From the Wires
WestJet announces third quarter results
Nov. 10, 2008 08:30 AM
Airline reports year-over-year third quarter revenue improvement of
18 per cent
CALGARY, Nov. 10 /PRNewswire-FirstCall/ - WestJet (TSX:WJA) today announced third quarter net earnings of $54.7 million that compared to $76.1 million reported in the third quarter of 2007, representing a 28.1 per cent decrease. Year to date, 2008 net earnings were $137.4 million, a 16.9 per cent increase from the $117.5 million earned in the same nine months of 2007.
"Our strong quarterly and record year-to-date net earnings strengthen our position as an industry-leading airline. Based on airlines that have reported, our third quarter results are among the best worldwide," commented Sean Durfy, WestJet President and CEO. "Nine months into what can be described as an unpredictable year with fluctuating oil prices, financial turmoil and economic uncertainty, we continued our growth in a purposeful and profitable manner. During this time of global credit crisis, we are comfortable with our cash position of over $800 million."
"While our third quarter results reflect a combination of higher fuel costs and the beginning of a more challenging environment for demand, we continued to demonstrate our ability to weather the financial storm and effectively manage costs," continued Sean Durfy. "This resilience is largely due to our dedicated team of over 7,300 WestJetters."
WestJet's third quarter 2008 diluted earnings per share (EPS) was 42 cents, compared to 58 cents in the same period last year; this was a decline of 27.6 per cent. Year to date, diluted EPS increased 16.7 per cent to $1.05, from 90 cents in 2007.
The airline reported a third quarter earnings before tax (EBT) margin of 11.0 per cent and an operating margin of 13.4 per cent. Year to date, WestJet's EBT margin was 10.2 per cent and its operating margin was 12.2 per cent.
WestJet's third quarter revenue for 2008 improved 18.5 per cent to $718.4 million, compared to $606.2 million in the third quarter of 2007. Year to date, revenue increased 22.8 per cent to $1.934 billion, from $1.575 billion in 2007.
Operational Highlights
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Q3 Q3 Change Year-to- Year-to- Change
2008 2007 date 2008 date 2007
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Load factor 81.4% 83.2% (1.8 pts.) 80.9% 81.8% (0.9 pts.)
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ASM (available
seat miles)
billions 4.551 3.789 20.1% 12.851 10.726 19.8%
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RPM (revenue
passenger
miles)
billions 3.705 3.152 17.6% 10.402 8.771 18.6%
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Yield (revenue
per revenue
passenger
mile) cents 19.39 19.23 0.8% 18.59 17.96 3.5%
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RASM (revenue
per available
seat mile)
cents 15.78 16.00 (1.4%) 15.05 14.69 2.5%
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CASM (cost
per
available
seat mile)
cents* 13.66 12.61 8.3% 13.22 12.29 7.6%
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CASM
excluding
fuel and
employee
profit
share
cents* 8.04 8.44 (4.7%) 8.13 8.57 (5.1%)
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*Excludes reservation system impairment of $31.9 million in the second
quarter of 2007.
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Sean Durfy continued, "Our third quarter capacity growth of 20.1 per cent was a successful investment in our efforts to gain market share and will continue to bear fruit in the future, as we carry out the objectives of our strategic plan. We have 36 per cent of the domestic market and are well on our way to achieving our goal of 40 to 50 per cent by 2013.
"Fuel was our biggest expense this period, making up almost 40 per cent of our third quarter operating costs. Our continued focus on cost efficiencies resulted in a 4.7 per cent decline in third quarter CASM, excluding fuel and profit share. We are extremely pleased with our continued cost-controlling efforts and efficiencies of scale."
"In the fourth quarter, we will deliver on the first element of our arrangement with Southwest Airlines by selling seat inventory through Southwest.com," said Sean Durfy. "This will increase our visibility for U.S. point of sale through one of the most heavily visited booking websites in North America.
"We are also seeing strong demand for our sun destinations including increased service into Hawaii, Mexico and the Caribbean. I am confident in our ability to continue generating industry-leading results and to keep costs in check. As an airline, we stood out as a good news story on a global scale, thanks to our people and their hard work. I am grateful for our WestJetters who continue to demonstrate that caring owners can deliver strong financial results and a great guest experience."
The airline expects 12 per cent capacity growth for the fourth quarter of 2008. A temporary strike at Boeing has delayed our aircraft deliveries. As a result the airline has revised its estimated full-year 2009 ASM growth to five per cent from eight per cent.
WestJet also reported third quarter operational performance, which is calculated based on the U.S. Department of Transportation's standards for the North American airline industry.
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Q3 Q3 Year-to- Year-to-
2008 2007 Change date 2008 date 2007 Change
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On-time
performance 83.8% 87.4% (3.6 pts.) 79.7% 84.2% (4.5 pts.)
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Completion
rate 99.4% 99.7% (0.3 pts.) 98.9% 99.2% (0.3 pts.)
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Bag ratio 3.40 4.02 (15.4%) 3.94 4.25 (7.3%)
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Caution regarding forward-looking statements
Certain information set forth in this press release, including information regarding WestJet's achievement of market share targets, implementation of WestJet's arrangements with Southwest Airlines, WestJet's expected capacity growth and management's assessment of WestJet's future plans, contain forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond WestJet's control. Specifically, WestJet's achievement of market share targets are based on current operational results and are dependant upon factors including but not limited to delivery of aircraft and introduction of competitors to the market; implementation of WestJet's arrangements with Southwest Airlines are based on currently available implementation plans and agreements but may vary based on factors including but not limited to the availability of sufficient technology; WestJet's expected capacity growth is based on the planned schedules but may vary based on factors including but not limited to delays to aircraft delivery. These and additional risk factors are discussed in WestJet's most recent Annual Information Form (AIF) and in other documents WestJet files from time to time with securities regulatory authorities, which are available through the internet on the Corporation's SEDAR profile at www.sedar.com. Readers are cautioned that undue reliance should not be placed on forward-looking statements as actual results may vary materially from the forward-looking statements. WestJet does not undertake to update any forward-looking statements, except as is required by law.
Management's Discussion and Analysis of Financial Results
Advisories
The following Management's Discussion and Analysis of Financial Results (MD&A), dated November 7, 2008, should be read in conjunction with the unaudited consolidated financial statements and notes thereto as at and for the three and nine months ended September 30, 2008 and 2007, as well as the audited consolidated financial statements, notes thereto and MD&A included in the Annual Report as at and for the year ended December 31, 2007. For a detailed description of risks, uncertainties and critical accounting estimates, please refer to the "Risks and Uncertainties" and "Accounting" sections in the 2007 annual MD&A dated February 22, 2008. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). 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. Additional information relating to WestJet Airlines Ltd. (WestJet, we, us or our), including Annual Information Forms (AIF) and financial statements, is located on SEDAR at www.sedar.com. An additional advisory with respect to forward-looking statements is set out below, and the use of non-GAAP measures is set out at the end of this MD&A under "Non-GAAP Measures."
Forward-looking statements
This MD&A offers our assessment of WestJet's future plans and operations as at November 7, 2008, and contains forward-looking statements, including our hedging expectations and the intent to hedge anticipated jet fuel purchases referred to under Results of Operations - Aircraft Fuel; sensitivity to changes in crude oil and fuel pricing referred to under Results of Operations - Aircraft Fuel; our sensitivity to the change in the value of the Canadian dollar versus the US dollar referred to under Results of Operations - Foreign Exchange; our initial assessment of the impact of transition to International Financial Reporting Standards referred to under Accounting - Future Accounting Policy Changes; our capacity increase expectation referred to under the Outlook; our expected revenue per available seat mile (RASM) referred to under the Outlook; our expected fuel costs per litre referred to under the Outlook; and our estimate of fuel costs as a percentage of total expected operating costs referred to under the Outlook.
These forward-looking statements typically contain the words "anticipate," "believe," "estimate," "intend," "expect," "may," "will," "should," "potential" or other similar terms. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond our control, 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 pricing environment), labour matters, government regulation, stock-market volatility, the ability to access sufficient capital from internal and external sources and additional risk factors discussed in our AIF and other documents we file from time to time with securities regulatory authorities, which are available through the internet on SEDAR at www.sedar.com or, upon request, without charge from us.
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. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements. We can give no assurance that any of the events anticipated will transpire or occur, or if any of them do, what benefits we will derive from them. The forward-looking information contained in the 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.
Stage Length: The 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 people whom have been booked to occupy a seat
on a flight leg and are not members of the assigned crew, 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.
OVERVIEW
In the third quarter of 2008, we continued our profitability and strong financial results despite volatile and elevated fuel prices combined with tumultuous conditions in the financial and credit markets. The strength of our balance sheet, positive net earnings and cash flows from operations position us well in this period of economic uncertainty. During the third quarter, we gained market share, substantially increased RPMs and lowered CASM, excluding fuel and employee profit share. Despite a weakening economic climate, we flew 8.5 per cent more guests, largely due to the exceptional guest experience provided by our WestJetters. For the third quarter of 2008, our financial results are among the best in the North American airline industry.
Quarterly Highlights
- Increased total revenues to $718.4 million for the three months ended
September 30, 2008, an increase of 18.5 per cent over the same period
of 2007.
- Recorded RASM of 15.78 cents in the third quarter of 2008, down from
16.00 cents in the same period of 2007, while growing capacity by
20.1 per cent.
- Decreased CASM, excluding fuel and employee profit share, by 4.7 per
cent to 8.04 cents for the third quarter of 2008 compared to
8.44 cents in the third quarter of 2007.
- Recorded an earnings before tax margin of 11.0 per cent for the
quarter ended September 30, 2008, down 7.4 points from the same
period of 2007.
- Realized net earnings of $54.7 million in the third quarter of 2008,
down from $76.1 million in the same period of 2007.
- Diluted earnings per share decreased to $0.42 in the third quarter of
2008 from $0.58 in the same quarter of 2007, a change of 27.6 per
cent.
- Assumed delivery of one new owned aircraft, increasing our total
registered fleet to 76.
- Generated cash flows from operations of $77.3 million for the quarter
ended September 30, 2008, down from $156.0 million in the same period
of 2007.
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Operational Highlights Three Months Ended September 30
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2008 2007 Change
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ASMs 4,551,211,270 3,788,590,681 20.1%
RPMs 3,705,367,631 3,151,875,384 17.6%
Load factor 81.4% 83.2% (1.8) pts.
Yield (cents) 19.39 19.23 0.8%
RASM (cents) 15.78 16.00 (1.4%)
CASM (cents)* 13.66 12.61 8.3%
CASM, excluding fuel and
employee profit share
(cents)* 8.04 8.44 (4.7%)
Fuel consumption (litres) 221,606,557 188,288,840 17.7%
Fuel costs/litre (cents) 110.35 69.62 58.5%
Segment guests 3,749,679 3,454,649 8.5%
Average stage length (miles) 930 862 7.9%
Utilization (hours) 12.5 12.2 2.5%
Number of full-time equivalent
employees at period end 6,275 5,598 12.1%
Fleet size at period end 76 68 11.8%
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Operational Highlights Nine Months Ended September 30
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2008 2007 Change
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ASMs 12,850,828,937 10,726,124,233 19.8%
RPMs 10,402,104,231 8,771,417,696 18.6%
Load factor 80.9% 81.8% (0.9) pts
Yield (cents) 18.59 17.96 3.5%
RASM (cents) 15.05 14.69 2.5%
CASM (cents)* 13.22 12.29 7.6%
CASM, excluding fuel and
employee profit share
(cents)* 8.13 8.57 (5.1%)
Fuel consumption (litres) 629,609,487 533,669,908 18.0%
Fuel costs/litre (cents) 99.41 67.75 46.7%
Segment guests 10,765,268 9,724,384 10.7%
Average stage length (miles) 918 852 7.7%
Utilization (hours) 12.4 12.1 2.5%
Number of full-time equivalent
employees at period end 6,275 5,598 12.1%
Fleet size at period end 76 68 11.8%
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* Excludes reservation system impairment of $31.9 million in the second
quarter of 2007.
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Unprecedented capital market conditions and a weak U.S. economy continued to drive aggressive actions within the North American airline industry, such as capacity reductions, employee layoffs, grounding of aircraft and bankruptcy protection. In spite of these conditions, we continue to offer exemplary guest experience for the best value, which has resulted in strong financial results for the third quarter of 2008.
During the three month period ended September 30, 2008, we reported net earnings of $54.7 million and diluted earnings per share of $0.42. We were pleased with these results, especially in light of the volatility in the financial markets and the economic downturn.
Total revenues increased to $718.4 million during the third quarter of 2008, an increase of 18.5 per cent from $606.2 million in the same quarter of 2007. This growth was attributable to additional capacity, an increased number of guests flown and improved yield.
Due to a softening of demand for air travel, our load factor decreased by 1.8 points to 81.4 per cent in the third quarter of 2008 from 83.2 per cent in the comparable period of 2007. Despite this decrease, our third quarter load factor remains within our optimal operating range of 78 per cent to 82 per cent. However, during the month of August, we reported an all-time record load factor of 88.4 per cent. Additionally, we increased capacity by 20.1 per cent. We experienced a RASM decline for the third quarter of 2008 of 1.4 per cent to 15.78 cents, down from 16.00 cents in the same period of 2007, attributable primarily to the slight reduction in load factors.
On September 18, 2008, due to a reduction in fuel prices and to provide more transparent pricing for our guests, we eliminated the fuel surcharge which had been implemented in the second quarter of 2008.
To see the Quarterly Load Factor chart, click here:
http://files.newswire.ca/762/Load_Factor.pdf
During the third quarter of 2008, we continued to focus our efforts on cost control to help combat the impact of higher fuel prices. Our CASM increased by 8.3 per cent in the third quarter of 2008 to 13.66 cents from 12.61 cents in the same quarter of 2007. The reason for this increase was significantly higher fuel costs period-over-period. Excluding fuel and employee profit share, our CASM decreased by 4.7 per cent to 8.04 cents in the third quarter of 2008 from 8.44 cents in the same period of 2007. We continued to drive down CASM, excluding fuel and employee profit share, largely through increased aircraft utilization, a longer average stage length and cost dilution over a greater number of available seat miles.
The strength of our balance sheet is reflected in our cash balance of $806.5 million as at September 30, 2008, an increase of 23.4 per cent from December 31, 2007. Similarly, our current ratio improved to 1.28 as compared to 1.22 as at December 31, 2007, and our adjusted debt-to-equity ratio declined to 1.86 from 2.07. Because of our strong financial position, we generated sufficient cash flow from operations to fund our working capital requirements, make our debt payments and fund the construction of our Campus during the third quarter, while increasing our cash balance from year-end.
SELECTED QUARTERLY UNAUDITED FINANCIAL INFORMATION
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Three Months Ended
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($ in thousands, except Sept. 30 Jun. 30 Mar. 31 Dec. 31
per share data) 2008 2008 2008 2007
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Total revenues $ 718,375 $ 616,000 $ 599,348 $ 552,004
Net earnings $ 54,665 $ 30,193 $ 52,506 $ 75,359
Basic earnings per share $ 0.43 $ 0.23 $ 0.40 $ 0.58
Diluted earnings per share $ 0.42 $ 0.23 $ 0.40 $ 0.57
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Three Months Ended
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($ in thousands, except Sept. 30 Jun. 30 Mar. 31 Dec. 31
per share data) 2007 2007 2007 2006
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Total revenues $ 606,242 $ 498,200 $ 470,710 $ 446,720
Net earnings $ 76,070 $ 11,549 $ 29,855 $ 26,651
Basic earnings per share $ 0.59 $ 0.09 $ 0.23 $ 0.21
Diluted earnings per share $ 0.58 $ 0.09 $ 0.23 $ 0.21
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Our business is seasonal in nature with varying levels of activity throughout the year. We experience increased domestic travel in the summer months (second and third quarters) and more demand for sun destinations over the winter period (fourth and first quarters). With the introduction of transborder and international destinations, we have been able to alleviate some of the effects of seasonality on our net earnings.
