2015 Second Quarter Report

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1 2015 Second Quarter Report

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3 Contents About WestJet... 2 Financial and operational highlights... 3 Overview... 4 Outlook... 7 Discussion of operations... 8 Summary of quarterly results Guest experience Liquidity and capital resources Advisories Fleet Off-balance sheet arrangements and related party transactions Share capital Accounting Controls and procedures Forward-looking information Definition of key operating indicators Non-GAAP and Additional GAAP Measures The following Management s Discussion and Analysis of Financial Condition and Operating Results (MD&A), dated July 27, 2015, should be read in conjunction with the cautionary statement regarding forward-looking information below, as well as WestJet s unaudited condensed consolidated interim financial statements and notes thereto for the three and six months ended June 30, 2015 and 2014, and audited consolidated financial statements and notes thereto, for the years ended December 31, 2014 and The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). All amounts in the following MD&A are in Canadian dollars unless otherwise stated. References to WestJet, the Corporation, the Company, we, us or our mean WestJet Airlines Ltd. and its subsidiaries and consolidated structured entities, unless the context otherwise requires. Additional information relating to WestJet, including periodic quarterly and annual reports and Annual Information Forms (AIF), filed with Canadian securities regulatory authorities, is available on SEDAR at sedar.com and our website at westjet.com. Cautionary statement regarding forward-looking information This MD&A contains forward-looking information as defined under applicable Canadian securities legislation. This forward-looking information typically contains the words anticipate, believe, estimate, intend, expect, may, will, should, potential, plan, project or other similar terms. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information. 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 its nature, forward-looking information is subject to numerous risks and uncertainties including, but not limited to, the impact of general economic conditions, changing domestic and international airline industry conditions, volatility of fuel prices, terrorism, pandemics, currency fluctuations, interest rates, competition from other airline industry participants (including new entrants, capacity fluctuations and changes to the pricing environment), labour matters, government regulations, stock market volatility, the ability to access sufficient capital from internal and external sources, and additional risk factors discussed in other documents we file from time to time with securities regulatory authorities, which are available on SEDAR at sedar.com or, upon request, without charge from us. The disclosure found under the heading Outlook in this MD&A, including the guidance summary for the three months ended September 30, 2015 and the year ended December 31, 2015 may contain forward-looking information that constitutes a financial outlook. The forwardlooking information, including any financial outlook, contained in this MD&A, is provided to assist investors in understanding our assessment of WestJet s future plans, operations and expected results. The forward-looking information, including without limitation, the disclosure found under the heading Outlook, contained in this MD&A may not be appropriate for other purposes and is expressly qualified by this cautionary statement. Please refer to page 26 of this MD&A for further information on our forward-looking information including assumptions and estimates used in its development. Our assumptions and estimates relating to the forward-looking information referred to above are updated in conjunction with filing our quarterly and annual MD&A and, except as required by law, we do not undertake to update any other forwardlooking information. Non-GAAP and additional GAAP measures Certain measures in this MD&A do not have any standardized meaning as prescribed by Generally Accepted Accounting Principles (GAAP) and, therefore, are considered non-gaap measures. These measures are provided to enhance the reader s overall understanding of our financial performance or current financial condition. They 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 periods. These measures are not in accordance with, or an alternative to, GAAP and do not have standardized meanings. Therefore, they are unlikely to be comparable to similar measures presented by other entities. Please refer to page 29 of this MD&A for a reconciliation of non-gaap measures, including cost per available seat mile (CASM), excluding fuel and employee profit share; return on invested capital (ROIC); free cash flow; diluted free cash flow per share; diluted operating cash flow per share; and earnings before income tax (EBT) margin, and for a reconciliation of additional GAAP measures, including adjusted debt-to-equity; adjusted net debt to earnings before interest, taxes, depreciation and aircraft rent (EBITDAR); and the cash to trailing twelve months revenue ratio. Definitions Various terms used throughout this MD&A are defined at page 29 under the title Definition of key operating indicators. WestJet Second Quarter

4 About WestJet WestJet is a Canadian airline based in Calgary, Alberta. Through scheduled flights across a growing network, WestJet also operates WestJet Vacations, which provides air, hotel, car and excursion packages, and WestJet Encore, a regional airline which operates a fleet of turboprop aircraft in a network of destinations in Canada. As of June 30, 2015, our airline offers scheduled service to 93 destinations in North America, Central America, the Caribbean and Europe with our fleet of 107 Boeing 737 Next Generation (Boeing 737 NG) aircraft and 22 Bombardier Q400 (Q400) aircraft. When including destinations accessed through our airline partners, we serve over 150 destinations. In the second quarter of 2015, we began our seasonal service to Glasgow, United Kingdom. We plan to continue adding new destinations and additional frequencies to our existing markets through the growth of our regional Bombardier Q400 fleet, our narrow-body Boeing 737 NG fleet and, for the first time in 2015, wide-body Boeing ERW (Boeing 767) aircraft. In the spring of 2016, London, United Kingdom will be our first transatlantic destination for our wide-body Boeing 767 aircraft. WestJet s mission is to enrich the lives of everyone in WestJet s world by providing safe, friendly and affordable air travel. We strive to be one of the top five airlines in the world. We believe that focusing on metrics that measure the health of our business such as on-time performance, safety, profitability, guest satisfaction and employee engagement will lead us toward this goal. Guiding us every day towards accomplishing our mission and vision are our core values: commitment to safety; positive and passionate in everything we do; appreciative of our people and guests; fun, friendly and caring; aligning the interests of WestJetters with the interests of the Company; and honest, open and keeping our commitments. WestJet s focus on our people has always been fundamental to the success of our airline. In an industry that has become largely commoditized, we recognize that WestJetters are an essential part of our business and that their commitment to caring for our guests supports our profitable results. Our goal remains to attract, train, motivate, develop and retain the right people. Our commitment to our people allows us to take care of WestJetters, who in turn take care of our guests. When this occurs, we will build on our success and take care of our business which in turn allows us to take care of our people, and so on, as depicted in the graphic below. Our caring culture is essential to our continuous growth and is one of the key elements that provide us with the capability to execute on our strategies. WestJet Second Quarter

