News Releases
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Airline continues its success, reporting first quarter 2009 net earnings
of $37.4 million
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CALGARY, May 5 /CNW/ - WestJet (TSX:WJA) today announced first quarter results for 2009. The airline reported net earnings of $37.4 million, or 29 cents per diluted share.
"Thanks to the continued hard work and dedication of our WestJetters, we once again differentiated ourselves as an industry leader, and we are extremely pleased with our strong start to 2009," commented Sean Durfy, WestJet President and CEO. "Our first quarter results demonstrate that our business strategy is staying the course; we successfully continued our growth and delivered profitable results while withstanding less than ideal economic conditions."
Compared to airlines who have reported their first quarter results, WestJet continues to have one of the best pre-tax margins in North America, having reported a first quarter earnings before tax (EBT) margin of 8.7 per cent.
"Our results reinforce the value of our healthy brand, unrivaled guest experience and commitment to being cost efficient," added Sean Durfy.
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Operating highlights (stated in Canadian dollars)
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Q1 Q1
2009 2008 Change
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Net earnings (millions) $37.4 $52.5 (28.7%)
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Diluted earnings per share $0.29 $0.40 (27.5%)
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Revenue (millions) $579.3 $599.3 (3.3%)
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ASM (available seat miles) (billions) 4.357 4.065 7.2%
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RPM (revenue passenger miles) (billions) 3.502 3.331 5.1%
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Load factor 80.4% 81.9% (1.5 pts.)
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Yield (revenue per revenue passenger
mile) (cents) 16.54 17.99 (8.1%)
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RASM (revenue per available seat mile)
(cents) 13.30 14.74 (9.8%)
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CASM (cost per available seat mile)
(cents) 11.90 12.71 (6.4%)
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CASM excluding fuel and employee
profit share (cents) 8.50 8.26 2.9%
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Sean Durfy continued, "While the weakened economy had a negative impact on our first quarter financial results, our margins continued to be among the strongest in North America. Softening demand, aggressive competitor pricing and Easter falling in the second quarter of 2009, versus the first quarter of 2008, all contributed to our decline in RASM. However, lower fuel prices resulted in a decline in CASM and contributed to our overall profitability."
WestJet took delivery of two 800-series aircraft in the first quarter; and in early April, it took delivery of its only aircraft scheduled to arrive in the second quarter, bringing its fleet size to 79. For the balance of the year, WestJet plans to receive an additional seven aircraft, bringing its fleet to 86.
"The flexibility of our fleet deployment strategy allows us to react to changes in market demand by adjusting our schedule for more favourable flying," explained Sean Durfy. "In the second quarter, we have adjusted our flight schedules to reduce some of our flying as we take into consideration the current demand environment. This will lower our previously planned second quarter capacity growth to between one and two per cent. We anticipate that competitors will continue to withdraw capacity, which we believe will allow us to capture additional market share as we continue to grow into domestic, transborder and international markets."
This morning, in a separate news release, the airline reported its April traffic results and expectations for second quarter RASM. Sean Durfy said, "With the weakened economy, second quarter RASM is tracking to year-over-year declines that are, at best, similar to what we experienced in the first quarter of 2009. The recent H1N1 influenza virus outbreak appears to be delaying some consumers' travel bookings; however, it is too early to determine how it will impact RASM. Despite these conditions, we are confident in our business model and our organization's ability to continue on our profitable path."
"Our recently introduced WestJet Care-antee, which is a set of promises we vow to uphold, is setting a new standard for service and value in the Canadian airline industry," added Sean Durfy. "Thanks to our dedicated team of WestJetters, we will continue to profitably grow our business by providing an unrivalled guest experience and by enhancing our airline in ways that truly benefit our guests."
WestJet also reported first quarter operational performance. WestJet calculates on-time performance and completion rate based on the U.S. Department of Transportation's standards. WestJet's baggage ratio represents the number of delayed or lost baggage claims made per 1,000 guests.
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Q1 2009 Q1 2008 Change
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On-time performance 70.6% 69.0% 1.6 pts.
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Completion rate 97.5% 98.1% (0.6 pts.)
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Bag ratio 4.41 5.15 14.4%
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Caution regarding forward-looking statements
Certain information set forth in this press release, including information regarding WestJet's anticipated aircraft delivery schedule, adjustments of flights schedules in the second quarter, expected capacity growth, projections as to RASM and traffic in the second quarter of 2009 and the anticipated impact of the H1N1 virus, contain forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond WestJet's control. These forward-looking statements are based on currently available implementation plans, agreements and bookings but may vary due to factors including, but not limited to, delay in aircraft delivery, change in customer demand, general economic conditions and availability of personnel and outside consultants. These and additional risk factors are discussed in WestJet's most recent Annual Information Form (AIF) and in other documents WestJet files from time to time with securities regulatory authorities, which are available through the Internet on WestJet's SEDAR profile at www.sedar.com.
Readers are cautioned that undue reliance should not be placed on forward-looking statements as actual results may vary materially from the forward-looking statements. WestJet does not undertake to update any forward-looking statements, except as is required by law.
Conference call
WestJet will hold a live analysts' conference call today at 9 a.m. MDT (11 a.m. EDT). Sean Durfy, President and CEO, and Vito Culmone, Executive Vice-President of Finance and CFO, will discuss WestJet's first quarter 2009 results and answer questions from financial analysts. The conference call is available through the toll-free telephone number 1-800-731-5319. The call can also be heard live through an Internet webcast in the Investor Relations section of westjet.com.
Annual and Special Meeting (AGM)
WestJet will hold its annual and special meeting at 2 p.m. MDT at WestJet's Calgary Campus located at 22 Aerial Place, NE. The AGM will be webcast and will be available 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 55-city North American and Caribbean network. Named one of Canada's most admired corporate cultures in 2005, 2006, 2007 and 2008, WestJet pioneered low-cost flying in Canada. WestJet offers increased legroom and leather seats on its modern fleet of 79 Boeing Next-Generation 737 aircraft, and live seatback television provided by Bell TV. With future confirmed deliveries for an additional 42 aircraft, bringing its fleet to 121 by 2013, WestJet strives to be the number one choice for travellers.
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Management's Discussion and Analysis of Financial Results
For the three months ended March 31, 2009
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Advisories
The following Management's Discussion and Analysis of Financial Results (MD&A), dated May 4, 2009, should be read in conjunction with the cautionary statement regarding forward-looking statements below, as well as the unaudited interim consolidated financial statements and notes thereto as at and for the three months ended March 31, 2009, and the consolidated financial statements, notes thereto and MD&A included in the Annual Report as at and for the year ended December 31, 2008. For a detailed description of risks and uncertainties, financial instruments and risk management and critical accounting estimates, please refer to these sections within the 2008 MD&A dated February 10, 2009. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). All amounts in the following MD&A are stated in Canadian dollars unless otherwise stated. Certain prior-period balances in the consolidated financial statements have been reclassified to conform to current period's presentation. References to "WestJet," "we," "us" or "our" mean WestJet Airlines Ltd., its subsidiaries, partnership and special-purpose entities, unless the context otherwise requires. Additional information relating to WestJet filed with Canadian securities commissions, including periodic quarterly and annual reports and Annual Information Forms (AIF), is available on SEDAR at www.sedar.com and our website at www.westjet.com. An additional advisory with respect to the use of non-GAAP measures is set out at the end of this MD&A under Non-GAAP Measures.
Cautionary statement regarding forward-looking information and statements
This MD&A offers our assessment of WestJet's future plans and operations and contains forward-looking statements as defined under applicable Canadian securities legislation, including our expectation that our financial results for the first quarter of 2009 are among the best of any North American airline referred to under the Overview and the Outlook; our expectation that our network will absorb the capacity used for Transat referred to under Results of Operations - Revenue; our expectation that WestJet Vacations and our commercial schedule will support our own flying to existing sun destinations and a number of new destinations to which we can fly referred to under Results of Operations - Revenue; our hedging expectations and the intent to hedge anticipated jet fuel purchases referred to under Results of Operations - Aircraft Fuel; our sensitivity to changes in crude oil and fuel pricing referred to under Results of Operations - Aircraft; our expectation that aircraft maintenance costs will increase as our fleet ages referred to under Results of Operations - Maintenance; our sensitivity to the change in the value of the Canadian dollar versus the US dollar referred to under Results of Operations - Foreign Exchange; our future aircraft deliveries referred to under Liquidity and Capital Resources; our expected capacity increase for the second quarter of 2009 referred to under the Outlook; our anticipated scheduling and capacity changes by us and our competitors in 2009 referred to under the Outlook; our anticipation that demand for air travel will be negatively impacted during the second quarter of 2009 referred to under the Outlook; our revenue per available seat mile (RASM) decline in the second quarter of 2009 referred to under the Outlook; and our expected fuel costs per litre referred to under the Outlook. These forward-looking statements typically contain the words "anticipate," "believe," "estimate," "intend," "expect," "may," "will," "should," "potential," "plan" or other similar terms.
Readers are cautioned that our 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. With respect to forward-looking statements contained within this MD&A, we have made the following key assumptions:
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- our expectation that our financial results for the first quarter of
2009 were among the best of any North American airline was based on
reported first quarter financial results of North American airlines;
- our expectation that our network will absorb the capacity used for
Transat was based on our actual and forecasted commercial schedules;
- our expectation that WestJet Vacations and our commercial schedule
will support our own flying to existing sun destinations and a number
of new destinations to which we can fly was based on current
financial results and our current strategic plan;
- our hedging expectations and intent to hedge anticipated jet fuel
purchases was based on our current approved hedging strategy;
- our sensitivity to changes in crude oil and fuel pricing was based on
our fuel consumption for our existing schedule and historical fuel
burn, as well as a Canadian-US dollar exchange rate similar to the
current market rate;
- our expectation that aircraft maintenance costs will increase as our
fleet ages was based on requirements specified in our maintenance
program and the number of aircraft off warranty;
- our sensitivity to the change in the value of the Canadian dollar
versus the US dollar was based on forecasted US-dollar spend for
2009, excluding a percentage of aircraft leasing expense hedged under
foreign exchange forward contracts and option arrangements, as well
as the exchange rate for the Canadian dollar similar to the current
market rate;
- our future aircraft deliveries were based on a revised aircraft
delivery schedule from Boeing;
- our expected capacity increase for the second quarter of 2009 was
based on our actual and forecasted commercial schedules;
- our anticipated scheduling and capacity changes by us and our
competitors in 2009 was based on actual and forecasted bookings;
- our anticipation that demand for air travel will be negatively
impacted was based on actual and forecasted bookings;
- our RASM guidance for the second quarter of 2009 was based on actual
and forecasted bookings for the same period; and
- our expected fuel costs per litre for the second quarter of 2009 were
based on realized jet fuel prices for April 2009 and forward curve
prices for May and June 2009, as well as the exchange rate for the
Canadian dollar in the second quarter similar to the current market
rate.
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Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements. We can give no assurance that any of the events anticipated will transpire or occur or, if any of them do, what benefits or costs we will derive from them. By their nature, forward-looking statements are subject to numerous risks and uncertainties including, but not limited to, 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 the pricing environment), labour matters, government regulation, stock-market volatility, the ability to access sufficient capital from internal and external sources and additional risk factors discussed in our AIF and other documents we file from time to time with securities regulatory authorities, which are available through the Internet on SEDAR at www.sedar.com or, upon request, without charge from us. Additionally, risks and uncertainties are discussed in detail within the 2008 MD&A dated February 10, 2009.
The forward-looking information contained in this MD&A is expressly qualified by this cautionary statement. Our assumptions relating to the forward-looking statements referred to above are updated quarterly and, except as required by law, we do not undertake to update any other forward-looking statements.
Definition of key operating indicators
Our key operating indicators are airline industry metrics, which are useful in assessing the operating performance of an airline.
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Flight leg: A segment of a flight involving a stopover, change of
aircraft or change of airline from one landing site to another.
Segment guest: Any person who has been booked to occupy a seat on a
flight leg and is not a member of the crew assigned to the flight.
Average stage length: The average distance of a non-stop flight leg
between take-off and landing as defined by International Air Transport
Association (IATA) guidelines.
Available seat miles (ASM): A measure of total guest capacity, calculated
by multiplying the number of seats available for guest use in an aircraft
by stage length.
Revenue passenger miles (RPM): A measure of guest traffic, calculated by
multiplying the number of segment guests by stage length.
Load factor: A measure of total capacity utilization, calculated by
dividing revenue passenger miles by total available seat miles.
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 revenues divided by
available seat miles.
Cost per available seat mile (CASM): Operating expenses divided by
available seat miles.
Cycle: One flight, counted by the aircraft leaving the ground and
landing.
Utilization: Operating hours per day per operating aircraft.
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OVERVIEW
Despite the continued worldwide recession, we are pleased to report our 16th consecutive quarter of profitability. We expect our financial results once again to be among the best of any North American airline.
During the first quarter of 2009, we saw overall demand for air travel soften, and as such, we adjusted our pricing in order to maintain our desired load factors. The reduction in the market price of jet fuel provided significant cost relief and partially offset the impact of the weak revenue environment. Additionally, we grew our cash balance from December 31, 2008, generated positive net earnings and cash flows from operations and lowered CASM. Our low-cost business model allowed us to successfully navigate through a less than ideal external environment, while producing industry-leading results. At a time of economic uncertainty, the fortitude of our WestJetters remained constant and unwavering, as evidenced by the delivery of our award-winning guest experience and commitment to high-value service.
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Quarterly highlights
- Recognized total revenues of $579.3 million, a decrease of
3.3 per cent over the same period of 2008.
- Recorded RASM of 13.30 cents, down 9.8 per cent from the comparable
period of 2008.
- Increased capacity by 7.2 per cent as compared to the same period of
2008.
- Decreased CASM to 11.90 cents from 12.71 cents in the first quarter
of 2008, an improvement of 6.4 per cent.
- Realized CASM, excluding fuel and employee profit share, of
8.50 cents, up 2.9 per cent over the same period of 2008.
- Recorded an earnings before tax (EBT) margin of 8.7 per cent, down
3.7 points from the same quarter in 2008.
- Realized net earnings of $37.4 million, a decrease of 28.7 per cent
from the same period of 2008.
- Diluted earnings per share were $0.29, a decrease of 27.5 per cent
compared to the first quarter of 2008.
- Grew our cash balance to $835.8 million, an increase of 1.9 per cent
from December 31, 2008.
- Generated cash flows from operations of $95.5 million, a decrease
from $184.8 million for the three months ended March 31, 2008.
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Please refer to the end of this MD&A for a reconciliation of CASM, excluding fuel and employee profit share, a non-GAAP measure, to the nearest measure under Canadian GAAP.
Our strong corporate culture allowed us to execute on our growth strategy and provided the momentum to face the economic challenges presented during the first quarter of the year. The actions of every WestJetter contributed to the continued success of our airline. Additionally, with the construction of our new Campus facility completed, many of our WestJetters moved into our new office space during the first quarter of 2009, contributing further to the enviable culture of our airline.