In the quarter ended December 31, 2007, our reported net earnings of $75.4 million were positively impacted by a non-cash adjustment in the amount of $33.7 million, or 25 cents per share, to future income tax expense as a result of the enactment of income tax rate reductions.
In the quarter ended June 30, 2007, our reported net earnings of $11.5 million were negatively impacted by a non-cash impairment of $31.9 million ($22.2 million after tax or 17 cents per share) for the capitalized costs associated with our former reservation system project.
RESULTS OF OPERATIONS
Revenue
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Three Months Ended September 30
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($ in thousands) 2008 2007 Change
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Guest revenues $ 656,782 $ 556,736 18.0%
Charter and other revenues 61,593 49,506 24.4%
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$ 718,375 $ 606,242 18.5%
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RASM (cents) 15.78 16.00 (1.4%)
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Nine Months Ended September 30
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($ in thousands) 2008 2007 Change
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Guest revenues $ 1,739,787 $ 1,396,780 24.6%
Charter and other revenues 193,936 178,372 8.7%
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$ 1,933,723 $ 1,575,152 22.8%
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RASM (cents) 15.05 14.69 2.5%
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The quarter ended September 30, 2008 saw total revenues increase by 18.5 per cent to $718.4 million from $606.2 million in the same period of 2007. For the nine months ended September 30, 2008, total revenues increased to $1,933.7 million from $1,575.2 million in the same period of 2007, representing an improvement of 22.8 per cent. These increases in total revenues were largely attributable to additional capacity and improved RPMs.
The third quarter is traditionally the busiest air travel period with significant domestic traffic. To accommodate the increased domestic demand in the summer months, we continued with our seasonal deployment strategy, allocating 86 per cent of our capacity to domestic routes in the third quarter of 2008. Additionally, our total capacity increased by 20.1 per cent and 19.8 per cent for the three and nine months ended September 30, 2008, respectively. Our increase in stage length of 7.9 per cent and 7.7 per cent for the third quarter and first nine months of 2008, respectively, negatively impacted our RASM. As average stage length increases, our revenue per mile decreases over a larger number of miles flown. As a result, our RASM for the third quarter of 2008 declined by 1.4 per cent to 15.78 cents, down from 16.00 cents in the same period in 2007. For the first nine months of 2008, RASM increased to 15.05 cents compared to 14.69 cents, an increase of 2.5 per cent. This improvement was mainly driven by increased yield, slightly offset by a decrease in load factors.
For the three and nine months ended September 30, 2008, guest revenues from our scheduled flight operations increased by 18.0 per cent and 24.6 per cent to $656.8 million and $1,739.8 million, respectively, compared to the same periods in 2007. These changes are attributable to capacity growth, yield, and the addition of new transborder and international routes, offset somewhat by slightly lower load factors.
Charter and other revenues, which include charter, cargo, ancillary, WestJet Vacations non-air and other revenue, increased by 24.4 per cent and 8.7 per cent for the three and nine months ended September 30, 2008 to $61.6 million and $193.9 million, respectively, as compared to the same periods in 2007. The quarterly improvement was mainly due to increases in ancillary revenue and WestJet Vacations non-air revenue, which increased over 150 per cent due largely to an expanded destination base and summer flying into the Dominican Republic and Hawaii. Similarly, the majority of the year-to-date increase in charter and other revenues was attributable to improvements in WestJet Vacations non-air revenue and ancillary revenue, offset partially by a decrease in charter revenue due to reduced summer charter requests, as depicted in the graph below.
To see the Charter and Scheduled Transborder and International as a
Percentage of Total ASMs chart, click here:
http://files.newswire.ca/762/Charter.pdf
Ancillary revenues, which include service fees, onboard sales, partner and program revenue, were $28.3 million and $69.6 million for the three and nine months ended September 30, 2008, respectively, representing increases of 37.4 per cent and 17.9 per cent over the same periods of 2007. Ancillary revenue per guest increased to $7.73 per guest in the third quarter of 2008 from $7.07 in the third quarter of 2007. Similarly, ancillary revenue per guest for the first nine months of 2008 improved to $6.68 from $6.34 per guest in the same period of 2007, an increase of 5.4 per cent. These increases were attributable primarily to higher revenue from fees, offset somewhat by lower revenue due to the termination of our tri-branded BMO Mosaik(R) AIR MILES(R) MasterCard(R) credit card partnership.
During the third quarter of 2008, we announced the introduction of a new seat selection option which, for a small fee, allows guests to select their seat at the time of booking. Revenue of $4.5 million from our pre-reserved seating option contributed to approximately half of our increase in fees revenue for the third quarter of 2008. Additionally, increases to our change and cancellation fees, same-day cancellation fees and certain buy-on-board product prices helped increase revenue from fees for the same periods.
Expenses
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Three Months Ended Nine Months Ended
September 30 September 30
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CASM (cents)* 2008 2007 Change 2008 2007 Change
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Aircraft fuel 5.37 3.46 55.2% 4.87 3.37 44.5%
Airport operations 1.86 1.95 (4.6%) 1.95 2.06 (5.3%)
Flight operations
and navigational
charges 1.60 1.75 (8.6%) 1.64 1.80 (8.9%)
Marketing, general
and administration 1.21 1.27 (4.7%) 1.17 1.22 (4.1%)
Sales and
distribution 1.03 1.07 (3.7%) 1.00 0.98 2.0%
Depreciation and
amortization 0.77 0.85 (9.4%) 0.79 0.88 (10.2%)
Inflight 0.59 0.57 3.5% 0.62 0.58 6.9%
Aircraft leasing 0.50 0.49 2.0% 0.49 0.53 (7.5%)
Maintenance 0.48 0.49 (2.0%) 0.47 0.52 (9.6%)
Employee profit
share 0.25 0.71 (64.8%) 0.22 0.35 (37.1%)
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13.66 12.61 8.3% 13.22 12.29 7.6%
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CASM, excluding fuel
and employee profit
share* 8.04 8.44 (4.7%) 8.13 8.57 (5.1%)
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* Excludes reservation system impairment of $31.9 million in the second
quarter of 2007.
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We experienced significant cost pressure during the third quarter and first nine months of 2008 due to increased fuel prices. As a result, our CASM increased for both the three and nine months ended September 30, 2008, to 13.66 cents and 13.22 cents, respectively, representing changes of 8.3 per cent and 7.6 per cent. Our underlying low-cost structure is integral during this period of unpredictable fuel prices and unprecedented capital market conditions, as we are able to operate with lower costs than our competitors. Our CASM, excluding fuel and employee profit share, decreased by 4.7 per cent for the third quarter of 2008 to 8.04 cents and 5.1 per cent for the first nine months of 2008 to 8.13 cents, as compared to the same periods in 2007, excluding the reservation system impairment of $31.9 million in the second quarter of 2007.
A contributing factor in improving our CASM, excluding fuel and employee profit share, for the three and nine months ended September 30, 2008 was a longer average stage length. During the third quarter of 2008, our average stage length increased by 7.9 per cent to 930 miles from 862 miles in the same quarter of 2007. For the nine months ended September 30, 2008, average stage length increased to 918 miles from 852 miles, an increase of 7.7 per cent over the same period of 2007. The increase in our average stage length is due to additional transborder and international departures, new routes and new destinations. As average stage length increases, cost efficiencies are gained, and we achieve a lower cost per mile because our fixed costs of operations are allocated over an increasing number of miles flown. Likewise, longer-haul routes typically achieve higher fuel economy, as we are able to absorb the higher cost of fuel for take-offs and landings over a longer trip length.
Optimization of our fleet continued during 2008 to increase productivity of our airline. In the third quarter of 2008, we increased our aircraft utilization by 18 minutes to 12.5 operating hours per day, compared to 12.2 operating hours per day in the same period of 2007. Similarly, we saw an improvement to 12.4 operating hours per day for the first nine months of 2008 from 12.1 operating hours per day in the comparable period of 2007, representing an increased utilization of 18 minutes.
In anticipation of our future engine service requirements, we have entered into an engine overhaul services agreement with GE Engine Services, Inc. for exclusive maintenance, repair and overhaul of our owned and leased aircraft engines, as well as certain related parts and accessories.
We increased capacity, measured in available seat miles, to 4.6 billion ASMs and 12.9 billion ASMs during the three and nine months ended September 30, 2008, respectively, as compared to 3.8 billion ASMs and 10.7 billion ASMs, respectively, in the same periods of 2007. The dilution of costs over a greater number of available seat miles contributed to the reduction of our CASM, excluding fuel and employee profit share, in the third quarter and first nine months of 2008.
Aircraft fuel
Fuel prices continued to negatively impact our CASM in 2008, representing approximately 39 per cent of total operating costs for the third quarter of 2008, up from 27 per cent in the same quarter of 2007. Similarly, fuel comprised approximately 37 per cent of total operating costs for the nine month period ended September 30, 2008 as compared to 27 per cent for the same period of 2007. During the month of July 2008, jet fuel prices peaked at US $180 per barrel, setting a record high for 2008. The average market price for jet fuel was US $145.12 per barrel in the third quarter of 2008 versus US $91.77 per barrel in the same quarter of 2007, representing an increase of 58.1 per cent, as depicted in the graph below. The increase in fuel prices increased our fuel cost per ASM to 5.37 cents and 4.87 cents for the three and nine months ended September 30, 2008, respectively, compared to 3.46 cents and 3.37 cents for the same periods of 2007. This represents a 55.2 per cent increase in our fuel cost per ASM for the third quarter of 2008, and a 44.5 per cent increase for the first nine months of 2008.
To see the Average Market Price of Jet Fuel chart, click here:
http://files.newswire.ca/762/Jetfuel.pdf
During the third quarter of 2008, we began a more extensive fuel hedging program under a revised policy as approved by our Board of Directors. Our current objective is to hedge a portion of our anticipated jet fuel purchases in order to provide management with reasonable foresight and predictability into operations and future cash flows. As jet fuel is not traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel; however, financial derivatives in other commodities, such as crude oil and heating oil, are useful in decreasing the risk of volatile fuel prices.
Upon proper qualification, we account for our fuel derivatives as cash flow hedges. Under cash flow hedge accounting, all effective periodic changes in fair value of the fuel derivative are recorded in accumulated other comprehensive loss (AOCL) until the anticipated jet fuel purchase impacts net earnings. Changes in fair value of any ineffective portion are recorded in non-operating income (expense). Upon maturity, the effective gain or loss previously recognized in AOCL is recorded in aircraft fuel expense.
The unrealized changes in fair value and realized settlement on fuel derivatives that do not qualify or that are not designated under cash flow hedge accounting are recorded in non-operating income (expense).
The following table displays our fuel costs per litre, excluding and including fuel hedging, for the three and nine months ended September 30, 2008:
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Three Months Ended September 30
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($ in thousands, except per
litre data) 2008 2007 Change
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Aircraft fuel expense $ 244,544 $ 131,090 86.5%
Realized loss on fuel derivatives
not designated under cash flow
hedge accounting 10,593 - N/A
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Economic cost of fuel $ 255,137 $ 131,090 94.6%
Fuel consumption (thousands of litres) 221,607 188,289 17.7%
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Fuel costs per litre (dollars) -
excluding fuel hedging 1.10 0.70 58.5%
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Fuel costs per litre (dollars) -
including fuel hedging 1.15 0.70 64.3%
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Nine Months Ended September 30
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($ in thousands, except per
litre data) 2008 2007 Change
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Aircraft fuel expense $ 625,871 $ 361,572 73.1%
Realized loss on fuel derivatives
not designated under cash flow
hedge accounting 10,593 - N/A
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Economic cost of fuel $ 636,464 $ 361,572 76.0%
Fuel consumption (thousands of litres) 629,609 533,670 18.0%
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Fuel costs per litre (dollars) -
excluding fuel hedging 0.99 0.68 46.7%
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Fuel costs per litre (dollars) -
including fuel hedging 1.01 0.68 48.5%
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For the three and nine months ended September 30, 2008, we realized a loss of $10.6 million, included in non-operating income (expense), from fuel derivatives not designated under cash flow hedge accounting. As at September 30, 2008, we do not hold any fuel derivatives that are not designated under cash flow hedge accounting.
Fuel costs per litre, excluding fuel hedging, increased by 58.5 per cent to $1.10 per litre in the third quarter of 2008 from $0.70 per litre in the third quarter of 2007. This differs from our estimate of $1.12 per litre, excluding fuel hedging, in the second quarter of 2008 due to softening in the price of jet fuel during the late stages of the third quarter of 2008. Similarly, we saw fuel costs per litre, excluding fuel hedging, increase for the first nine months of 2008 by 46.7 per cent compared to the same period of 2007. Including the effects of the realized loss on fuel derivatives not designated under cash flow hedge accounting, our fuel costs per litre were $1.15 and $1.01 for the three and nine months ended September 30, 2008, respectively.
As at September 30, 2008, we had fixed swap agreements in place to decrease our exposure to volatile fuel prices for approximately seven per cent of our 2009 total anticipated jet fuel purchases and two per cent of our 2010 total anticipated jet fuel purchases at average West Texas Intermediate (WTI) crude oil prices of CAD $108 and CAD $112 per barrel, respectively. Our anticipated jet fuel purchases are forward-looking, and as such, we have derived these estimates based on assumptions regarding fuel consumption for our existing schedule and historical fuel burn.
We record fuel derivatives on a gross basis on the consolidated balance sheet. As at September 30, 2008, fuel derivatives in an asset position totalled $0.4 million, included in prepaid expenses, deposits and other. Fuel derivatives in a liability position totalled $0.5 million, included in accounts payable and accrued liabilities.
For the three and nine months ended September 30, 2008, the unrealized effective change in fair value of fuel derivatives under cash flow hedging recorded in other comprehensive income (OCI) was a gain of $0.3 million. The unrealized ineffective change in the fair value of fuel derivatives under cash flow hedging recorded in non-operating income (expense) was a loss of $0.4 million. The estimated amount reported in AOCL that is expected to be reclassified to net earnings as a component of aircraft fuel expense when the underlying jet fuel is consumed during the next 12 months is a gain before tax of $0.2 million.
Through to November 5, 2008, we have entered into a mixture of fixed swap agreements and costless collar structures in Canadian dollar WTI crude oil derivative contracts to hedge approximately 20 per cent and eight per cent of our 2009 and 2010 anticipated jet fuel purchases, respectively. Our anticipated jet fuel purchases are forward-looking, and as such, we have derived these estimates based on assumptions regarding fuel consumption for our existing schedule and historical fuel burn. These percentages include the fixed swap agreements in place at September 30, 2008. For 2009, approximately 55 per cent of our hedges are comprised of fixed swap agreements at a weighted average swap price of CAD $103, and 45 per cent of our hedges are comprised of costless collar structures at a weighted average collar range of CAD $79 to CAD $115. For 2010, approximately 76 per cent of our hedges are comprised of fixed swap agreements at a weighted average swap price of CAD $103, and approximately 24 per cent of our hedges are comprised of costless collar structures at a weighted average collar range of CAD $87 to CAD $115.
