommodations for displaced guests
for situations beyond our control, such as inclement weather conditions.
Because the majority of expenses are levied on a per flight basis, the cost
per departure is also a relevant performance driver for airport operations.
For the three months ended March 31, 2008, our cost per available seat
mile for airport operations decreased by 5.1 per cent to 2.06 cents from 2.17
cents in the same quarter of 2007. The decrease was mainly due to the
increased average stage length of 6.9 per cent and our average airports rates
and fees decreasing on a per departure basis, partially offset by an increase
in our average ground handling rates and fees. This increase was caused by the
higher percentage of transborder and international departures this quarter as
a result of the strong demand for our sun destinations. In addition, due to
annual merit increases, our employee expenses are higher on a per departure
basis in the first quarter of 2008 compared to the first quarter of 2007.
Flight operations and navigational charges
Our flight operations and navigational charge per ASM was 1.66 cents for
the first quarter of 2008, a decrease of 8.3 per cent, from 1.81 cents in the
same period of 2007. This was due mainly to lower NAV CANADA fees and pilot
stock-based compensation, as well as the dilutive impact of our increased
capacity.
Flight operations expenses consist primarily of pilot compensation,
including salaries, training and stock-based compensation, as well as salaries
and benefits for operations control centre staff. Pursuant to the 2006 pilot
agreement, pilots may elect to receive a certain amount of cash in lieu of a
selected portion of their stock options. In the first quarter of 2008,
stock-based compensation expense relating to pilots' stock options decreased
by 31.4 per cent, from $5.1 million in the first quarter of 2007 to $3.5
million in the first quarter of 2008 as more pilots elected to receive cash in
lieu of stock options. This decrease was partially offset by an increase in
salary costs due to this cash payout in the first quarter of 2008 compared to
the same period in 2007.
Domestic air navigational charges relating to air traffic control are
administered by NAV CANADA on a per-flight basis. These fees are predominantly
driven by the size of aircraft and distance flown. Navigational charges for
the first quarter of 2008 have decreased on a cost per ASM basis by 10.0 per
cent to 0.71 cents from 0.79 cents in the same period of 2007. Contributing to
the decrease in NAV fees was the increase in transborder and international
traffic in the first quarter of 2008. Transborder and international departures
comprised 21.1 per cent of total departures in the first three months of 2008
compared to 18.6 per cent in the same period of 2007, an increase of 2.5
points. As we fly to more destinations outside Canadian air space, our NAV
CANADA charges decrease.
Sales and distribution
Sales and distribution encompasses a wide variety of expenses, including
travel agency commissions, corporate incentive programs, credit card fees,
global distribution system and WestJet Vacations costs.
Cost per available seat mile for sales and distribution increased from
0.88 cents in the first quarter of 2007 to 0.99 cents in the first three
months of 2008. This change was driven primarily by increased employee
expenses, higher credit card fees as a result of higher sales and higher
commissions resulting from increased WestJet Vacations non-air sales in the
first quarter of 2008.
Inflight
Our inflight expense consists mainly of flight attendant salaries,
benefits, travel costs and training. During the first quarter of 2008, our
inflight cost per ASM increased by 10.7 per cent to 0.62 cents compared to the
cost per ASM of 0.56 cents in the same period in the prior year. This variance
was mainly due to an increase in salary expenses related to a five per cent
band shift in salaries as compared to the prior period of 2007. Additionally,
we incurred higher hotel costs relating to additional transborder and
international routes, which is in line with our seasonal deployment strategy.
Maintenance
Our unit maintenance costs decreased 9.4 per cent to 0.48 cents per ASM
in the first three months of 2008, from 0.53 cents per ASM in the same period
of 2007 due to the strengthening Canadian dollar and the dilutive effect of
our increased capacity of 17.9 per cent.
These decreases were partially offset by an increase in the number of
aircraft that came off warranty in the first quarter of 2008 as compared to
the same period in 2007. At March 31, 2008, 28 out of 73 aircraft or 38.4 per
cent were off warranty compared to 17 out of 65 aircraft or 26.2 per cent at
March 31, 2007. We anticipate our unit maintenance costs will increase as more
aircraft come off warranty.
Aircraft leasing
During the first quarter of 2008, we assumed delivery of one new leased
737-800 aircraft to our registered fleet. This brings our total leased
aircraft to 22 as at March 31, 2008, which represents 30.1 per cent of our
total fleet. At the end of the first quarter of 2007, we leased a total of 20
aircraft, representing 30.8 per cent of our total fleet.
On a CASM basis, aircraft leasing costs decreased 13.0 per cent in the
first quarter of 2008 compared to the same period in 2007. This change relates
primarily to the dilution of these costs over a greater number of available
seat miles, as well as the favourable Canadian dollar relative to the US
dollar. This decrease was partially offset by incremental lease costs on the
new leased 737-800 aircraft delivered during the period ended March 31, 2008.
Compensation
Our compensation philosophy is designed to align corporate and personal
success. We have designed a compensation plan whereby a portion of our
expenses are variable and are tied to our financial results. Our compensation
strategy encourages employees to become owners in WestJet, which inherently
creates a personal vested interest for our employees in our accomplishments.
Salaries and benefits
Salaries and benefits are determined via a framework of job levels based
on internal experience and external market data. For the quarter ended
March 31, 2008, salaries and benefits increased by 21.7 per cent to
$87.6 million from $72.0 million in the same period of 2007. The increase is
due to market and merit increases in base salaries and benefits, as well as
the greater number of WestJetters employed versus a year ago, which is
directly tied to our capacity growth. Salaries and benefits expense for each
department is included in the respective department's operating expense line
item.
Employee profit share
All employees are eligible to participate in the employee profit sharing
plan. The profit share system is a variable cost that is reduced and adjusted
in less profitable times. Conversely, in good years, profit share will
generously reward employees. Our profit share expense for the period ended
March 31, 2008 was $13.1 million, a 111.3 per cent increase from $6.2 million
for the same quarter of 2007. This variance is directly attributable to the
increased earnings eligible for profit share generated in the first quarter of
2008.
Employee share purchase plan
Our employee share purchase plan (ESPP) allows employees to participate
in WestJet's success. WestJetters may contribute up to 20 per cent of their
base salaries in the ESPP, and during the first quarter of 2008, contributed
an average of 14 per cent. We match contributions for every dollar contributed
by employees. Our matching expense for the period ended March 31, 2008 was
$9.9 million, a 28.6 per cent increase from $7.7 million for the same quarter
of 2007. Of our eligible employees, 84 per cent participated in the ESPP
during the first quarter of 2008. The additional expense was driven by an
increase in employees in the first quarter of 2008 as compared to the same
period of 2007.
Stock options
Pilots, executives and certain non-executive employees participate in
stock option plans. The fair value of these options, as determined by the
Black-Scholes option pricing model, is expensed over the vesting period.
Stock-based compensation expense for the quarter ended March 31, 2008 includes
$3.5 million for pilots' options and $0.6 million for executives' and
non-executives' options as compared to $5.1 million for pilots' options and
$0.3 million for executives' and non-executives' options in the same period of
2007. The primary reason for the decrease in stock option expense relates to
pilots electing to receive a certain amount of cash in lieu of a selected
portion of their stock options, which is partially offset by an increase to
salary costs.
2008 Executive Share Unit Plan
During the three months ended March 31, 2008, the Board of Directors
approved the 2008 Executive Share Unit Plan whereby up to a maximum of 200,000
Restricted Share Units (RSU) and Performance Share Units (PSU) combined may be
issued to executive officers. The 2008 Executive Share Unit Plan is also
subject to shareholder approval, which is expected to occur at the Annual
General Meeting on April 29, 2008.
Each RSU entitles the executive to receive payment upon vesting in the
form of voting shares. We determine compensation expense for the 2008 RSUs
based on the market value of our voting shares on the date of grant.
Compensation expense is recognized in earnings on a straight-line basis over
the three year vesting period.
Each PSU entitles the executive to receive payment upon vesting in the
form of voting shares. The value of the PSUs is based on the fair market value
of our voting shares on the date of grant. PSUs time vest at the end of a
three-year term and incorporate performance criteria based upon achieving the
compounded average diluted earnings per share growth rate targets established
at the time of grant.
For the three months ended March 31, 2008, a total of $0.4 million of
compensation expense is included in marketing, general and administration
expense related to the 2008 Executive Share Unit Plan.
Foreign exchange
The foreign exchange gains and losses that we realize are largely
attributable to the effect of the changes in the value of the Canadian dollar,
relative to the US dollar, on our US denominated net monetary assets over the
respective periods. These assets, totalling approximately US $73.2 million at
March 31, 2008 (December 31, 2007 - $103.4 million), consist of US dollar cash
and cash equivalents and security deposits on various leased and financed
aircraft. We hold US denominated cash and short-term investments to reduce the
foreign currency risk inherent in our US dollar expenditures. We reported a
foreign exchange gain of $3.9 million in the first quarter of 2008 compared to
a loss of $0.3 million for the same period in 2007 on the revaluation of our
US dollar net monetary assets.
Income taxes
The effective consolidated income tax rate for the three months ended
March 31, 2008 was 29.2 per cent, as compared to 35.6 per cent for the same
period in 2007. The variance from 2007 is driven by corporate income tax rate
reductions enacted by the federal government in June and December 2007 and a
reduced British Columbia corporate income tax rate enacted in the first
quarter of 2008.
