Management s Discussion and Analysis of Financial Results. For the three and six months ended June 30, 2009

Transcription

1 Management s Discussion and Analysis of Financial Results For the three and six months ended June 30, 2009

2 Advisories The following Management s Discussion and Analysis of Financial Results (MD&A), dated August 5, 2009, should be read in conjunction with the cautionary statement regarding forward-looking information and statements below, as well as the unaudited interim consolidated financial statements and notes thereto as at and for the three and six months ended June 30, 2009, and 2008, and the consolidated financial statements, notes thereto and MD&A included in the Annual Report as at and for the year ended December 31, 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, 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 and policies. 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 and our website at 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 we will continue slowing capacity growth for the remainder of 2009 referred to under the Overview on page 5; our expectation that some of our cost savings will come in the form of capacity reductions, renegotiations with our key strategic suppliers and voluntary employee programs referred to under the Overview on page 5; our expectation that the 2009 pilot agreement will continue to provide both the pilot group and WestJet with positive employee relations and the stability to achieve long-term strategic goals referred to under the Overview on page 5; our expectation that WestJet Vacations Inc. (WVI) will help absorb capacity with the new destinations added to our schedule and that these destinations will drive new revenues and contribute to our profitable growth strategy referred to under Results of Operations Revenue on page 9 and the Outlook on page 29; our hedging expectations and the intent to hedge anticipated jet fuel purchases referred to under Results of Operations Aircraft Fuel on page 12; our sensitivity to changes in crude oil and fuel pricing referred to under Results of Operations Aircraft Fuel on page 12; our expectation that aircraft maintenance costs will increase as our fleet ages referred to under Results of Operations Maintenance on page 15; our expectation that the option to issue shares from treasury to meet our Employee Share Purchase Plan (ESPP) obligations may be revisited during 2009 referred to under Results of Operations Compensation on page 15; our sensitivity to the change in the value of the Canadian dollar versus the US dollar referred to under Results of Operations Foreign Exchange on page 17; our future aircraft deliveries referred to under Liquidity and Capital Resources on page 20; our expectation that the finalization of our line of credit will provide us with an additional source of cash if required referred to under Liquidity and Capital Resources on page 20 and the Outlook on page 29; our assessment of the impact of transition to International Financial Reporting Standards (IFRS) referred to under Accounting Future Accounting Policy Changes on page 26; our anticipation that demand for air travel will be negatively impacted during the remainder of 2009 referred to under the Outlook on page 29; our expected capacity decrease for the third quarter of 2009, and our full-year capacity increase for 2009, referred to under the Outlook on page 29; our expected focus on transborder and international markets referred to under the Outlook on page 29; our expectation that we will not see any real improvement in our revenue per available seat mile (RASM) for the balance of 2009, and RASM declines continuing at similar declines from the second quarter year-over-year results referred to under the Outlook on page 29; our expected fuel costs per litre referred to under the Outlook on page 29; our expectation of the impact that settlements of fuel hedging contracts will have on our fuel costs per litre referred to under the Outlook on page 29; our expectation that our cash balance and additional focus on cutting costs will help maintain one of the healthiest balance sheets in the airline industry referred to under the Outlook on page 29; our expectation that the flexibility of our schedule will provide us with the ability to grow capacity once demand for air travel improves referred to under the Outlook on page 29; our expectation that we will emerge as a stronger, more competitive airline with our continued focus on costs referred to under the Outlook on page 29; WestJet Second Quarter