For 2008, excluding the impact of fuel hedging, we estimate the sensitivity to changes in crude oil and fuel pricing to be approximately $6 million annually to our fuel costs for every US-dollar change per barrel of crude oil and $8 million for every one-cent change per litre of fuel. This is a forward-looking statement, and as such, we have derived these estimates based on assumptions regarding fuel consumption for our existing schedule and historical fuel burn and a year-to-date average Canadian-US dollar foreign exchange rate.
Airport operations
Airport operations expense consists primarily of airport landing and terminal fees and ground handling costs for our scheduled service and charter operations. These expenditures typically fluctuate depending on the destinations, aircraft weights, inclement weather conditions and number of guests. Transborder flights are more expensive than domestic flights due to increased charges from domestic airports for higher terminal and pre-clearance fees from transborder flights. Also included in airport operations are costs relating to flight cancellations and accommodations for displaced guests for situations beyond our control, such as inclement weather conditions. Because the majority of expenses are levied on a per-flight basis, the cost per departure is also a relevant performance driver for airport operations.
For the quarter ended September 30, 2008, our cost per ASM for airport operations decreased by 4.6 per cent to 1.86 cents from 1.95 cents compared to the same period of 2007. Similarly, cost per ASM was 1.95 cents for the first nine months of 2008 as compared to 2.06 cents in the same period of 2007, a decrease of 5.3 per cent. These decreases were primarily attributable to dilution of costs over a greater number of available seat miles. Our cost per departure increased by 2.7 per cent and 2.6 per cent in the third quarter and first nine months of 2008, respectively, as compared to the same periods of 2007. For the third quarter of 2008, the increase in our cost per departure was due mainly to higher average rates and fees for domestic and transborder airports and higher meal, hotel and transportation costs for displaced guests. The increase in our cost per departure for the nine months ended September 30, 2008 relates primarily to higher average rates and fees for domestic and transborder airports and ground handling, caused by a higher percentage of transborder and international departures. Additionally, we incurred higher costs for glycol due to the Canadian climate during the year-to-date period as compared to the same period in 2007.
Flight operations and navigational charges
During the third quarter of 2008, our flight operations and navigational charge per ASM decreased by 8.6 per cent to 1.60 cents, compared to 1.75 cents in the same quarter of 2007. For the nine months ended September 30, 2008, our cost per ASM for flight operations and navigational charges was 1.64 cents, a decrease of 8.9 per cent from 1.80 cents in the same period of 2007. These decreases were attributable mainly to lower NAV CANADA fees and pilot stock-based compensation, as well as the dilutive impact of our increased capacity for both periods.
Flight operations expenses consist primarily of pilot compensation, including salaries, training and stock-based compensation, as well as salaries and benefits for operations control centre staff. Pursuant to the 2006 pilot agreement, pilots may elect to receive a certain amount of cash in lieu of a selected portion of their stock options. For the third quarter of 2008, stock-based compensation expense relating to pilots' stock options was $1.7 million compared to $3.6 million in the third quarter of 2007, a decrease of 52.8 per cent, as pilots continued to elect to receive cash in lieu of stock options. Similarly, pilots' stock-based compensation expense related to options was $7.8 million for the first nine months of 2008, a decrease of 39.5 per cent from $12.9 million in the same period of 2007. The decreases in stock-based compensation expense were partially offset by increases in salary costs due to pilots continuing to elect to receive cash in 2008 compared to the same periods of 2007.
Domestic air navigational charges relating to air traffic control are administered by NAV CANADA on a per-flight basis. These fees are predominantly driven by the size of aircraft and distance flown. Navigational charges have decreased on an ASM basis by 8.0 per cent to 0.80 cents in the third quarter of 2008 from 0.87 cents in the third quarter of 2007. This decrease was primarily due to the dilutive impact of our capacity growth and a reduction in NAV rates effective in September 2007. For the year-to-date period, navigational charges decreased to 0.77 cents per ASM from 0.85 cents per ASM in the same period of 2007, representing a decrease of 9.4 per cent. The increase in our transborder and international departures during the first nine months of 2008 over the same period of 2007 has contributed to the decrease in our NAV fees. Transborder and international routes comprised 13.7 per cent of our total departures during the first nine months of 2008 versus 11.5 per cent of total departures in the same period of 2007, an increase of 2.2 points. As we fly to more destinations outside of Canadian airspace, our NAV CANADA charges decrease.
Depreciation and amortization
Our quarterly depreciation and amortization expense per ASM decreased to 0.77 cents from 0.85 cents in the same quarter of 2007, a decrease of 9.4 per cent. Similarly, cost per ASM for the nine months ended September 30, 2008 declined by 10.2 per cent to 0.79 cents compared to 0.88 cents in the same period of 2007. The decrease in depreciation and amortization expense on an ASM basis was largely attributable to the dilutive impact of our capacity growth. On a total dollar basis, depreciation and amortization increased by 8.2 per cent and 7.7 per cent for the three and nine months ended September 30, 2008, respectively, due to the greater number of aircraft in 2008 and flying more cycles compared to the same periods in 2007.
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.
Salaries and benefits
Salaries and benefits are determined via a framework of job levels based on internal experience and external market data. During the third quarter of 2008, salaries and benefits increased by 16.1 per cent to $90.1 million from $77.6 million in the third quarter of 2007. For the nine months ended September 30, 2008, salaries and benefits were $267.9 million as compared to $224.9 million, representing an increase of 19.1 per cent. These increases were due to market and merit increases in base salaries and benefits, as well as a greater number of WestJetters being employed versus a year ago because of our capacity growth. Salaries and benefits expense for each department is included in the respective department's operating expense line item.
Employee profit share
All employees are eligible to participate in the employee profit sharing plan. As the profit share system is a variable cost, employees will be generously rewarded during good years. Conversely, the amount distributed to employees is reduced and adjusted in less profitable times. Our profit share expense for the quarter ended September 30, 2008 was $11.5 million, a 56.4 per cent decrease from $26.4 million for the same quarter of 2007. For the nine months ended September 30, 2008, profit share expense was $26.8 million as compared to $38.0 million in the first nine months of 2007, representing a decrease of 29.5 per cent. These variances were directly attributable to the lower earnings eligible for profit share, primarily due to higher fuel costs in 2008.
Employee Share Purchase Plan
Our Employee Share Purchase Plan (ESPP) allows employees to participate in WestJet's success. WestJetters may contribute up to 20 per cent of their base salaries in the ESPP and, as at September 30, 2008, contributed an average of 14 per cent. We match contributions for every dollar contributed by employees. Of our eligible employees, 81 per cent participated in the ESPP as at September 30, 2008. Our matching expense for the third quarter of 2008 was $10.9 million, a 22.5 per cent increase from $8.9 million for the same quarter of 2007. Similarly, our matching expense increased by 25.4 per cent for the nine months ended September 30, 2008 compared to the same period of 2007, increasing to $31.6 million from $25.2 million. The additional expense for both periods was driven by an increase in the number of WestJetters over the same periods of 2007.
Stock options
Pilots, executives and certain non-executive employees participate in stock option plans. The fair value of these options, as determined by the Black-Scholes option pricing model, is expensed over the vesting period. Stock-based compensation expense related to stock options for the quarter ended September 30, 2008 was $2.6 million compared to $4.3 million in the same quarter of 2007, a decrease of 39.5 per cent. For the nine months ended September 30, 2008, stock-based compensation expense for stock options was $10.1 million, a decrease of 33.1 per cent from $15.1 million in the comparable period of 2007. The primary reason for the decrease in stock option expense relates to pilots electing to receive a certain amount of cash in lieu of a selected portion of their stock options, which is partially offset by an increase to salary costs.
2008 Executive Share Unit Plan
Senior executive officers participate in the 2008 Executive Share Unit Plan, whereby they receive Restricted Share Units (RSU) and Performance Share Units (PSU). Each RSU and PSU entitles the executive to receive payment upon vesting in the form of voting shares. We determine compensation expense for the 2008 RSUs based on the fair market value of our voting shares on the date of grant. Compensation expense for RSUs is recognized in earnings on a straight-line basis over the three-year vesting period. The value of the PSUs is based on the fair market value of our voting shares on the date of grant. PSUs time vest at the end of a three-year term and incorporate performance criteria based upon achieving the compounded average diluted earnings per share growth rate targets established at the time of grant. For the three and nine months ended September 30, 2008, a total of $0.2 million and $0.7 million, respectively, of compensation expense is included in marketing, general and administration expense related to the 2008 Executive Share Unit Plan.
Foreign exchange
The foreign exchange gains and losses that we realize are largely attributable to the effect of the changes in the value of the Canadian dollar, relative to the US dollar, on our US-denominated net monetary assets over the respective periods. These assets, totalling approximately US $129.9 million at September 30, 2008 (December 31, 2007 - $104.6 million), consist mainly of US-dollar cash and cash equivalents and security deposits on various leased and financed aircraft. We hold US-denominated cash and short-term investments to reduce the foreign currency risk inherent in our US-dollar expenditures. We reported foreign exchange gains of $6.2 million and $10.2 million during the three and nine months ended September 30, 2008, respectively, on the revaluation of our US-dollar net monetary assets with the period-end exchange rate of 1.0642. This compares to losses of $4.1 million and $11.4 million during the same three and nine month periods, respectively, in the prior year.
To manage our exposure to foreign currency exchange risk, we periodically use financial derivatives, including US-dollar forward contracts. Upon proper qualification, the forward contracts are designated as cash flow hedges for accounting purposes. As at September 30, 2008, to substantially offset our current US-dollar denominated aircraft lease payments, we entered into forward contracts to purchase US $5.9 million per month for nine months for a total of US $53.1 million at an average contract rate of 1.0360 per US dollar. Maturity dates for all of the forward contracts are within the fourth quarter of 2008 and the first half of 2009. All contracts were designated under cash flow hedge accounting with no portion considered ineffective.
For the three and nine months ended September 30, 2008, we realized a gain on the forward contracts of $0.7 million and $1.2 million, respectively, included in aircraft leasing costs. As at September 30, 2008, the estimated fair market value of the remaining forward contracts recorded in prepaid expenses, deposits and other is a gain of $1.4 million ($0.9 million net of tax). The estimated amount reported in AOCL that is expected to be reclassified to net earnings as a reduction to aircraft leasing expense during the next 12 months is a gain before tax of $1.4 million.
For 2008, including the impact of foreign exchange hedging, we estimate that every one-cent change in the value of the Canadian dollar versus the US dollar will have an approximate $9 million impact on our annual costs (approximately $8 million for fuel and $1 million related to other US-dollar denominated expenses). This is a forward-looking statement, and as such, we have derived these estimates based on assumptions regarding US-dollar spend for the remainder of 2008, extrapolated from actual year-to-date US-dollar spend, excluding a percentage of aircraft leasing expense hedged under the US-dollar forward contracts referred to above. The forward-looking statement relating to fuel includes an estimate for the year-to-date average Canadian-US dollar foreign exchange rate, as fuel is priced in US dollars.
Income taxes
The effective consolidated income tax rates for the three and nine months ended September 30, 2008 were 30.6 per cent and 30.1 per cent, respectively, as compared to 31.9 per cent and 32.7 per cent, respectively, for the same periods in 2007. The variances from 2007 are attributable to federal corporate income tax rate reductions enacted in December 2007 and provincial corporate income tax rate reductions enacted in the first two quarters of 2008.
Guest experience
We endeavour to provide exceptional guest experience through the high-value services we offer our guests. As we continue to fly more guests, we are committed to achieving positive operational results while maintaining a high level of safety standards.
Key Performance Indicators
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Three Months Ended Nine Months Ended
September 30 September 30
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2008 2007 Change 2008 2007 Change
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On-time
performance (A15) 83.8% 87.4% (3.6 pts.) 79.7% 84.2% (4.5 pts.)
Completion rate 99.4% 99.7% (0.3 pts.) 98.9% 99.2% (0.3 pts.)
Bag ratio 3.40 4.02 (15.4%) 3.94 4.25 (7.3%)
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Key performance indicators are calculated based on the U.S. Department of Transportation's standards of measurement for the U.S. airline industry.
On-time performance is a key factor in measuring our guest experience. More severe weather patterns, such as an increased number of thunderstorms in southern Ontario, negatively impacted our on-time performance during the third quarter of 2008 as compared to the same period of 2007. Similarly, for the nine months ended September 30, 2008, harsher weather, particularly during the first and second quarters, affected our on-time performance. In the third quarter of 2008, 83.8 per cent of all our flights arrived within 15 minutes of their scheduled time, compared to 87.4 per cent for the same period in 2007.
Our completion rates remained relatively flat for the three and nine months ended September 30, 2008 at 99.4 per cent and 98.9 per cent versus 99.7 per cent and 99.2 per cent, respectively, in the same periods of 2007. This indicator represents the percentage of flights completed from flights originally scheduled.
We continued to see improvements in our bag ratios for the third quarter and first nine months of 2008 of 3.40 and 3.94, respectively. This ratio represents the number of delayed or lost baggage claims made per 1,000 guests, representing improvements of 15.4 per cent and 7.3 per cent for the three and nine months ended September 30, 2008, respectively, over the same periods in the prior year.
Reservation system
As previously disclosed, we have been evaluating several options for our new reservation system. Our primary objective in selecting a new reservation system was to ensure our systems were capable of properly supporting both our current business model and enabling our future capability requirements related to business traveller, ancillary revenue and airline partnerships. Based on these criteria and the predictability of delivery, Sabre Airline Solutions(R) (Sabre) and their SabreSonic(R) reservation system was chosen as the best fit for our needs. We have signed a Memorandum of Understanding (MOU) with Sabre and will be communicating more details as we have them.
LIQUIDITY AND CAPITAL RESOURCES
The strength of our balance sheet is critical in withstanding this period of economic downturn and uncertainty. Despite the current unstable state of the financial and credit markets, we continue to execute our strategic plan. Our substantial cash balance and the continued generation of positive cash flows significantly mitigate the need to obtain external financing in the foreseeable future. Additionally, our positive leverage ratios reflect our financial health and stability. As a result, we continue to persevere and grow despite unprecedented volatility in fuel prices, unpredictable market conditions, tightening credit markets and an overall weakening economic outlook.
Our healthy cash balance of $806.5 million at September 30, 2008 compared to $653.6 million at December 31, 2007 indicates liquidity and a strong financial position. Part of this cash balance relates to cash collected with respect to advance ticket sales for which the balance at September 30, 2008 was $274.6 million, as compared to $194.9 million at December 31, 2007. Additionally, our working capital ratio of 1.28 has improved from 1.22 as at December 31, 2007, further demonstrating our financial stability. As at, and for the three and nine months ended September 30, 2008, we did not have any investments in asset-backed commercial paper.
During the three months ended September 30, 2008, we signed a three-year revolving operating line of credit with a syndicate of three Canadian banks. The line of credit is available for up to a maximum of $85 million commencing May 1, 2009 subject to various customary conditions precedent being satisfied and will be secured by our new Campus facility. The line of credit will bear interest at prime plus 0.50 per cent per annum and will be available for general corporate expenses and working capital purposes. We are required to pay a standby fee of 15 basis points, payable quarterly, on the undrawn portion.
