WestJet Reports Second Quarter Results



    Airline reports strong second quarter earnings amid a challenging
    operating environment

    CALGARY, July 30 /CNW/ - WestJet (TSX:WJA) today announced second quarter
net earnings of $30.2 million. This compared to $11.5 million reported in the
second quarter of 2007. Year to date, net earnings in 2008 were $82.7 million
compared to $41.4 million earned in the same six months of 2007.
    The airline's second quarter 2007 net earnings were impacted by the
one-time non-recurring impairment loss related to costs previously capitalized
for the aiRES project. Excluding this impairment, earnings for the quarter
were $33.7 million; this represents a second quarter 2008 earnings decrease of
10.4 per cent. Year-to-date 2008 earnings improved 30.0 per cent when compared
to the adjusted $63.6 million earned in the first six months of 2007.
    The airline's diluted earnings per share (EPS) for the second quarter of
2008 was 23 cents compared to nine cents in the same period last year.
Excluding the reservation-system impairment, diluted EPS for the quarter
decreased 11.5 per cent from an EPS of 26 cents in 2007. Year to date, diluted
EPS was 63 cents compared to 32 cents. Adjusted diluted EPS for the first half
of 2007 was 49 cents, representing a 2008 improvement of 28.6 per cent.
    The airline reported a second quarter earnings before tax (EBT) margin of
7.1 per cent and an operating margin of 9.1 per cent. Year to date, WestJet's
EBT margin was 9.7 per cent and its operating margin was 11.4 per cent.
    "We are very pleased with another quarter of results that will be among
the best in North America; we feel confident we can continue to grow
profitably and gain further market share domestically, transborder and
internationally," said Sean Durfy, WestJet President and CEO. "We continued to
implement our proven strategies of seasonally adjusting our capacity and
carefully selecting destinations and markets that benefit our business and our
guests. While we were not immune to the impacts of unprecedented and
unrelenting oil prices and the effects of economic uncertainty softening
demand, the hard work and dedication of over 7,300 WestJetters delivered
financial results that demonstrate the merits of our business strategy. I
thank them for continuing to deliver our WestJet experience to more and more
guests."
    Second quarter revenue for 2008 was $616.0 million compared to $498.2
million in the second quarter of 2007, an improvement of 23.6 per cent. Year
to date, revenue was $1.215 billion compared to $968.9 million in 2007, an
increase of 25.4 per cent.


    
    Operational Highlights
    -------------------------------------------------------------------------
                      Q2      Q2           %    Year-to-   Year-to-        %
                    2008    2007      change   date 2008  date 2007   change
    -------------------------------------------------------------------------
    Load factor    79.5%   80.9%   (1.4) pts.     80.7%     81.0%  (0.3) pts.
    -------------------------------------------------------------------------
    ASM (available
     seat miles)
     billions     4.235   3.488         21.4%    8.300     6.938       19.6%
    -------------------------------------------------------------------------
    RPM (revenue
     passenger
     miles)
     billions     3.366   2.822         19.3%    6.697     5.620       19.2%
    -------------------------------------------------------------------------
    RASM (revenue
     per available
     seat mile)
     cents        14.55   14.28          1.9%    14.64     13.97        4.8%
    -------------------------------------------------------------------------
    Yield (revenue
     per revenue
     passenger
     mile) cents  18.30   17.65          3.7%    18.15     17.24        5.3%
    -------------------------------------------------------------------------
    CASM (cost per
     available
     seat mile)
     cents(1)     13.22   12.32          7.3%    12.97     12.11        7.1%
    -------------------------------------------------------------------------
    CASM excluding
     fuel and
     employee profit
     share(1)      8.13    8.72         (6.8%)    8.20      8.62       (4.9%)
    -------------------------------------------------------------------------
    (1) Excludes reservation system impairment of $31.9 million in the second
        quarter of 2007.
    