Guest experience
Our airline is focused on meeting the needs of our guests while
maintaining the highest of safety standards. We are committed to delivering a
positive guest experience during every aspect of our service, from the time
the flight is booked to completion of the flight.
<<
Key Performance Indicators
-------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------------------
Mar. 31 Mar. 31 Change
2008 2007
-------------------------------------------------------------------------
On-time performance 69.0% 75.3% (6.3 pts)
Completion rate 98.1% 98.4% (0.3 pts)
Bag ratio 5.15 5.33 (3.4%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Key performance indicators are calculated based on the U.S. Department of
Transportation's standards of measurement for the U.S. airline industry.
On-time performance is a key factor in measuring our guest experience.
During the first three months of 2008, we encountered more severe winter
weather which contributed to the decline of our on-time performance when
compared to the same period of 2007. In the first quarter of 2008, 69.0 per
cent of all our flights arrived within 15 minutes of their scheduled time,
compared to 75.3 per cent for the same quarter in 2007.
During the first quarter of 2008, we remained committed to improving our
on-time performance and continued with several initiatives to do so, such as
mobile check-in, flow-through check-in, transborder and international web
check-in and electronic boarding passes. In order to continually enhance our
guest experience, we commenced testing of our self-tag baggage pilot project
at our Vancouver base on April 9, 2008. This initiative will offer guests a
complete self-serve check-in product. Upon successful completion of the trial,
self-serve baggage tagging will be expanded to additional Canadian airports.
Our completion rate remained relatively flat quarter over quarter at
98.1 per cent in the first quarter of 2008 versus 98.4 per cent in the same
period of 2007. This rate represents the percentage of flights completed from
what was originally scheduled.
Our first quarter bag ratio for 2008 was 5.15 and represents the number
of delayed or lost baggage claims made per 1,000 guests. This was an
improvement of 3.4 per cent over the same quarter of 2007.
On April 3, 2008, we announced a mutual decision between BMO Bank of
Montreal and WestJet to end our BMO Mosaik MasterCard partnership as of
July 31, 2008. Although both our guests and WestJet benefited initially from
this relationship, we believe we can exploit greater opportunities to leverage
our brand in the future.
LIQUIDITY AND CAPITAL RESOURCES
WestJet has continued to maintain a strong financial position as at
March 31, 2008. Our healthy balance sheet positions us favourably to weather
potential economic downturns in the industry and combat unpredictable external
pressures. Our balance sheet has remained one of the strongest balance sheets
in the airline industry.
Our cash position continues to grow, as total cash and cash equivalents
were $784.4 million at March 31, 2008 compared to $653.6 million at
December 31, 2007. Part of this cash balance relates to cash collected with
respect to advance ticket sales for which the balance at March 31, 2008 was
$241.0 million. An increase to our working capital ratio to 1.25 from 1.22 as
at December 31, 2007 further demonstrates our strong financial position and
liquidity. As at, and for the three months ended March 31, 2008, WestJet did
not have any investments in asset-backed commercial paper.
We monitor capital on a number of measures, such as adjusted
debt-to-equity and adjusted net debt to EBITDAR. Our adjusted debt-to-equity
ratio at March 31, 2008 was 1.99 to 1.0, including $568.6 million in
off-balance sheet aircraft operating leases. This compared favourably to our
adjusted debt-to-equity ratio at December 31, 2007 of 2.07 to 1. Our adjusted
net debt to EBITDAR ratio was 2.22 as at March 31, 2008 as compared to 2.51 as
at December 31, 2007. Both of these ratios met our targets for March 31, 2008
and December 31, 2007 of an adjusted debt-to-equity measure of no more than
3.00 and an adjusted net debt to EBITDAR ratio of no more than 3.00. As at
March 31, 2008, our adjusted debt-to-equity ratio improved by 3.9 per cent,
attributable to the increase in net earnings more than offsetting the addition
of new aircraft financing during the quarter. As at March 31, 2008, our
adjusted net debt to EBITDAR ratio improved by 11.6 per cent as a result of
increased EBITDAR and cash and cash equivalents. These ratios demonstrate our
strong balance sheet position to execute our business plan.
To see the Adjusted Net Debt to EBITDAR chart, click here:
http://media3.marketwire.com/docs/429wja_EBITDAR.pdf.
Operating cash flow
Due to our strong financial results, we have been able to generate
sufficient funds from operations to meet our working capital requirements. In
the first quarter of 2008, cash flow from operations increased by 31.3 per
cent to $189.8 million from $144.6 million for the same period in 2007 due to
growth in earnings from operations and improved working capital.
Financing cash flow
Our total cash flow from financing activities was $24.4 million,
consisting mainly of $67.9 million in long-term debt issued to finance two of
our newly purchased aircraft, partially offset by $41.4 million in long-term
debt repayments. In the previous year's quarter, cash flow used in financing
activities was $52.2 million, comprised largely of a cash outflow of
$43.1 million in long-term debt repayments primarily related to our aircraft.
In addition to having strong cash liquidity, we have been successful in
financing our growth through aircraft acquisitions financed by low-interest
rate debt supported by the Export-Import Bank of the United States (Ex-Im
Bank). As at March 31, 2008, we have a final commitment of up to US
$40.0 million from Ex-Im Bank for one aircraft to be delivered in July 2008.
These loan guarantees from the US government represent approximately
85 per cent of the purchase price of these aircraft. This financing activity
brings the cumulative number of aircraft financed with loan guarantees to 51,
with an outstanding debt balance of $1.4 billion associated with those
aircraft. All of this debt has been financed in Canadian dollars at fixed
interest rates, thus eliminating all future foreign exchange and interest rate
exposure on these US dollar aircraft purchases.
To facilitate the financing of our Ex-Im Bank supported aircraft, we
utilize five special-purpose entities. We have no equity ownership in the
special-purpose entities; however, we are the beneficiary of the
special-purpose entities' operations. The accounts of the special-purpose
entities have been consolidated in the financial statements.
Investing cash flow
Cash used in investing activities for the first quarter of 2008 totalled
$85.2 million compared to $0.9 million in the same quarter of 2007. In the
first three months of 2008, our investing activities included the addition of
two new owned 737-700 aircraft totalling $71.3 million, as well as
$13.9 million in expenditures relating to the construction of our new office
space, the Calgary "Campus". In the first quarter of 2007, we paid an
additional $10.4 million on deposits towards owned aircraft deliveries. This
outflow was partially offset by $13.8 million in proceeds received on the sale
of two engines.
Capital resources
In the quarter ended March 31, 2008, we took delivery of two additional
purchased aircraft and one leased aircraft for a total committed fleet of 116
by 2013. At March 31, 2008, we had existing commitments to take delivery of an
additional 43 aircraft as summarized below:
<<
At March 31, 2008
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Series
-------------------------------------------------------------------------
600s 700s
-------------------------------------------------------------------------
Leased Owned Total Leased Owned Total
-------------------------------------------------------------------------
Fleet at December 31,
2007 - 13 13 16 35 51
-------------------------------------------------------------------------
Fleet at March 31, 2008 - 13 13 16 37 53
Commitments:
2008 - - - 2 1 3
2009 - - - 7 - 7
2010 - - - 4 - 4
2011 - - - 4 - 4
2012 - - - - 14(1) 14
2013 - - - - 6(1) 6
-------------------------------------------------------------------------
Total Commitments - - - 17 21 38
-------------------------------------------------------------------------
Committed fleet as of 2013 - 13 13 33 58 91
-------------------------------------------------------------------------
-------------------------------------------------------------------------
800s Total Fleet
-------------------------------------------------------------------------
Leased Owned Total Leased Owned Total
-------------------------------------------------------------------------
Fleet at December 31, 2007 5 1 6 21 49 70
-------------------------------------------------------------------------
Fleet at March 31, 2008 6 1 7 22 51 73
Commitments:
2008 1 - 1 3 1 4
2009 3 - 3 10 - 10
2010 1 - 1 5 - 5
2011 - - - 4 - 4
2012 - - - - 14 14
2013 - - - - 6 6
-------------------------------------------------------------------------
Total Commitments 5 - 5 22 21 43
-------------------------------------------------------------------------
Committed fleet as of 2013 11 1 12 44 72 116
-------------------------------------------------------------------------
(1) We have an option to convert any of these future aircraft to
737-800s.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
On February 29, 2008, we signed a Letter of Intent to lease an additional
737-800 aircraft scheduled for delivery in 2011. This has not been reflected
as a commitment in the table above as the lease has not yet been signed. As at
March 31, 2008, our total purchased aircraft commitment, including amounts to
be paid for live satellite television systems on purchased and leased
aircraft, was $923.9 million, or US $902.7 million. Additionally, our
commitment relating to aircraft operating leases was $1,430.3 million, or
US $1,397.4 million as at March 31, 2008.
The construction of the Calgary Campus, our new office space adjacent to
the Calgary hangar, was well under way in the first quarter of 2008. The
Campus is expected to cost approximately $100 million and will be financed
through operating cash flow. During the first quarter of 2008, we incurred a
total of $13.9 million relating to the Campus for a total spend of
$25.8 million as at March 31, 2008. Expected completion of our new office
space is late 2008 with occupancy projected for early 2009.