We monitor capital on a number of measures, including adjusted debt-to-equity and adjusted net debt to EBITDAR. Our adjusted debt-to-equity ratio was 1.86 to 1.00 at September 30, 2008, which included $611.2 million in off-balance-sheet aircraft operating leases. This compared favourably to our adjusted debt-to-equity ratio of 2.07 to 1.00 at December 31, 2007, attributable to the increase in net earnings more than offsetting the addition of new aircraft financing during the last twelve months(i). As at September 30, 2008, our adjusted net debt to EBITDAR ratio was 2.28, an improvement of 9.2 per cent compared to 2.51 as at December 31, 2007, resulting primarily from increased cash and cash equivalents. Both of these ratios met our targets for September 30, 2008 and December 31, 2007 of an adjusted debt-to-equity measure and an adjusted net debt to EBITDAR ratio of no more than 3.00.
To see the Adjusted Net Debt to EBITDAR chart, click here:
http://files.newswire.ca/762/EBITDAR.pdf
(i) The trailing twelve months are used in the calculation of EBITDAR.
See "Reconciliation of Non-GAAP Measures to GAAP" at the end of this
MD&A for further information.
Operating cash flow
We continued to generate positive cash flow from operations to meet our working capital requirements. During the third quarter and first nine months of 2008, our operating cash flow decreased to $77.3 million and $393.0 million, respectively, compared to $156.0 million and $449.5 million, respectively, in the same periods of 2007. These declines of 50.4 per cent and 12.6 per cent during the third quarter and first nine months of 2008, respectively, related mainly to the higher cost of fuel in 2008 as compared to 2007.
Financing cash flow
For the third quarter of 2008, our total cash flow used in financing activities was $23.3 million, consisting primarily of $54.9 million in long-term debt repayments, offset partially by an increase of $33.8 million in long-term debt related to the financing of our additional 737-700 aircraft delivered in the quarter. Our total cash flow from financing activities in the third quarter of 2007 was $65.6 million, relating mainly to $109.1 million in long-term debt issued for three owned aircraft, offset partially by $37.1 million in long-term debt repayments. During the nine months ended September 30, 2008, our financing cash outflows of $72.5 million consisted primarily of $137.8 million in long-term debt repayments largely relating to our aircraft, $29.4 million to repurchase shares and $4.1 million in deposits mainly related to future leased aircraft. These outflows were partially offset by the issuance of $101.8 million in long-term debt to finance three owned aircraft. In the comparable period of 2007, our financing cash outflow was $36.9 million, consisting mainly of $117.2 million in long-term debt repayments, $13.3 million in consideration under our previous normal course issuer bid and $13.8 million in deposits relating mainly to future leased aircraft, offset partially by the issuance of long-term debt of $109.1 million.
In addition to having strong cash liquidity, we have been successful in financing our growth through aircraft acquisitions financed by low-interest-rate debt supported by the Export-Import Bank of the United States (Ex-Im Bank). On July 17, 2008, we took delivery of one owned 737-700 aircraft supported by $33.8 million in debt guaranteed by Ex-Im Bank. This was the final aircraft delivery under the existing facility, which was subsequently closed. We have yet to pursue financing agreements for our remaining aircraft commitments as our next purchased aircraft delivery is not expected until July 2010.
These loan guarantees from the U.S. government represent approximately 85 per cent of the purchase price of these aircraft. This financing activity brings the cumulative number of aircraft financed with loan guarantees to 52, with an outstanding debt balance of $1.4 billion associated with those aircraft. All of this debt has been financed in Canadian dollars at fixed interest rates, thus eliminating all future foreign exchange and interest rate exposure on these US-dollar aircraft purchases.
To facilitate the financing of our Ex-Im Bank- supported aircraft, we utilize five special-purpose entities. We have no equity ownership in the special-purpose entities; however, we are the beneficiary of the special-purpose entities' operations. The accounts of the special-purpose entities have been consolidated in the financial statements.
Investing cash flow
Cash used in investing activities for the third quarter and first nine months of 2008 totalled $63.9 million and $173.9 million, respectively, compared to $131.6 million and $150.7 million, respectively, in the same periods of 2007. In the third quarter of 2008, our investing activities primarily related to the addition of one owned aircraft and expenditures of $19.3 million for the construction of our new office space adjacent to the Calgary hangar, the Calgary Campus. During the third quarter of 2007, our investing activities included expenditures for three new aircraft and Boeing deposits on 20 future owned aircraft deliveries. For the nine months ended September 30, 2008, investing activities consisted of $110.5 million in aircraft additions, largely related to expenditures for three new owned aircraft, as well as $48.0 million in spending toward the Campus. Similarly, we added three new aircraft and paid deposits towards 23 future owned aircraft deliveries during the first nine months of 2007, partially offset by $13.8 million in proceeds received on the sale of two engines in the first quarter of 2007.
Capital resources
During the third quarter of 2008, we took delivery of one owned 737-700 aircraft, for a total registered fleet of 76 aircraft with an average age of 3.7 years. On September 6, 2008, Boeing's largest labour union, the International Association of Machinists and Aerospace Workers (IAM), went on strike. The IAM voted to ratify a new four-year labour contract with Boeing on November 2, 2008. Based on previous disclosure, we expected one aircraft to be delivered in the fourth quarter of 2008 and 10 aircraft to be delivered throughout 2009. Due to the Boeing strike, delivery dates for several of our future aircraft were delayed, and revised dates have not yet been confirmed with Boeing. As such, it is difficult to ascertain firm delivery dates for these aircraft, and we have lowered our expected capacity increase for 2009 to five per cent over the previously disclosed eight per cent in 2008 as a result of the delay. For further information on this forward-looking statement, please refer to the Outlook section of this MD&A. As at September 30, 2008, we had existing firm commitments to take delivery of an additional 44 aircraft, with timing of delivery to be determined, for a total of 120 aircraft.
On February 29, 2008, we signed a Letter of Intent to lease an additional 737-800 aircraft scheduled for delivery in 2011. This has not been reflected as a commitment as the lease agreement has not yet been signed; however, if included, our future deliveries would be 121 aircraft.
As at September 30, 2008, our total purchased aircraft commitment, including amounts to be paid for live satellite television systems on purchased and leased aircraft, was $1,106.9 million (US $1,040.2 million). Additionally, our commitment relating to aircraft operating leases was $1,481.2 million (US $1,391.8 million) as at September 30, 2008.
Significant progress in the construction of our Campus continued during the third quarter of 2008. The last pour of the new building's roof on August 28, 2008 marked a major construction milestone. We incurred $19.3 million and $48.0 million in Campus-related expenditures during the third quarter and first nine months of 2008, respectively, for a total spend of $59.9 million as at September 30, 2008. Our budget for the Campus construction is approximately $100 million, financed entirely through operating cash flow. Occupancy remains on track for the first quarter of 2009.
Contractual obligations, off-balance-sheet arrangements and commitments
We currently have 24 aircraft under operating leases. We have entered into agreements with independent third parties to lease 15 additional 737-700 aircraft and five 737-800 aircraft over eight- and 10-year terms in US dollars. Although the current obligations related to our aircraft operating lease agreements are not recognized on our balance sheet, we include these commitments in assessing our leverage through our adjusted debt-to-equity and net debt to EBITDAR ratios.
Contingencies
We are party to certain legal proceedings and claims that arise during the ordinary course of business. It is the opinion of management that the ultimate outcome of these matters will not have a material effect upon our financial position, results of operations or cash flows.
Normal course issuer bid
On March 12, 2008, we filed a notice with the Toronto Stock Exchange (TSX) to make a normal course issuer bid to purchase outstanding shares on the open market. As approved by the TSX, we are authorized to purchase up to 2,500,000 shares (representing approximately 1.9 per cent of our issued and outstanding shares at the time of the bid) during the period of March 17, 2008 to March 16, 2009, or until such earlier time as the bid is completed or terminated at our option. Any shares we purchase under this bid will be purchased on the open market through the facilities of the TSX at the prevailing market price at the time of the transaction. Shares acquired under this bid will be cancelled. During the three and nine months ended September 30, 2008, we purchased nil and 2,005,084 shares, respectively, under the bid for total consideration of $nil and $29.4 million, respectively. The average book value of the shares repurchased of $nil and $7.1 million, respectively, was charged to share capital with the $nil and $22.3 million, respectively, excess of the market price over the average book value charged to retained earnings.
During the three and nine months ended September 30, 2007, we purchased 100,000 and 845,700 shares, respectively, under our previous normal course issuer bid, which expired on February 27, 2008, for total consideration of $1.5 million and $13.3 million, respectively. The average book value for the shares repurchased of $0.3 million and $2.8 million, respectively, was charged to share capital with the $1.1 million and $10.5 million, respectively, excess of the market price over the average book value charged to retained earnings.
Share capital
As at November 5, 2008, the number of common voting shares and variable voting shares amounted to 123,516,743 and 4,394,750, respectively.
Related party transactions
We have debt financing and investments in short-term deposits with a financial institution that is related through two common directors, one of whom is also the president of the financial institution. As at September 30, 2008, total long-term debt includes an amount of $7.5 million (December 31, 2007 - $23.3 million) due to the financial institution. Included in cash and cash equivalents as at September 30, 2008 are short-term investments of $172.1 million (December 31, 2007 - $189.4 million) owing from the financial institution. During the three months ended September 30, 2008, we signed a three-year revolving operating line of credit with a banking syndicate, of which one of the members is the related-party financial institution. These transactions occurred in the normal course of operations with terms consistent with those offered to arm's length parties and are measured at the exchange amount.
ACCOUNTING
Changes in accounting policies
Effective January 1, 2008, we adopted CICA Section 3031, Inventories, which replaces Section 3030, Inventories, and harmonizes the Canadian standards related to inventories with International Financial Reporting Standards (IFRS). This section provides more extensive guidance on the determination of cost, narrows the permitted cost formulas, requires impairment testing and expands the disclosure requirements to increase transparency. There was no impact on our financial results from the adoption of Section 3031.
Effective January 1, 2008, we adopted CICA Section 1535, Capital Disclosures, which establishes guidelines for the disclosure of information on an entity's capital and how it is managed. This enhanced disclosure enables users to evaluate the entity's objectives, policies and processes for managing capital. This new requirement is for disclosure purposes only and upon adoption did not impact our financial results for the three and nine months ended September 30, 2008. See note 3 to the consolidated financial statements for further disclosure.
Effective January 1, 2008, we adopted CICA Section 3862, Financial Instruments - Disclosure, and Section 3863, Financial Instruments - Presentation, which replace the existing Section 3861, Financial Instruments - Disclosure and Presentation. Section 3862 requires enhanced disclosure on the nature and extent of financial instrument risks and how an entity manages those risks. Section 3863 carries forward the existing presentation requirements and provides additional guidance for the classification of financial instruments. This new requirement is for disclosure purposes only and upon adoption did not impact our financial results for the three and nine months ended September 30, 2008. See note 10 to the consolidated financial statements for further disclosure.
Future accounting policy changes
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets. Effective for fiscal years beginning on or after October 1, 2008, this section provides guidance on the recognition, measurement, presentation and disclosure for goodwill and intangible assets, other than the initial recognition of goodwill or intangible assets acquired in a business combination. Retroactive application to prior-period financial statements will be required. We do not anticipate that the adoption of this standard, effective January 1, 2009, will significantly impact our financial results.
IFRS
On February 13, 2008, the CICA Accounting Standards Board (AcSB) confirmed the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises for interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect our reported financial position and results of operations. This is a forward-looking statement, and as such, we have derived this estimate based on assumptions from our preliminary assessment of Canadian GAAP and IFRS differences.
We are currently in the process of finalizing our IFRS transition plan. Through an initial thorough diagnostic review, we have assessed the potential effects of IFRS to accounting and reporting processes, information systems, business processes and external disclosures. The IFRS transition plan also addresses project structure and governance, resourcing and training, and a phased plan to assess accounting policies under IFRS, as well as potential first-time adoption exemptions. We anticipate completing our project scoping, which will include a timetable for assessing the impact on data systems, internal controls over financial reporting and business activities, such as financing and compensation arrangements, in the fourth quarter of 2008.
We have established a working team to conduct further analysis on the potential effects identified in the IFRS transition plan. Additionally, we have established an IFRS Steering Committee to monitor progress and review and approve recommendations from the working team for the transition to IFRS. The Steering Committee comprises senior individuals from Finance, Treasury and Investor Relations. The working team reports to the Steering Committee on a monthly basis, and quarterly IFRS updates are provided to the Audit Committee.
Based on the diagnostic review in the IFRS transition plan, the most significant areas of difference between Canadian GAAP and IFRS applicable to us relate to property and equipment, provisions and leases, as well as the more extensive presentation and disclosure requirements under IFRS.
CONTROLS AND PROCEDURES
Management is responsible for the establishment and maintenance of a system of disclosure controls and procedures. The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) have evaluated the effectiveness of our disclosure controls and procedures (DC&P) as of September 30, 2008, as defined under the rules of the CSA, and have concluded that our disclosure controls and procedures are effective. Management is also responsible for the establishment and maintenance of a system of internal controls over financial reporting (ICFR). Management has designed internal controls over financial reporting effectively to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with Canadian GAAP. There were no changes in our internal controls over financial reporting during the most recent interim period that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Changes in CSA requirements over certification of disclosure
On August 15, 2008, the CSA finalized its proposal to repeal and replace Multilateral Instrument 52-109 with a revised version of National Instrument 52-109.
Based on this new rule, there is a requirement to evaluate the operating effectiveness of ICFR in addition to design effectiveness. Furthermore, the CEO and CFO will have a requirement to certify the design and operating effectiveness of DC&P and ICFR for the year ended December 31, 2008. We have incorporated the required revisions into the current annual certification process.
OUTLOOK
During the fourth quarter of 2008, we expect our capacity to increase by 12 per cent as compared to the fourth quarter of 2007. Fourth quarter bookings have been solid to date and we expect our fourth quarter RASM to be comparable to that of the same quarter of 2007. With the recent decline in jet fuel prices, we expect our fourth quarter fuel costs per litre to be approximately 85 cents, which represents an increase of approximately 13 per cent from the same quarter of 2007. Although WTI prices have dropped to this point, the Canadian dollar has also fallen versus the US dollar in the fourth quarter of 2008 versus 2007. Of our total operating costs, we expect fuel to comprise approximately 33 per cent, an increase of approximately three percentage points from the fourth quarter of 2007.
As we look into 2009, we are potentially entering a period unlike any in recent history and thus a cautious outlook is warranted. At this time, uncertainty about the economic outlook has replaced the challenge of high fuel prices. Although an accurate assessment of near-term demand and supply fundamentals is difficult to ascertain at this point, we continue to closely monitor air travel demand for any impact of lower consumer confidence and a declining Canadian dollar. Mitigating these factors is the fact that other carriers have reduced their year-over-year Canadian and transborder market capacity, indicating to us a healthy balance of demand and seat capacity for the next quarter. Due to delays in aircraft deliveries as a result of the Boeing strike, we expect a five per cent capacity increase for 2009, down from the previously disclosed eight per cent, as compared to 2008.