5 Operational highlights Financial highlights Financial and operational highlights The financial and operational highlights for WestJet for the second quarter and first six months of 2015 are as follows: ($ in thousands, unless otherwise noted) Three months ended June 30 Six months ended June Change Change Revenue 941, , % 2,025,495 1,972, % Operating expenses 841, ,898 (1.2%) 1,727,947 1,762,396 (2.0%) Earnings from operations 100,388 78, % 297, , % Operating margin (per cent) 10.7% 8.4% 2.3 pts. 14.7% 10.6% 4.1 pts. Non-operating expense (11,502) (7,157) 60.7% (16,213) (15,944) 1.7% EBT 88,886 71, % 281, , % EBT margin (per cent) 9.4% 7.7% 1.7 pts. 13.9% 9.8% 4.1 pts. Taxes 27,332 19, % 79,044 53, % Net earnings 61,554 51, % 202, , % Earnings per share: Basic % % Diluted % % ROIC (per cent) 16.0% 13.7% 2.3 pts. 16.0% 13.7% 2.3 pts. Three months ended June 30 Six months ended June Change Change ASMs 6,654,631,242 6,192,880, % 13,473,244,403 12,707,465, % RPMs 5,199,326,504 4,930,298, % 10,765,276,153 10,346,527, % Load factor 78.1% 79.6% (1.5 pts.) 79.9% 81.4% (1.5 pts.) Yield (cents) (4.0%) (1.3%) RASM (cents) (5.7%) (3.2%) CASM (cents) (8.1%) (7.5%) CASM, excluding fuel and employee profit share (cents) % (0.3%) Fuel consumption (litres) 310,947, ,845, % 634,070, ,425, % Fuel costs per litre (cents) (26.6%) (27.2%) Segment guests 4,956,488 4,772, % 9,871,067 9,579, % Average stage length (miles) (1.1%) (1.7%) Departures 51,702 47, % 100,771 93, % Utilization (hours) (1.7%) (1.7%) Full-time equivalent employees at period end 8,967 8, % 8,967 8, % Fleet size at period end % % Please refer to page 29 of this MD&A for a reconciliation of non-gaap measures and additional GAAP measures. O WestJet Second Quarter

6 Overview Our 2015 second quarter financial results represent our 41 st consecutive quarter of reported profitability with net earnings of $61.6 million and a second quarter record diluted earnings per share of $0.49. During the quarter, our operating margin expanded to 10.7 per cent, driven largely by continued lower fuel prices and an increase in ancillary revenue. Total revenue increased by 1.3 per cent year over year, driven by the increase in ancillary revenue which was offset by lower guest revenue resulting from downward pressure on our fares and a lower load factor. We returned approximately $45.1 million to our shareholders through our dividend and share buy-back programs in the second quarter of Since these programs began in 2010, we have returned over six hundred million dollars to our shareholders. At June 30, 2015, our 12-month record ROIC of 16.0 per cent marks the 12 th consecutive quarter of exceeding our goal of a sustainable 12.0 per cent ROIC and represents an increase of 1.7 percentage points compared to our 2014 fullyear ROIC of 14.3 per cent. As of the date of this MD&A, we revised our previous ROIC goal from a sustainable 12.0 per cent to a targeted range of 13.0 to 16.0 per cent. Second quarter overview Recognized total revenue of $942.0 million, an increase of 1.3 per cent from $930.3 million in the second quarter of Increased capacity, measured in available seat miles (ASMs), by 7.5 per cent over the second quarter of Increased traffic, measured in revenue passenger miles (RPMs), by 5.5 per cent over the second quarter of Realized yield of cents, down 4.0 per cent over the second quarter of Realized RASM of cents, down 5.7 per cent from cents in the second quarter of Realized CASM of cents, down 8.1 per cent from cents in the second quarter of Realized CASM, excluding fuel and employee profit share, of 9.28 cents, up 0.5 per cent from 9.23 cents in the second quarter of Recorded an operating margin of 10.7 per cent, up 2.3 percentage points from 8.4 per cent in the second quarter of Recorded an earnings before tax (EBT) margin of 9.4 per cent, up 1.7 percentage points from 7.7 per cent in the second quarter of Reported net earnings of $61.6 million, an increase of 18.9 per cent from $51.8 million in the second quarter of Reported diluted earnings per share of $0.49, an increase of 22.5 per cent from $0.40 per share in the second quarter of Please refer to page 29 of this MD&A for a reconciliation of non-gaap measures and additional GAAP measures. WestJet Second Quarter