Contractual obligations, off-balance sheet arrangements and commitments
We currently have 22 aircraft under operating leases. We have entered
into agreements with independent third parties to lease 17 additional 737-700
aircraft and five 737-800 aircraft over eight-and 10-year terms in US dollars,
to be delivered throughout 2008 to 2011. Although the current obligations
related to our aircraft operating lease agreements are not recognized on our
balance sheet, we include these commitments in assessing our leverage through
our adjusted debt-to-equity and net debt to EBITDAR ratios.
Contingencies
We are party to certain legal proceedings and claims that arise during
the ordinary course of business. It is the opinion of management that the
ultimate outcome of these matters will not have a material effect upon our
financial position, results of operations or cash flows.
On January 10, 2008, the Canadian Transportation Agency rendered Decision
No. 6-AT-A-2008 under the Canada Transportation Act, S.C., 1996, c. 10, as
amended, as a result of an application pursuant to subsection 172(1) of the
Act. The decision against WestJet, and other Canadian air carriers and parties
concerns the fares to be paid by persons with disabilities who require
additional seating to accommodate their disabilities when travelling
domestically by air. We are appealing the decision and it is not possible at
the present time to predict with any degree of certainty the outcome of the
appeal of the decision or the final effects thereof.
Normal course issuer bid
On March 13, 2008, we filed a notice with the Toronto Stock Exchange
(TSX) to make a normal course issuer bid to purchase outstanding shares on the
open market. As approved by the TSX, we are authorized to purchase up to
2,500,000 shares (representing approximately 1.9 per cent of our issued and
outstanding shares at the time of the bid) during the period of March 17, 2008
to March 16, 2009, or until such earlier time as the bid is completed or
terminated at our option. Any shares we purchase under this bid will be
purchased on the open market through the facilities of the TSX at the
prevailing market price at the time of the transaction. Shares acquired under
this bid will be cancelled. As at March 31, 2008, we had not purchased any
shares pursuant to this bid.
Share capital
As at April 25, 2008, the number of common voting shares and variable
voting shares amounted to 125,627,224 and 4,143,155 respectively.
Related party transactions
We have debt financing and investments in short-term deposits with a
financial institution which is related through two common directors, one of
which is also the president of the financial institution. As at
March 31, 2008, total long-term debt includes an amount of $22.6 million
(December 31, 2007 - $23.3 million) due to the financial institution. Included
in cash and cash equivalents as at March 31, 2008 are short-term investments
of $197.8 million (December 31, 2007 - $189.4 million) owing from the
financial institution. These transactions occurred in the normal course of
operations with terms consistent with those offered to arm's length parties
and are measured at the exchange amount.
ACCOUNTING
Changes in accounting policies
Effective January 1, 2008, we adopted CICA Section 3031, Inventories,
which replaces Section 3030, Inventories, and harmonizes the Canadian
standards related to inventories with International Financial Reporting
Standards (IFRS). This section provides more extensive guidance on the
determination of cost, narrows the permitted cost formulas, requires
impairment testing and expands the disclosure requirements to increase
transparency. There was no impact on our financial results from the adoption
of Section 3031.
Effective January 1, 2008, we adopted CICA Section 1535, Capital
Disclosures, which establishes guidelines for the disclosure of information on
an entity's capital and how it is managed. This enhanced disclosure enables
users to evaluate the entity's objectives, policies and processes for managing
capital. This new requirement is for disclosure purposes only and upon
adoption did not impact our financial results for the three months ended
March 31, 2008. See note 3 to the consolidated financial statements for
further disclosure.
Effective January 1, 2008, we adopted CICA Section 3862, Financial
Instruments - Disclosure, and Section 3863, Financial Instruments -
Presentation, which replace the existing Section 3861, Financial Instruments -
Disclosure and Presentation. Section 3862 requires enhanced disclosure on the
nature and extent of financial instrument risks and how an entity manages
those risks. Section 3863 carries forward the existing presentation
requirements and provides additional guidance for the classification of
financial instruments. This new requirement is for disclosure purposes only
and upon adoption did not impact our financial results for the three months
ended March 31, 2008. See note 10 to the consolidated financial statements for
further disclosure.
Future accounting policy changes
In January 2006, the Canadian Accounting Standards Board (AcSB) announced
its decision to replace Canadian GAAP with IFRS for all Canadian Publicly
Accountable Enterprises (PAE). On February 13, 2008 the AcSB confirmed
January 1, 2011 as the official changeover date for PAEs to commence reporting
under IFRS. Although IFRS is principles-based and uses a conceptual framework
similar to Canadian GAAP, there are significant differences and choices in
accounting policies, as well as increased disclosure requirements under IFRS.
We are currently in the process of assessing the impact of IFRS on our
financial statements.
CONTROLS AND PROCEDURES
Management is responsible for the establishment and maintenance of a
system of disclosure controls and procedures. The Chief Executive Officer
(CEO) and the Chief Financial Officer (CFO) have evaluated the effectiveness
of our disclosure controls and procedures (DC&P) as of March 31, 2008, as
defined under the rules of the Canadian Securities Administrators (CSA), and
have concluded that our disclosure controls and procedures are effective.
Management is also responsible for the establishment and maintenance of a
system of internal controls over financial reporting (ICFR). Management has
designed internal controls over financial reporting effectively to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of financial statements in accordance with Canadian GAAP.
There were no changes in our internal controls over financial reporting during
the most recent interim period that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
Changes in CSA requirements over certification of disclosure
On April 18, 2008, the CSA released a revised proposal to repeal and
replace Multilateral Instrument 52-109 with a revised version of National
Instrument 52-109.
Based on this new proposal, there is a requirement to evaluate the
operating effectiveness of ICFR in addition to design effectiveness.
Furthermore, the CEO and CFO will have a requirement to certify over the
design and operating effectiveness of DC&P and ICFR for the year ended
December 31, 2008. We expect the proposal to be finalized by the CSA and
become effective in the third quarter of 2008 and have therefore incorporated
the revisions into the current annual certification process.
OUTLOOK
The continued strong financial results in the first quarter of 2008
represent our people's dedication and loyalty to our airline. With an
unrivalled spirit and commitment to guest experience, the commitment of each
and every WestJetter has contributed to our financial success. Each passing
quarter provides more evidence that our business model and strategies are
proven and working well. Our brand, driven by our WestJetters' service
delivery, is enviable. We will continue to focus on enabling our people to
help execute these strategies.
Unprecedented fuel prices will continue to impact margins during 2008. As
such, our low-cost strategy has never been more critical to our financial
growth. Our continued focus will be on reducing CASM and executing our proven
seasonal deployment strategy. In addition to fuel price increases, there
remains some uncertainty regarding the overall economic outlook for Canada and
the impact this may have on air travel demand. Our strong balance sheet
positions us well to weather economic uncertainties and potential downturns in
2008.
In the second quarter of 2008, we will take delivery of two more
aircraft, bringing our total fleet to 75. Our capacity is expected to increase
by 20 per cent in the second quarter versus the same period in 2007. In
addition, the second quarter is a period where we transition a large part of
our transborder capacity back into Canada. As a result, we expect our RASM to
be comparable to the second quarter of 2007. Based on jet fuel pricing at the
end of April 2008, we expect our fuel cost per litre to be approximately
$1.01, which represents an increase of approximately 45 per cent from the same
quarter of 2007.
For 2008, we estimate the sensitivity to changes in crude oil and fuel
pricing to be approximately $5 million annually to our fuel costs for every US
dollar change per barrel of crude oil and $8 million for every one-cent change
per litre of fuel. We also estimate that every one-cent change in the value of
the Canadian dollar versus the US dollar will have an approximate $8 million
impact on our annual costs (approximately $6 million for fuel and $2 million
for remaining costs).
NON-GAAP MEASURES
To supplement our consolidated financial statements presented in
accordance with Canadian GAAP, we use various non-GAAP performance measures.
These measures are provided to enhance the user's overall understanding of our
current financial performance and are included to provide investors and
management with an alternative method for assessing our operating results in a
manner that is focused on the performance of our ongoing operations and to
provide a more consistent basis for comparison between quarters. These
measures are not in accordance with or an alternative for GAAP and may be
different from measures used by other entities.
The following non-GAAP measures are used to monitor our financial
performance:
Adjusted debt: Long-term debt and obligations under capital lease
adjusted to include off-balance sheet aircraft operating leases. Our practice,
consistent with common industry practice, is to multiply the trailing twelve
months of aircraft leasing expense by 7.5 to derive a present value debt
equivalent.
Adjusted equity: The sum of share capital, contributed surplus and
retained earnings, excluding accumulated other comprehensive loss.
Adjusted net debt: Adjusted total debt less cash and cash equivalents.
Earnings before tax margin: Earnings before income taxes divided by total
revenues.
EBITDAR: Earnings before interest, taxes, depreciation, aircraft leasing
and other items, such as asset write-downs and foreign exchange gains or
losses. EBITDAR is a non-GAAP measure commonly used in the airline industry to
evaluate results by excluding differences in the method in which an airline
finances its aircraft.
Operating margin: Earnings from operations divided by total revenues.
Operating revenues: The total of guest revenues and charter and other
revenues.