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Operational highlights Three months ended March 31
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2009 2008 Change
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ASMs 4,356,805,139 4,064,991,801 7.2%
RPMs 3,501,929,143 3,330,813,443 5.1%
Load factor 80.4% 81.9% (1.5 pts)
Yield (cents) 16.54 17.99 (8.1%)
RASM (cents) 13.30 14.74 (9.8%)
CASM (cents) 11.90 12.71 (6.4%)
CASM, excluding fuel and
employee profit share (cents) 8.50 8.26 2.9%
Fuel consumption (litres) 215,760,880 202,155,666 6.7%
Fuel costs per litre (cents) 65.99 82.96 (20.5%)
Segment guests 3,451,685 3,469,405 (0.5%)
Average stage length (miles) 938 917 2.3%
Utilization (hours) 12.2 12.5 (2.4%)
Number of full-time equivalent
employees at period end 6,224 5,939 4.8%
Fleet size at period end 78 73 6.8%
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The first quarter of 2009 saw the continuation of unprecedented worldwide economic conditions, resulting in significant challenges for the airline industry. The North American economy is in a recession, and similar to the latter half of 2008, this has resulted in capacity reductions, grounded aircraft, employee lay-offs, deep price discounting and aggressive ancillary revenue initiatives to stimulate demand within the airline industry. We have seen fuel costs continue to subside from the record-high levels of 2008, which provided substantial relief; however, not enough to offset the impact of weakening demand. Notwithstanding these external pressures, we continued to execute on our strategic growth plan throughout the first quarter, as evidenced by the addition of two leased fuel-efficient Boeing Next-Generation aircraft, new airline partnerships and increased frequency of routes and new destinations, all while providing high-value service to our guests.
Despite the challenges presented to us during the first quarter of 2009, we produced positive net earnings of $37.4 million and diluted earnings per share of $0.29. We were one of only a few North American airlines to generate a profit during the quarter. Our EBT margin of 8.7 per cent for the first quarter of 2009 was once again among the best in the North American airline industry.
During the three months ended March 31, 2009, total revenues decreased by 3.3 per cent to $579.3 million as compared to $599.3 million in the same period of 2008, attributable primarily to the weakening economy, pricing competition, Easter falling in the second quarter of 2009 versus the first quarter of 2008 and an extra day in the 2008 comparable period. Overall, we are pleased with our ability to increase RPMs by 5.1 per cent for the first quarter of 2009 in a more challenging economic environment than the same period of 2008.
Our load factor declined by 1.5 points to 80.4 per cent for the first quarter of 2009 from 81.9 per cent in the same quarter of 2008, as depicted in the following graph. However, this load factor remained within our optimal operating range of 78 per cent to 82 per cent and was achieved on capacity growth of 7.2 per cent quarter over quarter.
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To see the Quarterly Load Factor chart, click here:
http://files.newswire.ca/762/WestJet_load_factor.doc
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We experienced a significant decrease in RASM during the first quarter of 2009 of 9.8 per cent, making cost containment critical to our continued success and remaining one of our key focuses. For the three months ended March 31, 2009, our CASM improved by 6.4 per cent to 11.90 cents from 12.71 cents in the same period of 2008, attributable primarily to lower fuel costs quarter over quarter. Excluding fuel and employee profit share, our CASM increased to 8.50 cents from 8.26 cents in the first quarter of 2008, representing a change of 2.9 per cent, due mainly to inclement winter weather conditions, incremental maintenance costs, lower aircraft utilization and a weaker Canadian dollar.
We maintained a healthy cash balance of $835.8 million as at March 31, 2009, an increase of 1.9 per cent from December 31, 2008. Additionally, our current ratio, defined as current assets over current liabilities, remained strong at 1.24 as compared to 1.25 at the end of 2008. Our adjusted debt-to-equity ratio decreased to 1.72 from 1.78 as at December 31, 2008. Please refer to the end of this MD&A for a reconciliation of our adjusted debt-to-equity ratio, a non-GAAP measure, to the nearest measure under Canadian GAAP. We continue to generate positive cash flow from operations to fund our working capital needs and capital funding requirements, related primarily to our Campus and aircraft deposits, as well as to make our debt payments without requiring external financing.
During the first quarter of 2009, we assumed delivery of two leased 737-800s, increasing our total registered fleet to 78 aircraft. With an average age of 4.2 years, we continue to operate one of the youngest fleets of any large North American commercial airline.
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SELECTED QUARTERLY UNAUDITED FINANCIAL INFORMATION
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Three Months Ended
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($ in thousands, except Mar. 31 Dec. 31 Sept. 30 Jun. 30
per share data) 2009 2008 2008 2008
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Total revenues $ 579,285 $ 615,783 $ 718,375 $ 616,000
Net earnings $ 37,432 $ 40,771 $ 54,665 $ 30,193
Basic earnings per share $ 0.29 $ 0.32 $ 0.43 $ 0.23
Diluted earnings per share $ 0.29 $ 0.32 $ 0.42 $ 0.23
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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 $ 75,359 $ 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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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 our transborder and international destinations, we have been able to partially alleviate 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 ($22.2 million after tax or 17 cents per share) for the capitalized costs associated with our former reservation system project.
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RESULTS OF OPERATIONS
Revenue
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Three months ended March 31
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($ in thousands) 2009 2008 Change
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Guest revenues $ 497,095 $ 525,700 (5.4%)
Charter and other revenues 82,190 73,648 11.6%
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$ 579,285 $ 599,348 (3.3%)
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RASM (cents) 13.30 14.74 (9.8%)
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During the quarter ended March 31, 2009, total revenues decreased by 3.3 per cent to $579.3 million from $599.3 million in the same period of 2008. This quarter-over-quarter decline in total revenues was largely attributable to the weakening economic environment and the resulting softness in demand for air travel. One of the key indicators of revenue growth is RASM, as it takes into consideration load factor and yield. Our RASM decreased significantly by 9.8 per cent in the first quarter of 2009 to 13.30 cents from 14.74 cents in the same period of 2008, due mainly to the deteriorating economy, pricing competition and the negative effect of Easter falling in the second quarter of 2009 versus the first quarter of 2008. Additionally, we experienced declines in both yield and load factor quarter over quarter, attributable to the economic recession. This decline in RASM was offset partially by lower fuel costs, allowing us to produce another quarter of profitable financial results.
Guest revenues from our scheduled flight operations, our largest component of total revenues, declined for the first quarter of 2009 by 5.4 per cent to $497.1 million, as compared to $525.7 million in the same quarter of 2008. We continued our effective seasonal deployment strategy during the first quarter of 2009, shifting capacity to higher-demand transborder and international markets during the Canadian winter months while maintaining an attractive schedule, frequent flights and sufficient capacity for our domestic guests. Of our quarter-over-quarter increase in ASMs of 7.2 per cent, we deployed more capacity to scheduled transborder and international destinations than existing domestic markets in order to create revenue opportunities in a number of new markets. This strategy of profitable market expansion remained a continued focus as competitors withdrew capacity, allowing us to gain market share, as well as partially mitigate the impact of a deteriorating economy and pricing competition. The majority of our 7.2 per cent increase in ASMs for the first quarter of 2009 as compared to the same period of 2008 was deployed equally to new transborder and international markets and existing transborder and international markets.
During the first quarter of 2009, aircraft utilization decreased by 18 minutes to 12.2 operating hours per day, compared to 12.5 operating hours per day in the same period of 2008, due to optimization of our schedule to adjust to the weaker demand environment. Our lower aircraft utilization negatively impacted both revenue and CASM for the first quarter of 2009.
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To see the Charter and Scheduled Transborder and International as a
Percentage of Total ASMs chart, click here:
http://files.newswire.ca/762/WestJetCharter.doc
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For the three months ended March 31, 2009, charter and other revenues, which include charter, cargo, ancillary, WestJet Vacations Inc. (WVI) non-air and other revenue, increased by 11.6 per cent to $82.2 million from $73.6 million in the comparable period of 2008. This improvement was driven mainly by increases in ancillary revenue and WVI non-air revenue, resulting from an expanded destination base, which is in line with our market expansion strategy. These improvements were partially offset by a decrease in charter revenue, as charter saw similar pressure on yields as guest revenue.
WVI continued to play a significant role in our growth strategy in the first quarter of 2009, as evidenced by its quarter-over-quarter increase in revenues. In February 2009, WestJet and Transat terminated the Transat Charter Agreement, effective May 10, 2009. As we continue to grow our domestic, transborder and international network, we are confident that our network will absorb the capacity used for Transat. With the termination of the charter agreement, there will be more opportunity for WVI, as well as our commercial schedule, to support our own flying to existing sun destinations and a number of new destinations to which we can fly.
Ancillary revenues, which include service fees, onboard sales, and partner and program revenue, provide an opportunity to maximize our profits through the sale of higher-margin goods and services, while also enhancing our overall guest experience. In the first quarter of 2009, ancillary revenues increased by 24.0 per cent to $24.8 million from $20.0 million in the same period of 2008. Ancillary revenue per guest was $7.63 for the three months ended March 31, 2009, an improvement of 25.9 per cent from $6.06 per guest in the first quarter of 2008. This increase was mainly attributable to higher revenue from fees in the first quarter of 2009, offset somewhat by the termination of our tri-branded BMO Mosaik AIR MILES MasterCard credit card partnership on July 31, 2008. With revenue of $5.6 million, our pre-reserved seating option introduced in the third quarter of 2008 accounted for approximately 70 per cent of our quarter-over-quarter increase in fees. Additionally, increases to our change and cancellation fees contributed to increased revenue from fees in the first quarter of 2009, versus the comparable period of the prior year.
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Expenses
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Three months ended March 31
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CASM (cents) 2009 2008 Change
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Aircraft fuel 3.27 4.13 (20.8%)
Airport operations 2.15 2.06 4.4%
Flight operations and navigational charges 1.64 1.66 (1.2%)
Marketing, general and administration 1.21 1.17 3.4%
Sales and distribution 0.94 0.99 (5.1%)
Depreciation and amortization 0.78 0.81 (3.7%)
Inflight 0.66 0.62 6.5%
Aircraft leasing 0.58 0.47 23.4%
Maintenance 0.54 0.48 12.5%
Employee profit share 0.13 0.32 (59.4%)
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11.90 12.71 (6.4%)
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CASM, excluding fuel and employee
profit share 8.50 8.26 2.9%
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For the first quarter of 2009, our CASM decreased by 6.4 per cent, due largely to the 20.8 per cent decline in aircraft fuel expense per ASM. Our CASM, excluding fuel and employee profit share, increased slightly by 2.9 per cent to 8.50 cents in the first quarter of 2009 from 8.26 cents in the first quarter of 2008, led primarily by increases in aircraft leasing, airport operations and maintenance.
Our longer average stage length, which increased by 2.3 per cent in the first quarter of 2009 to 938 miles from 917 miles in the same period of 2008, helped play a role in creating cost efficiencies. Average stage length has a significant impact on our unit costs. As average stage length increases, cost efficiencies are gained, and we achieve a lower average 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. This increase in average stage length was offset partially by the 18 minute decline in our aircraft utilization quarter over quarter.
Aircraft fuel
During the first quarter of 2009, we experienced substantial relief from the elevated fuel prices that negatively impacted our CASM during 2008. During the three months ended March 31, 2009, the average market price for jet fuel was US $57.11 per barrel as compared to US $119.85 per barrel in the first quarter of 2008, representing a decrease of 52.3 per cent. We saw a corresponding decrease in our fuel cost per ASM of 20.8 per cent to 3.27 cents in the first quarter of 2009 as compared to 4.13 cents in the same period in 2008, as result of significant quarter-over-quarter reductions in both US-dollar West Texas Intermediate (WTI) crude oil prices and refining costs. This was offset partially by the devaluation of the Canadian dollar versus the US dollar, incremental costs incurred to transport fuel into the prairie provinces and the impact of realized losses on the settlement of fuel derivative contracts. Although market prices have subsided from their previous levels, fuel remains our most significant cost, representing approximately 27 per cent of total operating costs for the first quarter of 2009, down from approximately 32 per cent in the same period in 2008.
The following table displays our fuel costs per litre, including and excluding fuel hedging, for the three months ended March 31, 2009. Please refer to the end of this MD&A for a discussion on the use of non-GAAP measures, including aircraft fuel expense, excluding hedging, which is reconciled to GAAP in the table below.
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Three months ended March 31
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($ in thousands, except
per litre data) 2009 2008 Change
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Aircraft fuel expense - GAAP $ 142,391 $ 167,717 (15.1%)
Realized loss on fuel derivatives -
effective portion (11,974) - N/A
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Aircraft fuel expense, excluding
hedging - Non-GAAP $ 130,417 $ 167,717 (22.2%)
Fuel consumption (thousands of litres) 215,761 202,156 6.7%
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Fuel costs per litre (dollars)
- including fuel hedging 0.66 0.83 (20.5%)
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Fuel costs per litre (dollars)
- excluding fuel hedging 0.60 0.83 (27.7%)
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Our fuel costs decreased to $0.66 per litre during the first quarter of 2009, including fuel hedging, representing an improvement of 20.5 per cent from $0.83 per litre in the same period of 2008. Excluding the effects of the realized loss on fuel derivatives designated in an effective relationship under cash flow hedge accounting, our fuel costs per litre were $0.60 for the first quarter of 2009, a decrease of 27.7 per cent from the first quarter of 2008. This differs from our previous estimate of fuel costs for the first quarter of 2009, excluding the impact of fuel hedging, to be between $0.65 and $0.67 per litre, due to decreases in crude oil refining costs during the quarter.
As at March 31, 2009, we had a mixture of fixed swap agreements and costless collar structures in Canadian-dollar WTI crude oil derivative contracts to hedge approximately 30 per cent (December 31, 2008 - 30 per cent) of our remaining anticipated jet fuel requirements for 2009 and approximately 14 per cent (December 31, 2008 - 14 per cent) of our anticipated jet fuel requirements for 2010. The following table outlines, as at March 31, 2009, the notional volumes per barrel (bbl) and the weighted average strike price for fixed swap agreements and the weighted average call and put prices for costless collar structures for each year we are hedged.
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WTI WTI WTI
average average average
Notional strike call put
volumes price price price
Year Instrument (bbl) (CAD$/bbl) (CAD$/bbl) (CAD$/bbl)
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2009 Swaps 871,500 90.10 - -
Costless collars 410,000 - 114.27 79.15
2010 Swaps 381,000 103.09 - -
Costless collars 483,000 - 111.21 77.94
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The following table presents the financial impact and statement
presentation of our fuel derivatives on the consolidated balance sheet as at
March 31, 2009, and December 31, 2008.
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March 31, December 31,
($ in thousands) Statement presentation 2009 2008
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Fair value of fuel Accounts payable and $ 29,361 $ 37,811
derivatives - accrued liabilities
current portion
Fair value of fuel Other liabilities 9,006 14,487
derivatives -
long-term portion
Payable to Accounts payable and 3,768 -
counterparties for accrued liabilities
settled fuel
contracts
Net unrealized loss Accumulated other (33,052) (44,711)
from fuel comprehensive loss
derivatives (AOCL) - before tax
impact
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The following table presents the financial impact and statement
presentation of our fuel derivatives on the consolidated statement of earnings
for the three months ended March 31, 2009, and 2008.