3 and our expectation that the commitment of our WestJetters and our award-winning corporate culture will be key differentiators in the current challenges we are facing referred to under the Outlook on page 29. 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: our expectation that we will continue slowing capacity growth for the remainder of 2009 was based on our actual and forecasted commercial schedules; our expectation that some of our cost savings will come in the form of capacity reductions, renegotiations with our key strategic suppliers and voluntary employee programs was based on our actual and forecasted commercial schedules, as well as current financial results and our current strategic plan; our expectation that the 2009 pilot agreement will continue to provide both the pilot group and WestJet with positive employee relations and the stability to achieve long-term strategic goals was based on the mutual formation and acceptance of the agreement and various internal negotiation discussions; our expectation that WVI will help absorb capacity with the new destinations added to our schedule and that these destinations will drive new revenues and contribute to our profitable growth strategy 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 expectation that the option to issue shares from treasury to meet the obligations under our ESPP will be revisited during 2009 was based on our current strategic plan; 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 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 an aircraft delivery schedule from Boeing; our expectation that the finalization of our line of credit will provide us with an additional source of cash if required was based on the signed credit facility; our assessment of the impact of transition to IFRS was based on IFRS standards adopted by the International Accounting Standards Board thus far and our initial assessment of Canadian GAAP and IFRS differences; our anticipation that demand for air travel will be negatively impacted was based on actual and forecasted bookings; our expected capacity decrease for the third quarter of 2009, and our full-year expected capacity increase for 2009, were based on our actual and forecasted commercial schedules; our expected focus on transborder and international markets was based on actual and forecasted bookings, as well as our current strategic plan; our expectation that we will not see any real improvement in RASM for the balance of 2009, and RASM declines continuing at similar declines from the second quarter year-over-year results was based on actual and forecasted bookings for the same periods; our expected fuel costs per litre for the third quarter of 2009 and our expectation of the impact that settlements of fuel hedging contracts will have on our fuel costs per litre were based on realized jet fuel prices for July 2009 and forward WestJet Second Quarter

4 curve prices for August and September 2009, as well as the exchange rate for the Canadian dollar in the third quarter similar to the current market rate; our expectation that our cash balance and additional focus on cutting costs will help maintain one of the healthiest balance sheets in the airline industry was based on our current strategic plan and preliminary financial analysis; our expectation that the flexibility of our schedule will provide us with the ability to grow capacity once demand for air travel improves was based on our actual and forecasted commercial schedules; our expectation that we will emerge as a stronger, more competitive airline with our continued focus on costs was based on our current strategic plan; and our expectation that the commitment of our WestJetters and our award-winning corporate culture will be key differentiators in the current challenges we are facing was based on the corporate culture awards we have received. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forwardlooking 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 or, upon request, without charge from us. Additionally, risks and uncertainties are discussed in detail within the 2008 MD&A dated February 10, 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. 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. WestJet Second Quarter

5 OVERVIEW During the second quarter of 2009, we faced one of the most difficult revenue environments in our airline s history and as such, we are now seeing the full impact of the global recession on our financial results. While we reported positive net earnings for the 17 th consecutive quarter, our business is not immune to the negative impact of the weak economy. We experienced a significant year-over-year decline in second quarter RASM, driven primarily by a dramatic deterioration in demand for air travel, pricing pressure and removal of the fuel surcharge. The reduction in the market price of jet fuel provided cost relief and partially offset the effects of softening revenues. For the balance of 2009, we do not expect improvements in the revenue environment. As such, cost savings continue to be one of our key focuses and will help us maintain a strong and healthy balance sheet. Now more than ever, the commitment and focus of our WestJetters is critical in combating the external pressures that we are facing, without compromising our high-value service to our guests, as evidenced by being named Canada s preferred airline during the quarter. Quarterly highlights Recognized total revenues of $531.2 million for the three months ended June 30, 2009, a decrease of 13.8 per cent over the same period of Recorded RASM of cents in the second quarter of 2009, down 15.4 per cent from the comparable period of Increased capacity by 1.9 per cent for the second quarter of 2009, as compared to the same period of Decreased CASM to cents for the three months ended June 30, 2009, from cents in the second quarter of 2008, an improvement of 14.0 per cent. Realized CASM, excluding fuel and employee profit share, of 8.45 cents for the second quarter of 2009, up 2.5 per cent over the same period of Recorded an earnings before tax (EBT) margin of 2.6 per cent for the quarter ended June 30, 2009, down 3.7 points from the same quarter in Realized net earnings of $9.2 million in the second quarter of 2009, a decrease of 65.7 per cent from the same period of Diluted earnings per share were $0.07 for the three months ended June 30, 2009, a decrease of 66.7 per cent compared to the second quarter of Purchased a leased aircraft from the lessor during the second quarter of 2009 with cash, providing us with an unencumbered asset. Generated cash flows from operations of $25.8 million for the quarter ended June 30, 2009, a decrease from $125.9 million for the three months ended June 30, Announced our largest-ever seasonal non-stop flight schedule, featuring a record 11 new transborder and international destinations for our winter schedule. Announced a deal with RBC Royal Bank and MasterCard Canada for the upcoming launch of our new travel reward credit card as part of our new rewards program to be unveiled this fall. WestJet Second Quarter