We are confident we will be able to manage effectively through the challenges that may present themselves in 2009. We are uniquely positioned to adapt our capacity during this period, with our seasonal deployment strategy, the number of new destinations that we can fly to and our relatively low market share into a number of markets. Moreover, as our industry-leading results through 2008 thus far reflect, our low-cost, high-value business model positions us well to weather a recession or downturn in the economy. We remain confident due to our airline's healthy underlying fundamentals, which include a strong balance sheet, indomitable corporate culture and people providing an award-winning guest experience.
The capacity, RASM, fuel costs per litre and fuel costs as a percentage of total operating costs guidance above are forward-looking statements, and as such, we have derived these estimates based on certain assumptions. Our expected capacity increase for the fourth quarter of 2008 was based on the finalization of our winter schedule, while our projected capacity increase for 2009 was based on anticipated summer and fall commercial schedules as well a preliminary aircraft delivery schedule from Boeing for 2009. RASM guidance was based on fourth quarter actual bookings to date. Additionally, our fourth quarter costs per litre were based on jet fuel pricing at the beginning of November 2008 and our estimate of fuel costs as a percentage of total operating costs was based on fuel pricing at the beginning of November 2008 and estimated fuel consumption to arrive at an estimate for total fuel costs in the fourth quarter of 2008, taken as a percentage of our total estimated operating costs for the fourth quarter of 2008.
NON-GAAP MEASURES
To supplement our consolidated financial statements presented in accordance with Canadian GAAP, we use various non-GAAP performance measures. These measures are provided to enhance the user's overall understanding of our current financial performance and are included to provide investors and management with an alternative method for assessing our operating results in a manner that is focused on the performance of our ongoing operations and to provide a more consistent basis for comparison between quarters. These measures are not in accordance with or an alternative to GAAP and may be different from measures used by other entities.
The following non-GAAP measures are used to monitor our financial performance:
Adjusted debt: Long-term debt and obligations under capital lease include
off-balance-sheet aircraft operating leases. Our practice, consistent
with common industry practice, is to multiply the trailing twelve months
of aircraft leasing expense by 7.5 to derive a present value debt
equivalent.
Adjusted equity: The sum of share capital, contributed surplus and
retained earnings, excluding accumulated other comprehensive loss (AOCL).
Adjusted net debt: Adjusted debt less cash and cash equivalents.
Earnings before tax margin: Earnings before income taxes divided by total
revenues.
EBITDAR: Earnings Before Interest, Taxes, Depreciation, Aircraft Rent and
other items, such as asset impairments, gains and losses on derivatives,
and foreign exchange gains or losses. EBITDAR is a non-GAAP measure
commonly used in the airline industry to evaluate results by excluding
differences in the method in which an airline finances its aircraft.
Operating margin: Earnings from operations divided by total revenues.
Operating revenues: The total of guest revenues and charter and other
revenues.
Reconciliation of non-GAAP measures to GAAP
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in thousands, except September 30, December 31,
ratio amounts) 2008 2007 Change
-------------------------------------------------------------------------
Adjusted debt-to-equity:
Long-term debt(i) $ 1,393,473 $ 1,429,518 $ (36,045)
Obligations under capital
lease(ii) 1,203 1,483 (280)
Off-balance-sheet aircraft
leases(iii) 611,190 564,008 47,182
-------------------------------------------------------------------------
Adjusted debt $ 2,005,866 $ 1,995,009 $ 10,857
-------------------------------------------------------------------------
Total shareholders' equity 1,071,130 949,908 121,222
Add: AOCL 9,717 11,914 (2,197)
-------------------------------------------------------------------------
Adjusted equity $ 1,080,847 $ 961,822 $ 119,025
-------------------------------------------------------------------------
Adjusted debt-to-equity 1.86 2.07 (10.1%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted net debt to
EBITDAR(iv):
Net earnings $ 212,723 $ 192,833 $ 19,890
Add:
Net interest(v) 49,278 51,448 (2,170)
Taxes 46,058 43,925 2,133
Depreciation and amortization 134,494 127,223 7,271
Aircraft leasing 81,492 75,201 6,291
Other(vi) 2,128 44,631 (42,503)
-------------------------------------------------------------------------
EBITDAR $ 526,173 $ 535,261 $ (9,088)
-------------------------------------------------------------------------
Adjusted debt (as per above) 2,005,866 1,995,009 10,857
Less: Cash and cash equivalents 806,513 653,558 152,955
-------------------------------------------------------------------------
Adjusted net debt $ 1,199,353 $ 1,341,451 $ (142,098)
-------------------------------------------------------------------------
Adjusted net debt to EBITDAR 2.28 2.51 (9.2%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) At September 30, 2008, long-term debt includes the current portion
of long-term debt of $165,976 (December 31, 2007 - $172,992) and
long-term debt of $1,227,497 (December 31, 2007 - $1,256,526).
(ii) At September 30, 2008, obligations under capital lease includes the
current portion of obligations under capital lease of $390
(December 31, 2007 - $375) and obligations under capital lease of
$813 (December 31, 2007 - $1,108).
(iii) Off-balance-sheet aircraft leases is calculated by multiplying the
trailing twelve months of aircraft leasing expense by 7.5. At
September 30, 2008, the trailing twelve months of aircraft leasing
costs totalled $81,492 (December 31, 2007 - $75,201).
(iv) The trailing twelve months are used in the calculation of EBITDAR.
(v) For the twelve months ended September 30, 2008, net interest
includes interest income of $27,804 (December 31, 2007 - $24,301)
and interest expense of $77,082 (December 31, 2007 - $75,749).
(vi) For the twelve months ended September 30, 2008, other includes
foreign exchange gain of $8,867 and loss on derivatives of $10,995
(December 31, 2007 - reservation system impairment of $31,881 and
foreign exchange loss of $12,750).
WestJet
Consolidated Financial Statements and Notes
For the Three and Nine Months Ended September 30, 2008 and 2007
Consolidated Statement of Earnings
(Stated in thousands of Canadian dollars, except per share amounts)
(Unaudited)
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues:
Guest revenues $ 656,782 $ 556,736 $ 1,739,787 $ 1,396,780
Charter and other
revenues 61,593 49,506 193,936 178,372
-------------------------------------------------------------------------
718,375 606,242 1,933,723 1,575,152
Expenses:
Aircraft fuel 244,544 131,090 625,871 361,572
Airport operations 84,635 73,954 250,856 220,698
Flight operations
and navigational
charges 72,945 66,340 210,817 192,887
Marketing, general
and administration 54,871 48,115 150,789 129,823
Sales and distribution 46,760 40,616 127,976 105,350
Depreciation and
amortization 35,000 32,354 101,656 94,385
Inflight 27,018 21,715 79,404 62,011
Aircraft leasing 22,799 18,739 63,340 57,049
Maintenance 21,826 18,606 60,949 56,164
Employee profit share 11,453 26,377 26,787 37,964
Loss on impairment of
property and equipment - - - 31,881
-------------------------------------------------------------------------
621,851 477,906 1,698,445 1,349,784
-------------------------------------------------------------------------
Earnings from operations 96,524 128,336 235,278 225,368
Non-operating income
(expense):
Interest income 6,077 6,675 19,861 16,358
Interest expense (18,947) (19,105) (57,628) (56,295)
Gain (loss) on
foreign exchange 6,249 (4,137) 10,246 (11,371)
Gain (loss) on disposal
of property and
equipment (93) (44) (226) 453
Loss on derivatives
(note 10) (10,995) - (10,995) -
-------------------------------------------------------------------------
(17,709) (16,611) (38,742) (50,855)
-------------------------------------------------------------------------
Earnings before
income taxes 78,815 111,725 196,536 174,513
Income tax expense:
Current 92 413 2,245 1,601
Future 24,058 35,242 56,927 55,438
-------------------------------------------------------------------------
24,150 35,655 59,172 57,039
-------------------------------------------------------------------------
Net earnings $ 54,665 $ 76,070 $ 137,364 $ 117,474
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share:
Basic $ 0.43 $ 0.59 $ 1.07 $ 0.91
Diluted $ 0.42 $ 0.58 $ 1.05 $ 0.90
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Balance Sheet
(Stated in thousands of Canadian dollars)
(Unaudited)
-------------------------------------------------------------------------
September 30, December 31,
2008 2007
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 4) $ 806,513 $ 653,558
Accounts receivable 16,887 15,009
Prepaid expenses, deposits and other 53,267 39,019
Inventory 11,775 10,202
-------------------------------------------------------------------------
888,442 717,788
Property and equipment (note 5) 2,284,210 2,213,063
Other assets 62,286 53,371
-------------------------------------------------------------------------
$ 3,234,938 $ 2,984,222
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 192,577 $ 168,171
Advance ticket sales 274,552 194,929
Non-refundable guest credits 62,072 54,139
Current portion of long-term debt (note 6) 165,976 172,992
Current portion of obligations under
capital lease 390 375
-------------------------------------------------------------------------
695,567 590,606
Long-term debt (note 6) 1,227,497 1,256,526
Obligations under capital lease 813 1,108
Other liabilities 7,853 11,337
Future income tax 232,078 174,737
-------------------------------------------------------------------------
2,163,808 2,034,314
Shareholders' equity:
Share capital (note 7) 452,776 448,568
Contributed surplus 57,671 57,889
Accumulated other comprehensive loss (9,717) (11,914)
Retained earnings 570,400 455,365
-------------------------------------------------------------------------
1,071,130 949,908
Commitments and contingencies (note 9)
-------------------------------------------------------------------------
$ 3,234,938 $ 2,984,222
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statement of Shareholders' Equity
(Stated in thousands of Canadian dollars)
(Unaudited)
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Share capital:
Balance, beginning
of period $ 452,318 $ 439,088 $ 448,568 $ 431,248
Issuance of shares
pursuant to stock
option plans
(note 7) - - 227 1,467
Stock-based
compensation on
stock options
exercised (note 7) 458 1,493 11,072 10,369
Shares repurchased
(note 7) - (339) (7,091) (2,842)
-------------------------------------------------------------------------
452,776 440,242 452,776 440,242
Contributed surplus:
Balance, beginning
of period 55,394 60,581 57,889 58,656
Stock-based
compensation
expense (note 7) 2,735 4,268 10,854 15,069
Stock-based
compensation on
stock options
exercised (note 7) (458) (1,493) (11,072) (10,369)
-------------------------------------------------------------------------
57,671 63,356 57,671 63,356
Accumulated other
comprehensive loss:
Balance, beginning
of period (11,001) (12,720) (11,914) -
Change in accounting
policy - - - (13,420)
Other comprehensive
income 1,284 350 2,197 1,050
-------------------------------------------------------------------------
(9,717) (12,370) (9,717) (12,370)
Retained earnings:
Balance, beginning
of period 515,735 311,612 455,365 316,123
Change in accounting
policy - - - (36,612)
Shares repurchased
(note 7) - (1,147) (22,329) (10,450)
Net earnings 54,665 76,070 137,364 117,474
-------------------------------------------------------------------------
570,400 386,535 570,400 386,535
Total accumulated other
comprehensive loss
and retained earnings 560,683 374,165 560,683 374,165
-------------------------------------------------------------------------
Total shareholders'
equity $ 1,071,130 $ 877,763 $ 1,071,130 $ 877,763
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statement of Comprehensive Income
(Stated in thousands of Canadian dollars)
(Unaudited)
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings $ 54,665 $ 76,070 $ 137,364 $ 117,474
Other comprehensive
income, net of taxes
(note 10):
Amortization of
hedge settlements
to aircraft leasing 350 350 1,050 1,050
Net gain on foreign
exchange derivatives
under cash flow
hedge accounting
(net of tax of
$499; $779) 1,124 - 1,668 -
Reclassification of
net realized gains
on foreign exchange
derivatives to net
earnings (net of
tax of $(226);
$(364)) (506) - (837) -
Net gain on fuel
derivatives under
cash flow hedge
accounting 316 - 316 -
-------------------------------------------------------------------------
1,284 350 2,197 1,050
-------------------------------------------------------------------------
Total comprehensive
income $ 55,949 $ 76,420 $ 139,561 $ 118,524
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statement of Cash Flows
(Stated in thousands of Canadian dollars)
(Unaudited)
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Operating activities
Net earnings $ 54,665 $ 76,070 $ 137,364 $ 117,474
Items not involving
cash:
Depreciation and
amortization 35,000 32,354 101,656 94,385
Amortization of
other liabilities (235) (228) (704) (662)
Amortization of
hedge settlements 350 350 1,050 1,050
Unrealized loss on
derivatives 402 - 402 -
Loss on disposal of
property, equipment
and aircraft parts 135 619 1,222 32,200
Stock-based
compensation expense 2,702 4,379 10,618 15,559
Future income tax
expense 24,058 35,242 56,927 55,438
Unrealized foreign
exchange loss (gain) (6,900) 4,449 (11,103) 12,513
Change in non-cash
working capital (32,866) 2,747 95,602 121,559
-------------------------------------------------------------------------
77,311 155,982 393,034 449,516
-------------------------------------------------------------------------
Financing activities
Increase in
long-term debt 33,835 109,138 101,782 109,138
Repayment of
long-term debt (54,945) (37,063) (137,827) (117,167)
Decrease in
obligations under
capital lease (95) (90) (280) (266)
Increase in other
assets (1,419) (4,531) (4,084) (13,795)
Shares repurchased - (1,486) (29,420) (13,292)
Issuance of common
shares - - 227 1,467
Change in non-cash
working capital (689) (373) (2,895) (3,000)
-------------------------------------------------------------------------
(23,313) 65,595 (72,497) (36,915)
-------------------------------------------------------------------------
Investing activities
Aircraft additions (36,572) (124,147) (110,528) (146,333)
Other property and
equipment additions (27,285) (7,409) (63,497) (18,189)
Other property and
equipment disposals - - 170 13,801
-------------------------------------------------------------------------
(63,857) (131,556) (173,855) (150,721)
-------------------------------------------------------------------------
Cash flow from
operating, financing
and investing
activities (9,859) 90,021 146,682 261,880
Effect of exchange
rate on cash and
cash equivalents 4,382 (1,768) 6,273 (5,168)
-------------------------------------------------------------------------
Net change in cash
and cash equivalents (5,477) 88,253 152,955 256,712
Cash and cash
equivalents,
beginning of period 811,990 545,976 653,558 377,517
Cash and cash
equivalents,
end of period $ 806,513 $ 634,229 $ 806,513 $ 634,229
-------------------------------------------------------------------------
Cash interest paid $ (18,849) $ (18,387) $ (57,822) $ (56,185)
Cash taxes received
(paid) $ (428) $ 341 $ (1,790) $ 11,430
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2008 and 2007
(Stated in thousands of Canadian dollars, except share and per share
data)
(Unaudited)
-------------------------------------------------------------------------
1. Basis of presentation
The interim consolidated financial statements of WestJet Airlines
Ltd. (WestJet or the Corporation) have been prepared by management in
accordance with Canadian generally accepted accounting principles
(GAAP). The interim consolidated financial statements have been
prepared following the same accounting policies and methods of
computation as the consolidated financial statements for the year
ended December 31, 2007, except as described below. The disclosures
provided below are incremental to those included with the annual
consolidated financial statements. The interim consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto in the Corporation's
Annual Report for the year ended December 31, 2007.
The Corporation's business is seasonal in nature with varying levels
of activity throughout the year. The Corporation experiences
increased domestic travel in the summer months and more demand for
transborder and sun destinations over the winter period.