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Three months ended
March 31
($ in thousands) Statement presentation 2009 2008
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Realized loss on Aircraft fuel $ 11,974 $ -
fuel derivatives -
effective portion
Realized loss on Gain on derivatives 846 -
fuel derivatives -
ineffective portion
Unrealized gain on Gain on derivatives (949) -
fuel derivatives -
ineffective portion
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The fair value of the fuel derivatives designated in an effective hedging relationship is determined using inputs, including quoted forward prices for commodities, foreign exchange rates and interest rates, which can be observed or corroborated in the marketplace. The fair value of the fixed swap agreements is estimated by discounting the difference between the contractual strike price and the current forward price. The fair value of the costless collar structures is estimated by the use of a standard option valuation technique. As at March 31, 2009, for the 21-month period that we are hedged, the closing forward curve for crude oil ranged from approximately US $50 to US $65 (December 31, 2008 - US $45 to US $67) with the average forward foreign exchange rate used in determining the fair value being 1.2545 US dollars to Canadian dollars (December 31, 2008 - 1.2136).
The estimated amount reported in AOCL that is expected to be reclassified to net earnings as a component of aircraft fuel expense when the underlying jet fuel is consumed during the next 12 months is a loss after tax of $18.3 million.
For 2009, excluding the impact of fuel hedging, we estimate the sensitivity to changes in crude oil and fuel pricing to be approximately $7 million annually to our fuel costs for every one US-dollar change per barrel of WTI crude oil and $9 million for every one-cent change per litre of fuel.
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 serviced, aircraft weights, inclement weather conditions and number of guests. Transborder and international flights are more expensive than domestic flights due to the higher terminal and pre-clearance fees charged by domestic airports for transborder and international 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, 2009, our cost per ASM for airport operations increased by 4.4 per cent to 2.15 cents from 2.06 cents in the same period of 2008. Similarly, our quarter-over-quarter cost per departure increased by approximately eight per cent in 2009, versus the comparable period of 2008, due mainly to increased third-party ground handling rates relating to transborder and international airports resulting from a greater percentage of departures to sun destinations; higher meal, hotel and transportation costs for displaced guests; and the higher costs of de-icing from unfavourable weather conditions in the first quarter of 2009. Additionally, due to annual merit and market increases, our employee expenses are higher on both an ASM and per departure basis.
Marketing, general and administration
Marketing encompasses a wide variety of expenses, including advertising and promotions, onboard products, live satellite television licensing fees and catering. General and administration costs consist of our corporate office departments, professional fees, insurance costs and transaction costs related to aircraft acquisitions. During the first quarter of 2009, our marketing, general and administration charge per ASM increased by 3.4 per cent to 1.21 cents, compared to 1.17 cents in the same period of 2008. This increase was attributable mainly to the cost of the $500 future travel credit awarded to each of our WestJetters for their hard work and dedication during the 2008 Christmas holiday travel season, where much of Canada was impacted by harsh winter weather; increased professional fees resulting primarily from our International Financial Reporting Standards (IFRS) transition project; and costs incurred relating to our new reservation system to be implemented in 2009. These increases were offset partially by lower aircraft acquisition costs versus the first quarter of 2008, when we assumed delivery of two owned aircraft.
Aircraft leasing
During the first quarter of 2009, we assumed delivery of two leased 737-800 aircraft, bringing our total leased aircraft to 26 as at March 31, 2009. This represents 33.3 per cent of our total fleet. At the end of the first quarter of 2008, we had a total of 22 aircraft under operating leases, representing 30.1 per cent of our total registered fleet.
Our aircraft leasing costs per ASM increased by 23.4 per cent in the first quarter of 2009 to 0.58 cents from 0.47 cents in the same period of 2008. This change relates mainly to incremental leasing costs on four additional leased aircraft in the first quarter of 2009, versus the comparable period of the prior year, as well as the weaker Canadian dollar relative to the US dollar, which was mostly offset by our foreign exchange hedging program.
Maintenance
Our maintenance expense per ASM increased to 0.54 cents in the first quarter of 2009 from 0.48 cents in the same period of 2008, representing an increase of 12.5 per cent, primarily attributable to the weaker Canadian dollar, as approximately 40 per cent of our maintenance costs were denominated in US dollars, and incremental scheduled maintenance requirements as our aircraft continue to age. As at March 31, 2009, 39 out of 78 aircraft, or 50.0 per cent, were off warranty compared to 28 out of 73 aircraft, or 38.4 per cent, as at March 31, 2008. We anticipate our unit maintenance costs will continue to increase as our fleet ages.
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 in our financial results and accomplishments.
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Three months ended March 31
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($ in thousands) 2009 2008 Change
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Salaries and benefits $ 98,825 $ 88,236 12.0%
Employee share purchase plan 11,091 9,937 11.6%
Employee profit share 5,717 13,146 (56.5%)
Stock options 2,446 4,147 (41.0%)
Executive share unit plan 189 376 (49.7%)
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$ 118,268 $ 115,842 2.1%
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Salaries and benefits
Salaries and benefits are determined via a framework of job levels based on internal experience and external market data. During the first quarter of 2009, salaries and benefits increased by 12.0 per cent to $98.8 million from $88.2 million in the comparable period of 2008. This increase was due to the employment of a greater number of WestJetters, versus a year ago, to support our capacity growth; annual market and merit increases; and the costs relating to the future travel credits our WestJetters were awarded during the quarter. Salaries and benefits expense for each department is included in the respective department's operating expense line item.
Employee share purchase plan
Our Employee Share Purchase Plan (ESPP) encourages employees to become owners of WestJet shares. WestJetters may contribute up to 20 per cent of their base salaries to the ESPP. As at March 31, 2009, WestJetters contributed an average of 14 per cent. We match contributions for every dollar contributed by our employees, and as at March 31, 2009, 83 per cent of our eligible employees participated in the ESPP. Our matching expense for the three months ended March 31, 2009 was $11.1 million, an increase of 11.6 per cent from $9.9 million for the same period of 2008, driven primarily by an increased number of WestJetters.
Employee profit share
All employees are eligible to participate in the employee profit sharing plan. As the profit share system is a variable cost, employees receive larger awards when we are highly profitable. Conversely, the amount distributed to employees is reduced and adjusted in less profitable periods. Our profit share expense for the quarter ended March 31, 2009 was $5.7 million, a 56.5 per cent decrease from $13.1 million in the same period of 2008. This decrease was directly attributable to the lower earnings eligible for profit share, due primarily to the decrease in revenues quarter over quarter.
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 related to stock options for the first quarter of 2009 was $2.4 million compared to $4.1 million in the comparable period of 2008, representing a decrease of 41.0 per cent. This decrease related primarily to the vesting of options granted under the 2006 pilot agreement in which a significant number of stock options were granted. Stock-based compensation expense related to pilots' options is included in flight operations and navigational charges, while the expense related to executives' and certain non-executive employees' options is included in marketing, general and administration expense.
Executive share unit plan
We have an equity-based executive share unit plan whereby up to a maximum of 550,000 restricted share units (RSU) and performance share units (PSU) combined may be issued to senior executive officers. The maximum number of units reserved and issuable under the executive share unit plan is subject to shareholder approval, which is expected to occur at the Annual and Special Meeting of Shareholders on May 5, 2009.
Each RSU and PSU entitles the executive to receive payment upon vesting in the form of voting shares. We determine compensation expense for the RSUs and PSUs based on the fair market value of our voting shares at the time of grant, which is equal to the weighted average trading price of our voting shares for the five trading days immediately preceding the grant date. The RSUs time vest at the end of a three-year period, with compensation expense being recognized in net earnings over the vesting period. PSUs time vest at the end of a three-year term and incorporate performance criteria based on achieving compounded average diluted earnings per share growth rate targets established at the time of grant. Compensation expense is recognized in net earnings over the vesting period based on the number of units expected to vest. For the first quarter of 2009, $0.2 million in compensation expense was included in marketing, general and administration expense related to the executive share unit plan as compared to $0.4 million in the same period of 2008.
Foreign exchange
We are exposed to foreign currency exchange risks arising from fluctuations in exchange rates on our US-dollar denominated net monetary assets and our operating expenditures, mainly aircraft fuel, aircraft leasing expense, certain maintenance costs and a portion of airport operations costs. During the three months ended March 31, 2009, the average US-dollar exchange rate was 1.2448 (three months ended March 31, 2008 - 1.0036), with the period-end exchange rate at 1.2613 (March 31, 2008 - 1.0235), representing increases of approximately 24 per cent and 23 per cent, respectively.
The gain on foreign exchange line item on our consolidated statement of earnings was mainly attributable to the effect of the changes in the value of our US-dollar denominated net monetary assets. As at March 31, 2009, US-dollar net monetary assets totalled approximately US $89.3 million (December 31, 2008 - US $99.5 million) and consist mainly of US-dollar cash and cash equivalents and security deposits on various leased and financed aircraft, as well as US-dollar accounts payable and accrued liabilities. 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 $4.6 million for the first quarter of 2009 on the revaluation of our US-dollar net monetary assets as compared to a gain of $3.9 million for the same period of 2008.
We periodically use financial derivatives to manage our exposure to foreign currency exchange risk. As at March 31, 2009, we had a mixture of US-dollar forward contracts and option arrangements to offset our US-dollar denominated aircraft lease payments for the next six months of 2009 on our current leased aircraft. As at March 31, 2009, we had entered into financial derivative instruments to purchase on average US $6.6 million per month for six months for a total of US $39.5 million. Of this total, approximately 45 per cent is hedged using forward contracts at a weighted average strike price of 1.0463 per US dollar, and approximately 55 per cent is hedged using option arrangements at a weighted average range of 1.1248 to 1.2151 per US dollar.
Upon proper qualification, we designated our forward contracts as effective cash flow hedges for accounting purposes. Under cash flow hedge accounting, the effective portion of the change in the fair value of the hedging instrument is recognized in AOCL, while the ineffective portion is recognized in non-operating income (expense). Upon maturity of the derivative instrument, the effective gains and losses previously recognized in AOCL are recorded in net earnings as a component of aircraft leasing. Maturity dates for all of the foreign exchange forward contracts are within 2009. As at March 31, 2009, no portion of the forward contracts is considered ineffective.
For the three months ended March 31, 2009, we realized a gain before tax on the forward contracts of $3.3 million (three months ended March 31, 2008 - $0.3 million), included as a deduction to aircraft leasing expense. As at March 31, 2009, the estimated fair market value of the remaining forward contracts recorded in prepaid expenses, deposits and other is a gain of $3.8 million (December 31, 2008 - $5.9 million). The estimated amount reported in AOCL that is expected to be reclassified to net earnings as a reduction to aircraft leasing expense during the next 12 months is a gain after tax of $2.7 million.
Our foreign exchange option arrangements are not designated as hedges for accounting purposes and are recorded at fair value on the consolidated balance sheet, with changes in fair value recorded in non-operating income (expense). As at March 31, 2009, the estimated fair market value of the option arrangements recorded in prepaid expenses, deposits and other is a gain of $1.4 million (December 31, 2008 - $0.9 million). For the three months ended March 31, 2009, we realized a gain of $6,000 on our foreign exchange option arrangements and reported an unrealized gain of $0.5 million, both included in non-operating income (expense). Maturity dates for all of the foreign exchange option arrangements are within 2009.
The fair value of the foreign exchange option arrangements was determined through a standard option valuation technique used by the counterparty based on inputs, including foreign exchange rates, interest rates and volatilities. Contracts outstanding as at March 31, 2009 were at a weighted average contracted range of 1.1248 to 1.2151 US dollars to Canadian dollars (December 31, 2008 - 1.1333 to 1.2254). The fair value of the foreign exchange forward contracts designated in an effective hedging relationship was measured based on the difference between the contracted rate and the current forward price obtained from the counterparty, which can be observed and corroborated in the marketplace. As at March 31, 2009, the average contracted rate on the outstanding forward contracts was 1.0463 (December 31, 2008 - 1.0519) US dollars to Canadian dollars and the average forward rate used in determining the fair value was 1.2606 (December 31, 2008 - 1.2178) US dollars to Canadian dollars. Due to the short-term nature of the outstanding forward contracts, no discount rate was applied.
For 2009, including the impact of foreign exchange hedging, we estimate that every one-cent change in the value of the Canadian dollar versus the US dollar will have an approximate $7 million impact on our annual costs (approximately $5 million for fuel and $2 million related to other US-dollar denominated expenses). This differs from our estimate in the fourth quarter of 2008 of $6 million for fuel, due to softening in the price of jet fuel.
Income taxes
Our operations span several Canadian tax jurisdictions, subjecting our income to various rates of taxation. As such, the computation of the provision for income taxes involves judgments based on the analysis of several different pieces of legislation and regulation.
Our effective consolidated income tax rate for the quarter ended March 31, 2009 was 25.8 per cent, as compared to 29.2 per cent for the same period of 2008. The variance was driven primarily by British Columbia provincial income tax rate reductions substantively enacted in the first quarter of 2009, as well as adjustments to previous future tax estimates, for an overall reduction of future income tax expense recognized during this period of $2.3 million. Excluding these non-recurring items, the effective consolidated income tax rate for the first quarter of 2009 would have been 30.3 per cent, which is consistent with our expected effective tax rate of 30 to 31 per cent.
Guest experience
As an airline, we are focused on meeting the needs of our guests while maintaining the highest 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 operating performance indicators
On-time performance and completion rates are calculated based on the U.S. Department of Transportation's standards of measurement for the North American airline industry. Our bag ratio represents the number of delayed or lost baggage claims made per 1,000 guests.
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Three months ended March 31
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2009 2008 Change
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On-time performance 70.6% 69.0% 1.6 pts
Completion rate 97.5% 98.1% (0.6 pts)
Bag ratio 4.41 5.15 14.4%
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On-time performance, indicating the percentage of flights that arrived within 15 minutes of their scheduled time, is a key factor in measuring our guest experience. Despite harsh winter weather during the first quarter of 2009, our on-time performance improved by 1.6 points during the quarter as compared to the same period in 2008.
Our completion rate was down slightly for the first quarter of 2009 at 97.5 per cent versus 98.1 per cent in the comparable period of 2008, due to inclement weather and resulting flight cancellations. This indicator represents the percentage of flights completed from flights originally scheduled.
We continued to see our bag ratio improve by 14.4 per cent for the three months ended March 31, 2009, as compared to the same period in 2008.
LIQUIDITY AND CAPITAL RESOURCES
Despite the economic environment, we achieved another quarter of profitable financial results. Our substantial cash on hand and continued generation of positive cash flows from operations position us well to execute our strategy and withstand the economic recession. Additionally, our strong leverage ratios reflect our financial health and stability. We ended the first quarter of 2009 with a cash balance of $835.8 million, an increase of 1.9 per cent as compared to $820.2 million as at December 31, 2008. Part of this cash balance relates to cash collected with respect to advance ticket sales, for which the balance at March 31, 2009 was $263.7 million, as compared to $251.4 million as at December 31, 2008. Typically, we have cash and cash equivalents on hand to have sufficient liquidity to meet our liabilities when due, under both normal and stressed conditions. As at March 31, 2009, we had cash on hand of 3.17 times (December 31, 2008 - 3.26 times) the advance ticket sales balance. Our working capital ratio of 1.24 as at March 31, 2009 remained strong and demonstrates our financial stability. Credit risk associated with cash and cash equivalents is minimized substantially by ensuring that these financial assets are invested primarily in debt instruments with highly-rated financial institutions. Additionally, we have not been required to post collateral with respect to any of our derivative contracts.