6 Due to a change in accounting policy during the second quarter of 2009, retrospective restatement of prior periods was required. This change has been denoted throughout this MD&A. Please refer to Accounting Changes in Accounting Policy on page 24 of this MD&A, as well as note 2, Recent accounting pronouncements, to the consolidated financial statements and notes for the three and six months ended June 30, 2009, and 2008, for further disclosure. Please refer to page 31 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 enviable corporate culture and brand remains strong as our WestJetters demonstrate their ingenuity and dedication to help us reduce costs in this challenging time for the airline industry. We continue to deliver a worldclass guest experience despite the challenges presented to us during the second quarter of Operational highlights Three months ended June 30 Six months ended June Change Change ASMs 4,314,869,886 4,234,625, % 8,671,675,025 8,299,617, % RPMs 3,284,898,568 3,365,923,157 (2.4%) 6,786,827,711 6,696,736, % Load factor 76.1% 79.5% (3.4 pts.) 78.3% 80.7% (2.4 pts.) Yield (cents) (11.6%) (9.9%) RASM (cents) (15.4%) (12.5%) CASM (cents) * (14.0%) * (10.4%) CASM, excluding fuel and employee profit share (cents) * 2.5% * 2.5% Fuel consumption (litres) 207,532, ,847, % 423,293, ,002, % Fuel costs per litre (dollars) (40.4%) (31.2%) Segment guests 3,417,877 3,546,184 (3.6%) 6,869,562 7,015,589 (2.1%) Average stage length (miles) % % Utilization (hours) (5.7%) (3.3%) Number of full-time equivalent employees at period end 6,140 6,156 (0.3%) 6,140 6,156 (0.3%) Fleet size at period end % % *Restated The global recession continues to impact the North American airline industry. As a result, consumer confidence is low and unemployment rates are higher than we have seen in recent years. These factors have contributed to the rapid weakening of demand as consumers remain cautious and reduce discretionary spending on air travel. Although there appear to be early signs of improvements in both the North American and global economies, these signs are not present in the airline industry at this point, as the industry continues to lag behind overall economic recovery. Fuel costs for the second quarter of 2009 were significantly lower year over year, which partially offset the impact of a softening revenue environment. We remain committed to our growth strategy; however, we slowed our capacity growth in the second quarter and will continue this strategy for the remainder of 2009 to better align supply with existing demand. Despite the challenges presented to us during the second quarter of 2009, we produced positive net earnings of $9.2 million and diluted earnings per share of $0.07. During the three months ended June 30, 2009, total revenues decreased by 13.8 per cent to $531.2 million as compared to $616.0 million in the same period of 2008, attributable primarily to the weak economy, competitive pricing to stimulate demand and the absence of the fuel surcharge that WestJet Second Quarter

7 was introduced in the second quarter of 2008, representing a quarter-over-quarter decline of approximately $24 million. Due to the softening in demand, our second quarter load factor declined by 3.4 points to 76.1 per cent from 79.5 per cent in the same quarter of 2008, as depicted in the following graph. Quarterly load factor 85% 80% 75% 70% 2007 Q Q Q Q Q Q Q Q2 We experienced a significant decrease in RASM during the second quarter of 2009 of 15.4 per cent. As such, cost control is of critical importance, as is introducing activities to stimulate demand. During the second quarter, we introduced an internal cost containment program for the remainder of 2009 and 2010 to identify areas for sustainable savings, cost deferrals and cost avoidances. We anticipate some of the cost savings to come in the form of capacity reductions, renegotiations with our key strategic suppliers and voluntary employee programs, such as early-out options and early retirements. The goal of the program is to continue WestJet s focus on cost control and operating one of the most efficiently-run airlines in the world. For the three months ended June 30, 2009, our CASM improved by 14.0 per cent to cents from 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 8.45 cents from 8.24 cents in the second quarter of 2008, representing a change of 2.5 per cent, due mainly to incremental maintenance costs, lower aircraft utilization and a weaker Canadian dollar. As at June 30, 2009, our cash and cash equivalents balance was $739.6 million, a decrease of 9.8 per cent from December 31, 2008, due primarily to the purchase of one of our leased aircraft from the lessor, negative working capital movements and lower earnings from operations. Our adjusted debt-to-equity ratio improved to 1.72 from 1.79 as at December 31, 2008, while our adjusted net debt to Earnings Before Interest, Taxes, Depreciation, Aircraft Rent and other items (EBITDAR) ratio increased by 12.2 per cent to 2.57 as compared to 2.29 as at December 31, Although our adjusted net debt to EBITDAR leverage ratio has increased from year end, both ratios remain strong relative to the airline industry. During the second quarter of 2009, we finalized the agreement for our $85 million credit facility that is secured by our new Calgary Campus. This, coupled with the unencumbered WestJet Second Quarter