<<
Reconciliation of non-GAAP measures to GAAP
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mar. 31 Dec. 31 Change
($ in thousands, except ratio amounts) 2008 2007
-------------------------------------------------------------------------
Adjusted debt-to-equity:
Long-term debt (i) $1,456,038 $1,429,518 $26,520
Obligations under capital lease (ii) 1,391 1,483 (92)
Off-balance sheet aircraft leases (iii) 568,568 564,008 4,560
-------------------------------------------------------------------------
Adjusted debt $2,025,997 $1,995,009 $30,988
-------------------------------------------------------------------------
Total shareholders' equity 1,007,651 949,908 57,743
Add back accumulated other comprehensive
loss 11,200 11,914 (714)
-------------------------------------------------------------------------
Adjusted equity $1,018,851 $961,822 57,029
-------------------------------------------------------------------------
Adjusted debt-to-equity 1.99 2.07 (3.9%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net debt to EBITDAR: (iv)
Net earnings $215,484 $192,833 $22,651
Add back:
Net interest (v) 49,302 51,448 (2,146)
Taxes 49,130 43,925 5,205
Depreciation and amortization 129,050 127,223 1,827
Aircraft leasing 75,809 75,201 608
Other (vi) 40,372 44,631 (4,259)
-------------------------------------------------------------------------
EBITDAR $559,147 $535,261 $23,886
-------------------------------------------------------------------------
Adjusted debt (as per above) 2,025,997 1,995,009 30,988
Less: Cash and cash equivalents 784,352 653,558 130,794
-------------------------------------------------------------------------
Adjusted net debt $1,241,645 $1,341,451 ($99,806)
-------------------------------------------------------------------------
Adjusted net debt to EBITDAR 2.22 2.51 (11.6%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) At March 31, 2008, long-term debt includes the current portion of
long-term debt of $178,115 (December 31, 2007 - $172,992) and
long-term debt of $1,277,923 (December 31, 2007 - $1,256,526).
(ii) At March 31, 2008, obligations under capital lease includes the
current portion of obligations under capital lease of $380
(December 31, 2007 - $375) and obligations under capital lease of
$1,011 (December 31, 2007 - $1,108).
(iii) Off-balance-sheet aircraft leases is calculated by multiplying the
trailing twelve months of aircraft leasing expense by 7.5. At
March 31, 2008, the trailing twelve months of aircraft leasing
costs totalled $75,809 (December 31, 2007 - $75,201).
(iv) The trailing twelve months are used in the calculation of EBITDAR.
(v) For the twelve months ended March 31, 2008, net interest includes
interest income of $27,208 (December 31, 2007 - $24,301) and
interest expense of $76,510 (December 31, 2007 - $75,749).
(vi) For the twelve months ended March 31, 2008, other includes aiRES
write-down of $31,881 and foreign exchange loss of $8,491
(December 31, 2007 - aiRES write down of $31,881 and foreign
exchange loss of $12,750).
Consolidated Financial Statements and Notes
For the Three Months Ended March 31, 2008 and 2007
Consolidated Statement of Earnings
(Stated in thousands of Canadian dollars, except per share amounts)
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31, 2008 2007
-------------------------------------------------------------------------
Revenues:
Guest revenues $ 525,700 $ 390,732
Charter and other revenues 73,648 79,978
-------------------------------------------------------------------------
599,348 470,710
Expenses:
Aircraft fuel 167,717 110,211
Airport operations 83,928 74,722
Flight operations and navigational charges 67,575 62,569
Marketing, general and administration 47,406 38,548
Sales and distribution 40,278 30,505
Depreciation and amortization 32,849 31,022
Inflight 25,399 19,485
Maintenance 19,406 18,414
Aircraft leasing 19,083 18,475
Employee profit share 13,146 6,223
-------------------------------------------------------------------------
516,787 410,174
-------------------------------------------------------------------------
Earnings from operations 82,561 60,536
Non-operating income (expense):
Interest income 7,306 4,399
Interest expense (19,533) (18,772)
Gain (loss) on foreign exchange 3,937 (322)
Gain (loss) on disposal of property and
equipment (70) 503
-------------------------------------------------------------------------
(8,360) (14,192)
-------------------------------------------------------------------------
Earnings before income taxes 74,201 46,344
Income tax expense:
Current 991 441
Future 20,704 16,048
-------------------------------------------------------------------------
21,695 16,489
-------------------------------------------------------------------------
Net earnings $ 52,506 $ 29,855
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share:
Basic $ 0.40 $ 0.23
Diluted $ 0.40 $ 0.23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Balance Sheet
(Stated in thousands of Canadian dollars)
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 4) $ 784,352 $ 653,558
Accounts receivable 22,381 15,009
Prepaid expenses, deposits and other 39,405 39,019
Inventory 11,091 10,202
-------------------------------------------------------------------------
857,229 717,788
Property and equipment (note 5) 2,264,650 2,213,063
Other assets 57,946 53,371
-------------------------------------------------------------------------
$3,179,825 $2,984,222
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 210,572 $ 168,171
Advance ticket sales 241,024 194,929
Non-refundable guest credits 56,297 54,139
Current portion of long-term debt (note 6) 178,115 172,992
Current portion of obligations under capital
lease 380 375
-------------------------------------------------------------------------
686,388 590,606
Long-term debt (note 6) 1,277,923 1,256,526
Obligations under capital lease 1,011 1,108
Other liabilities 11,203 11,337
Future income tax 195,649 174,737
-------------------------------------------------------------------------
2,172,174 2,034,314
Shareholders' equity:
Share capital (note 7) 453,192 448,568
Contributed surplus 57,788 57,889
Accumulated other comprehensive loss (11,200) (11,914)
Retained earnings 507,871 455,365
-------------------------------------------------------------------------
1,007,651 949,908
Commitments and contingencies (note 9)
-------------------------------------------------------------------------
$3,179,825 $2,984,222
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statement of Shareholders' Equity
(Stated in thousands of Canadian dollars)
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31, 2008 2007
-------------------------------------------------------------------------
Share capital:
Balance, beginning of period $ 448,568 $ 431,248
Issuance of shares pursuant to stock option
plans (note 7) - 124
Stock-based compensation on stock options
exercised (note 7) 4,624 3,644
-------------------------------------------------------------------------
453,192 435,016
Contributed surplus:
Balance, beginning of period 57,889 58,656
Stock-based compensation expense (note 7) 4,523 5,450
Stock-based compensation on stock options
exercised (note 7) (4,624) (3,644)
-------------------------------------------------------------------------
57,788 60,462
Accumulated other comprehensive loss:
Balance, beginning of period (11,914) -
Change in accounting policy - (13,420)
Other comprehensive income 714 350
-------------------------------------------------------------------------
(11,200) (13,070)
Retained earnings:
Balance, beginning of period 455,365 316,123
Change in accounting policy - (36,612)
Net earnings 52,506 29,855
-------------------------------------------------------------------------
507,871 309,366
Total accumulated other comprehensive loss and
retained earnings 496,671 296,296
-------------------------------------------------------------------------
Total shareholders' equity $1,007,651 $ 791,774
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statement of Comprehensive Income
(Stated in thousands of Canadian dollars)
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31, 2008 2007
-------------------------------------------------------------------------
Net earnings $ 52,506 $ 29,855
Other comprehensive income, net of tax:
Amortization of hedge settlements to aircraft
leasing 350 350
Unrealized change in fair value on cash flow
hedges (net of tax of $208) 592 -
Reclassification of net realized gains on cash
flow hedges to net earnings (228) -
-------------------------------------------------------------------------
714 350
------------------------------------------------------------------------
Total comprehensive income $ 53,220 $ 30,205
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statement of Cash Flows
(Stated in thousands of Canadian dollars)
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31, 2008 2007
------------------------------------------------------------------------
Operating activities
Net earnings $ 52,506 $ 29,855
Items not involving cash:
Depreciation and amortization 32,849 31,022
Amortization of other liabilities (235) (217)
Amortization of hedge settlements 350 350
Loss (gain) on disposal of property,
equipment and aircraft parts 877 (420)
Stock-based compensation expense 4,521 5,450
Future income tax expense 20,704 16,048
Unrealized foreign exchange loss (gain) (4,301) 299
Change in non-cash working capital 82,530 62,241
-------------------------------------------------------------------------
189,801 144,628
-------------------------------------------------------------------------
Financing activities
Increase in long-term debt 67,948 -
Repayment of long-term debt (41,428) (43,058)
Decrease in obligations under capital lease (92) (88)
Increase in other assets (2,072) (9,131)
Issuance of common shares - 124
-------------------------------------------------------------------------
24,356 (52,153)
-------------------------------------------------------------------------
Investing activities
Aircraft additions (71,310) (12,105)
Aircraft disposals 2,131 -
Other property and equipment additions (16,137) (2,548)
Other property and equipment disposals 155 13,760
-------------------------------------------------------------------------
(85,161) (893)
-------------------------------------------------------------------------
Cash flow from operating, financing and
investing activities 128,996 91,582
Effect of exchange rate on cash and cash
equivalents 1,798 (55)
-------------------------------------------------------------------------
Net change in cash and cash equivalents 130,794 91,527
Cash and cash equivalents, beginning of period 653,558 377,517
------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 784,352 $ 469,044
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash interest paid $ 19,633 $ 19,336
Cash taxes received (paid) $ (768) $ 10,520
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Notes to Consolidated Financial Statements
For the three months ended March 31, 2008 and 2007
(Amounts are stated in thousands of dollars, except share and per share
data)
(Unaudited)
-------------------------------------------------------------------------
1. Basis of presentation
The interim consolidated financial statements of WestJet Airlines Ltd.