We monitor capital on a number of measures, including adjusted debt-to-equity and adjusted net debt to Earnings Before Interest, Taxes, Depreciation, Aircraft Rent and other items (EBITDAR). Our adjusted debt-to-equity ratio improved by 3.4 per cent to 1.72 as at March 31, 2009, which included $690.3 million in off-balance-sheet aircraft operating leases. This compared favourably to an adjusted debt-to-equity ratio of 1.78 as at December 31, 2008, attributable to the increase in shareholders' equity more than offsetting the addition of new aircraft financing during the period. As at March 31, 2009, our adjusted net debt to EBITDAR ratio was 2.33, representing a decline of 1.7 per cent as compared to 2.29 as at December 31, 2008, due primarily to the decrease in EBITDAR being slightly greater than the decrease in adjusted net debt. Both of these ratios met our internal targets for March 31, 2009 and December 31, 2008 of an adjusted debt-to-equity measure and an adjusted net debt to EBITDAR ratio of no more than 3.00.
Please refer to the end of this MD&A for a reconciliation of the non-GAAP measures listed above, including our adjusted debt-to-equity and adjusted net debt to EBITDAR ratios, to the nearest measure under Canadian GAAP.
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To see the Adjusted Debt-To-Equity and Adjusted Net Debt to EBITDAR
charts, click here:
http://files.newswire.ca/762/WestJet_EBITDAR.doc
>>
Operating cash flow
We continued to generate positive cash flows from operations to fund our working capital requirements. In the first quarter of 2009, cash from operations decreased to $95.5 million compared to $184.8 million for the same period of 2008, representing a decline of 48.4 per cent. This quarter-over-quarter decrease related primarily to lower earnings from operations due to the weakening economy, as well as a decrease in non-cash working capital due to lower advance ticket sales and accounts payable and accrued liabilities balances, versus amounts as at March 31, 2008.
Financing cash flow
For the first quarter of 2009, our total cash flow used in financing activities was $41.6 million, consisting substantially of repayments of long-term debt. During the comparable quarter of 2008, our cash flow from financing activities was $24.4 million, comprised mainly of $67.9 million in long-term debt issued to finance two owned aircraft, partially offset by $41.4 million in long-term debt repayments and $2.1 million in deposits relating mainly to leased aircraft.
In addition to having strong cash liquidity, we have grown through aircraft acquisitions financed by low-interest-rate debt supported by the Export-Import Bank of the United States (Ex-Im Bank). We have yet to pursue financing agreements for our remaining aircraft commitments, as our next purchased aircraft delivery is not expected until September 2010.
The loan guarantees from the U.S. 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 52, with an outstanding debt balance of $1.3 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 2009 totalled $45.0 million compared to $80.2 million in the same period of 2008. During the three months ended March 31, 2009, our investing activities consisted of $27.0 million in aircraft additions, largely resulting from the conversion to an accelerated deposit schedule with Boeing, toward four future owned aircraft in order to mitigate carrying costs. Additionally, we incurred $18.0 million in other property and equipment additions, mainly related to our new office space, the Campus, adjacent to the Calgary hangar. Cash used in investing activities for the first quarter of 2008 included $70.8 million related primarily to the addition of two owned 737-700 aircraft, as well as $11.6 million in capital spending, mainly associated with the Campus facility.
Capital Resources
During the first quarter of 2009, we took delivery of two leased 737-800s, increasing our total registered fleet to 78 aircraft with an average age of 4.2 years. As at March 31, 2009, we had existing commitments to take delivery of an additional 42 aircraft as summarized below, for a total committed fleet of 120 by 2013. 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 following table as the lease agreement has not yet been signed; however, if included, our future deliveries would be 121 aircraft by 2013.
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Series
------------------------------------------------
600s 700s
------------------------------------------------
Leased Owned Total Leased Owned Total
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Fleet at
December 31, 2008 - 13 13 18 38 56
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Fleet at March 31, 2009 - 13 13 18 38 56
Commitments:
2009 - - - 7 - 7
2010 - - - 4 2* 6
2011 - - - 4 2* 6
2012 - - - - 14* 14
2013 - - - - 6* 6
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Total Commitments - - - 15 24 39
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Committed fleet
as of 2013 - 13 13 33 62 95
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*We have an option to convert any of these future aircraft to 737-800s.
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Series
------------------------------------------------
800s Total Fleet
------------------------------------------------
Leased Owned Total Leased Owned Total
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Fleet at
December 31, 2008 6 1 7 24 52 76
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Fleet at March 31, 2009 8 1 9 26 52 78
Commitments:
2009 1 - 1 8 - 8
2010 2 - 2 6 2 8
2011 - - - 4 2 6
2012 - - - - 14 14
2013 - - - - 6 6
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Total Commitments 3 - 3 18 24 42
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Committed fleet
as of 2013 11 1 12 44 76 120
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*We have an option to convert any of these future aircraft to 737-800s.
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As at March 31, 2009, our total purchased aircraft commitment, including amounts to be paid for live satellite television systems on purchased and leased aircraft, was $1,286.6 million (US $1,020.0 million). Additionally, our commitment relating to aircraft operating leases was $1,586.8 million (US $1,258.0 million) as at March 31, 2009, to be funded through our operating cash flow. Amounts relating to the previously mentioned unsigned lease have not been included in these commitments.
During 2008, we signed a three-year revolving operating line of credit with a syndicate of three Canadian banks. The line of credit is available for up to a maximum of $85 million, commencing in the second quarter of 2009. It is subject to various customary conditions precedent being satisfied, and will be secured by our new Campus facility. The line of credit will bear interest at prime plus 0.50 per cent per annum or a bankers acceptance rate at 2.0 per cent annual stamping fee and will be available for general corporate expenditures and working capital purposes. We are required to pay a standby fee of 15 basis points, based on the average unused portion of the line of credit for the previous quarter, payable quarterly. As at March 31, 2009, no amounts were drawn on this facility.
Contingencies
We are party to certain legal proceedings 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.
Share capital
Our issued and outstanding common shares, along with common shares potentially issuable, are as follows:
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Number of shares
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May 1, March 31,
2009 2009
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Issued and outstanding:
Common voting shares 123,827,080 124,132,879
Variable voting shares 4,102,255 3,796,100
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Total common shares issued and outstanding 127,929,335 127,928,979
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Common shares potentially issuable:
Stock options 11,729,630 11,735,130
RSUs 157,938 157,938
PSUs 210,579 210,579
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Total common shares potentially issuable 12,098,147 12,103,647
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Total outstanding and potentially issuable
common shares 140,027,482 140,032,626
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Related-party transactions
We have debt financing and investments in short-term deposits with a financial institution that is related through two common directors, one of whom is also the president of the financial institution. As at March 31, 2009, total long-term debt includes an amount of $7.1 million (December 31, 2008 - $7.3 million) due to the financial institution. Included in cash and cash equivalents as at March 31, 2009 are short-term investments of $125.2 million (December 31, 2008 - $96.5 million) owing from the financial institution. In 2008, we signed a three-year revolving operating line of credit agreement with a banking syndicate, of which one of the members is the related-party 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.
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ACCOUNTING
Changes in accounting policies
Goodwill and intangible assets
>>
Effective January 1, 2009, we adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3064, Goodwill and Intangible Assets. This section provides guidance on the recognition, measurement, presentation and disclosure for goodwill and intangible assets, other than the initial recognition of goodwill or intangible assets acquired in a business combination. Upon adoption of Section 3064, we reclassified the net book value of purchased software that was previously recognized in property and equipment of $13.2 million as at March 31, 2009 (December 31, 2008 - $12.1 million) to intangible assets on our consolidated balance sheet. There was no impact to current or prior-period net earnings. See note 6 to the consolidated financial statements for further disclosure.
Business combinations
In January 2009, the CICA Accounting Standards Board (AcSB) issued Section 1582, Business Combinations. Section 1582 replaces Section 1581, Business Combinations and harmonizes the Canadian standards with IFRS. Section 1582 establishes principles and requirements of the acquisition method for business combinations and related disclosures. This section is effective January 1, 2011, and applies prospectively to business combinations for which the acquisition date is on or after our first annual reporting period beginning on or after January 1, 2011. Early adoption is permitted. We elected to adopt Section 1582 prospectively effective January 1, 2009. Adoption of this section did not impact our results of operations or financial position.
Consolidated statements and non-controlling interests
In January 2009, the AcSB issued Sections 1601, Consolidated Financial Statements and Section 1602, Non-controlling Interests, which together replace Section 1600, Consolidated Financial Statements and harmonizes the Canadian standards with IFRS. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 provides guidance on accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These sections are effective on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. Early adoption is permitted. We elected to adopt Section 1601 and Section 1602 prospectively effective January 1, 2009. Adoption of these sections did not impact our results of operations or financial position.
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Future accounting policy changes
IFRS
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On February 13, 2008, the CICA AcSB confirmed that the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises for interim and annual financial statements, effective for fiscal years beginning on or after January 1, 2011, including comparatives for 2010. The objective is to improve financial reporting by having one single set of accounting standards that are comparable with other entities on an international basis.
We commenced our IFRS conversion project during 2008 and established a formal project governance structure, including an IFRS Steering Committee, to monitor the progress and critical decisions in the transition to IFRS. The Steering Committee consists of senior levels of management from Finance, Treasury and Investor Relations, among others. An external advisor has been engaged to work with our dedicated project staff to complete the conversion. Regular reporting is provided by the project team to senior management, the Steering Committee and the Audit Committee of the Board of Directors.
Our IFRS conversion project consists of three phases: Diagnostic, Solution Development and Implementation and Execution. We have completed the Diagnostic phase, which involved a high-level preliminary assessment of the differences between Canadian GAAP and IFRS and the potential effects of IFRS to accounting and reporting processes, information systems, business processes and external disclosures. This assessment has provided insight as to the most significant areas of difference applicable to us and include property and equipment, provisions and leases, as well as the more extensive presentation and disclosure requirements under IFRS.
We have finalized our IFRS transition plan including a timetable for assessing the impact on systems, internal controls over financial reporting (ICFR) and business activities. Currently, we are engaged in the Solution Development phase of the project and are working in issue-specific teams to focus on generating options and making recommendations in the identified areas. We have begun to roll out our staff training programs and have begun to perform an in-depth review of accounting policy impacts, as well as the associated impacts of the IFRS transition on business activities. A full review of our information systems is in progress to assess IFRS conversion impacts and we continue to evaluate the available alternatives within our current financial systems. Our target is to complete the Solution Development phase by the third quarter of 2009.
We continue to monitor standards development as issued by the International Accounting Standards Board and the AcSB, as well as regulatory developments as issued by the Canadian Securities Administrators (CSA), which may affect the timing, nature or disclosure of the our adoption of IFRS.
The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect our reported financial position and results of operations. As we are still in the Solution Development phase and have not yet selected our accounting policy choices and IFRS 1 exemptions, we are unable to quantify the impact of IFRS on our financial statements. The areas of significance identified above are based on available information and our expectations as of the date of this MD&A and thus, are subject to change for new facts and circumstances.
Please see the following table for certain elements of our IFRS transition plan and an assessment of progress towards achieving these. The project team is working through a detailed IFRS transition plan and certain project activities and milestones could change. We have begun to highlight certain key activities below to provide insights into the IFRS project.
Given the progress of the project and outcomes identified, we could change our intentions between the time of communicating these key milestones below and the changeover date. Further, changes in regulation or economic conditions at the date of the changeover or throughout the project could result in changes to the transition plan being different from those communicated here.
<<
-------------------------------------------------------------------------
Key activity Key milestones Status
-------------------------------------------------------------------------
Financial statement preparation
-------------------------------------------------------------------------
- Identify differences Senior management and Completed the IFRS
in Canadian GAAP/IFRS Steering Committee Diagnostic phase during
accounting policies sign-off for all key 2008, which involved a
- Select ongoing IFRS IFRS accounting high-level review of the
policies policy choices to major differences
- Select IFRS 1 choices occur during the third between Canadian GAAP
- Develop financial quarter of 2009. and IFRS.
statement format
- Quantify effects of Development of draft Currently engaged in the
change in initial financial statement Solution Development
IFRS disclosure and format to occur phase, which includes an
2010 comparative during the latter in-depth analysis of
financial statements part of 2009. issues and accounting
policy choices.
-------------------------------------------------------------------------
Training
-------------------------------------------------------------------------
Define and introduce Controller's Group Project team expert
appropriate level of and business unit resources have been
IFRS expertise for accounting personnel identified to provide
each of the following: training to occur insights and training.
during the third and Training for project
- Controller's Group fourth quarters of team members is
and business unit 2009 as needed. occurring throughout the
accounting personnel Additional training project.
- Audit Committee will occur throughout
the project as needed.
Audit Committee
training tentatively
scheduled to occur
during the second
half of 2009.
-------------------------------------------------------------------------
Information technology (IT) infrastructure
-------------------------------------------------------------------------
Confirm that business Confirm that systems Diagnostic analysis
processes and systems can address 2010 dual regarding current IT
are IFRS compliant, reporting requirements systems completed.
including: by the third quarter
of 2009. Currently reviewing
- Program upgrades/ options to address
changes Confirm that business business process
- Gathering data for processes and systems changes. Proof of
disclosures are IFRS compliant concept for dual
throughout the project. reporting during
2010 is currently
being developed.
-------------------------------------------------------------------------
Control environment
-------------------------------------------------------------------------
- For all accounting All key control and Analysis of control
policy changes design effectiveness issues is underway in
identified, assess implications are conjunction with review
control design and being assessed as part of accounting issues and
effectiveness of the key IFRS policies.
implications differences and
- Implement appropriate accounting policy
changes choices through to
the fourth quarter
of 2009.
-------------------------------------------------------------------------
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL
REPORTING
Disclosure controls and procedures
>>
Disclosure controls and procedures (DC&P) are designed to provide reasonable assurance that all relevant information is gathered and reported to management, including the President and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure.
An evaluation of the effectiveness of our DC&P was conducted, as at March 31, 2009, by management under the supervision of the CEO and the CFO. Based on this evaluation, the CEO and the CFO have concluded that, as at March 31, 2009, our DC&P, as defined by the CSA in National Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, are effective to ensure that information required to be disclosed in reports that we file or submit under Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified therein.
Internal control over financial reporting
ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian GAAP. Management is responsible for establishing and maintaining adequate ICFR.
Our ICFR includes policies and procedures that pertain to the maintenance of records that provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with Canadian GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors; pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; and are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our annual and interim consolidated financial statements.
Because of its inherent limitations, ICFR can provide only reasonable assurance and may not prevent or detect misstatements. Furthermore, projections of an evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management, under the supervision of the CEO and the CFO, has evaluated the effectiveness of our ICFR using the framework and criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the design of our ICFR was effective as at March 31, 2009. There were no changes in our ICFR during the quarter ended March 31, 2009, that have materially affected, or are reasonably likely to affect, our ICFR.
OUTLOOK
During the first quarter of 2009, we continued to see the impact of the weak economic environment, putting substantial pressure on yield and pricing. Despite this, we remain profitable and are reporting what we believe to be one of the top margins within the North American airline industry.