8 aircraft that we purchased from the lessor during the second quarter of 2009, provides us easy and timely access to approximately $110 to $120 million of financing. Additionally, our current ratio of 1.18, defined as current assets over current liabilities, remained positive as at June 30, 2009 as compared to 1.24 at the end of Please refer to page 31 of this MD&A for a reconciliation of the non-gaap measures listed above, including our adjusted debt-to-equity and adjusted net debt to EBITDAR ratios, to the nearest measure under Canadian GAAP. Relative to our peers in the airline industry, our balance sheet remains healthy. During the second quarter of 2009, we also assumed delivery of one leased , increasing our total registered fleet to 79 aircraft. Our fleet remains one of the youngest fleets of any large North American commercial airline with an average age of 4.3 years. On June 17, 2009, WestJet and the WestJet Pilots Association ratified a four-year pilot agreement, obtaining 89 per cent support from 91 per cent of the total pilot population. The new agreement became effective July 1, 2009 and expires on April 30, The implementation of the four-year deal will provide both the pilot group and WestJet with positive employee relations and the stability required to achieve long-term strategic goals. SELECTED QUARTERLY UNAUDITED FINANCIAL INFORMATION Three months ended Jun. 30 Mar. 31 Dec. 31 Sept ($ in thousands, except per share data) Restated Restated Total revenues $ 531,163 $ 579,285 $ 615,783 $ 718,375 Net earnings $ 9,153 $ 37,432 $ 42,026 $ 57,876 Basic earnings per share $ 0.07 $ 0.29 $ 0.33 $ 0.45 Diluted earnings per share $ 0.07 $ 0.29 $ 0.33 $ 0.45 Three months ended Jun. 30 Mar. 31 Dec. 31 Sept ($ in thousands, except per share data) Restated Restated Restated Restated Total revenues $ 616,000 $ 599,348 $ 552,004 $ 606,242 Net earnings $ 26,840 $ 51,764 $ 75,005 $ 76,678 Basic earnings per share $ 0.21 $ 0.40 $ 0.58 $ 0.59 Diluted earnings per share $ 0.21 $ 0.39 $ 0.56 $ 0.59 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 restated net earnings of $75.0 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. WestJet Second Quarter

9 RESULTS OF OPERATIONS Revenue Three months ended June 30 Six months ended June 30 ($ in thousands) Change Change Guest revenues $ 485,248 $ 557,305 (12.9%) $ 982,343 $ 1,083,005 (9.3%) Charter and other revenues 45,915 58,695 (21.8%) 128, ,343 (3.2%) $ 531,163 $ 616,000 (13.8%) $ 1,110,448 $ 1,215,348 (8.6%) RASM (cents) (15.4%) (12.5%) During the quarter ended June 30, 2009, total revenues decreased by 13.8 per cent to $531.2 million from $616.0 million in the same period of Similarly, total revenues declined to $1,110.4 million for the six months ended June 30, 2009, from $1,215.3 million for the comparable period in 2008, representing a decrease of 8.6 per cent. These declines in total revenues were largely attributable to the weak economy and the resulting softness in demand for air travel, as well as the elimination of the fuel surcharge that was implemented in the second quarter of The quarter ended June 30, 2009 was bolstered by a strong April resulting from the favourable effects of Easter falling in the second quarter of 2009 versus the first quarter of One of the key indicators of revenue growth is RASM, as it takes into consideration load factor and yield. Our RASM decreased by 15.4 per cent and 12.5 per cent for the three and six months ended June 30, 2009 to cents and cents, respectively, compared to the same periods in These changes were primarily due to declines in yield of 11.6 per cent and 9.9 per cent for the second quarter and first half of 2009, respectively. The decreases in yield for the respective periods were attributable to the deteriorating economy and pricing competition, resulting in a significant increase in discounting of seats to stimulate demand and a shorter booking curve. Additionally, the second quarter is a transitional period where a large portion of our transborder, international and charter capacity is shifted back into our domestic markets. The difficult demand environment and softness in the domestic markets negatively impacted our RASM for the second quarter and first six months of For the three and six months ended June 30, 2009, guest revenues from our scheduled flight operations declined by 12.9 per cent and 9.3 per cent to $485.2 million and $982.3 million, respectively, compared to the same periods in the prior year. These changes were attributable to lower load factors from the weak economy, the absence of the fuel surcharge in 2009 and pricing competition with our main competitor, offset somewhat by increased WestJet Vacations Inc. (WVI) air revenue. For these periods, we also saw a related decline in full-fare bookings versus the same periods of the prior year, as we increased seat sales and the level of fare discounts in order to stimulate demand amid the weak economic environment. Although we saw a benefit from Easter falling during the second quarter of 2009 versus the first quarter of 2008, this was not enough to offset the effects of lower load factors and reductions in fares during the quarter and the year-to-date period. WestJet Second Quarter