7 WestJetters The commitment and caring attitude of our people has always been fundamental to the success of our airline. WestJetters deliver care to our guests and crews to ensure their safety at all times while working together as a team to ensure we achieve a positive outcome when facing any operational challenge. Our continued improvement of on-time performance is also a direct result of WestJetters working together. Thank you to the more than 10,000 WestJetters for their commitment to safety and care. On June 22, 2015, the WestJet Professional Pilots Association filed an application for certification as bargaining agent for WestJet pilots with the Canada Industrial Relations Board (CIRB). The CIRB will conduct an electronic secret-ballot representation vote between July 22 and August 5, In May 2015, we were pleased that our flight attendants voted in favour of a new five-year work agreement. With their collaboration, we developed a fair and balanced agreement. This is an important milestone for WestJet as it represents the first ratified agreement between the WestJet flight attendants and the airline. Items ratified in the five-year agreement include compensation, work rules, standardized processes and a formal framework to facilitate communication between WestJet and our flight attendants. As disclosed in the 2015 first quarter MD&A, Vito Culmone, Executive Vice-President, Finance and Chief Financial Officer resigned from WestJet, and we are actively recruiting for this position. In June 2015, Brigid Pelino, Executive Vice-President, People, departed WestJet and Ferio Pugliese, President of Encore, is temporarily responsible for supporting WestJet s People department, in addition to his current role, while we recruit for this position. Guest experience and service enhancements One of the core foundations to providing exceptional guest experience is to ensure our guests arrive at their destination safely and on time. For the three months ended June 30, 2015, our on-time performance (OTP), measured by the percentage of flights that arrive within 15 minutes of the scheduled time was 91.3 per cent. This is a testament to the hard work of WestJetters as well as the numerous corporate initiatives to improve our operational reliability. Our OTP for the second quarter of 2015 places WestJet as the top performing North American airline and marks the seventh consecutive quarter of improved year over year OTP performance for WestJet. We enhanced our Plus product, which among other new product features, offers guests an empty middle seat on our Boeing 737 NG aircraft and an improved onboard experience. These new features became available for booking on May 6, 2015, for travel beginning September 14, 2015 on both our Boeing NG 737 aircraft and our Boeing 767 aircraft. In addition, we successfully implemented new technology that supports our ancillary revenues, specifically expanding the distribution channels that can both market and sell our Plus fare and pre-reserved seating functionality. To date, we are pleased with initial feedback and bookings on both these product and technology enhancements. WestJet remains committed to improving our onboard guest experience through the continued evolution of our new inflight entertainment and connectivity system, WestJet Connect. Installations of the new system, WestJet Connect, are ongoing and, as of the date of this MD&A, we have completed installation on 15 of our Boeing 737 NG aircraft. Implementation across our Boeing 737 NG and Boeing 767 aircraft is now expected to be complete in early During the second quarter of 2015, we received all Transport Canada approvals for our Boeing 737 NG aircraft flight operations relating to WestJet Connect, and today the system was activated on our first commercial flights. Network expansion and fleet We continue to strategically grow our airline through new and increased service across our scheduled network. In the second quarter of 2015, we began our seasonal service to Glasgow, United Kingdom. In addition, WestJet Encore began flying to Gander, Newfoundland, which is now the third WestJet destination in Newfoundland. Throughout the second half of 2015, we plan to grow our domestic network with more WestJet and WestJet Encore service in eastern Canada, which will provide our guests with more flight options and greater connectivity. WestJet Second Quarter

8 The following table depicts our newest destinations: Destination Operated by Service scheduled to commence London, United Kingdom WestJet Spring 2016 Boston, Massachusetts WestJet Encore Winter West Palm Beach, Florida WestJet Winter Sarasota, Florida WestJet Winter Hatulco, Mexico WestJet Winter Merida, Mexico WestJet Winter San Jose, Costa Rica WestJet Winter London, United Kingdom is the first transatlantic destination for our wide-body Boeing 767 aircraft, with service from Canada through London Gatwick beginning in the spring of On July 20, 2015 we announced our winter schedule that includes WestJet Encore s first U.S. destination, service to five new sun destinations, the extension of certain routes from seasonal to year round service and increased frequencies on certain routes within Canada. These additions and changes are in-line with our strategies to improve our business and leisure products. Throughout the second quarter of 2015, we also continued to focus on developing our relationships with the 46 airlines we currently have partnership agreements with. Establishing strong airline partnerships continues to be a key strategy of ours, as our partnerships enable our guests to access over 150 destinations through WestJet. In order to meet the demands of our growing network, we have built flexibility into our fleet plan through lease renewal options on our Boeing 737 NG fleet and our ability to deploy a mix of Boeing 737 NG and Bombardier Q400 aircraft, allowing us to align our growth with existing and anticipated market conditions. In the second quarter of 2015 we added three new Q400 aircraft to our fleet for a total of 22 Q400s, and will add three more before the end of We also added two Boeing 737 NG 800 series aircraft to our fleet and disposed of the final two Boeing 737 NG 700 series aircraft sold to Southwest Airlines (Southwest), for a total of 107 Boeing 737 NG aircraft at June 30, 2015, and will add seven more Boeing 737 NG 800 series aircraft by the end of We expect the delivery of the first of four Boeing ERW aircraft to occur in the summer of The addition of wide-body aircraft to our WestJet fleet will allow us to explore the expansion of our operations into additional overseas markets. As our fleet, including our future deliveries of Boeing 737 MAX aircraft and wide-body Boeing 767s, continues to expand, we expect to establish additional profitable routes in Canada, the U.S. and internationally. Our evolving aircraft mix allows us to provide increased route frequency, increased non-stop routes and improved scheduling times and connectivity to our guests. Corporate commitment On July 7, 2015, we provided an update to our second quarter 2015 RASM guidance, which was down 5.7 per cent as a result of industry capacity running ahead of demand in certain markets, the unfavourable economic conditions experienced in Alberta and further impacted by more aggressive fares and higher than expected ASMs as a result of WestJet's superior completion rate. Despite this environment, decreased fuel prices along with our cost structure enabled WestJet to expand operating margins and achieve its highest second quarter reported diluted earnings per share, notwithstanding foreign exchange volatility. During the second quarter of 2015, continued reductions in the price of jet fuel supported our strong earnings performance as this expense represented 26 per cent of our total operating costs, compared to 32 per cent in the same quarter of Fuel remains a significant cost to WestJet and we anticipate continued volatility in the near term. We also face an increase in our general corporate income tax rate for Alberta to 12 per cent, from 10 per cent, effective July 1, As a result, for the second quarter of 2015, WestJet reported an effective tax rate of 31 per cent which resulted in an increase to deferred income taxes of $2.6 million in the quarter. We remain committed to protecting our low cost operations while growing our airline and strengthening our competitive advantage. On July 7, 2015, we reported that CASM, excluding fuel and profit share increased by 0.5 per cent year over year, an improvement from our original guidance with the difference primarily driven by lower than expected airport operating costs and lower marketing, general and administration expenses, as well as higher than expected ASMs. Looking forward, finding innovative ways to reduce costs remains a top priority for us and we continue to work alongside WestJetters on implementing cost-reduction strategies. WestJet Second Quarter