Amounts presented in the Corporation's interim consolidated financial
statements and the notes thereto are in Canadian dollars unless
otherwise stated.
Certain prior-period balances have been reclassified to conform to
current period's presentation, including the reclassification of
interest income and interest expense as non-operating items and the
reclassification of the Corporation's employee profit share expense
as an operating item.
2. Recent accounting pronouncements
(a) Change in accounting policies
Effective January 1, 2008, the Corporation adopted the following new
accounting standards issued by the Canadian Institute of Chartered
Accountants (CICA):
(i) Inventory
CICA Section 3031, Inventories, replaces Section 3030, Inventories,
and harmonizes the Canadian standards related to inventories with
International Financial Reporting Standards (IFRS). This section
provides more extensive guidance on the determination of cost,
narrows the permitted cost formulas, requires impairment testing and
expands the disclosure requirements to increase transparency. There
was no impact on the financial results of the Corporation from the
adoption of Section 3031.
(ii) Capital disclosures
CICA Section 1535, Capital Disclosures, establishes guidelines for
the disclosure of information on an entity's capital and how it is
managed. This enhanced disclosure enables users to evaluate the
entity's objectives, policies and processes for managing capital.
This new requirement is for disclosure purposes only and upon
adoption did not impact the financial results of the Corporation. See
note 3, capital management, for further disclosure.
(iii) Financial instruments - disclosure and presentation
CICA Section 3862, Financial Instruments - Disclosure, and Section
3863, Financial Instruments - Presentation, replace the existing
Section 3861, Financial Instruments - Disclosure and Presentation.
Section 3862 requires enhanced disclosure on the nature and extent of
financial instrument risks and how an entity manages those risks.
Section 3863 carries forward the existing presentation requirements
and provides additional guidance for the classification of financial
instruments. This new requirement is for disclosure purposes only and
upon adoption did not impact the financial results of the
Corporation. See note 10, financial instruments and risk management,
for further disclosure.
(b) Future accounting policies
(i) Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and
Intangible Assets. Effective for fiscal years beginning on or after
October 1, 2008, this section provides guidance on the recognition,
measurement, presentation and disclosure for goodwill and intangible
assets, other than the initial recognition of goodwill or intangible
assets acquired in a business combination. Retroactive application to
prior-period financial statements will be required. The Corporation
does not anticipate that the adoption of this standard will
significantly impact its financial results.
(ii) International financial reporting standards
On February 13, 2008, the CICA Accounting Standards Board (AcSB)
confirmed the changeover to IFRS from Canadian GAAP will be required
for publicly accountable enterprises for interim and annual financial
statements effective for fiscal years beginning on or after
January 1, 2011. The transition from current Canadian GAAP to IFRS is
a significant undertaking that may materially affect the
Corporation's reported financial position and results of operations.
The Corporation is currently in the process of finalizing its IFRS
transition plan. Through an initial thorough diagnostic review, the
Corporation has assessed the potential impacts of IFRS to its
accounting and reporting processes, information systems, business
processes and external disclosures. The IFRS transition plan also
addresses project structure and governance, resourcing and training,
and a phased plan to assess accounting policies under IFRS, as well
as potential first-time adoption exemptions. The Corporation
anticipates completing its project scoping, which will include a
timetable for assessing the impact on data systems, internal controls
over financial reporting and business activities, such as financing
and compensation arrangements, in the fourth quarter of 2008.
The Corporation has established a working team to conduct further
analysis on the potential impacts identified in the IFRS transition
plan. Additionally, it has established an IFRS Steering Committee to
monitor progress and review and approve recommendations from the
working team for the transition to IFRS. The Steering Committee is
comprised of senior individuals from Finance, Treasury and Investor
Relations. The working team reports to the Steering Committee on a
monthly basis, and quarterly IFRS updates are provided to the Audit
Committee.
Based on the diagnostic review in the IFRS transition plan, the most
significant areas of difference between Canadian GAAP and IFRS
applicable to the Corporation, relates to property and equipment,
provisions and leases, as well as the more extensive presentation and
disclosure requirements under IFRS.
3. Capital management
The Corporation's policy is to maintain a strong capital base so as
to maintain investor, creditor and market confidence and to sustain
future development of the airline. The Corporation manages its
capital structure and makes adjustments to it in light of changes in
economic conditions and the risk characteristics of the underlying
assets.
In order to maintain or adjust the capital structure, the Corporation
may from time to time purchase shares for cancellation pursuant to
normal course issuer bids to offset dilution, issue new shares and
adjust current and projected debt levels.
In the management of capital, the Corporation includes shareholders'
equity (excluding accumulated other comprehensive loss), long-term
debt, capital leases, cash and cash equivalents and the Corporation's
off-balance-sheet obligations related to its aircraft operating
leases, all of which are presented in detail further below.
The Corporation monitors capital on a number of bases, including
adjusted debt-to-equity and adjusted net debt to Earnings Before
Interest, Taxes, Depreciation and Aircraft Rent (EBITDAR). EBITDAR is
a non-GAAP financial measure commonly used in the airline industry to
evaluate results by excluding differences in the method by which an
airline finances its aircraft. In addition, the Corporation will
adjust EBITDAR for one-time special items, for gains and losses on
derivatives and for gains and losses on foreign exchange. The
calculation of EBITDAR is a measure that does not have a standardized
meaning prescribed under GAAP and is therefore not likely to be
comparable to similar measures presented by other issuers. The
Corporation adjusts debt to include its off-balance-sheet aircraft
operating leases. Common industry practice is to multiply the
trailing twelve months of aircraft leasing expense by 7.5 to derive a
present value debt equivalent. The Corporation defines adjusted net
debt as adjusted debt less cash and cash equivalents. The Corporation
defines equity as the sum of share capital, contributed surplus and
retained earnings and excludes accumulated other comprehensive loss
(AOCL).
---------------------------------------------------------------------
September 30, December 31,
2008 2007 Change
---------------------------------------------------------------------
Adjusted debt-to-equity:
Long-term debt(i) $ 1,393,473 $ 1,429,518 $ (36,045)
Obligations under capital
lease(ii) 1,203 1,483 (280)
Off-balance-sheet aircraft
leases(iii) 611,190 564,008 47,182
---------------------------------------------------------------------
Adjusted debt $ 2,005,866 $ 1,995,009 $ 10,857
---------------------------------------------------------------------
Total shareholders' equity 1,071,130 949,908 121,222
Add: AOCL 9,717 11,914 (2,197)
---------------------------------------------------------------------
Adjusted equity $ 1,080,847 $ 961,822 $ 119,025
---------------------------------------------------------------------
Adjusted debt-to-equity 1.86 2.07 (10.1%)
---------------------------------------------------------------------
---------------------------------------------------------------------
Adjusted net debt to
EBITDAR(iv):
Net earnings $ 212,723 $ 192,833 $ 19,890
Add:
Net interest(v) 49,278 51,448 (2,170)
Taxes 46,058 43,925 2,133
Depreciation and amortization 134,494 127,223 7,271
Aircraft leasing 81,492 75,201 6,291
Other(vi) 2,128 44,631 (42,503)
---------------------------------------------------------------------
EBITDAR $ 526,173 $ 535,261 $ (9,088)
---------------------------------------------------------------------
Adjusted debt (as per above) 2,005,866 1,995,009 10,857
Less: Cash and cash equivalents 806,513 653,558 152,955
---------------------------------------------------------------------
Adjusted net debt $ 1,199,353 $ 1,341,451 $ (142,098)
---------------------------------------------------------------------
Adjusted net debt to EBITDAR 2.28 2.51 (9.2%)
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) At September 30, 2008, long-term debt includes the current
portion of long-term debt of $165,976 (December 31, 2007 -
$172,992) and long-term debt of $1,227,497 (December 31, 2007 -
$1,256,526).
(ii) At September 30, 2008, obligations under capital lease includes
the current portion of obligations under capital lease of $390
(December 31, 2007 - $375) and obligations under capital lease
of $813 (December 31, 2007 - $1,108).
(iii) Off-balance-sheet aircraft leases is calculated by multiplying
the trailing twelve months of aircraft leasing expense by 7.5.
At September 30, 2008, the trailing twelve months of aircraft
leasing costs totalled $81,492 (December 31, 2007 - $75,201).
(iv) The trailing twelve months are used in the calculation of
EBITDAR.
(v) For the twelve months ended September 30, 2008, net interest
includes interest income of $27,804 (December 31, 2007 -
$24,301) and interest expense of $77,082 (December 31, 2007 -
$75,749).
(vi) For the twelve months ended September 30, 2008, other includes
foreign exchange gain of $8,867 and loss on derivatives of
$10,995 (December 31, 2007 - reservation system impairment of
$31,881 and foreign exchange loss of $12,750).
For September 30, 2008 and December 31, 2007, the Corporation's
targets were an adjusted debt-to-equity measure of no more than 3.00
and an adjusted net debt to EBITDAR of no more than 3.00. As at
September 30, 2008, the Corporation's adjusted debt-to-equity ratio
improved by 10.1% compared to December 31, 2007, attributable to the
increase in shareholders' equity (mainly net earnings) more than
offsetting the addition of new aircraft financing in the nine months.
As at September 30, 2008, the Corporation's adjusted net debt to
EBITDAR improved by 9.2% compared to December 31, 2007, mainly as a
result of increased cash and cash equivalents.
As part of existing long-term debt agreements, excluding facilities
guaranteed by the Export-Import Bank of the United States (Ex-Im
Bank), the Corporation monitors certain financial covenants to ensure
compliance with the debt agreements. As at September 30, 2008, the
Corporation is in compliance with these financial covenants.
Under the Canada Transportation Act, the Corporation must, as a
corporation which indirectly wholly owns the holder of a domestic
licence, a scheduled international licence and a non-scheduled
international licence, be Canadian, that is, be controlled, in fact,
by Canadians with at least 75% of its voting interest owned and
controlled by Canadians. To monitor this external requirement, the
Corporation has structured its voting shares into two classes: common
voting and variable voting. The common voting shares may be owned and
controlled by Canadians only. The variable voting shares may be owned
and controlled only by persons who are not Canadian and, as a class,
cannot exceed more than 25% of the total number of votes cast on any
matter on which a vote is to be taken. As at September 30, 2008, the
Corporation is in compliance with this requirement.
No dividends have been paid or declared on any of the Corporation's
shares since the date of incorporation. This policy is based on
operational results, financial policy and financing requirements for
future growth and is continuously reviewed by the Corporation.
There were no changes in the Corporation's approach to capital
management during the three and nine months ended September 30, 2008.
4. Cash and cash equivalents
As at September 30, 2008, cash and cash equivalents included bank
balances of $45,434 (December 31, 2007 - $37,395) and short-term
investments of $761,079 (December 31, 2007 - $616,163). Included in
these balances, as at September 30, 2008, the Corporation has US-
dollar cash and cash equivalents of US $79,050 (December 31, 2007 -
US $59,843).
As at September 30, 2008, cash and cash equivalents included
restricted cash of $4,408 (December 31, 2007 - $nil) representing
cash held in trust by WestJet Vacations in accordance with regulatory
requirements governing advance ticket sales for certain travel-
related activities and $4,269 (December 31, 2007 - $2,069) for
security on the Corporation's facilities for letters of guarantee. In
accordance with regulatory requirements, the Corporation has US $255
(December 31, 2007 - US $295) in restricted cash representing cash
not yet remitted for passenger facility charges.
5. Property and equipment
---------------------------------------------------------------------
Accumulated Net book
September 30, 2008 Cost depreciation value
---------------------------------------------------------------------
Aircraft $ 2,391,068 $ 373,368 $ 2,017,700
Ground property and equipment 152,281 81,524 70,757
Spare engines and parts 85,229 16,155 69,074
Buildings 40,028 6,577 33,451
Leasehold improvements 11,806 5,487 6,319
Assets under capital lease 2,481 1,565 916
---------------------------------------------------------------------
2,682,893 484,676 2,198,217
Deposits on aircraft 23,715 - 23,715
Assets under development 62,278 - 62,278
---------------------------------------------------------------------
$ 2,768,886 $ 484,676 $ 2,284,210
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Net book
December 31, 2007 Cost depreciation value
---------------------------------------------------------------------
Aircraft $ 2,273,509 $ 288,909 $ 1,984,600
Ground property and equipment 158,477 81,345 77,132
Spare engines and parts 76,862 13,610 63,252
Buildings 40,028 5,825 34,203
Leasehold improvements 7,039 5,112 1,927
Assets under capital lease 2,481 1,191 1,290
---------------------------------------------------------------------
2,558,396 395,992 2,162,404
Deposits on aircraft 38,795 - 38,795
Assets under development 11,864 - 11,864
---------------------------------------------------------------------
$ 2,609,055 $ 395,992 $ 2,213,063
---------------------------------------------------------------------
---------------------------------------------------------------------
As at September 30, 2008, assets under development includes $59,888
(December 31, 2007 - $11,850) in amounts capitalized in conjunction
with the Corporation's new Campus facility.
6. Long-term debt
---------------------------------------------------------------------
September 30, December 31,
2008 2007
---------------------------------------------------------------------
Term loans - purchased aircraft (i) $ 1,371,758 $ 1,389,888
Term loan - flight simulator (ii) 7,468 23,325
Term loans - live satellite
television equipment (iii) 2,210 3,621
Term loan - Calgary hangar facility (iv) 9,752 10,054
Term loan - Calgary hangar facility (v) 2,285 2,630
---------------------------------------------------------------------
1,393,473 1,429,518
Current portion 165,976 172,992
---------------------------------------------------------------------
$ 1,227,497 $ 1,256,526
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) 52 individual term loans, amortized on a straight-line basis
over a 12-year term, each repayable in quarterly principal
instalments ranging from $668 to $955, including fixed interest
at a weighted average rate of 5.32%, maturing between 2014 and
2020. These facilities are guaranteed by Ex-Im Bank and secured
by one 800-series aircraft, 38 700-series aircraft and 13 600-
series aircraft.
(ii) Term loan repayable in monthly instalments of $99, including
floating interest at the bank's prime rate plus 0.88%, with an
effective interest rate of 5.63% as at September 30, 2008,
maturing in 2011, secured by one flight simulator.
(iii) 14 individual term loans, amortized on a straight-line basis
over a five-year term, repayable in quarterly principal
instalments ranging from $29 to $42, including floating
interest at the Canadian LIBOR rate plus 0.08%, with a weighted
average effective interest rate of 3.43% as at September 30,
2008, maturing between 2009 and 2011. These facilities are for
the purchase of live satellite television equipment and are
guaranteed by the Ex-Im Bank and secured by certain 700-series
and 600-series aircraft.
(iv) Term loan repayable in monthly instalments of $108, including
interest at 9.03%, maturing April 2011, secured by the Calgary
hangar facility.
(v) Term loan repayable in monthly instalments of $50, including
floating interest at the bank's prime rate plus 0.50%, with an
effective interest rate of 5.25% as at September 30, 2008,
maturing April 2013, secured by the Calgary hangar facility.
The net book value of the property and equipment pledged as
collateral for the Corporation's secured borrowings was $2,043,546 as
at September 30, 2008 (December 31, 2007 - $2,028,548).