10 Aircraft utilization decreased by 42 minutes to 11.5 operating hours per day for the second quarter of 2009, compared to 12.2 operating hours per day in the same period of Similarly, utilization declined to 11.9 operating hours per day for the year-to-date period ended June 30, 2009 as compared to 12.3 operating hours per day for the same period in the prior year, representing a decrease of 24 minutes. These declines were due to optimization of our schedule to adjust to the weaker demand environment. The flexibility of our fleet deployment strategy allows us to react to demand changes by adjusting our schedule for more profitable flying. Our lower aircraft utilization negatively impacted both revenue and CASM for the three and six months ended June 30, For the three and six months ended June 30, 2009, charter and other revenues, which include charter, cargo, ancillary, WVI non-air and other revenue, decreased by 21.8 per cent and 3.2 per cent to $45.9 million and $128.1 million, respectively, versus the comparable periods of These decreases were driven mainly by the termination of our charter agreement with Transat effective May 10, 2009 in favour of our own flying to existing and new sun destinations, as depicted in the graph below. Due to our expanded destination base, these declines for both periods were partially offset by increases in ancillary revenue and WVI non-air revenue. Charter and scheduled transborder and international as a percentage of total ASMs 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Transborder/International Charter WVI continued to play a significant role in our growth strategy in the second quarter and first half of Recently, we announced our largest-ever seasonal non-stop flight schedule, featuring a record eight new sun destinations and three additional U.S. destinations for our winter schedule. Beginning in the fall of 2009, WestJet and WVI will launch seasonal non-stop service to Varadero, Holguin and Cayo Coco, Cuba; Ixtapa and Cozumel, Mexico; St. Martin; Providenciales, Turks and Caicos; Freeport, Bahamas; Lihue (Kauai), Hawaii; Miami, Florida; and Atlantic City, New Jersey. As we continue to grow our network, we are confident that WVI will help absorb capacity with these 11 new destinations added to our schedule. We believe these destinations will drive new revenues and contribute to our profitable growth strategy. WestJet Second Quarter