Our second quarter capacity is expected to increase between one and two per cent from the second quarter of 2008. During the second quarter, we have adjusted our flight schedules to reduce some of our flying as we take into consideration the current demand and revenue environment. We anticipate that competitors will continue to withdraw capacity in the domestic, transborder and international markets; however, we continue to add additional capacity into these markets, which we believe will allow us to capture additional market share.
As we move further into 2009, we do not anticipate a dramatic improvement in external economic conditions in the short term, and thus, we believe that demand for air travel in the second quarter of 2009 will continue to be negatively impacted. Additionally, we are not seeing any improvement in the revenue environment. As a result, it is expected that second quarter RASM will show year-over-year declines that are, at best, similar to what we saw in the first quarter of 2009. The recent H1N1 influenza virus outbreak appears to be delaying some consumers' travel bookings; however, it is too early to determine how it will impact RASM.
The price of jet fuel has declined from the record levels of 2008 and at current levels, is providing substantial relief on costs. Fuel prices have increased slightly since the start of the year, but with significantly less volatility than seen during 2008. Due to lower jet fuel prices, we expect our second quarter 2009 fuel costs, excluding hedging, to range between $0.60 and $0.62 per litre, representing a 40 per cent decline or greater from the same period last year, partially offset by a weaker Canadian dollar and slightly higher fuel transportation costs.
For the second quarter of 2009, we have hedged approximately 30 per cent of our anticipated fuel requirements using Canadian-dollar WTI fixed swap agreements and costless collar structures. The fixed swap agreements represent approximately 70 per cent of the total volume hedged for the second quarter and are at an average of CAD $91 per barrel. The costless collar structures represent the remaining 30 per cent and have a weighted average call price of CAD $114 per barrel and a weighted average put price of CAD $77 per barrel. The settlements of these hedging contracts are anticipated to add between $0.04 and $0.06 per litre to our cost of fuel.
In spite of the unprecedented events, we remain confident that we will effectively manage through the economic challenges as they are presented in 2009. We are well positioned to adapt our capacity during this period, with our seasonal deployment strategy, a number of newly-introduced destinations and the opportunity to increase our market share in a number of markets. Moreover, during these challenging times, our WestJet brand has remained strong, making us the airline of choice for many travellers who are seeking stability in their travel plans, which has in turn resulted in market share gains. We continue capitalizing on our low-cost structure, maintaining a strong balance sheet and delivering high-value service to our guests. With our airline's healthy underlying fundamentals, including continued profitability, a healthy cash position, enviable corporate culture and people providing an award-winning guest experience, we believe that 2009 will be another successful and profitable year for WestJet.
NON-GAAP MEASURES
To supplement our consolidated financial statements presented in accordance with Canadian GAAP, we use various non-GAAP performance measures as discussed below. These measures are provided to enhance the reader'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 to, Canadian GAAP and do not have standardized meanings. Therefore, they are not likely to be comparable to similar measures presented by other entities.
The following non-GAAP measures are used to monitor our financial performance:
<<
Adjusted debt: The sum of long-term debt, obligations under capital lease
and 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. This measure is used in the calculation of adjusted debt-to-
equity and adjusted net debt to Earnings Before Interest, Taxes,
Depreciation, Aircraft Rent and other items, as defined below.
Adjusted equity: The sum of share capital, contributed surplus and
retained earnings, excluding accumulated other comprehensive loss (AOCL).
This measure is used in the calculation of adjusted debt-to-equity.
Adjusted net debt: Adjusted debt less cash and cash equivalents. This
measure is used in the calculation of adjusted net debt to Earnings
Before Interest, Taxes, Depreciation, Aircraft Rent and other items, as
defined below.
EBITDAR: Earnings Before Interest, Taxes, Depreciation, Aircraft Rent and
other items, such as asset impairments, gains and losses on derivatives
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.
CASM, excluding fuel and employee profit share: We exclude the effects of
aircraft fuel expense and employee profit share expense to assess the
operating performance of our business. Fuel expense is excluded from our
operating results due to the fact that fuel prices are impacted by a host
of factors outside our control, such as significant weather events,
geopolitical tensions, refinery capacity and global demand and supply.
Excluding this expense allows us to analyze our operating results on a
comparable basis. Employee profit share expense is excluded from our
operating results due to its variable nature and excluding this expense
allows greater comparability.
Aircraft fuel expense, excluding hedging: As presented in the non-GAAP
measures to GAAP reconciliation in Results of Operations - Aircraft Fuel,
we believe it is useful to reflect aircraft fuel expense excluding
hedging, which excludes the effective portion of realized losses on fuel
derivatives and excludes ineffectiveness, as defined, for future period
derivative instruments. Since fuel expense is highly volatile, we believe
presenting the cost of fuel, both including and excluding the effects of
hedging, is useful to a reader. This table has not been repeated in this
section.
Reconciliation of non-GAAP measures to GAAP
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in thousands, except March 31, December 31,
ratio amounts) 2009 2008 Change
-------------------------------------------------------------------------
Adjusted debt-to-equity:
Long-term debt(i) $ 1,310,313 $ 1,351,903 $ (41,590)
Obligations under capital
lease(ii) 1,011 1,108 (97)
Off-balance-sheet aircraft
leases(iii) 690,323 645,375 44,948
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted debt $ 2,001,647 $ 1,998,386 $ 3,261
-------------------------------------------------------------------------
Total shareholders' equity 1,133,256 1,086,137 47,119
Add: AOCL 31,060 38,112 (7,052)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted equity $ 1,164,316 $ 1,124,249 $ 40,067
-------------------------------------------------------------------------
Adjusted debt-to-equity 1.72 1.78 (3.4%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted net debt to EBITDAR(iv):
Net earnings $ 163,061 $ 178,135 $ (15,074)
Add:
Net interest(v) 53,733 50,593 3,140
Taxes 68,018 76,702 (8,684)
Depreciation and amortization 137,529 136,485 1,044
Aircraft leasing 92,043 86,050 5,993
Other(vi) (14,574) (13,256) (1,318)
-------------------------------------------------------------------------
EBITDAR $ 499,810 $ 514,709 $ (14,899)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted debt (as above) 2,001,647 1,998,386 3,261
Less: Cash and cash equivalents (835,791) (820,214) (15,577)
-------------------------------------------------------------------------
Adjusted net debt $ 1,165,856 $ 1,178,172 $ (12,316)
-------------------------------------------------------------------------
Adjusted net debt to EBITDAR 2.33 2.29 (1.7%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) As at March 31, 2009, long-term debt includes the current portion
of long-term debt of $165,413 (December 31, 2008 - $165,721) and
long-term debt of $1,144,900 (December 31, 2008 - $1,186,182).
(ii) As at March 31, 2009, obligations under capital lease includes the
current portion of obligations under capital lease of $400
(December 31, 2008 - $395) and obligations under capital lease of
$611 (December 31, 2008 - $713).
(iii) Off-balance-sheet aircraft leases is calculated by multiplying the
trailing twelve months of aircraft leasing expense by 7.5. As at
March 31, 2009, the trailing twelve months of aircraft leasing
costs totalled $92,043 (December 31, 2008 - $86,050).
(iv) The trailing twelve months are used in the calculation of EBITDAR.
(v) As at March 31, 2009, net interest include the trailing twelve
months of interest income of $20,297 (December 31, 2008 - $25,485)
and the trailing twelve months of interest expense of $74,030
(December 31, 2008 - $76,078).
(vi) As at March 31, 2009, other includes the trailing twelve month
foreign exchange gain of $31,271 and the trailing twelve month loss
on derivatives of $16,697 (December 31, 2008 - $30,587 foreign
exchange gain and $17,331 loss on derivatives).
-------------------------------------------------------------------------
Three months ended March 31
-------------------------------------------------------------------------
($ in thousands, except per unit data) 2009 2008
-------------------------------------------------------------------------
CASM, excluding fuel and employee
profit share
-------------------------------------------------------------------------
Operating expenses - GAAP $ 518,624 $ 516,787
Adjusted for:
Aircraft fuel expense (142,391) (167,717)
Employee profit share expense (5,717) (13,146)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses, excluding above
items - Non-GAAP $ 370,516 $ 335,924
-------------------------------------------------------------------------
ASMs (in thousands) 4,356,805 4,064,992
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CASM, excluding above items - Non-GAAP (cents) 8.50 8.26
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Financial Statements and Notes
For the three months ended March 31, 2009, and 2008
Consolidated Statement of Earnings
(Stated in thousands of Canadian dollars, except per share amounts)
(Unaudited)
-------------------------------------------------------------------------
Three months ended March 31 2009 2008
-------------------------------------------------------------------------
Revenues:
Guest revenues $ 497,095 $ 525,700
Charter and other revenues 82,190 73,648
-------------------------------------------------------------------------
579,285 599,348
Expenses:
Aircraft fuel 142,391 167,717
Airport operations 93,657 83,928
Flight operations and navigational charges 71,707 67,575
Marketing, general and administration 52,866 47,406
Sales and distribution 40,914 40,278
Depreciation and amortization 33,893 32,849
Inflight 28,884 25,399
Aircraft leasing 25,076 19,083
Maintenance 23,519 19,406
Employee profit share 5,717 13,146
-------------------------------------------------------------------------
518,624 516,787
-------------------------------------------------------------------------
Earnings from operations 60,661 82,561
Non-operating income (expense):
Interest income 2,118 7,306
Interest expense (17,485) (19,533)
Gain on foreign exchange 4,621 3,937
Loss on disposal of property and equipment (106) (70)
Gain on derivatives (note 11) 634 -
-------------------------------------------------------------------------
(10,218) (8,360)
-------------------------------------------------------------------------
Earnings before income taxes 50,443 74,201
Income tax expense:
Current 706 991
Future 12,305 20,704
-------------------------------------------------------------------------
13,011 21,695
-------------------------------------------------------------------------
Net earnings $ 37,432 $ 52,506
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share (note 8):
Basic $ 0.29 $ 0.40
Diluted $ 0.29 $ 0.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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,
2009 2008
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 4) $ 835,791 $ 820,214
Accounts receivable 25,365 16,837
Future income tax 2,344 4,196
Prepaid expenses, deposits and other 57,214 67,693
Inventory 7,919 17,054
-------------------------------------------------------------------------
928,633 925,994
Property and equipment (note 5) 2,282,642 2,269,790
Intangible assets (note 6) 13,237 12,060
Other assets 75,970 71,005
-------------------------------------------------------------------------
$ 3,300,482 $ 3,278,849
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 251,080 $ 249,354
Advance ticket sales 263,748 251,354
Non-refundable guest credits 67,529 73,020
Current portion of long-term debt (note 7) 165,413 165,721
Current portion of obligations under
capital lease 400 395
-------------------------------------------------------------------------
748,170 739,844
Long-term debt (note 7) 1,144,900 1,186,182
Obligations under capital lease 611 713
Other liabilities 18,485 24,233
Future income tax 255,060 241,740
-------------------------------------------------------------------------
2,167,226 2,192,712
Shareholders' equity:
Share capital (note 8) 453,638 452,885
Contributed surplus 62,075 60,193
Accumulated other comprehensive loss (note 12) (31,060) (38,112)
Retained earnings 648,603 611,171
-------------------------------------------------------------------------
1,133,256 1,086,137
Commitments and contingencies (note 10)
-------------------------------------------------------------------------
$ 3,300,482 $ 3,278,849
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2009 2008
-------------------------------------------------------------------------
Share capital:
Balance, beginning of period $ 452,885 $ 448,568
Stock-based compensation on stock options
exercised (note 8) 753 4,624
-------------------------------------------------------------------------
453,638 453,192
Contributed surplus:
Balance, beginning of period 60,193 57,889
Stock-based compensation expense (note 8) 2,635 4,523
Stock-based compensation on stock options
exercised (note 8) (753) (4,624)
-------------------------------------------------------------------------
62,075 57,788
Accumulated other comprehensive loss (note 12):
Balance, beginning of period (38,112) (11,914)
Other comprehensive income 7,052 714
-------------------------------------------------------------------------
(31,060) (11,200)
Retained earnings:
Balance, beginning of period 611,171 455,365
Net earnings 37,432 52,506
-------------------------------------------------------------------------
648,603 507,871
Total accumulated other comprehensive loss and
retained earnings 617,543 496,671
-------------------------------------------------------------------------
Total shareholders' equity $ 1,133,256 $ 1,007,651
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2009 2008
-------------------------------------------------------------------------
Net earnings $ 37,432 $ 52,506
Other comprehensive income, net of tax:
Amortization of hedge settlements to
aircraft leasing 350 350
Net unrealized gain on foreign exchange
derivatives under cash flow hedge
accounting (net of tax of ($283);
2008 - ($208)) 910 592
Reclassification of net realized gains on
foreign exchange derivatives to net
earnings (net of tax of $907; 2008 - $92) (2,376) (228)
Net unrealized loss on fuel derivatives
under cash flow hedge accounting (net of
tax of $32) (283) -
Reclassification of net realized losses on
fuel derivatives to net earnings (net of
tax of ($3,523)) 8,451 -
-------------------------------------------------------------------------
7,052 714
-------------------------------------------------------------------------
Total comprehensive income $ 44,484 $ 53,220
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2009 2008
-------------------------------------------------------------------------
Operating activities:
Net earnings $ 37,432 $ 52,506
Items not involving cash:
Depreciation and amortization 33,893 32,849
Amortization of other liabilities (235) (235)
Amortization of hedge settlements 350 350
Unrealized gain on derivative instruments (1,474) -
Loss on disposal of property, equipment and
aircraft parts 205 877
Stock-based compensation expense 2,635 4,521
Income tax credit receivable (1,952) -
Future income tax expense 12,305 20,704
Unrealized foreign exchange gain (9,441) (4,301)
Change in non-cash working capital 21,808 77,563
-------------------------------------------------------------------------
95,526 184,834
-------------------------------------------------------------------------
Financing activities:
Increase in long-term debt - 67,948
Repayment of long-term debt (41,590) (41,428)
Decrease in obligations under capital lease (97) (92)
Increase in other assets (700) (2,072)
Change in non-cash working capital 830 -
-------------------------------------------------------------------------
(41,557) 24,356
-------------------------------------------------------------------------
Investing activities:
Aircraft additions (26,994) (70,840)
Aircraft disposals - 2,131
Other property and equipment additions (18,048) (11,640)
Other property and equipment disposals - 155
-------------------------------------------------------------------------
(45,042) (80,194)
-------------------------------------------------------------------------
Cash flow from operating, financing and investing
activities 8,927 128,996
Effect of foreign exchange on cash and cash
equivalents 6,650 1,798
-------------------------------------------------------------------------
Net change in cash and cash equivalents 15,577 130,794
Cash and cash equivalents, beginning of period 820,214 653,558
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 835,791 $ 784,352
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash interest paid $ 18,006 $ 19,633
Cash taxes paid $ 1,240 $ 768
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Notes to Consolidated Financial Statements
For the three months ended March 31, 2009, and 2008
(Stated in thousands of Canadian dollars, except share and per share
data)
(Unaudited)
-------------------------------------------------------------------------
1. Basis of presentation
The interim consolidated financial statements of WestJet Airlines Ltd.
(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, 2008, 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, 2008.