9 Guidance summary Outlook Our year over year system capacity growth will slow from the 6.0 per cent increase realized in the first half of 2015 to approximately 4.5 per cent in the second half of 2015, with fourth quarter capacity growth of approximately 2.0 per cent. For the third quarter of 2015, we anticipate system-wide capacity growth between 7.0 and 7.5 per cent year over year, and domestic capacity growth between 9.5 and 10.0 per cent year over year. In terms of the full-year 2015, we now expect system-wide capacity to grow between 4.5 and 5.5 per cent and domestic capacity to grow between 6.5 and 7.5 per cent, up from the 4.0 to 5.0 per cent change for both system-wide and domestic capacity previously disclosed. These changes to our full-year outlook are primarily driven by a higher than expected completion rate on flights year-to-date and adjustments to our schedule, including additional domestic capacity on certain routes at peak times and utilization flying to enhance overall network flow. WestJet Encore continues to represent approximately half of expected 2015 system capacity growth. For the third quarter of 2015, we expect our traffic and revenue growth to continue and anticipate record net earnings and the best operating margin in the past five years. We continue to see a robust overall demand environment; however we expect year-over-year declines in RASM to continue in the third quarter, although improving slightly from the year over year declines experienced in the second quarter of 2015, as industry capacity runs ahead of otherwise healthy demand in certain markets. We expect CASM, excluding fuel and employee profit share for the third quarter of 2015 to be up 3.5 to 4.0 per cent year over year. For the full-year 2015, we now expect CASM, excluding fuel and employee profit share, to be up 2.5 to 3.0 per cent year over year, an improvement from the 2.5 to 3.5 per cent change previously disclosed, primarily as the result of better than expected year-to-date results, notwithstanding foreign exchange volatility. For the third quarter of 2015, we expect fuel costs to range between 66 and 68 cents per litre, which represents a year-overyear decrease of 28 to 30 per cent. The third quarter 2015 expected fuel costs are based on current forecasted jet fuel prices of US $68 per barrel and an average foreign exchange rate of approximately 1.29 Canadian dollars to one US dollar. For the full-year 2015, we continue to forecast capital expenditures, net of the proceeds from the sale of the last five aircraft pursuant to the Southwest transaction, to be between approximately $920 million and $940 million, with spending related primarily to aircraft deliveries, deposits on future aircraft and overhauls on owned engines. For the third quarter of 2015, we expect our capital expenditures to be between $155 million and $165 million. The third quarter and full-year 2015 expected CASM, excluding fuel and employee profit share and capital expenditures are based on an average forecasted foreign exchange rate of approximately 1.29 Canadian dollars to one US dollar. Guidance summary RASM Fuel cost per litre Three months ended September 30, 2015 year-over-year declines to continue, improving slightly from year-over-year declines experienced in the second quarter of to 68 cents Year ended December 31, 2015 CASM, excluding fuel and profit share Up 3.5% to 4.0% Up 2.5% to 3.0% System capacity Up 7.0% to 7.5% Up 4.5% to 5.5% Domestic capacity Up 9.5% to 10.0% Up 6.5% to 7.5% Effective tax rate 29% to 30% Capital expenditures $155 to $165 million $920 to $940 million WestJet Second Quarter