11 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. For the three and six months ended June 30, 2009, ancillary revenues were $23.5 million and $48.3 million, representing increases of 10.8 per cent and 17.2 per cent, respectively, over the same periods of Ancillary revenue per guest increased to $6.94 per guest in the second quarter of 2009 from $6.15 in the second quarter of 2008, an improvement of 12.8 per cent. Similarly, ancillary revenue per guest in the first six months of 2009 improved by 19.1 per cent to $7.28 from $6.11 per guest in the same period of These increases were attributable primarily to higher revenue from fees in both quarters, offset somewhat by lower revenue due to the termination of our tri-branded BMO Mosaik AIR MILES MasterCard credit card partnership on July 31, With revenues of $5.3 million and $10.9 million for the three and six months ended June 30, 2009, respectively, our pre-reserved seating option introduced in the third quarter of 2008 accounted for nearly all of our quarter-over-quarter and year-to-date increase in fees. Additionally, increases to our change and cancellation fees, same-day cancellation fees and certain buy-on-board product prices contributed to increased revenue from fees for the same periods. Three months ended June 30 Six months ended June 30 CASM (cents) Change Change Aircraft fuel (40.9%) (31.8%) Airport operations (1.0%) % Flight operations and navigational charges % % Marketing, general and administration * (2.6%) * - Sales and distribution * (14.2%) * (10.6%) Depreciation and amortization (1.3%) Inflight % % Aircraft leasing % % Maintenance % % Employee profit share (40.0%) (61.1%) * (14.0%) * (10.4%) CASM, excluding fuel and employee profit share * 2.5% * 2.5% *Restated For the second quarter and first half of 2009, our CASM decreased by 14.0 per cent and 10.4 per cent, respectively, due largely to the 40.9 per cent and 31.8 per cent declines in aircraft fuel expense per ASM for the same periods. Our CASM, excluding fuel and employee profit share, grew slightly to 8.45 cents and 8.48 cents, representing increases of 2.5 per cent for both the three and six months ended June 30, These changes primarily related to increased maintenance, aircraft leasing and inflight expenses, offset somewhat by a decrease in sales and distribution expense. We remain focused on our cost containment efforts and maintaining our low-cost advantage. As a result, on July 3, 2009, we announced, among other initiatives, voluntary leave of absence options for our employees, as well as earlyout and early retirement packages. WestJet Second Quarter

12 Aircraft fuel During the second quarter and first half of 2009, we experienced substantial relief from the elevated fuel prices that negatively impacted our CASM during the same periods in During the three months ended June 30, 2009, the average market price for jet fuel was US $66.03 per barrel as compared to US $ per barrel in the second quarter of 2008, representing a decrease of 57.6 per cent. We saw a corresponding decrease in our fuel costs per ASM of 40.9 per cent to 2.98 cents in the second quarter of 2009 as compared to 5.04 cents in the same period in Similarly, our fuel costs per ASM decreased to 3.13 cents from 4.59 cents for the six months ended June 30, 2009, a decline of 31.8 per cent. For both periods in 2009, these favourable changes resulted from 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 26 per cent and 27 per cent of total operating costs for the three and six months ended June 30, 2009, respectively, down from approximately 38 per cent and 35 per cent for the same periods in The following table displays our fuel costs per litre, including and excluding fuel hedging, for the three and six months ended June 30, Please refer to page 31 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. Three months ended June 30 Six months ended June 30 ($ in thousands, except per litre data) Change Change Aircraft fuel expense - GAAP $ 128,677 $ 213,610 (39.8%) $ 271,068 $ 381,327 (28.9%) Realized loss on fuel derivatives - effective portion (7,060) - N/A (19,034) - N/A Aircraft fuel expense, excluding hedging - Non-GAAP $ 121,617 $ 213,610 (43.1%) $ 252,034 $ 381,327 (33.9%) Fuel consumption (thousands of litres) 207, , % 423, , % Fuel costs per litre (dollars) - including fuel hedging (40.4%) (31.2%) Fuel costs per litre (dollars) - excluding fuel hedging (43.3%) (35.5%) Our fuel costs per litre, including fuel hedging, decreased to $0.62 per litre during the second quarter of 2009, representing an improvement of 40.4 per cent, from $1.04 per litre in the same period of 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 $0.59 for the second quarter of 2009, a decrease of 43.3 per cent from the second quarter of Similarly, we saw fuel costs per litre, including fuel hedging, decrease for the six months ended June 30, 2009 by 31.2 per cent compared to the same period in Excluding the effects of the realized loss on fuel derivatives designated in an effective hedging relationship, our fuel costs per litre were $0.60 for the six months ended June 30, WestJet Second Quarter