Future scheduled repayments of long-term debt are as follows:
---------------------------------------------------------------------
2008 $ 41,560
2009 165,687
2010 165,009
2011 177,627
2012 163,279
2013 and thereafter 680,311
---------------------------------------------------------------------
$ 1,393,473
---------------------------------------------------------------------
---------------------------------------------------------------------
7. Share capital
(a) Issued and outstanding
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, 2008 September 30, 2008
---------------------------------------------------------------------
Number Amount Number Amount
---------------------------------------------------------------------
Common and
variable voting
shares:
Balance, beginning
of period 127,891,226 $ 452,318 129,571,570 $ 448,568
Issuance of shares
pursuant to stock
option plans 20,267 - 345,007 227
Stock-based
compensation
expense on stock
options exercised - 458 - 11,072
Shares repurchased - - (2,005,084) (7,091)
---------------------------------------------------------------------
Balance, end of
period 127,911,493 $ 452,776 127,911,493 $ 452,776
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, 2007 September 30, 2007
---------------------------------------------------------------------
Number Amount Number Amount
---------------------------------------------------------------------
Common and
variable voting
shares:
Balance, beginning
of period 129,650,259 $ 439,088 129,648,688 $ 431,248
Issuance of shares
pursuant to stock
option plans 29,097 - 776,368 1,467
Stock-based
compensation
expense on stock
options exercised - 1,493 - 10,369
Shares repurchased (100,000) (339) (845,700) (2,842)
---------------------------------------------------------------------
Balance, end
of period 129,579,356 $ 440,242 129,579,356 $ 440,242
---------------------------------------------------------------------
---------------------------------------------------------------------
As at September 30, 2008, the number of common voting shares
outstanding was 123,581,426 (September 30, 2007 - 125,357,776) and
the number of variable voting shares was 4,330,067 (September 30,
2007 - 4,221,580).
On March 12, 2008, the Corporation filed a notice with the Toronto
Stock Exchange (TSX) to make a normal course issuer bid to purchase
outstanding shares on the open market. As approved by the TSX,
WestJet is authorized to purchase up to 2,500,000 shares
(representing approximately 1.9% of its issued and outstanding shares
at the time of the bid) during the period of March 17, 2008 to
March 16, 2009, or until such earlier time as the bid is completed or
terminated at the option of the Corporation. Any shares the
Corporation purchases under this bid will be purchased on the open
market through the facilities of the TSX at the prevailing market
price at the time of the transaction. Shares acquired under this bid
will be cancelled. During the three and nine months ended
September 30, 2008, the Corporation purchased nil and 2,005,084
shares, respectively, under the bid for total consideration of $nil
and $29,420, respectively. The average book value of the shares
repurchased of $nil and $7,091, respectively, was charged to share
capital with the $nil and $22,329, respectively, excess of the market
price over the average book value charged to retained earnings.
During the three and nine months ended September 30, 2007, the
Corporation purchased 100,000 and 845,700 shares, respectively, under
its previous normal course issuer bid, which expired on February 27,
2008, for total consideration of $1,486 and $13,292, respectively.
The average book value for the shares repurchased of $339 and $2,842,
respectively, was charged to share capital with the $1,147 and
$10,450, respectively, excess of the market price over the average
book value charged to retained earnings.
(b) Per share amounts
The following table summarizes the shares used in calculating net
earnings per share:
---------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
---------------------------------------------------------------------
Weighted average
number of shares
outstanding -
basic 127,902,530 129,610,501 128,951,584 129,754,229
Effect of dilutive
employee stock
options and unit
plans 862,672 1,334,989 1,714,486 1,094,785
---------------------------------------------------------------------
Weighted average
number of shares
outstanding -
diluted 128,765,202 130,945,490 130,666,070 130,849,014
---------------------------------------------------------------------
---------------------------------------------------------------------
For the three and nine months ended September 30, 2008, 6,542,092 and
3,905,990 employee stock options, respectively, and 48,300 and 48,300
restricted share units, respectively, (three months ended
September 30, 2007 - 1,659,989 employee stock options; nine months
ended September 30, 2007 - 4,633,046 employee stock options) were not
included in the calculation of dilutive potential shares as the
result would be anti-dilutive.
(c) Stock option plan
Changes in the number of options, with their weighted average
exercise prices, are summarized below:
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, 2008 September 30, 2008
---------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
---------------------------------------------------------------------
Stock options
outstanding,
beginning of
period 12,232,317 $ 13.90 12,226,232 $ 13.66
Granted 6,750 14.53 1,972,329 16.68
Exercised (105,353) 12.14 (1,986,881) 15.12
Forfeited (19,971) 13.66 (83,313) 12.94
Expired (32,908) 15.95 (47,532) 15.84
---------------------------------------------------------------------
Stock options
outstanding, end
of period 12,080,835 $ 13.91 12,080,835 $ 13.91
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable,
end of period 7,978,154 $ 12.88 7,978,154 $ 12.88
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, 2007 September 30, 2007
---------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
---------------------------------------------------------------------
Stock options
outstanding,
beginning of
period 14,231,868 $ 13.89 15,046,201 $ 13.21
Granted 23,649 15.50 1,669,607 16.41
Exercised (269,523) 15.12 (2,573,719) 11.74
Forfeited (41,539) 13.48 (197,634) 13.10
Expired (6,259) 15.97 (6,259) 15.97
---------------------------------------------------------------------
Stock options
outstanding, end
of period 13,938,196 $ 13.86 13,938,196 $ 13.86
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable,
end of period 6,099,334 $ 15.07 6,099,334 $ 15.07
---------------------------------------------------------------------
---------------------------------------------------------------------
Under the terms of the Corporation's stock option plan, a cashless
settlement alternative is available, whereby option holders can
either (i) elect to receive shares by delivering cash to the
Corporation in the amount of the options, or (ii) elect to receive a
number of shares equivalent to the market value of the options over
the exercise price. For the three and nine months ended September 30,
2008, option holders exercised 105,353 and 1,972,517 options,
respectively, (three months ended September 30, 2007 - 269,523
options; nine months ended September 30, 2007 - 2,442,923 options) on
a cashless settlement basis and received 20,267 and 330,643 shares,
respectively (three months ended September 30, 2007 - 29,097;
nine months ended September 30, 2007 - 645,572 shares). During the
three and nine months ended September 30, 2008, nil and 14,364
options, respectively, were exercised on a cash basis (three months
ended September 30, 2007 - nil options; nine months ended
September 30, 2007 - 130,796 options).
(d) Stock option compensation
As new options are granted, the fair market value of the options is
expensed over the vesting period, with an offsetting entry to
contributed surplus. The fair market value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing
model. Upon the exercise of stock options, consideration received,
together with amounts previously recorded in contributed surplus, is
recorded as an increase to share capital.
Stock-based compensation expense related to stock options included in
flight operations and navigational charges and marketing, general and
administration expenses totalled $2,564 and $10,138 for the three and
nine months ended September 30, 2008, respectively (three months
ended September 30, 2007 - $4,268; nine months ended September 30,
2007 - $15,069).
The fair market value of options granted during the three and
nine months ended September 30, 2008 and 2007 and the assumptions
used in their determination are as follows:
---------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
---------------------------------------------------------------------
Weighted average
fair market value
per option $ 4.62 $ 5.36 $ 5.24 $ 5.65
Average risk-free
interest rate 3.02% 4.65% 3.04% 4.20%
Average volatility 37% 38% 37% 38%
Expected life
(years) 3.6 3.6 3.6 3.7
Dividends per share - - - -
---------------------------------------------------------------------
---------------------------------------------------------------------
(e) Executive share unit plan
During the nine months ended September 30, 2008, the Board of
Directors approved the 2008 Executive Share Unit Plan whereby up to a
maximum of 200,000 Restricted Share Units (RSU) and Performance Share
Units (PSU) combined may be issued to senior executive officers of
the Corporation.
2008 Restricted share units
Each RSU entitles the executive to receive payment upon vesting in
the form of voting shares of the Corporation. The Corporation
determines compensation expense for the 2008 RSUs based on the fair
market value of the Corporation's voting shares on the date of grant.
The 2008 RSUs vest at the end of a three-year period, with
compensation expense being recognized in earnings on a straight-line
basis over the vesting period. For the three and nine months ended
September 30, 2008, 904 and 55,181 RSUs, respectively, were granted
under this plan at a weighted average fair market value of $19.37 per
unit, with $79 and $306, respectively, of compensation expense
included in marketing, general and administration expense.
Performance share units
Each PSU entitles the executive to receive payment upon vesting in
the form of voting shares of the Corporation. The value of the PSUs
is based on the fair market value of the Corporation's voting shares
on the date of grant. PSUs time vest at the end of a three-year term
and incorporate performance criteria based upon achieving the
compounded average diluted earnings per share growth rate targets
established at the time of grant. For the three and nine months ended
September 30, 2008, 1,205 and 73,574 PSUs, respectively, were granted
under this plan at a weighted average fair market value of $19.37 per
unit, with $92 and $410, respectively, of compensation expense
included in marketing, general and administration expense.
8. Related party transactions
The Corporation has debt financing and investments in short-term
deposits with a financial institution that is related through two
common directors, one of whom is also the president of the financial
institution. As at September 30, 2008, total long-term debt includes
an amount of $7,468 (December 31, 2007 - $23,325) due to the
financial institution. See note 6, long-term debt for further
disclosure. Included in cash and cash equivalents as at September 30,
2008 are short-term investments of $172,072 (December 31, 2007 -
$189,389) owing from the financial institution. During the
three months ended September 30, 2008, the Corporation signed a
three-year revolving operating line of credit agreement with a
banking syndicate, of which one of the members is the related-party
financial institution. See note 9, commitments and contingencies for
further information. These transactions occurred in the normal course
of operations with terms consistent with those offered to arm's
length parties and are measured at the exchange amount.
9. Commitments and contingencies
(a) Purchased aircraft and live satellite television systems
As at September 30, 2008, the Corporation is committed to purchase
24 737-700 aircraft for delivery between 2010 and 2013. The remaining
estimated amounts to be paid in deposits and purchase prices for the
24 aircraft, as well as amounts to be paid for live satellite
television systems on purchased and leased aircraft in Canadian
dollars and the US-dollar equivalent, are as follows:
---------------------------------------------------------------------
US dollar CAD dollar
---------------------------------------------------------------------
2008 $ 724 $ 771
2009 24,517 26,091
2010 113,422 120,703
2011 149,440 159,034
2012 529,562 563,560
2013 222,503 236,787
---------------------------------------------------------------------
$ 1,040,168 $ 1,106,946
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Operating leases
The Corporation has entered into operating leases and agreements for
aircraft, land, buildings, equipment, computer hardware, software
licences and satellite programming. As at September 30, 2008, the
future payments, in Canadian dollars and when applicable the US-
dollar equivalent, under operating leases are as follows:
---------------------------------------------------------------------
US dollar CAD dollar
---------------------------------------------------------------------
2008 $ 27,317 $ 34,145
2009 125,809 147,631
2010 155,449 174,355
2011 174,112 190,158
2012 180,535 195,779
2013 and thereafter 752,167 818,739
---------------------------------------------------------------------
$ 1,415,389 $ 1,560,807
---------------------------------------------------------------------
---------------------------------------------------------------------
As at September 30, 2008, the Corporation is committed to lease an
additional 15 737-700 aircraft and five 737-800 aircraft for terms
ranging between eight and 10 years in US dollars. These aircraft have
been included in the above totals.
(c) Operating line of credit
During the three months ended September 30, 2008, the Corporation
signed a three-year revolving operating line of credit with a
syndicate of three Canadian banks. The line of credit is available
for up to a maximum of $85 million commencing May 1, 2009 subject to
various customary conditions precedent being satisfied and will be
secured by the Corporation's new Campus facility. The line of credit
will bear interest at prime plus 0.50% per annum and will be
available for general corporate expenses and working capital
purposes. The Corporation is required to pay a standby fee of
15 basis points, payable quarterly, on the undrawn portion.
(d) Contingencies
On February 29, 2008, the Corporation signed a letter of intent to
lease one 737-800 aircraft over a term of eight years commencing in
March 2011 for an estimated total commitment of US $39 million.
The Corporation is party to legal proceedings and claims that arise
during the ordinary course of business. It is the opinion of
management that the ultimate outcome of these and any outstanding
matters will not have a material effect upon the Corporation's
financial position, results of operations or cash flows.
10. Financial instruments and risk management
(a) Fair value of financial assets and financial liabilities
The Corporation's financial assets and liabilities consist primarily
of cash and cash equivalents, accounts receivable, derivatives
designated as cash flow hedges, US-dollar deposits, accounts payable
and accrued liabilities, and long-term debt. The following table sets
out the Corporation's classification and the carrying amount for each
of its financial assets and liabilities as at September 30, 2008:
---------------------------------------------------------------------
Held Held for Other
for trading - Loans and financial
trading derivatives receivables liabilities
---------------------------------------------------------------------
Asset (liability)
Cash and cash
equivalents $ 806,513 $ - $ - $ -
Accounts
receivable - - 16,887 -
Cash flow
hedges:(i)
Foreign exchange
derivatives(ii) - 1,351 - -
Fuel derivatives
Assets(iii) - 374 - -
Liabilities(iv) - (460) - -
US-dollar
deposits(v) 25,103 - - -
Accounts payable
and accrued
liabilities(vi) - - - (192,117)
Long-term
debt(vii) - - - (1,393,473)
---------------------------------------------------------------------
$ 831,616 $ 1,265 $ 16,887 $(1,585,590)
---------------------------------------------------------------------
---------------------------------------------------------------------
------------------------------
Total
carrying
amount
------------------------------
Asset (liability)
Cash and cash
equivalents $ 806,513
Accounts
receivable 16,887
Cash flow
hedges:(i)
Foreign exchange
derivatives(ii) 1,351
Fuel derivatives
Assets(iii) 374
Liabilities(iv) (460)
US-dollar
deposits(v) 25,103
Accounts payable
and accrued
liabilities(vi) (192,117)
Long-term
debt(vii) (1,393,473)
------------------------------
$ (735,822)
------------------------------
------------------------------
(i) Designated under cash flow hedge accounting.
(ii) Foreign exchange derivative assets included in prepaid
expenses, deposits and other. See foreign currency exchange
risk section for more information.
(iii) Fuel derivative assets included in prepaid expenses, deposits
and other. See fuel risk section for more information.
(iv) Fuel derivative liabilities included in accounts payable and
accrued liabilities. See fuel risk section for more
information.
(v) Includes $2,128 classified in prepaid expenses, deposits and
other and $22,975 classified in other assets.
(vi) Excludes fuel derivative liabilities of $460.
(vii) Includes current portion of long-term debt of $165,976 and
long-term portion of $1,227,497.
The fair values of financial assets and liabilities, together with
carrying amounts, shown in the balance sheet as at September 30, 2008
and December 31, 2007, are as follows:
---------------------------------------------------------------------
September 30, 2008 December 31, 2007
Carrying Fair Carrying Fair
amount value amount value
---------------------------------------------------------------------
Asset (liability)
Cash and cash
equivalents (i) $ 806,513 $ 806,513 $ 653,558 $ 653,558
Accounts
receivable (i) 16,887 16,887 15,009 15,009
Cash flow
hedges:
Foreign
exchange
deriv-
atives (ii) 1,351 1,351 106 106
Fuel
deriv-
atives (iii)
Assets 374 374 - -
Liabilities (460) (460) - -
US-dollar
deposits (iv) 25,103 25,103 22,748 22,748
Accounts
payable and
accrued
liabil-
ities (v) (192,117) (192,117) (168,171) (168,171)
Long-term
debt (vi) (1,393,473) (1,463,196) (1,429,518) (1,473,997)
---------------------------------------------------------------------
$ (735,822) $ (805,545) $ (906,268) $ (950,747)
---------------------------------------------------------------------
Unrecognized
loss $ (69,723) $ (44,479)
---------------------------------------------------------------------
---------------------------------------------------------------------
The fair values of financial assets and financial liabilities are
calculated on the basis of information available at the balance sheet
date using the following methods:
(i) The fair value of cash and cash equivalents and accounts
receivable approximates their carrying amounts due to the
short-term nature of the instruments.