    Sean Durfy continued, "The price of oil continues to have a significant
impact on our costs, as it has for all fuel-consuming sectors in the world
economy. Economic uncertainties in North America, as well as the higher cost
of air travel due to record fuel prices, are deterring some guests from
travelling.
    "Where we truly continue to shine is in our CASM (excluding fuel and
employee profit share), which was down 6.8 per cent this quarter. At a time
when other airlines are required to introduce cost-cutting initiatives, our
true efficiencies are coming from the low-cost structure and philosophies we
have had in place since we began operations in 1996.
    "We have taken delivery of one of the remaining two aircraft slated for
the second half of 2008, the second is arriving in the fourth quarter, for a
2008 total of 77 Boeing Next-Generation 737s. Capacity will increase 18 per
cent in the third quarter, with a more modest 10 per cent increase in the
fourth quarter.
    "While we recognize that the unpredictable nature of our current
operating environment may impact demand, we remain committed to our growth
strategy. We recently announced that a code-share and distribution agreement
is in the works with Southwest Airlines. This will allow us to meet our stated
goal of gaining 20 to 25 per cent of the transborder market share over the
next five years - demonstrating our commitment to executing our business plan
and supporting the long-term positive outlook for our airline."
    WestJet also reported second quarter operational performance. The airline
calculates operational performance based on the U.S. Department of
Transportation's standards for the North American airline industry.


    
    -------------------------------------------------------------------------
                     Q2      Q2              Year-to-   Year-to-
                   2008    2007    change   date 2008  date 2007      change
    -------------------------------------------------------------------------
    On-time
     performance   84.3%   88.5%  (4.2) pts.     77.2%      82.3%  (5.1) pts.
    -------------------------------------------------------------------------
    Completion
     rate          99.0%   99.4%  (0.4) pts.     98.6%      98.9%  (0.3) pts.
    -------------------------------------------------------------------------
    Bag ratio      3.32    3.47        (4.3%)    4.23       4.37       (3.2%)
    -------------------------------------------------------------------------
    


    Management's Discussion and Analysis of Financial Results

    Advisories

    The following Management's Discussion and Analysis of Financial Results
(MD&A), dated July 29, 2008, should be read in conjunction with the unaudited
consolidated financial statements and notes thereto as at and for the three
and six months ended June 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 and
financial statements, is located on SEDAR at www.sedar.com. An additional
advisory with respect to forward-looking information is set out below, and the
use of non-GAAP measures is set out at the end of this MD&A under "Non-GAAP
Measures".

    Forward-looking information

    Certain information set forth in this document, including management's
assessment of WestJet's future plans and operations, contains forward-looking
statements. These forward-looking statements typically contain the words
"anticipate", "believe", "estimate", "intend", "expect", "may", "will",
"should" or other similar terms. By their nature, forward-looking statements
are subject to numerous risks and uncertainties, some of which are beyond
WestJet's control, including the impact of general economic conditions,
changing domestic and international industry conditions, volatility of fuel
prices, terrorism, currency fluctuations, interest rates, competition from
other industry participants (including new entrants, and generally as to
capacity fluctuations and pricing environment), labour matters, government
regulation, stock-market volatility and the ability to access sufficient
capital from internal and external sources. Readers are cautioned that
management's expectations, estimates, projections and assumptions used in the
preparation of such information, although considered reasonable at the time of
preparation, may prove to be imprecise and, as such, undue reliance should not
be placed on forward-looking statements. WestJet's actual results, performance
or achievements could differ materially from those expressed in, or implied
by, these forward-looking statements.

    Definition of key operating indicators

    Our key operating indicators are airline industry metrics which are
useful in assessing the operating performance of an airline.

    Available Seat Miles (ASM): A measure of total passenger capacity,
calculated by multiplying the total number of seats available for sale by the
total distance flown.

    Revenue Passenger Miles (RPM): A measure of passenger traffic, calculated
as the number of revenue passengers, multiplied by the total distance flown.