10 Discussion of operations Capacity For the three and six months ended June 30, 2015, our overall capacity increased by 7.5 per cent and 6.0 per cent, respectively, over the same periods in These increases are a result of taking delivery of three Bombardier Q400 aircraft in the second quarter of 2015, in addition to the aircraft added to our fleet in the first quarter of 2015 and in the latter half of 2014, including the substitution of larger gauge Boeing 737 NG 800s for the Boeing 737 NG 700s, which were sold to Southwest. The following tables depict our capacity allocation between our domestic, transborder and international markets for the three and six months ended June 30, 2015: Three months ended June Change ASMs % of total ASMs % of total ASMs Domestic 3,874,562, % 3,617,490, % 7.1% Transborder and international 2,780,069, % 2,575,390, % 7.9% Total 6,654,631, % 6,192,880, % 7.5% Six months ended June Change ASMs % of total ASMs % of total ASMs Domestic 6,637,374, % 6,281,109, % 5.7% Transborder and international 6,835,869, % 6,426,356, % 6.4% Total 13,473,244, % 12,707,465, % 6.0% Our domestic to transborder and international capacity mix remained relatively unchanged year over year. The majority of domestic capacity growth in the quarter was driven by increased frequencies and new destinations serviced by our growing Bombardier Q400 fleet and new and redeployed Boeing 737 fleet. The capacity increases in transborder and international markets was serviced by our new and redeployed Boeing 737 fleet. During the second quarter of 2015, our domestic traffic, measured in RPMs, increased by 5.2 per cent year over year as compared to the 7.1 per cent increase in capacity. For the six months ended June 30, 2015, domestic traffic, measured in RPMs, increased 4.5 per cent year over year compared to the 5.7 per cent increase in capacity. The increases in RPMs were lower than the increases in capacity, which is partially a result of industry capacity running ahead of demand in certain markets and the unfavourable economic conditions experienced in Alberta. With regard to our transborder and international markets, RPMs increased by 5.8 per cent over the second quarter of 2014 while capacity increased 7.9 per cent. For the six months ended June 30, 2015, RPMs increased 3.6 per cent compared to a 6.4 per cent increase in capacity. The increases in transborder and international RPMs are consistent with the significant capacity increases experienced in certain markets throughout the first half of 2015, however the impact to load factor improved in the second quarter of 2015 as compared to the first quarter of WestJet Second Quarter

11 Revenue Three months ended June 30 Six months ended June 30 ($ in thousands) Change Change Guest 828, ,454 (2.2%) 1,785,855 1,784, % Other 113,089 82, % 239, , % Total revenue 941, , % 2,025,495 1,972, % Load factor 78.1% 79.6% (1.5 pts.) 79.9% 81.4% (1.5 pts.) Yield (cents) (4.0%) (1.3%) RASM (cents) (5.7%) (3.2%) During the second quarter of 2015, total revenue increased by 1.3 per cent to $942.0 million compared to $930.3 million in the same quarter of The overall increase in total revenue was driven by an increase in ancillary revenue included in other revenue, partially offset by lower guest revenue resulting from downward pressure on our fares and a lower load factor. On an ASM basis, for the three months ended June 30, 2015 revenue decreased by 5.7 per cent to cents from cents in the same quarter of Contributing to this year-over-year decrease was the effects of industry capacity running ahead of demand in certain markets and the unfavourable economic conditions experienced in Alberta. For the six months ended June 30, 2015 total revenue increased by 2.7 per cent to $2,025.5 million compared to $1,972.4 million in the same period of Revenue on an ASM basis decreased by 3.2 per cent to from cents in the same period of the prior year. The overall demand environment remained strong throughout the first half of 2015 compared to the same period in 2014, and load factors held up reasonably well, in spite of industry supply increases in certain markets running ahead of demand. Other revenue Included in other revenue are amounts related to ancillary revenue, WestJet Vacations non-air revenue and our cargo and charter operations. During the three and six months ended June 30, 2015, other revenue increased by 36.4 and 27.4 per cent to $113.1 million and $239.6 million from $82.9 million and $188.1 million in the same periods of the prior year. This increase was driven mainly by an increase in ancillary revenue. Ancillary revenue, which includes service fees, our WestJet RBC MasterCard ± program revenue and onboard sales, provides an opportunity to maximize our profits through the sale of higher-margin goods and services while enhancing our overall guest experience by providing guests with additional products and services to meet their needs. The following table presents ancillary revenue and ancillary revenue on a per guest basis for the three and six months ended June 30, 2015: Three months ended June 30 Six months ended June Change Change Ancillary revenue ($ in thousands) 82,899 47, % 165,984 98, % Ancillary revenue per guest % % For the three and six months ended June 30, 2015, ancillary revenue was $82.9 million and $166.0 million, an increase of 73.3 and 68.5 per cent from $47.8 million and $98.5 million, respectively, in the same periods of the prior year. These increases are mainly attributable to the introduction of the first bag fee in late Other areas contributing to the increase include higher guest bookings, an increase in Plus seating upgrade sales and the continued penetration of our WestJet RBC MasterCard ± program. On a per guest basis, ancillary fees for the quarter and year to date increased by 66.7 and 63.4 per cent to $16.74 and $16.83 per guest, from $10.04 and $10.30 per guest, respectively, for This change is mainly attributable to the introduction of the first bag fee. WestJet Vacations continues to generate revenue which supports WestJet s overall network. The land component, which includes hotels, attractions and car rentals, is reported on the condensed consolidated statement of earnings at the net amount received. In the first half of 2015, WestJet Vacations non-air revenue component declined as the weaker Canadian dollar impacted our margins throughout the first half of 2015 compared to the same period in the prior year. The majority of the land components are paid in US dollars, which is netted against the gross revenue collected in Canadian dollars. WestJet Second Quarter