(WestJet or the Corporation) have been prepared by management in
accordance with Canadian generally accepted accounting principles (GAAP).
The interim consolidated financial statements have been prepared
following the same accounting policies and methods of computation as the
consolidated financial statements for the year ended December 31, 2007,
except as described below. The disclosures provided below are incremental
to those included with the annual consolidated financial statements. The
interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto in the
Corporation's Annual Report for the year ended December 31, 2007.
The Corporation's business is seasonal in nature with varying levels of
activity throughout the year. The Corporation experiences increased
domestic travel in the summer months and more demand for transborder and
sun destinations over the winter period.
Amounts presented in the Corporation's interim consolidated financial
statements and the notes thereto are in Canadian dollars unless otherwise
stated.
Certain prior-period balances have been reclassified to conform to
current period's presentation, including the reclassification of interest
income and interest expense as non-operating items and the
reclassification of the Corporation's employee profit share expense as
operating.
2. Recent accounting pronouncements
(a) Change in accounting policies
Effective January 1, 2008, the Corporation adopted the following new
accounting standards issued by the Canadian Institute of Chartered
Accountants (CICA):
(i) Inventory
CICA Section 3031, Inventories, replaces Section 3030, Inventories and
harmonizes the Canadian standards related to inventories with
International Financial Reporting Standards (IFRS). This section provides
more extensive guidance on the determination of cost, narrows the
permitted cost formulas, requires impairment testing and expands the
disclosure requirements to increase transparency. There was no impact on
the financial results of the Corporation from the adoption of Section
3031.
(ii) Capital disclosures
CICA Section 1535, Capital Disclosures, establishes guidelines for the
disclosure of information on an entity's capital and how it is managed.
This enhanced disclosure enables users to evaluate the entity's
objectives, policies and processes for managing capital. This new
requirement is for disclosure purposes only and upon adoption did not
impact the financial results of the Corporation. See note 3, capital
management, for further disclosure.
(iii) Financial instruments - disclosure and presentation
CICA Section 3862, Financial Instruments - Disclosure, and Section 3863,
Financial Instruments - Presentation replace the existing Section 3861
Financial Instruments - Disclosure and Presentation. Section 3862
requires enhanced disclosure on the nature and extent of financial
instrument risks and how an entity manages those risks. Section 3863
carries forward the existing presentation requirements and provides
additional guidance for the classification of financial instruments. This
new requirement is for disclosure purposes only and upon adoption did not
impact the financial results of the Corporation. See note 10, financial
instruments and risk management, for further disclosure.
(b) Future accounting policies
International Financial Reporting Standards
In January 2006, the Canadian Accounting Standards Board (AcSB) announced
its decision to replace Canadian GAAP with IFRS for all Canadian Publicly
Accountable Enterprises (PAE). On February 13, 2008, the AcSB confirmed
January 1, 2011 as the official changeover date for PAEs to commence
reporting under IFRS. Although IFRS is principles-based and uses a
conceptual framework similar to Canadian GAAP, there are significant
differences and choices in accounting policies, as well as increased
disclosure requirements under IFRS. The Corporation is currently in the
process of assessing the impact of IFRS on its financial statements.
3. Capital management
The Corporation's policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain future
development of the airline. The Corporation manages its capital structure
and makes adjustments to it in light of changes in economic conditions
and the risk characteristics of the underlying assets.
In order to maintain or adjust the capital structure, the Corporation may
from time to time purchase shares for cancellation pursuant to normal
course issuer bids to offset dilution caused by stock option exercises,
issue new shares, and to adjust current and projected debt levels.
In the management of capital, the Corporation includes shareholders'
equity (excluding accumulated other comprehensive loss), long-tem debt,
capital leases, cash and cash equivalents and the Corporation's off-
balance sheet obligations related to its aircraft operating leases.
The Corporation monitors capital on a number of bases, including:
adjusted debt-to-equity and adjusted net debt to Earnings Before
Interest, Taxes, Depreciation and Aircraft Rent (EBITDAR). EBITDAR is a
non-GAAP financial measure commonly used in the airline industry to
evaluate results by excluding differences in the method by which an
airline finances its aircraft. In addition, the Corporation will adjust
EBITDAR for one-time special items and for gains and losses on foreign
exchange. The Corporation adjusts debt to include its off-balance-sheet
aircraft operating leases. Common industry practice is to multiply the
trailing twelve months of aircraft leasing expense by 7.5 to derive a
present value debt equivalent. The Corporation defines adjusted net debt
as adjusted total debt less cash and cash equivalents. The Corporation
defines equity as the sum of share capital, contributed surplus and
retained earnings and excludes accumulated other comprehensive loss
(AOCL).
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, December 31,
2008 2007 Change
-------------------------------------------------------------------------
Adjusted debt-to-equity:
Long-term debt (i) $1,456,038 $1,429,518 $ 26,520
Obligations under capital lease (ii) 1,391 1,483 (92)
Off-balance-sheet aircraft leases
(iii) 568,568 564,008 4,560
-------------------------------------------------------------------------
Adjusted debt $2,025,997 $1,995,009 $ 30,988
-------------------------------------------------------------------------
Total shareholders' equity 1,007,651 949,908 57,743
Add: AOCL 11,200 11,914 (714)
-------------------------------------------------------------------------
Adjusted equity $1,018,851 $ 961,822 $ 57,029
-------------------------------------------------------------------------
Adjusted debt-to-equity 1.99 2.07 (3.9%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted net debt to EBITDAR (iv):
Net earnings $ 215,484 $ 192,833 $ 22,651
Add back:
Net interest (v) 49,302 51,448 (2,146)
Taxes 49,130 43,925 5,205
Depreciation and amortization 129,050 127,223 1,827
Aircraft leasing 75,809 75,201 608
Other (vi) 40,372 44,631 (4,259)
-------------------------------------------------------------------------
EBITDAR $ 559,147 $ 535,261 $ 23,886
-------------------------------------------------------------------------
Adjusted total debt (as per above) 2,025,997 1,995,009 30,988
Less: Cash and cash equivalents 784,352 653,558 130,794
-------------------------------------------------------------------------
Adjusted net debt $1,241,645 $1,341,451 $(99,806)
-------------------------------------------------------------------------
Adjusted net debt to EBITDAR 2.22 2.51 (11.6%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) At March 31, 2008, long-term debt includes the current portion of
long-term debt of $178,115 (December 31, 2007 - $172,992) and
long-term debt of $1,277,923 (December 31, 2007 - $1,256,526).
(ii) At March 31, 2008, obligations under capital lease includes the
current portion of obligations under capital lease of $380
(December 31, 2007 - $375) and obligations under capital lease of
$1,011 (December 31, 2007 - $1,108).
(iii) Off-balance-sheet aircraft leases is calculated by multiplying the
trailing twelve months of aircraft leasing expense by 7.5. At
March 31, 2008, the trailing twelve months of aircraft leasing
costs totalled $75,809 (December 31, 2007 - $75,201).
(iv) The trailing twelve months are used in the calculation of EBITDAR.
(v) For the twelve months ended March 31, 2008, net interest includes
interest income of $27,208 (December 31, 2007 - $24,301) and
interest expense of $76,510 (December 31, 2007 - $75,749).
(vi) For the twelve months ended March 31, 2008, other includes aiRES
write-down of $31,881 and foreign exchange loss of $8,491
(December 31, 2007 - aiRES write-down of $31,881 and foreign
exchange loss of $12,750).
For March 31, 2008 and December 31, 2007, the Corporation's targets were
an adjusted debt-to-equity measure of no more than 3.00 and an adjusted
net debt to EBITDAR of no more than 3.00. As at March 31, 2008, the
Corporation's adjusted debt-to-equity ratio improved by 3.9%,
attributable to the increase in shareholders' equity (mainly net
earnings) more than offsetting the addition of new aircraft financing in
the quarter. As at March 31, 2008, the Corporation's net debt to EBITDAR
improved by 11.6% as a result of increased EBITDAR and cash and cash
equivalents.
No dividends have been paid or declared on any of the Corporation's
shares since the date of incorporation. This policy is based on
operational results, financial policy and financing requirements for
future growth and is continuously reviewed by the Corporation.
The Corporation is subject to an externally imposed capital requirement
under the provisions of the Canada Transportation Act. Under the Act, the
Corporation must, as a corporation which indirectly wholly owns the
holder of a domestic licence, a scheduled international licence and a
non-scheduled international licence, be Canadian, that is, be controlled,
in fact, by Canadians with at least 75% of its voting interest be owned
and controlled by Canadians. To monitor this external requirement, the
Corporation has structured its voting shares into two classes: common
voting and variable voting. The variable voting shares may be owned and
controlled only by persons who are not Canadian and, as a class, cannot
exceed more than 25% of the total number of votes cast on any matter on
which a vote is to be taken. The common voting shares may be owned and
controlled by Canadians only. As at March 31, 2008, the Corporation is
in compliance with this requirement.
There were no changes in the Corporation's approach to capital management
during the three months ended March 31, 2008.
4. Cash and cash equivalents
As at March 31, 2008, cash and cash equivalents included bank balances of
$48,977 (December 31, 2007 - $37,395) and short-term investments of
$735,375 (December 31, 2007 - $616,163). Included in these balances, as
at March 31, 2008, the Corporation has US-dollar cash and cash
equivalents of US $24,650 (December 31, 2007 - US $59,843).