13 As at June 30, 2009, we had a mixture of fixed swap agreements and costless collar structures in Canadian-dollar WTI crude oil derivative contracts to hedge approximately 32 per cent (December 31, per cent) of our remaining anticipated jet fuel requirements for 2009 and approximately 14 per cent (December 31, per cent) of our anticipated jet fuel requirements for The following table outlines, as at June 30, 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. We have not entered into any additional fuel derivative contracts for the three and six months ended June 30, Notional volumes WTI average strike price WTI average call price WTI average put price Year Instrument (bbl) (CAD$/bbl) (CAD$/bbl) (CAD$/bbl) 2009 Swaps 591, Costless collars 284, Swaps 381, Costless collars 483, The following table presents the financial impact and statement presentation of our fuel derivatives on the consolidated balance sheet as at June 30, 2009, and December 31, ($ in thousands) Statement presentation June 30, 2009 December 31, 2008 Fair value of fuel derivatives - current portion Prepaid expenses, deposits and other $ 1,075 $ - Receivable from counterparties for settled fuel contracts Prepaid expenses, deposits and other 94 - Fair value of fuel derivatives - current portion Accounts payable and accrued liabilities (10,675) (37,811) Fair value of fuel derivatives - long-term portion Other liabilities (2,925) (14,487) Payable to counterparties for settled fuel contracts Accounts payable and accrued liabilities (1,353) - Unrealized loss from fuel derivatives Accumulated other comprehensive loss (AOCL) - before tax impact 12,076 44,711 The following table presents the financial impact and statement presentation of our fuel derivatives on the consolidated statement of earnings for the three and six months ended June 30, 2009, and Three months ended June 30 ($ in thousands) Statement presentation Realized loss on fuel derivatives - effective portion Aircraft fuel $ 7,060 $ - Gain on fuel derivatives - ineffective portion Gain on derivatives (4,740) - Six months ended June 30 ($ in thousands) Statement presentation Realized loss on fuel derivatives - effective portion Aircraft fuel $ 19,034 $ - Gain on fuel derivatives - ineffective portion Gain on derivatives (4,843) - During the three and six months ended June 30, 2009, we cash-settled fuel derivatives in favour of the counterparties of $7.2 million and $21.3 million, respectively. 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 June 30, 2009, for the 18-month WestJet Second Quarter

14 period that we are hedged, the closing forward curve for crude oil ranged from approximately US $70 to US $77 (December 31, 2008 US $45 to US $67) with the average forward foreign exchange rate used in determining the fair value being US dollars to Canadian dollars (December 31, ). The estimated amount reported in accumulated other comprehensive loss (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 before tax of $9.1 million. For 2009, excluding the impact of fuel hedging, we estimate our sensitivity to changes in crude oil to be approximately $6 million annually to our fuel costs for every one US-dollar change per barrel of WTI crude oil. This differs from our previously-disclosed estimate of $7 million due to a reduction in forecasted fuel consumption resulting from capacity reductions, as well as a revised Canadian-US dollar exchange rate similar to the current market rate. Additionally, we estimate our sensitivity to changes in fuel pricing to be approximately $9 million for every one-cent change per litre of fuel. Sales and distribution Commissions paid to travel agents and credit card fees comprise a significant portion of our sales and distribution expense. During the second quarter of 2009, our sales and distribution expense per ASM decreased to 0.91 cents, a decline of 14.2 per cent from 1.06 cents from the same quarter of We saw a similar decrease for the first half of 2009 to 0.93 cents from 1.04 cents in the comparable period of 2008, representing a change of 10.6 per cent. These variances were primarily attributable to declines in commissionable sales and bookings for both periods. Inflight Our inflight expense consists mainly of flight attendant salaries, benefits, travel costs and training. During the second quarter of 2009, our inflight cost per ASM increased to 0.70 cents from 0.64 cents in the same period of 2008, representing an increase of 9.4 per cent. Similarly, we also experienced an increase of 7.9 per cent for the first half of 2009 to 0.68 cents from 0.63 cents in the same period of The majority of the increases for both periods related to the one-time costs associated with our new uniform launch in the second quarter of 2009 and merit and market increases to flight attendant salaries. Aircraft leasing During the second quarter of 2009, we assumed delivery of one leased aircraft, bringing our total leased aircraft to 26 as at June 30, This represents 32.9 per cent of our total fleet. At the end of the second quarter of 2008, we had a total of 24 aircraft under operating leases, representing 32.0 per cent of our total registered fleet. Our aircraft leasing cost per ASM increased by 23.5 per cent in the second quarter of 2009 to 0.63 cents from 0.51 cents in the same period of Approximately 80 per cent of this variance related to three additional leased aircraft since the end of the second quarter of 2008, one of which was purchased from the lessor in June, while the WestJet Second Quarter