12 Expenses Expense ($ in thousands) CASM (cents) Three months ended June 30 Three months ended June Change Change Aircraft fuel 214, ,861 (21.8%) (27.3%) Airport operations 132, , % % Flight operations and navigational charges 120, , % % Sales and distribution 88,685 86, % (4.3%) Depreciation and amortization 62,766 54, % % Marketing, general and administration 58,420 61,162 (4.5%) (11.1%) Maintenance 55,531 50, % % Inflight 54,685 42, % % Aircraft leasing 43,981 44,714 (1.6%) (8.3%) Employee profit share 9,359 5, % % Total operating expenses 841, ,898 (1.2%) (8.1%) Total, excluding fuel and profit share 617, , % % During the three months ended June 30, 2015, operating expenses decreased by 1.2 per cent to $841.6 million as compared to $851.9 million in the same period in On an ASM basis, operating expenses decreased by 8.1 per cent to cents from cents in the same period in These decreases were driven largely by decreases in aircraft fuel expense partially offset by the increase in our employee profit share expense. Expense ($ in thousands) CASM (cents) Six months ended June 30 Six months ended June Change Change Aircraft fuel 425, ,697 (24.0%) (28.2%) Airport operations 270, , % % Flight operations and navigational charges 245, , % % Sales and distribution 186, ,834 (0.5%) (6.1%) Depreciation and amortization 119, , % (2.2%) Marketing, general and administration 116, , % (3.4%) Maintenance 109, , % % Inflight 103,069 86, % % Aircraft leasing 91,636 93,822 (2.3%) (8.1%) Employee profit share 59,122 26, % % Total operating expenses 1,727,947 1,762,396 (2.0%) (7.5%) Total, excluding fuel and profit share 1,243,432 1,176, % (0.3%) During the six months ended June 30, 2015, operating expenses decreased by 2.0 per cent to $1,727.9 million as compared to $1,762.4 million in the same period in 2014, primarily driven by the year-over-year decrease in aircraft fuel expense, partially offset by the increase in our employee profit share expense. On an ASM basis, operating expenses for the six months ended June 30, 2015 decreased by 7.5 per cent to cents from cents in the same period in However, excluding a VAT recovery of $20.1 million ($17.6 million in aircraft fuel expense and $2.5 million in airport operations expense), related to the periods 2009 to 2013, recorded in the first half 2014, total 2015 CASM would have decreased by 8.6 per cent and CASM, excluding fuel and profit share would have decreased by 0.5 per cent over the same period in WestJet Second Quarter

13 Aircraft fuel Three months ended June 30 Six months ended June Change Change Aircraft fuel expense ($ in thousands) 214, ,861 (21.8%) 425, ,697 (24.0%) Aircraft fuel expense as a percent of operating expenses 26% 32% (6.0 pts.) 25% 32% (7.0 pts.) Fuel consumption (litres) 310,947, ,845, % 634,070, ,425, % Fuel cost per litre (cents) (26.6%) (27.2%) Average market price for jet fuel in US dollars (per barrel) (38.2%) (39.8%) Average market price for jet fuel in Canadian dollars (per barrel) (29.9%) (32.1%) Fuel remains a significant cost representing 26 per cent and 25 per cent of total operating expenses for the three and six months ended June 30, 2015 (three and six months ended June 30, per cent). Fuel prices continue to be extremely volatile due to global economic and geopolitical factors which we can neither control nor accurately predict. For the three and six months ended June 30, 2015, aircraft fuel expense decreased by 21.8 per cent and 24.0 per cent to $214.9 million and $425.4 million from $274.9 million and $559.7 million, respectively, primarily due to the 26.6 per cent and 27.2 per cent yearover-year decrease in our fuel cost per litre. Fuel costs per ASM for the three and six months ended June 30, 2015, were 3.23 cents and 3.16 cents, compared to 4.44 cents and 4.40 cents in the same periods of 2014, a decrease of 27.3 per cent and 28.2 per cent year over year. However, in the first half of 2014 fuel costs per ASM included a VAT recovery related to the years 2009 through to the end of Fuel costs per ASM would have decreased 32.5 per cent year over year, with fuel costs per ASM excluding the VAT recovery at 4.68 cents for the six months ended June 30, This decrease was driven by the overall decrease in the Canadian market price of jet fuel. Our fuel costs per litre for the three and six months ended June 30, 2015 decreased by 26.6 per cent and 27.2 per cent to 69 cents and 67 cents per litre. On average, the market price for jet fuel was US $76 per barrel in the second quarter of 2015 versus US $123 per barrel in the second quarter of 2014, a decrease of approximately 38.2 per cent. The benefit from the lower market price of US-dollar jet fuel on a year-over-year basis was partially offset by the weaker Canadian dollar as the average market price for jet fuel in Canadian dollars decreased by only 29.9 per cent to $94 per barrel from $134 per barrel in the second quarter of Similarly, on average, the market price for jet fuel was US $74 per barrel for the six months ended June 30, 2015 versus US $123 per barrel in the same period of the prior year, a decrease of approximately 39.8 per cent while jet fuel in Canadian dollars decreased by only 32.1 per cent to $91 per barrel from $134 per barrel in the second quarter of For 2015, we estimate our sensitivity of fuel costs to changes in crude oil to be approximately USD $8.0 million annually for every one US-dollar change per barrel of West Texas Intermediate (WTI) crude oil. Additionally, we estimate our sensitivity to changes in fuel pricing to be approximately $13.0 million for every one-cent change per litre of fuel. We estimate that every one-cent change in the value of the Canadian dollar versus the US dollar will have an approximate impact of $6.2 million on fuel costs. As at June 30, 2015, we have no fuel derivative contracts outstanding. We will continue to monitor and adjust to movements in fuel prices and may re-visit our hedging strategy as changing markets and competitive conditions warrant. Marketing, general and administration Marketing expenses largely consist of advertising and sponsorship costs. General and administration expenses consist of corporate office departments, professional fees and insurance costs. For the three months ended June 30, 2015, marketing, general and administration expenses were $58.4 million, representing a decrease of 4.5 per cent from the comparable period of Marketing, general and administration expenses per ASM were 0.88 cents for the second quarter of 2015, representing a decrease of 11.1 per cent from 0.99 cents in the same period of the prior year. Included in the second quarter of the prior year was an amount of $5.3 million relating to a pending settlement with a vendor. Excluding this amount, year WestJet Second Quarter