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.
2. Recent accounting pronouncements
(a) Change in accounting policies
(i) Goodwill and intangible assets
Effective January 1, 2009, the Corporation adopted Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3064, Goodwill and
Intangible Assets. This section provides guidance on the recognition,
measurement, presentation and disclosure for goodwill and intangible
assets, other than the initial recognition of goodwill or intangible
assets acquired in a business combination. Upon adoption of Section 3064,
the Corporation reclassified the net book value of purchased software
that was previously recognized in property and equipment to intangible
assets as shown on the Corporation's consolidated balance sheet. Prior
period balances were reclassified. There was no impact to current or
prior period net earnings. Software is carried at cost less accumulated
depreciation and is amortized on a straight-line basis over its useful
life of five years. See note 6, intangible assets, for further
disclosure.
(ii) Business combinations
In January 2009, the CICA Accounting Standards Board (AcSB) issued
Section 1582, Business Combinations. Section 1582 replaces Section 1581,
Business Combinations and harmonizes the Canadian standards with
International Financial Reporting Standards (IFRS). Section 1582
establishes principles and requirements of the acquisition method for
business combinations and related disclosures. This section is effective
January 1, 2011, and applies prospectively to business combinations for
which the acquisition date is on or after the first reporting period of
the Corporation beginning on or after January 1, 2011. Early adoption is
permitted. The Corporation elected to adopt Section 1582 prospectively
effective January 1, 2009. Adoption of this section did not impact the
Corporation's results of operations or financial position.
(iii) Consolidated statements and non-controlling interests
In January 2009, the AcSB issued Section 1601, Consolidated Financial
Statements and Section 1602, Non-controlling Interests, which together
replace Section 1600, Consolidated Financial Statements and harmonizes
the Canadian standards with IFRS. Section 1601 establishes standards for
the preparation of consolidated financial statements. Section 1602
provides guidance on accounting for a non-controlling interest in a
subsidiary in consolidated financial statements subsequent to a business
combination. These sections are effective on or after the beginning of
the first reporting period beginning on or after January 1, 2011. Early
adoption is permitted. The Corporation elected to adopt Section 1601 and
Section 1602 prospectively effective January 1, 2009. Adoption of these
sections did not impact the Corporation's results of operations or
financial position.
(b) International financial reporting standards (IFRS)
On February 13, 2008, the AcSB confirmed that the changeover to IFRS from
Canadian GAAP will be required for publicly accountable enterprises for
interim and annual financial statements effective for fiscal years
beginning on or after January 1, 2011, including comparatives for 2010.
The objective is to improve financial reporting by having one single set
of accounting standards that are comparable with other entities on an
international basis.
The Corporation commenced its IFRS conversion project during 2008 and
established a formal project governance structure, including an IFRS
Steering Committee, to monitor the progress and critical decisions in the
transition to IFRS. The Steering Committee consists of senior levels of
management from Finance, Treasury and Investor Relations, among others.
An external advisor has been engaged to work with the Corporation's
dedicated project staff to complete the conversion. Regular reporting is
provided by the project team to senior management, the Steering Committee
and the Audit Committee of the Board of Directors.
The Corporation's IFRS conversion project consists of three phases:
Diagnostic, Solution Development and Implementation and Execution. The
Corporation has completed the Diagnostic phase, which involved a high-
level preliminary assessment of the differences between Canadian GAAP and
IFRS and the potential effects of IFRS to accounting and reporting
processes, information systems, business processes and external
disclosures. This assessment has provided insight as to the most
significant areas of difference applicable to the Corporation and
includes property and equipment, provisions and leases, as well as the
more extensive presentation and disclosure requirements under IFRS.
The Corporation has finalized its IFRS transition plan including a
timetable for assessing the impact on systems, internal controls over
financial reporting and business activities. Currently, the Corporation
is engaged in the Solution Development phase of the project and is
working in issue-specific teams to focus on generating options and making
recommendations in the identified areas. The Corporation has begun to
roll out its staff training programs and has begun to perform an in-depth
review of accounting policy impacts, as well as the associated impacts of
the IFRS transition on business activities. A full review of the
Corporation's information systems is in progress to assess IFRS
conversion impacts and is continuing to evaluate the available
alternatives within its current financial systems. The Corporation's
target is to complete the Solution Development phase by third quarter of
2009.
The Corporation continues to monitor standards development as issued by
the International Accounting Standards Board and the AcSB, as well as
regulatory developments as issued by the Canadian Securities
Administrators, which may affect the timing, nature or disclosure of the
Corporation's adoption of IFRS.
The transition from current Canadian GAAP to IFRS is a significant
undertaking that may materially affect the Corporation's reported
financial position and results of operations. As the Corporation is still
in the Solution Development phase and has not yet selected its accounting
policy choices and IFRS 1 exemptions, the Corporation is unable to
quantify the impact of IFRS on its financial statements. The areas of
significance identified above are based on available information and the
Corporation's expectations as of the date of this disclosure and thus,
are subject to change for new facts and circumstances.
Please see the table on the following page for certain elements of the
Corporation's IFRS transition plan, and an assessment of progress towards
achieving these. The project team is working through a detailed IFRS
transition plan and certain project activities and milestones could
change. The Corporation has begun to highlight certain key activities
below to provide insights into the IFRS project.
Given the progress of the project and outcomes identified, the
Corporation could change its intentions between the time of communicating
these key milestones below and the changeover date. Further, changes in
regulation or economic conditions at the date of the changeover or
throughout the project could result in changes to the transition plan
being different from those communicated here.
-------------------------------------------------------------------------
Key activity Key milestones Status
-------------------------------------------------------------------------
Financial statement preparation
-------------------------------------------------------------------------
- Identify differences Senior management and Completed the IFRS
in Canadian GAAP/IFRS Steering Committee Diagnostic phase during
accounting policies sign-off for all key 2008, which involved a
- Select ongoing IFRS IFRS accounting policy high-level review of
policies choices to occur the major differences
- Select IFRS 1 choices during the third between Canadian GAAP
- Develop financial quarter of 2009. and IFRS.
statement format
- Quantify effects of Development of draft Currently engaged in the
change in initial financial statement Solution Development
IFRS disclosure and format to occur during phase, which includes an
2010 comparative the latter part of in-depth analysis of
financial statements 2009. issues and accounting
policy choices.
-------------------------------------------------------------------------
Training
-------------------------------------------------------------------------
Define and introduce Controller's Group and Project team expert
appropriate level of business unit resources have been
IFRS expertise for each accounting personnel identified to provide
of the following: training to occur insights and training.
- Controller's Group during the third and Training for project
and business unit fourth quarters of team members is
accounting personnel 2009 as needed. occurring throughout the
- Audit Committee Additional training project.
will occur throughout
the project as needed.
Audit Committee
training tentatively
scheduled to occur
during the second half
of 2009.
-------------------------------------------------------------------------
Information technology (IT) infrastructure
-------------------------------------------------------------------------
Confirm that business Confirm that systems Diagnostic analysis
processes and systems can address 2010 regarding current IT
are IFRS compliant, parallel processing systems completed.
including: requirements by the
- Program upgrades/ third quarter of 2009. Currently reviewing
changes options to address
- Gathering data for Confirm that business business process. Proof
disclosures processes and systems of concept for dual
are IFRS compliant reporting during 2010
throughout the is currently being
project. developed.
-------------------------------------------------------------------------
Control environment
-------------------------------------------------------------------------
- For all accounting All key control and Analysis of control
policy changes design effectiveness issues is underway in
identified, assess implications are being conjunction with review
control design and assessed as part of of accounting issues
effectiveness the key IFRS and policies.
implications differences and
- Implement appropriate accounting policy
changes choices through to the
fourth quarter of
2009.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, issue new shares and adjust current and projected
debt levels.
In the management of capital, the Corporation includes shareholders'
equity (excluding accumulated other comprehensive loss (AOCL)), long-term
debt, capital leases, cash and cash equivalents and the Corporation's
off-balance-sheet obligations related to its aircraft operating leases,
all of which are presented in detail below.
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, for non-operating gains and losses on derivatives and for
gains and losses on foreign exchange. The calculation of EBITDAR is a
measure that does not have a standardized meaning prescribed under GAAP
and is therefore not likely to be comparable to similar measures
presented by other issuers. 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 debt less cash and cash equivalents. The
Corporation defines equity as the sum of share capital, contributed
surplus and retained earnings, and excludes AOCL.
-------------------------------------------------------------------------
March 31, 2009 December 31, 2008 Change
-------------------------------------------------------------------------
Adjusted debt-to-equity:
Long-term debt(i) $ 1,310,313 $ 1,351,903 $ (41,590)
Obligations under capital
lease(ii) 1,011 1,108 (97)
Off-balance-sheet aircraft
leases(iii) 690,323 645,375 44,948
-------------------------------------------------------------------------
Adjusted debt $ 2,001,647 $ 1,998,386 $ 3,261
-------------------------------------------------------------------------
Total shareholders' equity 1,133,256 1,086,137 47,119
Add: AOCL 31,060 38,112 (7,052)
-------------------------------------------------------------------------
Adjusted equity $ 1,164,316 $ 1,124,249 $ 40,067
-------------------------------------------------------------------------
Adjusted debt-to-equity 1.72 1.78 (3.4%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted net debt to EBITDAR(iv):
Net earnings $ 163,061 $ 178,135 $ (15,074)
Add:
Net interest(v) 53,733 50,593 3,140
Taxes 68,018 76,702 (8,684)
Depreciation and amortization 137,529 136,485 1,044
Aircraft leasing 92,043 86,050 5,993
Other(vi) (14,574) (13,256) (1,318)
-------------------------------------------------------------------------
EBITDAR $ 499,810 $ 514,709 $ (14,899)
-------------------------------------------------------------------------
Adjusted debt (as above) 2,001,647 1,998,386 3,261
Less: Cash and cash equivalents (835,791) (820,214) (15,577)
-------------------------------------------------------------------------
Adjusted net debt $ 1,165,856 $ 1,178,172 $ (12,316)
-------------------------------------------------------------------------
Adjusted net debt to EBITDAR 2.33 2.29 1.7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) As at March 31, 2009, long-term debt includes the current portion
of long-term debt of $165,413 (December 31, 2008 - $165,721) and
long-term debt of $1,144,900 (December 31, 2008 - $1,186,182).
(ii) As at March 31, 2009, obligations under capital lease includes the
current portion of obligations under capital lease of $400
(December 31, 2008 - $395) and obligations under capital lease of
$611 (December 31, 2008 - $713).
(iii) Off-balance-sheet aircraft leases is calculated by multiplying the
trailing twelve months of aircraft leasing expense by 7.5. As at
March 31, 2009, the trailing twelve months of aircraft leasing
costs totalled $92,043 (December 31, 2008 - $86,050).
(iv) The trailing twelve months are used in the calculation of EBITDAR.
(v) As at March 31, 2009, net interest includes the trailing twelve
months of interest income of $20,297 (December 31, 2008 - $25,485)
and the trailing twelve months of interest expense of $74,030
(December 31, 2008 - $76,078).
(vi) As at March 31, 2009, other includes the trailing twelve month
foreign exchange gain of $31,271 and the trailing twelve month loss
on derivatives of $16,697 (December 31, 2008 - $30,587 foreign
exchange gain and $17,331 loss on derivatives).
As at March 31, 2009, and December 31, 2008, the Corporation's internal
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,
2009, the Corporation's adjusted debt-to-equity ratio improved by 3.4%
compared to December 31, 2008, attributable to the increase in
shareholders' equity more than offsetting the net increase in financing
in the period. As at March 31, 2009, the Corporation's adjusted net debt
to EBITDAR increased by 1.7% compared to December 31, 2008, as a result
of the decrease in EBITDAR being slightly greater than the decease in
adjusted net debt.
As part of the long-term debt agreements for the Calgary hangar facility
and the flight simulator, the Corporation monitors certain financial
covenants to ensure compliance with these debt agreements. As at March
31, 2009, and December 31, 2008, the Corporation was in compliance with
these financial covenants. There are no financial covenant compliance
requirements for the facilities guaranteed by the Export-Import Bank of
the United States (Ex-Im Bank).
There were no changes in the Corporation's approach to capital management
during the three months ended March 31, 2009.
4. Cash and cash equivalents
As at March 31, 2009, cash and cash equivalents includes bank balances of
$56,532 (December 31, 2008 - $98,998) and short-term investments of
$779,259 (December 31, 2008 - $721,216). Included in these balances, as
at March 31, 2009, the Corporation has US-dollar cash and cash
equivalents totaling US $55,227 (December 31, 2008 - US $56,920).
As at March 31, 2009, cash and cash equivalents includes total restricted
cash of $13,130 (December 31, 2008 - $10,748). Included in this amount is
$8,574 (December 31, 2008 - $6,062), representing cash held in trust by
WestJet Vacations Inc., a wholly owned subsidiary of the Corporation, in
accordance with regulatory requirements governing advance ticket sales
for certain travel-related activities; $4,083 (December 31, 2008 -
$4,222) for security on the Corporation's facilities for letters of
guarantee; and, in accordance with U.S. regulatory requirements, US $375
(December 31, 2008 - US $381) in restricted cash representing cash not
yet remitted for passenger facility charges.
5. Property and equipment
-------------------------------------------------------------------------
Accumulated
March 31, 2009 Cost depreciation Net book value
-------------------------------------------------------------------------
Aircraft $ 2,394,894 $ 429,309 $ 1,965,585
Ground property and equipment 121,864 53,993 67,871
Spare engines and parts 88,429 18,148 70,281
Buildings 130,944 7,253 123,691
Leasehold improvements 10,881 4,710 6,171
Assets under capital lease 2,482 1,814 668
-------------------------------------------------------------------------
2,749,494 515,227 2,234,267
Deposits on aircraft 47,999 - 47,999
Assets under development 376 - 376
-------------------------------------------------------------------------
$ 2,797,869 $ 515,227 $ 2,282,642
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated
December 31, 2008 Cost depreciation Net book value
-------------------------------------------------------------------------
Aircraft $ 2,394,098 $ 402,095 $ 1,992,003
Ground property and equipment 116,990 53,873 63,117
Spare engines and parts 86,728 17,099 69,629
Buildings 40,028 6,828 33,200
Leasehold improvements 12,019 5,692 6,327
Assets under capital lease 2,482 1,690 792
-------------------------------------------------------------------------
2,652,345 487,277 2,165,068
Deposits on aircraft 23,982 - 23,982
Assets under development 80,740 - 80,740
-------------------------------------------------------------------------
$ 2,757,067 $ 487,277 $ 2,269,790
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months ended March 31, 2009, the Corporation began
amortization of its Campus facility. As at March 31, 2009, a total cost
of $90,916 has been capitalized and included in buildings (December 31,
2008 - $80,725 was included in assets under development).
6. Intangible assets
-------------------------------------------------------------------------
Accumulated
Cost depreciation Net book value
-------------------------------------------------------------------------
March 31, 2009
Software $ 44,228 $ 30,991 $ 13,237
December 31, 2008
Software $ 41,835 $ 29,775 $ 12,060
-------------------------------------------------------------------------
For the three months ended March 31, 2009, the Corporation recognized
$1,430 (three months ended March 31, 2008 - $1,599) of depreciation
expense related to software.