As at March 31, 2008, cash and cash equivalents included restricted cash
of $2,647 (December 31, 2007 -$2,069) for security on the Corporation's
facilities for letters of guarantee. In accordance with regulatory
requirements, the Corporation has US $271 (December 31, 2007 - US $295)
in restricted cash representing cash not yet remitted for passenger
facility charges.
5. Property and equipment
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated
March 31, 2008 Cost depreciation Net book value
-------------------------------------------------------------------------
Aircraft $ 2,356,464 $ 316,018 $ 2,040,446
Ground property and
equipment 155,528 81,109 74,419
Spare engines and parts 76,358 14,276 62,082
Buildings 40,028 6,076 33,952
Leasehold improvements 7,021 5,249 1,772
Assets under capital lease 2,481 1,316 1,165
-------------------------------------------------------------------------
2,637,880 424,044 2,213,836
Deposits on aircraft 23,691 - 23,691
Assets under development 27,123 - 27,123
-------------------------------------------------------------------------
$ 2,688,694 $ 424,044 $ 2,264,650
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated
December 31, 2007 Cost depreciation Net book value
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Aircraft $ 2,273,509 $ 288,909 $ 1,984,600
Ground property and
equipment 158,477 81,345 77,132
Spare engines and parts 76,862 13,610 63,252
Buildings 40,028 5,825 34,203
Leasehold improvements 7,039 5,112 1,927
Assets under capital lease 2,481 1,191 1,290
-------------------------------------------------------------------------
2,558,396 395,992 2,162,404
Deposits on aircraft 38,795 - 38,795
Assets under development 11,864 - 11,864
-------------------------------------------------------------------------
$ 2,609,055 $ 395,992 $ 2,213,063
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at March 31, 2008, assets under development include $25,751
(December 31, 2007 - $11,850) in amounts capitalized in conjunction with
the Corporation's new Campus facility.
-------------------------------------------------------------------------
6. Long-term debt
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
Term loans - purchased aircraft (i) $ 1,417,865 $ 1,389,888
Term loans - flight simulators (ii) 22,554 23,325
Term loans - live satellite
television (iii)
equipment 3,151 3,621
Term loan - Calgary hangar
facility (iv) 9,952 10,054
Term loan - Calgary hangar
facility (v) 2,516 2,630
-------------------------------------------------------------------------
1,456,038 1,429,518
Current portion 178,115 172,992
-------------------------------------------------------------------------
$ 1,277,923 $ 1,256,526
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) 51 individual term loans, amortized on a straight-line basis over a
12- year term, each repayable in quarterly principal instalments
ranging from $668 to $955, including fixed interest at a weighted
average rate of 5.33%, maturing between 2014 and 2019. These
facilities are guaranteed by the Export-Import Bank of the United
States (Ex-Im Bank) and secured by one 800-series aircraft, 37 700-
series aircraft and 13 600-series aircraft.
(ii) Three individual term loans, repayable in monthly instalments
ranging from $104 to $168, including floating interest at the
bank's prime rate plus 0.88%, with an effective interest rate of
6.13% as at March 31, 2008, maturing in 2008 and 2011, secured by
three flight simulators.
(iii) 14 individual term loans, amortized on a straight-line basis over a
five-year term, repayable in quarterly principal instalments
ranging from $29 to $42, including floating interest at the
Canadian LIBOR rate plus 0.08%, with a weighted average effective
interest rate of 4.21% as at March 31, 2008, maturing between 2009
and 2011. These facilities are for the purchase of live satellite
television equipment and are guaranteed by the Ex-Im Bank and
secured by certain 700-series and 600-series aircraft.
(iv) Term loan repayable in monthly instalments of $108, including
interest at 9.03%, maturing April 2011, secured by the Calgary
hangar facility.
(v) Term loan repayable in monthly instalments of $50, including
floating interest at the bank's prime rate plus 0.50%, with an
effective interest rate of 5.75% as at March 31, 2008, maturing
April 2013, secured by the Calgary hangar facility.
The net book value of the property and equipment pledged as collateral
for the Corporation's secured borrowings was $2,003,259 as at
March 31, 2008 (December 31, 2007 - $2,028,548).
Future scheduled repayments of long-term debt are as follows:
-------------------------------------------------------------------------
2008 $ 137,245
2009 162,854
2010 162,180
2011 174,839
2012 160,460
2013 and thereafter 658,460
-------------------------------------------------------------------------
$ 1,456,038
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at March 31, 2008, the Corporation has a final commitment of
US $40.0 million from Ex-Im Bank for one 737-700 aircraft to be delivered
in July 2008. The Corporation will be charged a commitment fee of 0.125%
per annum on the unutilized and uncancelled balance of the Ex-Im Bank
facility, payable at specified dates and upon delivery of each aircraft,
and will be charged a 3% exposure fee on the financed portion of the
aircraft price, payable upon delivery of an aircraft. Upon final delivery
of the aircraft, any unused portion of the final commitment will be
cancelled.
7. Share capital
(a) Issued and outstanding
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Three months ended
March 31, 2008 March 31, 2007
-------------------------------------------------------------------------
Number Amount Number Amount
-------------------------------------------------------------------------
Common and variable voting shares:
Balance, beginning
of period 129,571,570 $ 448,568 129,648,688 $ 431,248
Issuance of shares
pursuant to
stock option plans 193,925 - 253,634 124
Stock-based compensation
expense
on stock options exercised - 4,624 - 3,644
-------------------------------------------------------------------------
Balance, end
of period 129,765,495 $ 453,192 129,902,322 $ 435,016
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at March 31, 2008, the number of common voting shares outstanding was
125,725,013 (March 31, 2007 - 125,003,722) and the number of variable
voting shares was 4,040,482 (March 31, 2007 - 4,898,600).
On March 13, 2008, WestJet filed a notice with the Toronto Stock Exchange
(TSX) to make a normal course issuer bid to purchase outstanding shares
on the open market. As approved by the TSX, WestJet is authorized to
purchase up to 2,500,000 shares (representing approximately 1.9% of its
issued and outstanding shares at the time of the bid) during the period
of March 17, 2008 to March 16, 2009, or until such earlier time as the
bid is completed or terminated at the option of WestJet. Any shares
WestJet purchases under this bid will be purchased on the open market
through the facilities of the TSX at the prevailing market price at the
time of the transaction. Shares acquired under this bid will be
cancelled. As at March 31, 2008, the Corporation has not purchased any
shares pursuant to this bid.
During 2007, the Corporation purchased 1,263,500 shares under its
previous normal course issuer bid, which expired on February 27, 2008,
for total consideration of $21,250. The average book value for the shares
repurchased of $4,271 was charged to share capital with the $16,979
excess of the market price over the average book value charged to
retained earnings.
(b) Per share amounts
The following table summarizes the shares used in calculating net
earnings per share:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31, 2008 2007
-------------------------------------------------------------------------
Weighted average number of
shares outstanding - basic 129,694,432 129,783,267
Effect of dilutive employee stock options
and unit plans 2,752,634 597,646
-------------------------------------------------------------------------
Weighted average number of shares
outstanding - diluted 132,447,066 130,380,913
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended March 31, 2008, 1,537,273 employee stock
options and 48,300 restricted share units (three months ended
March 31, 2007 - 3,274,549 employee stock options) were not included in
the calculation of dilutive potential shares as the result would be anti-
dilutive.
(c) Stock option plan
Changes in the number of options, with their weighted average exercise
prices, are summarized below:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Three months ended
March 31, 2008 March 31, 2007
-------------------------------------------------------------------------
Weighted Weighted
Number of average Number of average
options exercise price options exercise price
-------------------------------------------------------------------------
Stock options
outstanding,
beginning of
period 12,226,232 $ 13.66 15,046,201 $ 13.21
Issued 8,156 19.45 10,959 15.28
Exercised (813,827) 15.43 (961,552) 11.21
Forfeited (26,791) 13.06 (131,063) 12.82
-------------------------------------------------------------------------
Stock options
outstanding,
end of
period 11,393,770 $ 13.54 13,964,545 $ 13.35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable,
end of
period 3,694,816 $ 14.78 3,884,684 $ 14.23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Under the terms of the Corporation's stock option plan, a cashless
settlement alternative is available, whereby option holders can either
(i) elect to receive shares by delivering cash to the Corporation in the
amount of the options, or (ii) elect to receive a number of shares
equivalent to the market value of the options over the exercise price.
For the three months ended March 31, 2008, option holders exercised
813,827 (three months ended March 31, 2007 - 950,523) on a cashless
settlement basis and received 193,925 shares (three months ended March
31, 2007 - 242,605). During the three months ended March 31, 2008, nil
options were exercised on a cash basis (three months ended March 31, 2007
- 11,029).
(d) Stock option compensation
As new options are granted, the fair value of the options is expensed
over the vesting period, with an offsetting entry to contributed surplus.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model. Upon the exercise of stock
options, consideration received, together with amounts previously
recorded in contributed surplus, is recorded as an increase to share
capital.
Stock-based compensation expense related to stock options included in
flight operations and navigational charges and marketing, general and
administration expenses totalled $4,147 for the three months ended
March 31, 2008 (three months ended March 31, 2007 - $5,450).