14 over year marketing, general and administration expenses per ASM would have decreased 2.2 per cent, which was mainly attributable to lower advertising spend. For the six months ended June 30, 2015, marketing, general and administration expenses were $116.5 million, representing a $3.1 million or 2.8 per cent increase compared to the six months ended June 30, On a year-to-date basis our marketing, general and administration expenses per ASM were 0.86 cents, representing a decrease of 3.4 per cent from 0.89 cents in the same period of the prior year. Excluding the $5.3 million discussed above, marketing, general and administration expenses per ASM would have increased by 1.2 per cent from 0.85 cents in the same period of the prior year. Inflight Inflight expense is comprised mainly of salaries and benefits, travel costs and training for our flight attendants. For the three months ended June 30, 2015, inflight expense was $54.7 million, representing a $12.6 million or 29.9 per cent increase, compared to the same period of The increase was primarily attributable to a $5.1 million lump-sum payment associated with the new flight attendant agreement reached in May 2015 (the lump-sum payment). Our inflight cost per ASM was 0.82 cents in the second quarter of 2015, representing an increase of 20.6 per cent from 0.68 cents in the same period of the prior year. Excluding the $5.1 million lump-sum payment incurred in the second quarter of 2015, on an ASM basis, inflight expense would have been 0.74 cents in 2015, representing an increase of 8.8 per cent from the same period in 2014, caused by higher salaries and benefits, as well as timing of certain discretionary costs such as uniform replacements, travel costs and training costs. For the six months ended June 30, 2015, inflight expense was $103.1 million, representing a $16.3 million or 18.7 per cent increase compared to the six month ended June 30, 2014, due to the lump-sum payment. On a year-to-date basis our inflight cost per ASM was 0.76 cents, representing an increase of 11.8 per cent from 0.68 cents in the same period of the prior year. Excluding the impact of the above noted $5.1 million payment the per ASM increase for the six months ended June 30, 2015 would have been 5.9 per cent. Compensation Our compensation philosophy is designed to align corporate and personal success. We have created a compensation program whereby a portion of our expenses are variable and are tied to our financial results. Our compensation strategy encourages employees to become owners in WestJet, which creates a personal vested interest in our financial results and operational accomplishments. Three months ended June 30 Six months ended June 30 ($ in thousands) Change Change Salaries and benefits 175, , % 354, , % Employee share purchase plan 21,528 19, % 42,173 38, % Employee profit share 9,359 5, % 59,122 26, % Share-based payment plans 5,250 5,904 (11.1%) 8,750 9,762 (10.4%) Total 211, , % 464, , % Presentation on the Condensed Consolidated Statement of Earnings: Airport operations 29,197 26, % 57,376 52, % Flight operations and navigational charges 66,868 60, % 139, , % Sales and distribution 17,921 17, % 36,492 35, % Marketing, general and administration 28,587 26, % 58,361 51, % Inflight 42,761 32, % 80,179 68, % Maintenance 17,179 15, % 33,821 30, % Employee profit share 9,359 5, % 59,122 26, % Total 211, , % 464, , % Salaries and benefits Salaries and benefits are determined via a framework of job levels based on internal experience and external market data. During the three and six months ended June 30, 2015, salaries and benefits increased by 14.0 per cent and 12.5 per cent to WestJet Second Quarter