7. Long-term debt
-------------------------------------------------------------------------
March 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Term loans - purchased aircraft (i) $ 1,290,406 $ 1,331,083
Term loan - flight simulator (ii) 7,056 7,265
Term loans - live satellite
television equipment (iii) 1,269 1,740
Term loan - Calgary hangar
facility (iv) 9,535 9,648
Term loan - Calgary hangar
facility (v) 2,047 2,167
-------------------------------------------------------------------------
1,310,313 1,351,903
Current portion 165,413 165,721
-------------------------------------------------------------------------
$ 1,144,900 $ 1,186,182
-------------------------------------------------------------------------
(i) 52 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 5.32%, maturing between 2014 and 2020. These
facilities are guaranteed by Ex-Im Bank and secured by one 800-
series aircraft, 38 700-series aircraft and 13 600-series aircraft.
(ii) Term loan repayable in monthly instalments of $93 including
floating interest at the bank's prime rate plus 0.88%, with an
effective interest rate of 3.38% as at March 31, 2009, maturing in
2011, secured by one flight simulator.
(iii) 11 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 1.54% as at March 31, 2009, 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 fixed
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 3.00% as at March 31, 2009, 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 $1,988,494 as at March 31,
2009 (December 31, 2008 - $2,012,915).
Future scheduled repayments of long-term debt are as follows:
-------------------------------------------------------------------------
2009 $ 124,145
2010 165,045
2011 177,533
2012 163,279
2013 162,740
2014 and thereafter 517,571
-------------------------------------------------------------------------
$ 1,310,313
-------------------------------------------------------------------------
8. Share capital
(a) Issued and outstanding
-------------------------------------------------------------------------
Three months ended Three months ended
March 31, 2009 March 31, 2008
-------------------------------------------------------------------------
Number Amount Number Amount
-------------------------------------------------------------------------
Common and variable voting
shares:
Balance, beginning
of period 127,913,580 $ 452,885 129,571,570 $ 448,568
Issuance of shares
pursuant to stock
option plans 15,399 - 193,925 -
Stock-based
compensation expense
on stock options
exercised - 753 - 4,624
-------------------------------------------------------------------------
Balance, end of period 127,928,979 $ 453,638 129,765,495 $ 435,192
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at March 31, 2009, the number of common voting shares outstanding was
124,132,879 (March 31, 2008 - 125,725,013) and the number of variable
voting shares was 3,796,100 (March 31, 2008 - 4,040,482).
(b) Per share amounts
The following table summarizes the shares used in calculating net
earnings per share:
-------------------------------------------------------------------------
Three months ended March 31
2009 2008
-------------------------------------------------------------------------
Weighted average number of shares
outstanding - basic 127,924,018 129,694,432
Effect of dilutive employee stock
options and unit plans 367,661 2,752,634
-------------------------------------------------------------------------
Weighted average number of shares
outstanding - diluted 128,291,679 132,447,066
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended March 31, 2009, 6,511,629 employee stock
options (three months ended March 31, 2008 - 1,537,273 employee stock
options and 48,300 restricted share units) were not included in the
calculation of dilutive potential shares as the result would be anti-
dilutive.
(c) Stock option plan
-------------------------------------------------------------------------
Three months ended Three months ended
March 31, 2009 March 31, 2008
-------------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
-------------------------------------------------------------------------
Stock options outstanding,
beginning of period 11,918,168 $ 13.90 12,226,232 $ 13.66
Granted 6,793 11.35 8,156 19.45
Exercised (181,194) 11.92 (813,827) 15.43
Forfeited (1,103) 16.65 (26,791) 13.06
Expired (7,534) 14.60 - -
-------------------------------------------------------------------------
Stock options
outstanding, end of
period 11,735,130 $ 13.93 11,393,770 $ 13.54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable, end of
period 7,669,672 $ 12.89 3,694,816 $ 14.78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Under the terms of the Corporation's stock option plan, option holders
can either (i) elect to receive shares by delivering cash to the
Corporation in the amount of the options, or (ii) choose a cashless
settlement alternative whereby they can 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, 2009, option holders
exercised 181,194 options (three months ended March 31, 2008 - 813,827)
on a cashless settlement basis and received 15,399 shares (three months
ended March 31, 2008 - 193,925).
(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 $2,446 for the three months ended March
31, 2009 (three months ended March 31, 2008 - $4,147).
The fair value of options granted during the three months ended March 31,
2009 and 2008 and the assumptions used in their determination, are as
follows:
-------------------------------------------------------------------------
Three months ended March 31
2009 2008
-------------------------------------------------------------------------
Weighted average fair value per option $ 3.40 $ 6.11
Weighted average risk-free interest rate 1.7% 3.3%
Weighted average volatility 37.2% 36.0%
Expected life (years) 3.6 3.6
Dividends per share $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Corporation has not incorporated an estimated forfeiture rate for
stock options that will not vest. Rather, the Corporation accounts for
actual forfeitures as they occur.
(e) Executive share unit plan
The Corporation has an equity-based executive share unit plan, whereby up
to a maximum of 550,000 restricted share units (RSU) and performance
share units (PSU) combined may be issued to senior executive officers of
the Corporation. The maximum number of units reserved and issuable under
the executive share unit plan is subject to shareholder approval, which
is expected to occur at the Annual and Special Meeting of Shareholders on
May 5, 2009.
The fair market value of the RSUs and PSUs at the time of grant is equal
to the weighted average trading price of the Corporation's voting shares
for the five trading days immediately preceding the grant date.
Each RSU entitles the senior executive to receive payment upon vesting in
the form of voting shares of the Corporation. The RSUs time vest at the
end of a three-year period, with compensation expense being recognized in
net earnings over the vesting period.
Each PSU entitles the senior executive to receive payment upon vesting in
the form of voting shares of the Corporation. PSUs time vest at the end
of a three-year term and incorporate performance criteria based on
achieving compounded average diluted earnings per share growth rate
targets established at the time of grant. Compensation expense is
recognized in net earnings over the vesting period based on the number of
units expected to vest.
-------------------------------------------------------------------------
Three months ended March 31, 2009
-------------------------------------------------------------------------
RSUs PSUs
Weighted Weighted
average average
Number of grant date Number of grant date
units fair value units fair value
-------------------------------------------------------------------------
Units outstanding,
beginning of period 55,181 $ 19.37 73,574 $ 19.37
Granted 102,757 11.35 137,005 11.35
-------------------------------------------------------------------------
Units outstanding,
end of period 157,938 $ 14.15 210,579 $ 14.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Vested, end of period - $ - - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended March 31, 2008
RSUs PSUs
Weighted Weighted
average average
Number of grant date Number of grant date
units fair value units fair value
-------------------------------------------------------------------------
Units outstanding,
beginning of period - $ - - $ -
Granted 54,277 19.45 72,369 19.45
-------------------------------------------------------------------------
Units outstanding,
end of period 54,277 $ 19.45 72,369 $ 19.45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Vested, end of period - $ - - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock-based compensation expense related to the executive share unit plan
included in marketing, general and administration expense totalled $189
for the three months ended March 31, 2009 (three months ended March 31,
2008 - $376).
9. Related-party transactions
The Corporation has debt financing and investments in short-term deposits
with a financial institution that is related through two common
directors, one of whom is also the president of the financial
institution. As at March 31, 2009, total long-term debt includes an
amount of $7,056 (December 31, 2008 - $7,265) due to the financial
institution. See note 7, long-term debt, for further disclosure. Included
in cash and cash equivalents as at March 31, 2009, are short-term
investments of $125,195 (December 31, 2008 - $96,500) owing from the
financial institution. In 2008, the Corporation signed a three-year
revolving operating line of credit agreement with a banking syndicate, of
which one of the members is the related-party financial institution. See
note 10, commitments and contingencies, for further information. 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.
10. Commitments and contingencies
(a) Purchased aircraft and live satellite television systems
As at March 31, 2009, the Corporation is committed to purchase 24 737-700
aircraft for delivery between 2010 and 2013. The remaining estimated
amounts to be paid in deposits and purchase prices for the 24 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
equivalents, are as follows:
-------------------------------------------------------------------------
US dollar CAD dollar
-------------------------------------------------------------------------
2009 $ 34,460 $ 43,464
2010 111,014 140,022
2011 122,503 154,513
2012 529,562 667,937
2013 222,503 280,643
-------------------------------------------------------------------------
$ 1,020,042 $ 1,286,579
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Corporation has yet to pursue financing agreements for the remaining
24 purchased aircraft included in the above totals. The next purchased
aircraft delivery is not expected until September 2010.
(b) Operating leases and commitments
The Corporation has entered into operating leases and commitments for
aircraft, land, buildings, equipment, computer hardware, software
licences and satellite programming. As at March 31, 2009, the future
payments in Canadian dollars, and when applicable the US-dollar
equivalents under operating leases and commitments are as follows:
-------------------------------------------------------------------------
US dollar CAD dollar
-------------------------------------------------------------------------
2009 $ 94,275 $ 135,318
2010 163,602 219,818
2011 184,300 238,980
2012 190,332 245,635
2013 179,987 231,500
2014 and thereafter 601,213 809,271
-------------------------------------------------------------------------
$ 1,413,709 $ 1,880,522
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at March 31, 2009, the Corporation is committed to lease an additional
15 737-700 aircraft and three 737-800 aircraft for terms ranging between
eight and 10 years in US dollars. These aircraft have been included in
the above totals.
(c) Operating line of credit
During 2008, the Corporation signed a three-year revolving operating line
of credit with a syndicate of three Canadian banks. The line of credit is
available for up to a maximum of $85 million commencing in the second
quarter of 2009 subject to various customary conditions precedent being
satisfied, and will be secured by the Corporation's new Campus facility.
The line of credit will bear interest at prime plus 0.50% per annum, or a
bankers acceptance rate at 2.0% annual stamping fee or equivalent and
will be available for general corporate expenditures and working capital
purposes. The Corporation is required to pay a standby fee of 15 basis
points, based on the average unused portion of the line of credit for the
previous quarter, payable quarterly. As at March 31, 2009, no amounts
were drawn on this facility.
(d) 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 US $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.
11. 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, derivatives both
designated and not designated in an effective hedging relationship, US-
dollar deposits, accounts payable and accrued liabilities and long-term
debt. The following tables set out the Corporation's classification and
the carrying amount for each of its financial assets and liabilities as
at March 31, 2009, and December 31, 2008:
-------------------------------------------------------------------------
Held- Other Total
March 31, for- Loans and financial carrying
2009 trading Derivatives receivables liabilities amount
-------------------------------------------------------------------------
Asset (liability)
Cash and cash
equivalents $ 835,791 $ - $ - $ - $ 835,791
Accounts receivable - - 25,365 - 25,365
Foreign exchange
options(i) - 1,387 - - 1,387
Cash flow
hedges:(ii)
Foreign exchange
forwards(iii) - 3,783 - - 3,783
Fuel derivatives(iv) - (42,135) - - (42,135)
US-dollar deposits(v) 25,154 - - - 25,154
Accounts payable
and accrued
liabilities(vi) - - - (217,951) (217,951)
Long-term debt(vii) - - - (1,310,313) (1,310,313)
-------------------------------------------------------------------------
$ 860,945 $ (36,965) $ 25,365 $(1,528,264) $ (678,919)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Held- Other Total
December 31, for- Loans and financial carrying
2008 trading Derivatives receivables liabilities amount
-------------------------------------------------------------------------
Asset(liability)
Cash and cash
equivalents $ 820,214 $ - $ - $ - $ 820,214
Accounts receivable - - 16,837 - 16,837
Foreign exchange
options(i) - 862 - - 862
Cash flow hedges:(ii)
Foreign exchange
forwards(iii) - 5,873 - - 5,873
Fuel derivatives(iv) - (52,298) - - (52,298)
US-dollar deposits(v) 24,309 - - - 24,309
Accounts payable
and accrued
liabilities(vi) - - - (211,543) (211,543)
Long-term debt(vii) - - - (1,351,903) (1,351,903)
-------------------------------------------------------------------------
$ 844,523 $ (45,563) $ 16,837 $(1,563,446) $ (747,649)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Foreign exchange option arrangements not designated in a hedging
relationship included in prepaid expenses, deposits and other.
(ii) Derivatives designated in an effective cash flow hedging
relationship.
(iii) Foreign exchange forward contracts included in prepaid expenses,
deposits and other.
(iv) As at March 31, 2009, balance includes $33,129 (December 31, 2008 -
$37,811) classified in accounts payable and accrued liabilities and
$9,006 (December 31, 2008 - $14,487) classified in other
liabilities.
(v) As at March 31, 2009, balance includes $419 (December 31, 2008 -
$404) classified in prepaid expenses, deposits and other and
$24,735 (December 31, 2008 - $23,905) classified in other assets.
(vi) As at March 31, 2009, balance excludes fuel derivative liabilities
of $33,129 (December 31, 2008 - $37,811).
(vii) As at March 31, 2009, balance includes current portion of long-term
debt of $165,413 (December 31, 2008 - $165,721) and long-term
portion of $1,144,900 (December 31, 2008 - $1,186,182).
The fair values of financial assets and liabilities, together with
carrying amounts, shown in the balance sheet as at March 31, 2009, and
December 31, 2008, are as follows:
-------------------------------------------------------------------------
March 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
-------------------------------------------------------------------------
Asset (liability)
Cash and cash
equivalents(i) $ 835,791 $ 835,791 $ 820,214 $ 820,214
Accounts receivable(i) 25,365 25,365 16,837 16,837
Foreign exchange
options(ii) 1,387 1,387 862 862
Cash flow hedges:
Foreign exchange
forwards(iii) 3,783 3,783 5,873 5,873
Fuel derivatives(iv) (42,135) (42,135) (52,298) (52,298)
US-dollar deposits(v) 25,154 25,154 24,309 24,309
Accounts payable and
accrued liabilities(i) (217,951) (217,951) (211,543) (211,543)
Long-term debt(vi) (1,310,313) (1,474,236) (1,351,903) (1,515,487)
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$ (678,919) $ (842,842) $ (747,649) $ (911,233)
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Unrecognized loss $ (163,923) $ (163,584)
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The fair values of financial assets and financial liabilities are
calculated on the basis of information available at the balance sheet
date using the following methods:
(i) The fair value of cash and cash equivalents, accounts receivable
and accounts payable and accrued liabilities approximates their
carrying amounts due to the short-term nature of the instruments.
(ii) The fair value of the foreign exchange option arrangements is
determined through a standard option valuation technique used by
the counterparty based on inputs, including foreign exchange rates,
interest rates and volatilities. Contracts outstanding as at
March 31, 2009, are at a weighted average contracted range of
1.1248 to 1.2151 US dollars to Canadian dollars (December 31, 2008
- 1.1333 to 1.2254).
(iii) The fair value of the foreign exchange forward contracts designated
in an effective hedging relationship is measured based on the
difference between the contracted rate and the current forward
price obtained from the counterparty, which can be observed and
corroborated in the marketplace. As at March 31, 2009, the average
contracted rate on the outstanding forward contracts was 1.0463
(December 31, 2008 - 1.0519) US dollars to Canadian dollars and the
average forward rate used in determining the fair value was 1.2606
(December 31, 2008 - 1.2178) US dollars to Canadian dollars. Due to
the short-term nature of the outstanding contracts, no discount
rate was applied.