The fair market value of options granted during the three months ended
March 31, 2008 and 2007 and the assumptions used in their determination
are as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31 2008 2007
-------------------------------------------------------------------------
Weighted average fair market value per option $ 6.11 $ 5.32
Average risk-free interest rate 3.3% 4.0%
Average volatility 36.0% 39.0%
Expected life (years) 3.6 3.8
Dividends per share $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(e) Executive share unit plan
During the three months ended March 31, 2008, the Board of Directors
approved the 2008 Executive Share Unit Plan whereby up to a maximum of
200,000 Restricted Share Units (RSU) and Performance Share Units (PSU)
combined may be issued to executive officers of the Corporation. The 2008
Executive Share Unit Plan is also subject to shareholder approval, which
is expected to occur at the Annual General Meeting on April 29, 2008.
2008 Restricted share units
Each RSU entitles the executive to receive payment upon vesting in the
form of voting shares of the Corporation. The Corporation determines
compensation expense for the 2008 RSUs based on the market value of the
Corporation's voting shares on the date of grant. The 2008 RSUs vest at
the end of a three year period, with compensation expense being
recognized in earnings on a straight-line basis over the vesting period.
For the three months ended March 31, 2008, 54,277 RSUs were granted under
this plan at a weighted average fair value of $19.45 per unit, with $149
of compensation expense included in marketing, general and administration
expense.
Performance share units
Each PSU entitles the executive to receive payment upon vesting in the
form of voting shares of the Corporation. The value of the PSUs is based
on the fair market value of the Corporation's voting shares on the date
of grant. PSUs time vest at the end of a three-year term and incorporate
performance criteria based upon achieving the compounded average diluted
earnings per share growth rate targets established at the time of grant.
For the three months ended March 31, 2008, 72,369 PSUs were granted under
this plan at a weighted average fair value of $19.45 per unit, with $227
of compensation expense included in marketing, general and administration
expense.
8. Related party transactions
The Corporation has debt financing and investments in short-term deposits
with a financial institution which is related through two common
directors, one of which is also the president of the financial
institution. As at March 31, 2008, total long-term debt includes an
amount of $22,554 (December 31, 2007 - $23,325) due to the financial
institution. See note 6, long-term debt for further disclosure. Included
in cash and cash equivalents as at March 31, 2008 are short-term
investments of $197,769 (December 31, 2007 - $189,389) owing from the
financial institution. See note 4, cash and cash equivalents for further
disclosure. These transactions occurred in the normal course of
operations with terms consistent with those offered to arm's length
parties and are measured at the exchange amount.
9. Commitments and contingencies
(a) Aircraft At March 31, 2008, the Corporation is committed to purchase
21 737-700 aircraft for delivery between 2008 and 2013. The remaining
estimated amounts to be paid in deposits and purchase prices for the
21 aircraft, as well as amounts to be paid for live satellite television
systems on purchased and leased aircraft in Canadian dollars and the
US-dollar equivalent, are as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
US dollar CAD dollar
-------------------------------------------------------------------------
2008 $ 36,195 $ 37,046
2009 7,614 7,793
2010 37,488 38,369
2011 81,533 83,449
2012 521,168 533,415
2013 218,700 223,839
-------------------------------------------------------------------------
$ 902,698 $ 923,911
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Operating leases
The Corporation has entered into operating leases and agreements for
aircraft, buildings, computer hardware, software licences and satellite
programming. As at March 31, 2008, the future payments, in Canadian
dollars and when applicable in the US-dollar equivalent, under operating
leases are as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
US dollar CAD dollar
-------------------------------------------------------------------------
2008 $ 74,323 $ 89,292
2009 125,246 139,028
2010 151,137 161,194
2011 168,608 175,451
2012 174,502 180,273
2013 and thereafter 722,196 756,890
-------------------------------------------------------------------------
$ 1,416,012 $ 1,502,128
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At March 31, 2008, the Corporation is committed to lease an additional
17 737-700 aircraft and five 737-800 aircraft to be delivered between
2008 and 2011 for terms ranging between eight and 10 years in US dollars.
These aircraft have been included in the above totals.
(c) Contingencies
On February 29, 2008, the Corporation signed a letter of intent to lease
one 737-800 aircraft over a term of eight years commencing in March 2011
for an estimated total commitment of $39 million.
The Corporation is party to legal proceedings and claims that arise
during the ordinary course of business. It is the opinion of management
that the ultimate outcome of these and any outstanding matters will not
have a material effect upon the Corporation's financial position, results
of operations or cash flows.
10. Financial instruments and risk management
(a) Fair value of financial assets and financial liabilities
The Corporation's financial assets and liabilities consist primarily of
cash and cash equivalents, accounts receivable, cash flow hedges, US-
dollar deposits, accounts payable and accrued liabilities and long-term
debt. The following table sets out the Corporation's classification based
on the measurement categories set out in CICA Handbook Section 3855,
Financial Instruments - Recognition and Measurement, and the carrying
amount for each of its financial assets and liabilities as at
March 31, 2008:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Held Loans Other Total
for and financial carrying
trading receivables liabilities value
-------------------------------------------------------------------------
Asset (liability)
Cash and cash
equivalents $ 784,352 $ - $ - $ 784,352
Accounts receivable - 22,381 - 22,381
Cash flow hedges (i) 678 - - 678
US-dollar
deposits (ii) 23,979 - - 23,979
Accounts payable
and accrued
liabilities - - (210,572) (210,572)
Long-term debt (iii) - - (1,456,038) (1,456,038)
-------------------------------------------------------------------------
$ 809,009 $ 22,381 $ (1,666,610) $ (835,220)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Forward exchange contracts used for hedging included in prepaid
expenses, deposits and other.
(ii) Includes $2,047 classified in prepaid expenses, deposits and other
and $21,932 classified in other assets.
(iii) Includes current portion of long-term debt of $178,115 and long-
term portion of $1,277,923.
The fair values of financial assets and liabilities, together with
carrying amounts, shown in the balance sheet as at March 31, 2008 and
December 31, 2007, are as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, 2008 December 31, 2007
Carrying Fair Carrying Fair
amount value amount value
-------------------------------------------------------------------------
Asset (liability)
Cash and cash
equivalents (i) $ 784,352 $ 784,352 $ 653,558 $ 653,558
Accounts
receivable (i) 22,381 22,381 15,009 15,009
Forward exchange
contracts used
for hedging (ii) 678 678 106 106
US-dollar
deposits (iii) 23,979 23,979 22,748 22,748
Accounts payable and
accrued
liabilities (iv) (210,572) (210,572) (168,171) (168,171)
Long-term debt (v) (1,456,038) (1,546,504) (1,429,518) (1,473,997)
-------------------------------------------------------------------------
$ (835,220) $ (925,686) $ (906,268) $ (950,747)
-------------------------------------------------------------------------
Unrecognized loss $ (90,466) $ (44,479)
-------------------------------------------------------------------------
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The fair values of financial instruments are calculated on the basis of
information available on the balance sheet date using the following
methods:
(i) The fair value of cash and cash equivalents and accounts receivable
approximates their carrying amounts due to the short term nature of the
instruments.
(ii) The fair value of the forward exchange contracts is measured based
on the difference between the contracted rate and the forward rate
obtained from the counterparty at the balance sheet date. Due to the
short-term nature of the outstanding contracts, no discount rate has been
applied. Forward rates at March 31, 2008 range between 1.0270 and 1.0289
(December 31, 2007 - between 0.9906 and 0.9909) for US dollars to
Canadian dollars.
(iii) The fair value of the US-dollar deposits, which relate to purchased
aircraft, approximates their carrying amounts as they are at a floating
market rate of interest.
(iv) The fair value of accounts payable and accrued liabilities
approximates their carrying amounts due to the short-term nature of the
instruments.
(v) The fair value of the Corporation's fixed rate long-term debt is
determined by discounting the future contractual cash flows under current
financing arrangements at discount rates obtained from the lender, which
represents borrowing rates presently available to the Corporation for
loans with similar terms and remaining maturities. At March 31, 2008,
rates used in determining the fair value ranged from 3.62% to 3.92%
(December 31, 2007 - from 4.52% to 4.61%). The fair value of the
Corporation's variable rate long-term debt approximates its carrying
value as it is at a floating market rate of interest.
(b) Risk management
The Corporation is exposed to market, credit and liquidity risks
associated with its financial instruments. The Corporation will from time
to time use various financial instruments to reduce market risk exposures
from changes in foreign currency exchange rates, interest rates and
aircraft fuel prices. The Corporation does not hold or use any derivative
instruments for trading or speculative purposes.
Overall, the Corporation's Board of Directors has responsibility for the
establishment and approval of the Corporation's risk management policies.
Management performs a risk assessment on a continual basis to ensure that
all significant risks related to the Corporation and its operations have
been reviewed and assessed to reflect changes in market conditions and
the Corporation's operating activities.
Fuel risk
The airline industry is inherently dependent upon jet fuel to operate,
and is therefore impacted by changes in jet fuel prices. Aircraft fuel
expense during the three months ended March 31, 2008 represented
approximately 32% (three months ended March 31, 2007 - 27%) of the
Corporation's total operating expenses. A significant change in the price
of jet fuel could significantly impact the Corporation's financial
results.
For the three months ended March 31, 2008, the Corporation's average jet
fuel cost per litre was $0.83 (for the three months ended March 31, 2007
- $0.64). For the three months ended March 31, 2008, WestJet estimates
that a one-cent-per-litre change in the price of jet fuel would have
increased or decreased the Corporation's net earnings by approximately
$1.4 million (three months ended March 31, 2007 - $1.1 million). This is
assuming that all other variables, in particular, currency rates, remain
constant. The increase in sensitivity from the first quarter of 2007 is a
result of the overall increase in the Corporation's capacity and fuel
consumption during the period.