(ii) The fair value of the forward exchange derivatives is measured
based on the difference between the contracted rate and the
forward rate obtained from the counterparty at the balance-
sheet date. Due to the short-term nature of the outstanding
contracts, no discount rate has been applied. Contracts
outstanding as at September 30, 2008, are at an average
contracted rate of 1.0360 (December 31, 2007 - 0.9871) US
dollars to Canadian dollars.
(iii) The fair value of the fuel derivatives is determined by the use
of a valuation technique based on inputs, including quoted
forward and spot prices for commodities, foreign exchange rates
and interest rates, which can be observed or corroborated in
the marketplace.
(iv) The fair value of the US-dollar deposits, which relate to
purchased aircraft, approximates their carrying amounts as they
are at a floating market rate of interest.
(v) The fair value of accounts payable and accrued liabilities
approximates their carrying amounts due to the short-term
nature of the instruments.
(vi) The fair value of the Corporation's fixed-rate long-term debt
is determined by discounting the future contractual cash flows
under current financing arrangements at discount rates obtained
from the lender, which represent borrowing rates presently
available to the Corporation for loans with similar terms and
remaining maturities. At September 30, 2008, rates used in
determining the fair value ranged from 3.85% to 4.22%
(December 31, 2007 - from 4.52% to 4.61%). The fair value of
the Corporation's variable-rate long-term debt approximates its
carrying value as it is at a floating market rate of interest.
(b) Risk management
The Corporation is exposed to market, credit and liquidity risks
associated with its financial assets and liabilities. The Corporation
will from time to time use various financial derivatives to reduce
market risk exposures from changes in foreign currency exchange
rates, interest rates and jet fuel prices. The Corporation does not
hold or use any derivative instruments for trading or speculative
purposes.
Overall, the Corporation's Board of Directors has responsibility for
the establishment and approval of the Corporation's risk management
policies. Management continually performs risk assessments to ensure
that all significant risks related to the Corporation and its
operations have been reviewed and assessed to reflect changes in
market conditions and the Corporation's operating activities.
Fuel risk
The airline industry is inherently dependent upon jet fuel to operate
and therefore the Corporation is exposed to the risk of volatile fuel
prices. Fuel prices are impacted by a host of factors outside the
Corporation's control, such as weather conditions, geopolitical
tensions, refinery capacity and global demand and supply. For the
three and nine months ended September 30, 2008, aircraft fuel expense
represented approximately 39% and 37%, respectively, (three months
ended September 30, 2007 - 27%; nine months ended September 30, 2007
- 27%) of the Corporation's total operating expenses.
During the three months ended September 30, 2008, the Corporation's
Board of Directors approved an amended fuel price risk management
policy. Under the amended policy, it is the Corporation's current
objective to hedge a portion of its anticipated jet fuel purchases in
order to provide its management with reasonable foresight and
predictability into operations and future cash flows. As jet fuel is
not traded on an organized futures exchange, there are limited
opportunities to hedge directly in jet fuel; however, financial
derivatives in other commodities, such as crude oil and heating oil,
are useful in decreasing the risk of volatile fuel prices.
Upon proper qualification, the Corporation accounts for its fuel
derivatives as cash flow hedges. Under cash flow hedge accounting,
all effective periodic changes in fair value of the fuel derivative
are recorded in AOCL until the anticipated jet fuel purchase impacts
net earnings. Changes in fair value of any ineffective portion are
recorded in non-operating income (expense). Upon maturity, the
effective gain or loss previously recognized in AOCL is recorded in
net earnings as a component of aircraft fuel expense.
If the hedge ceases to qualify for cash flow hedge accounting, any
period change in fair value of the instrument from the point it
ceases to qualify is recorded in non-operating income (expense).
Amounts previously recorded in AOCL will remain in AOCL until the
anticipated jet fuel purchase occurs. If the purchase is no longer
expected to occur, amounts previously recorded in AOCL will be
reclassified to non-operating income (expense).
The periodic changes in fair value and realized settlements on fuel
derivatives that do not qualify or that are not designated under cash
flow hedge accounting are recorded in non-operating income (expense).
As at September 30, 2008, the Corporation has fixed swap agreements
in place to decrease its exposure to volatile fuel prices for
approximately 7% of the 2009 total anticipated jet fuel purchases and
2% of the 2010 total anticipated jet fuel purchases at average West
Texas Intermediate crude oil prices of CAD $108 and CAD $112 per
barrel, respectively.
The Corporation records fuel derivatives on a gross basis on the
consolidated balance sheet. As at September 30, 2008, fuel
derivatives in an asset position, included in prepaid expenses,
deposits and other, totalled $374. Fuel derivatives in a liability
position, included in accounts payable and accrued liabilities,
totalled $460.
For the three and nine months ended September 30, 2008, the
unrealized effective change in fair value of fuel derivatives under
cash flow hedging recorded in OCI was a gain of $316. The unrealized
ineffective change in the fair value of fuel derivatives under cash
flow hedging recorded in non-operating income (expense) was a loss of
$402. The estimated amount reported in AOCL that is expected to be
reclassified to net earnings as a component of aircraft fuel expense
when the underlying jet fuel is consumed during the next 12 months is
a gain before tax of $245.
For the three and nine months ended September 30, 2008, the
Corporation realized a loss of $10,593, included in non-operating
income (expense), from fuel derivatives not designated under cash
flow hedge accounting and which have settled during the three months
ended September 30, 2008. As at September 30, 2008, the Corporation
does not hold any fuel derivatives that are not designated under cash
flow hedge accounting.
As at September 30, 2008, due to the immaterial fair value balance of
the Corporation's fuel derivatives, a reasonable change in the
underlying would not have significantly impacted net earnings and
other comprehensive income.
Foreign currency exchange risk
Foreign currency exchange risk is the risk that the fair value of
recognized assets and liabilities or future cash flows would
fluctuate as a result of changes in foreign exchange rates. The
Corporation is exposed to foreign currency exchange risks arising
from fluctuations in exchange rates on its US-dollar denominated
monetary assets and liabilities and its operating expenditures,
mainly aircraft fuel, aircraft leasing expense, certain maintenance
costs and a portion of airport operation costs. During the three and
nine month periods ended September 30, 2008, the average US-dollar
exchange rate was 1.0409 and 1.0182, respectively, (three months
ended September 30, 2007 - 1.0469; nine months ended September 30,
2007 - 1.1066) with the period-end exchange rate at 1.0642 (September
30, 2007 - 1.0009).
The gain or loss on foreign exchange included on the Corporation's
consolidated statement of earnings is attributable to the effect of
the changes in the value of the Corporation's US-dollar denominated
net monetary assets. As at September 30, 2008, US-dollar denominated
net monetary assets totalled approximately US $129,900 (September 30,
2007 - US $83,800). For the three and nine months ended September 30,
2008, the Corporation estimates that a one-cent change in the value
of the US dollar versus the Canadian dollar would have increased or
decreased net earnings by $900 and $2,200, respectively, (three
months ended September 30, 2007 - $600; nine months ended September
30, 2007 - $1,500) as a result of the Corporation's US-dollar
denominated net monetary assets.
To manage its exposure to foreign currency exchange risk, the
Corporation periodically uses financial derivatives, including US-
dollar forward contracts. Upon proper qualification, the forward
contracts are designated as cash flow hedges for accounting purposes.
As at September 30, 2008, to substantially offset its current US-
dollar denominated aircraft lease payments, the Corporation had
entered into forward contracts to purchase US $5,900 per month
for nine months for a total of US $53,100 at an average
contract rate of 1.0360 per US dollar. Maturity dates for all of the
forward contracts are within the fourth quarter of 2008 and the first
half of 2009. All contracts were designated under cash flow hedge
accounting with no portion considered ineffective.
For the three and nine months ended September 30, 2008, the
Corporation realized a gain on the forward contracts of $732 and
$1,202, respectively, included in aircraft leasing costs. As at
September 30, 2008, the estimated fair market value of the remaining
forward contracts recorded in prepaid expenses, deposits and other is
a gain of $1,351 ($938 net of tax). The estimated amount reported in
AOCL that is expected to be reclassified to net earnings as a
reduction to aircraft leasing expense during the next 12 months is a
gain before tax of $1,351.
A one-cent change in the US-dollar exchange rate for the three and
nine months ended September 30, 2008 would not have significantly
impacted the Corporation's net earnings and other comprehensive
income as a result of the forward contracts.
Interest rate risk
Interest rate risk is the risk that the value of financial assets and
liabilities or future cash flows will fluctuate as a result of
changes in market interest rates.
(i) Cash and cash equivalents
The Corporation is exposed to interest rate fluctuations on its cash
and cash equivalents balance, which at September 30, 2008 totalled
$806,513 (September 30, 2007 - $634,229). A change of 50 basis
points in the market interest rate would have had, for the three and
nine months ended September 30, 2008, an approximate impact on net
earnings of $700 and $1,900, respectively (three months
ended September 30, 2007 - $400; nine months ended
September 30, 2007 - $1,100). The increase in sensitivity from
2007 is a direct result of the increase in the balance of the
Corporation's cash and cash equivalents balance.
(ii) US-dollar deposits
The Corporation is exposed to interest rate fluctuations on its US-
dollar deposits that relate to purchased aircraft, which at
September 30, 2008 totalled $25,103 (September 30, 2007 - $23,059). A
reasonable change in market interest rates for the three and
nine months ended September 30, 2008, would not have significantly
impacted the Corporation's net earnings as a result of the US-dollar
deposits.
(iii) Long-term debt
The fixed-rate nature of the majority of the Corporation's long-term
debt reduces the risk of interest rate fluctuations over the term of
the outstanding debt. The Corporation accounts for its long-term
fixed-rate debt at amortized cost, and therefore, a change in
interest rates at September 30, 2008, would not affect net earnings.
The Corporation is exposed to interest rate fluctuations on its
variable-rate long-term debt, which at September 30, 2008 totalled
$11,963 (September 30, 2007 - $30,944) or 0.9% (September 30, 2007 -
2.2%) of the Corporation's total long-term debt. Due to the
immaterial balance of the variable-rate long-term debt, a change in
market interest rates for the three and nine months ended
September 30, 2008, would not have significantly impacted the
Corporation's net earnings.
Credit risk
Credit risk is the risk that one party to a financial instrument will
cause a financial loss for the other party by failing to discharge an
obligation. As at September 30, 2008, the Corporation's credit
exposure consists primarily of the carrying amounts of cash and cash
equivalents and accounts receivable as well as the fair value of
derivative financial assets associated with hedging activities.
(i) Cash and cash equivalents
Cash and cash equivalents consist of bank balances and short-term
investments with terms of up to 91 days. Credit risk associated with
cash and cash equivalents is minimized substantially by ensuring that
these financial assets are purchased through Schedule I and selected
Schedule II banks, as defined by the Canadian Bankers Association. As
at September 30, 2008, the Corporation had a total principal amount
invested of $675,455 in Canadian-dollar short-term investments with
terms ranging between seven and 91 days and a total of US $80,459
invested in US-dollar short-term investments with terms ranging
between one and 91 days.
During the three and nine month periods ended September 30, 2008, the
Corporation did not hold any investments in asset-backed commercial
paper.
The Corporation performs an ongoing review to evaluate changes in the
status of the counterparties. As at September 30, 2008, the
Corporation does not expect any counterparties to fail to meet their
obligations.
(ii) Accounts receivable
Generally, the Corporation's accounts receivable are the result from
tickets sold to individual guests through the use of travel agents
and other airlines. Purchase limits are established for each agent
and in some cases, when deemed necessary, a letter of credit is
required. As at September 30, 2008, $9,239 is receivable from travel
agents and other airlines. These receivables are short-term in
nature, generally being settled within four weeks from the date of
booking. As at September 30, 2008, $969 of the balance receivable is
covered by letters of credit.
(iii) Derivative financial assets
The Corporation recognizes that it is subject to credit risk arising
from derivative transactions that are in an asset position at the
balance sheet date. The Corporation carefully monitors this risk by
keeping close consideration to the size, credit rating and
diversification of the counterparty. As at September 30, 2008, the
fair value of foreign exchange derivative assets totalled $1,351. As
at September 30, 2008, outstanding fuel derivatives by counterparty
are in a net liability position.
Liquidity risk
Liquidity risk is the risk that the Corporation will encounter
difficulty in meeting obligations associated with financial
liabilities. The Corporation maintains a strong liquidity position
and maintains sufficient financial resources to meet its obligations
as they fall due.
The Corporation has secured low-interest-rate fixed debt supported by
Ex-Im Bank commitments on its aircraft acquisitions. This represents
approximately 98% of the Corporation's total long-term debt. See
note 6, long-term debt, for further detail.
The Corporation's total accounts payable and accrued liabilities are
classified as current and as such will be settled within one year.
For detailed information on the Corporation's long-term contractual
financial liabilities, including a schedule of future repayments, see
note 6, long-term debt. Refer to note 9, commitments and
contingencies, for a commitment schedule of the Corporation's off-
balance-sheet operating commitments, including its aircraft operating
leases.
A portion of the Corporation's cash and cash equivalents balance
relates to cash collected with respect to advance ticket sales, for
which the balance at September 30, 2008 was $274,552 (December 31,
2007 - $194,929). Typically, the Corporation has cash and cash
equivalents on hand to have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions. At
September 30, 2008, the Corporation had cash on hand of 2.94 times
(December 31, 2007 - 3.35 times) the advance ticket sales balance.
The Corporation aims to maintain a current ratio, defined as current
assets over current liabilities, of at least 1.00. At September 30,
2008, the Corporation's current ratio was 1.28 (December 31, 2007 -
1.22).
Conference call
WestJet will hold a live analysts' conference call today at 9 a.m. MT (11 a.m. ET). Sean Durfy, President and CEO, and Vito Culmone, Executive Vice-President of Finance and CFO, will discuss WestJet's third quarter 2008 results and answer questions from financial analysts. The conference call is available through the toll-free telephone number 1-800-926-7748. Participants are encouraged to join the call 10 minutes prior to the scheduled start time at 8:50 a.m. MT (10:50 ET). The call can also be heard live through an Internet webcast in the Investor Relations section of westjet.com.
About WestJet
WestJet is Canada's leading high-value low-cost airline offering scheduled service throughout its 51-city North American and Caribbean network. Named Canada's most admired corporate culture in 2005, 2006 and 2007, WestJet pioneered low-cost flying in Canada. WestJet offers increased legroom and leather seats on its modern fleet of 76 Boeing Next-Generation 737 aircraft, and live seatback television provided by Bell TV. With future confirmed deliveries for an additional 45 aircraft, bringing its fleet to 121 by 2013, WestJet strives to be the number one choice for travellers.
SOURCE WestJet
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