15 remainder of the change was driven by unfavourable foreign exchange, offset somewhat by our foreign exchange hedging program. For the six months ended June 30, 2009, our aircraft leasing cost per ASM was 0.60 cents, an increase of 22.4 per cent from the first half of Of this increase, approximately 40 per cent was comprised of incremental leasing costs on three additional leased aircraft since the end of the second quarter of 2008, including the aircraft purchased from the lessor in June, and approximately 30 per cent related to a full period of aircraft leasing costs for three leased aircraft delivered in the first half of The balance of the change was driven by the weaker Canadian dollar relative to the US dollar, which was partially offset by our foreign exchange hedging program. Maintenance Our maintenance cost per ASM was 0.61 cents in the second quarter of 2009, representing an increase of 29.8 per cent from 0.47 cents in the second quarter of Similarly, our year-to-date maintenance cost per ASM increased by 23.4 per cent to 0.58 cents from 0.47 cents in the first half of For the three and six months ended June 30, 2009, approximately 20 per cent and 25 per cent, respectively, of these increases were attributable to the weaker Canadian dollar, as approximately 40 per cent of our maintenance costs were denominated in US dollars. The remainder of the increases for both periods related to incremental scheduled maintenance requirements as our aircraft continue to age. As at June 30, 2009, 44 out of 79 aircraft, or 55.7 per cent, were off warranty compared to 32 out of 75 aircraft, or 42.7 per cent, as at June 30, 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. Three months ended June 30 Six months ended June 30 ($ in thousands) Change Change Salaries and benefits $ 97,980 $ 89, % $ 196,804 $ 177, % Employee share purchase plan 11,600 10, % 22,691 20, % Employee profit share 1,185 2,187 (45.8%) 6,902 15,334 (55.0%) Stock options 2,872 3,427 (16.2%) 5,318 7,574 (29.8%) Executive share unit plan % (14.5%) $ 113,914 $ 106, % $ 232,181 $ 221, % Salaries and benefits are determined via a framework of job levels based on internal experience and external market data. During the second quarter of 2009, salaries and benefits increased by 9.5 per cent to $98.0 million from $89.5 million in the second quarter of For the six months ended June 30, 2009, salaries and benefits were $196.8 million as compared to $177.7 million in the comparable period of the prior year, representing an increase of 10.7 per cent. These increases were due primarily to a retroactive payment of approximately $2 million in relation to the 2009 WestJet Second Quarter

16 pilot agreement signed in the second quarter of 2009 and annual market and merit increases. 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 a portion of their base salaries to the ESPP, and as at June 30, 2009, active WestJetters contributed an average of 14 per cent. In the first three and six months of 2009, we matched contributions for every dollar contributed by our employees and as at June 30, 2009, 83 per cent of our eligible active employees participated in the ESPP. The combined funds are used to buy voting shares on the open market during each calendar month. Our plan also provides us with an option to issue shares from treasury to meet our contribution obligations, a strategy that may be revisited in the remainder of For the quarter ended June 30, 2009, our matching expense was $11.6 million, a 7.9 per cent increase from the same period of Similarly, our matching expense grew by 9.7 per cent for the six months ended June 30, 2009, compared to the same period of 2008, to $22.7 million from $20.7 million, respectively. The additional expense for both periods was driven primarily by an increase in salary expense over the same periods of 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 and adjusted in less profitable periods. Our profit share expense for the quarter ended June 30, 2009 was $1.2 million, a 45.8 per cent decrease from the same period of For the six months ended June 30, 2009, profit share expense was $6.9 million compared to the first six months of 2008, representing a decrease of 55.0 per cent. These declines were directly attributable to lower earnings eligible for profit share, due primarily to the decrease in revenues versus the same periods of the prior year. Stock options Pilots, senior executives and certain non-executive employees participate in the stock option plan. As new options are granted, the fair value of these options, as determined by the Black-Scholes option pricing model on the date of grant, is expensed over the vesting period, with an offsetting entry to contributed surplus. Stock-based compensation expense related to stock options for the quarter ended June 30, 2009 was $2.9 million compared the same quarter of 2008, representing a decrease of 16.2 per cent. For the six months ended June 30, 2009, stock-based compensation expense related to stock options was $5.3 million, a decrease of 29.8 per cent from the comparable period of These decreases in stock option expense 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 senior executives and certain non-executive employees options is included in marketing, general and administration expense. WestJet Second Quarter