15 $175.7 million and $354.7 million, from $154.2 million and $315.4 million in the same periods of These increases were primarily due to the 7.8 per cent increase in our total number of full-time equivalent employees to 8,967 employees at June 30, 2015 (June 30, ,320 employees), our annual market and merit increases as a result of our growth and a lumpsum payment associated with the new flight attendant agreement reached in May 2015 (as discussed above under the heading Inflight). Salaries and benefits expense for each department is included in the respective department s operating expense line item, as presented in the table above. Employee share purchase plan (ESPP) The ESPP encourages employees to become owners of WestJet shares and provides employees with the opportunity to significantly enhance their earnings. Under the terms of the ESPP, WestJetters may, dependent on their employment agreement, contribute up to a maximum of 10 per cent or 20 per cent of their gross salary to acquire voting shares of WestJet at the current fair market value. The contributions are matched by WestJet and are required to be held within the ESPP for a period of one year. At June 30, 2015, approximately 85.0 per cent of our eligible active employees participated in the ESPP, contributing an average of 14.2 per cent of their gross salaries. Under the terms of the ESPP, we acquire voting shares on behalf of employees through open market purchases. For the three and six months ended June 30, 2015, our matching expense was $21.5 million and $42.2 million, an 11.3 per cent and 10.6 per cent increase, respectively, from $19.3 million and $38.1 million in the same periods of 2014, driven largely by the increased number of eligible employees compared to the prior year as well as the overall increase in salaries, as discussed above under the heading Salaries and benefits. 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 more profitable. Conversely, the amount distributed to employees is reduced in less profitable periods. Our profit share expense for the three and six months ended June 30, 2015, was $9.4 million and $59.1 million, representing a 74.9 per cent and over one hundred per cent increase, respectively, from $5.4 million and $26.3 million in the same periods of the prior year. These year-over-year increases are directly attributable to higher earnings eligible for profit share in the first half of 2015 versus the prior year. Share-based payment plans We have three equity-settled share-based payment plans whereby either stock options, restricted share units (RSUs) or performance share units (PSUs) may be awarded to pilots, senior executives and certain non-executive employees. Our equity-settled share-based payments are measured at the fair value of the instrument granted and recognized as compensation expense with a corresponding increase in equity reserves on a straight-line basis over the related service period based on the number of awards expected to vest. For the three months ended June 30, 2015, share-based payment expense totaled $5.3 million, representing a decrease of 11.1 per cent over the $5.9 million recognized in the same period in the prior year. This decrease relates to a revision of the number of stock options and RSUs estimated to be granted to pilots for past service. In addition, in the second quarter of 2014 an increase was made to the estimate of the number of PSU s expected to vest while in the second quarter of 2015 no such revision occurred. Share-based payment expense related to pilots awards is included in flight operations and navigational charges, while the expense related to senior executives and certain nonexecutive employees awards is included in marketing, general and administration expense. For the six months ended June 30, 2015, share-based payment expense was $8.8 million, representing a decrease of 10.4 per cent from $9.8 million recognized in the same period in the prior year. This decrease relates primarily to a revision of the estimated number of stock options and RSUs granted to pilots for past service. Foreign exchange The gain or loss on foreign exchange included in our condensed consolidated statement of earnings is mainly attributable to the effect of the changes in the value of our US-dollar-denominated net monetary assets and liabilities. These net monetary assets consist mainly of monetary assets of US-dollar cash and cash equivalents, security deposits on various leased aircraft, and maintenance reserves paid to lessors, offset by monetary liabilities of US-dollar accounts payable and accrued liabilities and maintenance provisions. We hold US-dollar-denominated cash and short-term investments to reduce the foreign currency risk inherent in our US-dollar expenditures. At June 30, 2015, US-dollar-denominated net monetary assets totaled approximately US $43.4 million compared to US $6.1 million in net monetary assets at December 31, This increase in US-dollar-denominated net monetary assets compared to 2014 year end is largely due to an increase in US-dollar- WestJet Second Quarter

16 denominated cash and short-term investment balances and a decrease in US-dollar-denominated liabilities. We reported a foreign exchange gain of $0.9 million and $0.3 million for the three and six months ended June 30, 2015 on the revaluation of our US-dollar-denominated monetary assets and liabilities (three and six months ended June 30, $0.5 million gain and $1.0 million loss). We periodically use financial derivatives to manage our exposure to foreign exchange risk. At June 30, 2015, to fix the exchange rate on a portion of our US-dollar-denominated aircraft lease payments, we had entered into foreign exchange forward contracts for an average of US $11.1 million per month for the period of July 2015 to June 2016 for a total of US $132.9 million at a weighted average contract price of Canadian dollars to one US dollar. Upon proper qualification, we designated the forward contracts as effective cash flow hedges for accounting purposes. Under cash flow hedge accounting, the effective portion of the change in the fair value of the hedging instrument is recognized in hedge reserves. Upon maturity of the derivative instrument, the effective gains and losses previously recognized in hedge reserves are recorded in net earnings as a component of aircraft leasing expense. At June 30, 2015, no portion of the forward contracts was considered ineffective. The following table presents the financial impact and statement presentation of our foreign exchange derivatives on the condensed consolidated statement of financial position at June 30, 2015 and December 31, 2014 and on the condensed consolidated statement of earnings for the three and six months ended June 30, 2015 and June 30 December 31 ($ in thousands) Statement presentation Statement of Financial Position: Fair value Prepaid expenses, deposits and other 8,602 6,409 Fair value Accounts payable and accrued liabilities (388) (49) Unrealized gain Hedge reserves (before tax) 8,214 6,360 Three months ended June 30 ($ in thousands) Statement presentation Statement of Earnings: Realized gain Aircraft leasing 4,942 2,856 Six months ended June 30 ($ in thousands) Statement presentation Statement of Earnings: Realized gain Aircraft leasing 9,665 5,705 The fair value of the foreign exchange forward contracts presented on the condensed consolidated statement of financial position 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. For 2015, we estimate that every one-cent change in the value of the Canadian dollar versus the US dollar will have an approximate impact of $9.0 million on our annual unhedged operating costs (approximately $6.2 million for fuel expense and $2.8 million related to other US-dollar-denominated operating expenses). We also have a significant amount of our future purchase obligations, including certain aircraft, exposed to foreign exchange risk. At June 30, 2015, we estimate for every one-cent change in the value of the Canadian dollar versus the US dollar would have an approximate impact of $37.0 million on our future US-dollar-denominated purchase obligations. Income taxes Our effective consolidated income tax rate for the three and six months ended June 30, 2015 was 31 per cent and 28 per cent respectively, as compared to 27 per cent for both comparative periods in The year-over-year increase in our effective rate for both the three and six months ended June 30, 2015, was due to an increase to the general corporate income tax rate in Alberta to 12 per cent, from 10 per cent, effective July 1, WestJet Second Quarter