(iv) The fair value of the fuel derivatives designated in an effective
hedging relationship is determined using inputs, including quoted
forward prices for commodities, foreign exchange rates and interest
rates, which can be observed or corroborated in the marketplace.
The fair value of the fixed swap agreements is estimated by
discounting the difference between the contractual strike price and
the current forward price. The fair value of the costless collar
structures is estimated by the use of a standard option valuation
technique. As at March 31, 2009, for the 21-month period that the
Corporation is hedged, the closing forward curve for crude oil
ranged from approximately US $50 to US $65 (December 31, 2008 - US
$45 to US $67) with the average forward foreign exchange rate used
in determining the fair value being 1.2545 US dollars to Canadian
dollars (December 31, 2008 - 1.2136).
(v) 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.
(vi) 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 represent borrowing rates presently available to the
Corporation for loans with similar terms and remaining maturities.
As at March 31, 2009, rates used in determining the fair value
ranged from 1.83% to 2.43% (December 31, 2008 - 2.08% to 2.58%).
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 assets and liabilities. The Corporation
will from time to time use various financial derivatives to reduce market
risk exposures from changes in foreign exchange rates, interest rates and
jet 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 continually performs risk assessments 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, therefore, the Corporation is exposed to the risk of volatile fuel
prices. Fuel prices are impacted by a host of factors outside the
Corporation's control, such as significant weather events, geopolitical
tensions, refinery capacity and global demand and supply. For the three
months ended March 31, 2009, aircraft fuel expense represented
approximately 27% (three months ended March 31, 2008 - 32%) of the
Corporation's total operating expenses.
Under the Corporation's fuel price risk management policy, it is the
Corporation's objective to hedge a portion of its anticipated jet fuel
purchases in order to provide its management with reasonable foresight
and predictability into operations and future cash flows. As jet fuel is
not traded on an organized futures exchange, there are limited
opportunities to hedge directly in jet fuel; however, financial
derivatives in other commodities, such as crude oil and heating oil, are
useful in decreasing the risk of volatile fuel prices.
As at March 31, 2009, the Corporation had a mixture of fixed swap
agreements and costless collar structures in Canadian-dollar West Texas
Intermediate (WTI) crude oil derivative contracts to hedge approximately
30% (December 31, 2008 - 30%) of its remaining anticipated jet fuel
requirements for 2009 and approximately 14% (December 31, 2008 - 14%) of
its anticipated jet fuel requirements for 2010. The following table
outlines, as at March 31, 2009, the notional volumes per barrel (bbl) and
the weighted average strike price for fixed swap agreements and the
weighted average call and put prices for costless collar structures for
each year the Corporation is hedged.
-------------------------------------------------------------------------
Notional WTI average WTI average WTI average
volumes strike price call price put price
Year Instrument (bbl) (CAD$/bbl) (CAD$/bbl) (CAD$/bbl)
-------------------------------------------------------------------------
2009 Swaps 871,500 90.10 - -
Costless collars 410,000 - 114.27 79.15
2010 Swaps 381,000 103.09 - -
Costless collars 483,000 - 111.21 77.94
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Upon proper qualification, the Corporation accounts for its fuel
derivatives as cash flow hedges. Under cash flow hedge accounting, the
effective portion of the change in the fair value of the hedging
instrument is recognized in AOCL, while the ineffective portion is
recognized in non-operating income (expense). Upon maturity of the
derivative instrument, the effective gains and losses previously
recognized in AOCL are recorded in net earnings as a component of
aircraft fuel expense.
The following table presents the financial impact and statement
presentation of the Corporation's fuel derivatives on the consolidated
balance sheet as at March 31, 2009, and December 31, 2008:
-------------------------------------------------------------------------
March 31, December 31,
Statement presentation 2009 2008
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Fair value of fuel Accounts payable
derivatives - current and accrued
portion liabilities $ 29,361 $ 37,811
Fair value of fuel
derivatives - long-term
portion Other liabilities 9,006 14,487
Payable to Accounts payable
counterparties for and accrued
settled fuel contracts liabilities 3,768 -
Net unrealized loss from AOCL - before tax
fuel derivatives impact (33,052) (44,711)
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The following table presents the financial impact and statement
presentation of the Corporation's fuel derivatives on the consolidated
statement of earnings for the three months ended March 31, 2009, and
2008:
-------------------------------------------------------------------------
Three months ended March 31
Statement presentation 2009 2008
-------------------------------------------------------------------------
Realized loss on fuel
derivatives -
effective portion Aircraft fuel $ 11,974 $ -
Realized loss on fuel
derivatives -
ineffective portion Gain on derivatives 846 -
Unrealized gain on fuel
derivatives -
ineffective portion Gain on derivatives (949) -
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The estimated amount reported in AOCL that is expected to be reclassified
to net earnings as a component of aircraft fuel expense when the
underlying jet fuel is consumed during the next 12 months is a loss after
tax of $18,281.
A 10% increase in the forward curve for WTI, the underlying commodity of
the Corporation's fuel derivatives, as at March 31, 2009, would have
decreased AOCL by approximately $9,685, net of taxes (December 31, 2008 -
$11,546). A 10% decrease in the forward curve for WTI, as at March 31,
2009, would have increased AOCL by approximately $9,785, net of taxes
(December 31, 2008 - $11,574). This is assuming that all other variables
remain constant, particularly foreign exchange and interest rates. It
also assumes that 100% of the change in price is considered effective
under cash flow hedge accounting. These assumptions may not be
representative of actual movements.
Foreign exchange risk
Foreign currency exchange risk is the risk that the fair value of
recognized assets and liabilities or future cash flows would 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 net monetary assets and its operating
expenditures, mainly aircraft fuel, aircraft leasing expense, certain
maintenance costs and a portion of airport operations costs. During the
three months ended March 31, 2009, the average US-dollar exchange rate
was 1.2448 (three months ended March 31, 2008 - 1.0036), with the
period-end exchange rate at 1.2613 (March 31, 2008 - 1.0235).
The gain or loss on foreign exchange included on the Corporation's
consolidated statement of earnings is mainly attributable to the effect
of the changes in the value of the Corporation's US-dollar denominated
net monetary assets. As at March 31, 2009, US-dollar denominated net
monetary assets totalled approximately US $89,307 (December 31, 2008 - US
$99,488). During the three months ended March 31, 2009, the Corporation
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 $700
(three months ended March 31, 2008 - $572) as a result of the
Corporation's US-dollar denominated net monetary assets.
As at March 31, 2009, the Corporation had a mixture of US-dollar forward
contracts and option arrangements to offset its US-dollar denominated
aircraft lease payments for the next six months of 2009, on its current
leased aircraft. As at March 31, 2009, the Corporation had entered into
financial derivative instruments to purchase on average US $6,585 per
month for six months for a total of US $39,510. Of this total,
approximately 45% is hedged using forward contracts at a weighted average
strike price of 1.0463 per US dollar and approximately 55% is hedged
using option arrangements at a weighted average range of 1.1248 to 1.2151
per US dollar.
Upon proper qualification, the Corporation designated its forward
contracts as effective cash flow hedges for accounting purposes. Under
cash flow hedge accounting, the effective portion of the change in the
fair value of the hedging instrument is recognized in AOCL, while the
ineffective portion is recognized in non-operating income (expense). Upon
maturity of the derivative instrument, the effective gains and losses
previously recognized in AOCL are recorded in net earnings as a component
of aircraft leasing. Maturity dates for all of the foreign exchange
forward contracts are within 2009. As at March 31, 2009, no portion of
the forward contracts is considered ineffective.
For the three months ended March 31, 2009, the Corporation realized a
gain before tax on the forward contracts of $3,283 (three months ended
March 31, 2008 - $320), included as a deduction to aircraft leasing
expense. As at March 31, 2009, the estimated fair market value of the
remaining forward contracts recorded in prepaid expenses, deposits and
other is a gain of $3,783 (December 31, 2008 - $5,873). The estimated
amount reported in AOCL that is expected to be reclassified to net
earnings as a reduction to aircraft leasing expense during the next 12
months is a gain after tax of $2,667.
The Corporation's foreign exchange option arrangements are not designated
as hedges for accounting purposes and are recorded at fair value on the
consolidated balance sheet with changes in fair value recorded in non-
operating income (expense). As at March 31, 2009, the estimated fair
market value of the option arrangements recorded in prepaid expenses,
deposits and other is a gain of $1,387 (December 31, 2008 - $862). For
the three months ended March 31, 2009, the Corporation realized a gain of
$6 on its foreign exchange option arrangements and reported an unrealized
gain of $525, both included in non-operating income (expense). Maturity
dates for all of the foreign exchange option arrangements are within
2009.
A one-cent change in the US-dollar exchange rate for the three months
ended March 31, 2009, would not have significantly impacted the
Corporation's net earnings and other comprehensive income as a result of
the foreign exchange derivatives.
Interest rate risk
Interest rate risk is the risk that the value of financial assets and
liabilities or future cash flows will fluctuate as a result of changes in
market interest rates.
(i) Cash and cash equivalents
The Corporation is exposed to interest rate fluctuations on its cash and
cash equivalents balance, which, as at March 31, 2009, totalled $835,791
(December 31, 2008 - $820,214). A change of 50 basis points in the market
interest rate would have had, for the three months ended March 31, 2009,
an approximate impact on net earnings of $681 (three months ended March
31, 2008 - $591). The increase in sensitivity from 2008 is a direct
result of the increase in the balance of the Corporation's cash and cash
equivalents balance.
(ii) US-dollar deposits
The Corporation is exposed to interest rate fluctuations on its US-dollar
deposits that relate to purchased aircraft, which, as at March 31, 2009,
totalled $25,154 (December 31, 2008 - $24,309). A reasonable change in
market interest rates as at March 31, 2009, would not have significantly
impacted the Corporation's net earnings as a result of the US-dollar
deposits.
(iii) 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 as at
March 31, 2009, would not impact net earnings.
The Corporation is exposed to interest rate fluctuations on its variable-
rate long-term debt, which, as at March 31, 2009, totalled $10,372
(December 31, 2008 - $11,172) or 0.8% (December 31, 2008 - 0.8%) of the
Corporation's total long-term debt. Due to the immaterial balance of the
variable-rate long-term debt, a change in market interest rates as at
March 31, 2009, would not have significantly impacted the Corporation's
net earnings.
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. As at March 31, 2009, the Corporation's credit exposure
consists primarily of the carrying amounts of cash and cash equivalents,
accounts receivable and US-dollar deposits, as well as the fair value of
derivative financial assets.
(i) Cash and cash equivalents
Cash and cash equivalents consist of bank balances and short-term
investments with terms of up to 91 days. Credit risk associated with cash
and cash equivalents is minimized substantially by ensuring that these
financial assets are invested primarily in debt instruments with highly
rated financial institutions. The Corporation manages its exposure risk
by assessing the financial strength of its counterparties and by limiting
the total exposure to any one individual counterparty. As at March 31,
2009, the Corporation had a total principal amount invested of $713,031
(December 31, 2008 - $692,188) in Canadian-dollar short-term investments
with terms ranging between seven and 90 days and a total of US $52,508
(December 31, 2008 - US $23,832) invested in US-dollar short-term
investments with terms ranging between 30 and 90 days.
The Corporation performs an ongoing review to evaluate its counterparty
risk. As at March 31, 2009, the Corporation does not expect any
counterparties to fail to meet their obligations.
(ii) Accounts receivable
Generally, the Corporation's accounts receivable are the result of
tickets sold to individual guests through the use of travel agents and
other airlines. Purchase limits are established for each agent and in
some cases, when deemed necessary, a letter of credit is obtained. As at
March 31, 2009, $16,888 (December 31, 2008 - $7,403) is receivable from
travel agents and other airlines. These receivables are short term in
nature, generally being settled within four weeks from the date of
booking. As at March 31, 2009, $982 (December 31, 2008 - $651) of the
balance receivable is covered by letters of credit.
(iii) Derivative financial assets
The Corporation recognizes that it is subject to credit risk arising from
derivative transactions that are in an asset position at the balance
sheet date. The Corporation carefully monitors this risk by keeping close
consideration to the size, credit rating and diversification of the
counterparty. As at March 31, 2009, the fair value of foreign exchange
derivative assets totalled $5,171 (December 31, 2008 - $6,735). As at
March 31, 2009, outstanding fuel derivatives are in a net liability
position by counterparty.
(iv) US-dollar deposits
The Corporation is not exposed to counterparty credit risk on its US-
dollar deposits that relate to purchased aircraft, as the funds are held
in a security trust separate from the assets of the financial
institution.
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.
The Corporation has secured low-interest-rate fixed debt supported by
Ex-Im Bank commitments on its aircraft acquisitions. This represents
approximately 98% of the Corporation's total long-term debt. See note 7,
long-term debt, for further detail.
The following table details the Corporation's contractual maturities for
its non-derivative and derivative financial liabilities, including those
designated in an effective hedging relationship, as at March 31, 2009:
-------------------------------------------------------------------------
Carrying Within 1 - 3 4 - 5 Over
amount 1 year years years 5 years
-------------------------------------------------------------------------
Accounts payable
and accrued
liabilities(i) $ 217,951 $ 217,951 $ - $ - $ -
Long-term debt 1,310,313 165,413 342,127 325,878 476,895
Fuel derivatives 42,135 33,129 9,006 - -
-------------------------------------------------------------------------
Total $ 1,570,399 $ 416,493 $ 351,133 $ 325,878 $ 476,895
-------------------------------------------------------------------------
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(i) Excludes fuel derivative liabilities of $33,129.
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, 2009, was $263,748 (December 31, 2008 - $251,354).
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. As at March 31, 2009, the Corporation had cash
on hand of 3.17 times (December 31, 2008 - 3.26 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. As at March 31, 2009,
the Corporation's current ratio was 1.24 (December 31, 2008 - 1.25).
As at March 31, 2009, the Corporation has not been required to post
collateral with respect to any of its outstanding derivative contracts.
12. Accumulated other comprehensive loss
-------------------------------------------------------------------------
Cash flow
hedges -
Amortization foreign Cash flow
of hedge exchange hedges - fuel
settlements derivatives derivatives Total
-------------------------------------------------------------------------
Balance as at December
31, 2007 $ (12,020) $ 106 $ - $ (11,914)
Amortization of
settlements 1,400 - - 1,400
Unrealized gain (loss)
on derivatives - 10,321 (44,711) (34,390)
Tax on unrealized portion - (3,097) 13,086 9,989
Realized gain on derivatives - (4,554) - (4,554)
Tax on realized portion - 1,357 - 1,357
-------------------------------------------------------------------------
Balance as at December
31, 2008 (10,620) 4,133 (31,625) (38,112)
Amortization of
settlements 350 - - 350
Unrealized gain (loss)
on derivatives - 1,193 (315) 878
Tax on unrealized portion - (283) 32 (251)
Realized (gain) loss on
derivatives - (3,283) 11,974 8,691
Tax on realized portion - 907 (3,523) (2,616)
-------------------------------------------------------------------------
Balance as at March 31,
2009 $ (10,270) $ 2,667 $ (23,457) $ (31,060)
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%SEDAR: 00010649E