Fuel prices will continue to be susceptible to political events, weather
conditions, refinery capacity, worldwide demand and other factors that
can affect the supply of jet fuel. To mitigate exposure to fluctuations
in jet fuel prices, the Corporation periodically uses short-term
financial and physical derivatives, and accounts for these as cash flow
hedges and as normal purchase and sale agreements. As at, and for the
period ending March 31, 2008, the Corporation has no outstanding fuel
hedges.
Foreign currency exchange risk
Foreign currency exchange risk is the risk that the fair value of
recognized assets and liabilities or future cash flows will fluctuate as
a result of changes in foreign exchange rates. The Corporation is exposed
to foreign currency exchange risks arising from fluctuations in exchange
rates on its US-dollar denominated operating expenditures, mainly
aircraft fuel, aircraft leasing expense, certain maintenance costs and a
portion of airport operation costs. During the three month period ending
March 31, 2008 the average US-dollar rate was 1.0036 (three months ended
March 31, 2007 - 1.1720), with the period end exchange rate at 1.0235
(three months ended March 31, 2007 - 1.1567).
For the three months ended March 31, 2008, WestJet estimates that a one
cent change in the value of the US dollar versus the Canadian dollar
would have increased or decreased net earnings by $1.4 million (three
months ended March 31, 2007 - $0.8 million), that is, $1.1 million as a
result of fuel (three months ended March 31, 2007 - $0.5 million) and
$0.3 million for all remaining costs (three months ended March 31, 2007 -
$0.3 million). This is assuming that all other variables remain constant.
The increase in sensitivity from the first quarter of 2007 is mainly a
result of the increase in the price of jet fuel valued in US dollars.
The foreign exchange gains and losses realized are mainly attributable to
the effect of the changes in the value of our US-dollar denominated net
monetary assets. At March 31, 2008, US-dollar denominated net monetary
assets totalled approximately US $73.2 million (March 31, 2007 -
US $72.6 million). For the three months ended March 31, 2008, WestJet
estimates that a one cent change in the value of the US dollar versus the
Canadian dollar would have increased or decreased net earnings by
$0.6 million (three months ended March 31, 2007 - $0.4 million)as a
result of the Corporation's US-dollar denominated net monetary assets.
To manage its exposure, the Corporation periodically uses financial
derivatives, including US-dollar forward contracts. Upon proper
qualification, the forward contracts are designated as cash flow hedges
and qualify for hedge accounting. As at March 31, 2008, to offset its
US-dollar denominated aircraft lease payments, the Corporation entered
into forward contracts to purchase US $5.9 million per month for four
months for a total of US $23.6 million at an average forward rate of
0.9992 per US dollar. Maturity dates for all contracts are within 2008.
For the three months ended March 31, 2008, the Corporation realized a
total gain on the contracts of $320, included in aircraft leasing costs.
As at March 31, 2008, the estimated fair market value of the remaining
contracts recorded in prepaid expenses, deposits and other is a gain of
$678 ($470 net of tax) to be realized in 2008. Due to the immaterial
balance of the forward contracts, a change in the US-dollar exchange rate
for the three months ended March 31, 2008 would not have significantly
impacted the Corporation's net earnings and other comprehensive income.
Interest rate risk
Interest rate risk is the risk that earnings will fluctuate as a result
of changes in market interest rates.
(i) Long-term debt
The fixed-rate nature of the majority of the Corporation's long-term debt
reduces the risk of interest rate fluctuations over the term of the
outstanding debt. The Corporation accounts for its long-term fixed-rate
debt at amortized cost, and therefore, a change in interest rates at
March 31, 2008 would not affect net earnings.
The Corporation is exposed to interest rate fluctuations on its variable
interest rate long-term debt, which at March 31, 2008 totalled $28,221
(March 31, 2007 - $33,642) or 1.9% (March 31, 2007 - 2.4%) of the
Corporation's total long-term debt. Due to the immaterial balance of the
variable interest rate debt, a change in market interest rates for the
three months ended March 31, 2008 would not have significantly impacted
the Corporation's net earnings.
(ii) Cash and cash equivalents
The Corporation is exposed to interest rate fluctuations on its cash and
cash equivalents balance, which at March 31, 2008 totalled $784,352
(March 31, 2007 - $469,044). A change of 50 basis points in the market
interest rate would have had, for the three months ended March 31, 2008,
an approximate impact on net earnings of $0.6 million (three months ended
March 31, 2007 - $0.3 million). The increase in sensitivity from the
first quarter of 2007 is a direct result of the increase in the balance
of the Corporation's cash and cash equivalents balance.
Credit risk
Credit risk is the risk that one party to a financial instrument will
cause a financial loss for the other party by failing to discharge an
obligation. The Corporation does not believe it is subject to significant
concentration of credit risk on its accounts receivable and cash and cash
equivalents balances. The carrying amount of accounts receivable and cash
and cash equivalent balances represents the maximum credit exposure.
(i) Cash and cash equivalents
Cash and cash equivalents consist of cash bank balances and short-term
investments with terms of up to 91 days. It is the Corporation's policy
to hold investments with maturities of no more than 91 days with the
majority between 30 and 60 days. The Corporation purchases short-term
investments through Schedule I and selected Schedule II banks, as defined
by the Canadian Bankers Association. As at March 31, 2008, the
Corporation had a total principal amount invested of $712,208 in Canadian
dollar short-term investments with terms ranging between four and 91 days
and a total of US $24,979 invested in US-dollar short-term investments
with terms ranging between two and 90 days.
As at, and for the three months ended March 31, 2008, the Corporation did
not have any investments in asset-backed commercial paper.
The Corporation does not expect any counterparties to fail to meet their
obligations.
(ii) Accounts receivable
Generally, the Corporation's accounts receivable result from tickets sold
to individual guests through the use of travel agents. Purchase limits
are established for each agent and in some cases, when deemed necessary,
a letter of credit is required. At March 31, 2008, the Corporation's
accounts receivable were $22,381 (December 31, 2007 - $15,009),
approximately 60% (December 31, 2007 - 30%) being due from travel agents.
These receivables are short-term in nature, generally being settled
within four weeks from the date of booking. As at March 31, 2008, the
Corporation has a total of $2,539 (December 31, 2007 - $2,309) in letters
of credit from travel agents.
Liquidity risk
Liquidity risk is the risk that the Corporation will encounter difficulty
in meeting obligations associated with financial liabilities. The
Corporation maintains a strong liquidity position and maintains
sufficient financial resources to meet its obligations as they fall due.
Inherent in the airline industry is the high cost of capital and the
volatility of aircraft fuel prices. To mitigate exposure to this
challenge, the Corporation has secured low-interest-rate fixed debt
supported by Ex-Im Bank commitments on its aircraft acquisitions. See
note 6, long-term debt, for further detail.
The Corporation's total accounts payable and accrued liabilities are
classified as current and as such will be settled within one year. For
detailed information on the Corporation's long-term contractual financial
liabilities, including a schedule of future repayments, see note 6, long-
term debt. Refer to note 9, commitments and contingencies, for a
commitment schedule of the Corporation's off-balance-sheet operating
commitments, including its aircraft operating leases.
A portion of the Corporation's cash and cash equivalents balance relates
to cash collected with respect to advance ticket sales, for which the
balance at March 31, 2008 was $241,024 (December 31, 2007 - $194,929).
Typically, the Corporation has cash and cash equivalents on hand to have
sufficient liquidity to meet its liabilities when due, under both normal
and stressed conditions. At March 31, 2008, the Corporation had cash on
hand of 3.25 times (December 31, 2007 - 3.35 times) the advance ticket
sales balance.
The Corporation aims to maintain a current ratio, defined as current
assets over current liabilities, of at least 1.00. At March 31, 2008, the
Corporation's current ratio was 1.25 (December 31, 2007 - 1.22).
>>
Conference Call
WestJet will hold a live analysts' conference call today at 9 a.m. MT
(11 a.m. ET). Sean Durfy, President and CEO, and Vito Culmone, Executive
Vice-President, Finance and CFO will discuss WestJet's first quarter 2008
results and answer questions from financial analysts. The conference call is
available through the toll-free telephone number 1-800-926-7748. Participants
are encouraged to join the call 10 minutes prior to the scheduled start, at
8:50 a.m. MT (10:50 a.m. ET). The call can also be heard live through an
Internet webcast in the Investor Relations section of westjet.com.
Annual General Meeting
WestJet will hold its annual general meeting on April 29, 2008, at
2 p.m. MT (4 p.m. ET) at its Calgary Hangar, located at 21 Aerial Place NE.
Shareholders, media and members of the public are invited to attend. The
formal presentations can be heard live through an Internet webcast in the
Investor Relations section of westjet.com.
About WestJet
WestJet is Canada's leading high-value, low-cost airline offering
scheduled service throughout its 47-city North American and Caribbean network.
Named Canada's most admired corporate culture in 2005, 2006 and 2007, WestJet
pioneered low-cost flying in Canada. With increased legroom and leather seats
on its modern fleet of 74 Boeing Next-Generation 737 aircraft, and live
seatback television provided by Bell ExpressVu, WestJet strives to be the
number one choice for travellers.