    Load Factor: A measure of total capacity utilization, calculated as the
proportion of total available seat miles occupied by revenue passengers.

    Yield (Revenue per Revenue Passenger Mile): A measure of unit revenue,
calculated as the gross revenue generated per revenue passenger mile.

    Revenue per Available Seat Mile (RASM): Total revenue divided by
available seat miles.

    Cost per Available Seat Mile (CASM): Operating expenses divided by
available seat miles.

    Cycle: One flight counted by the aircraft leaving the ground and landing.

    Average Stage Length: The average distance of a flight between take-off
and landing.

    Utilization: Operating hours per day per operating aircraft.

    OVERVIEW

    In the second quarter of 2008, we delivered strong financial results and
continued execution on our strategy despite significant pressures on the
airline industry from record fuel prices and an uncertain economic
environment. On July 8, 2008, we announced a Memorandum of Understanding (MOU)
to build a distribution and code-share agreement with Southwest Airlines,
based in the United States, further demonstrating delivery of our strategic
plan. The distribution component of the MOU will provide us with significant
point of sale presence in the United States by enabling our flights to be
displayed and sold on Southwest's website. Subsequently, the code-share
agreement will provide both airlines, by late 2009, with the ability to
commence code-share flights across both networks. We believe the MOU marks an
important step forward for our guests and their ability to fly to more
destinations in the United States conveniently and cost effectively.

    Quarterly Highlights

    
    -   Increased total revenues to $616.0 million for the three months ended
        June 30, 2008, up 23.6 per cent over the second quarter of 2007 from
        $498.2 million.

    -   Increased RASM by 1.9 per cent to 14.55 cents in the second quarter
        of 2008, from 14.28 cents in the same period of 2007, while
        increasing capacity by 21.4 per cent.

    -   Decreased CASM, excluding fuel and employee profit share, by 6.8 per
        cent to 8.13 cents for the second quarter of 2008 compared to 8.72
        cents, excluding the reservation system impairment in the second
        quarter of 2007.

    -   Realized an earnings before tax margin of 7.1 per cent for the three
        months ended June 30, 2008, down 2.6 points from the second quarter
        of 2007, excluding the second quarter reservation system impairment
        in 2007.

    -   Recorded net earnings of $30.2 million in the second quarter of 2008
        from $11.5 million in the same quarter of 2007. Excluding the second
        quarter reservation system impairment in 2007, net earnings decreased
        by 10.4 per cent from $33.7 million in the second quarter of 2007.

    -   Diluted earnings per share increased by 155.6 per cent to $0.23 in
        the second quarter of 2008 from $0.09 in the same quarter of 2007.
        Adjusted for the second quarter reservation system impairment in
        2007, our diluted earnings per share decreased by 11.5 per cent from
        2007.

    -   Assumed delivery of two new leased aircraft, increasing our total
        registered fleet to 75.

    -   Generated cash flows from operations of $125.9 million for the three
        months ended June 30, 2008 from $148.9 million in the same period of
        2007.
    

    In the current operating environment of the airline industry, our people
remain one of our key success factors. The combination of our high-value,
low-cost business model and the commitment of our WestJetters has positioned
us well in the North American airline industry. Our people continue to deliver
superior guest experience and build our brand in the face of external
pressures within the industry.


    
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Operational Highlights                      Three Months Ended June 30
    -------------------------------------------------------------------------
                                             2008           2007     Change
    -------------------------------------------------------------------------
    ASMs                            4,234,625,866  3,488,485,738       21.4%
    RPMs                            3,365,923,157  2,822,372,023       19.3%
    Load factor                              79.5%          80.9%  (1.4) pts
    Yield (cents)                           18.30          17.65        3.7%
    RASM (cents)                            14.55          14.28        1.9%
    CASM (cents)(i)                         13.22          12.32        7.3%
    CASM, excluding fuel and
     employee profit share (cents)(i)        8.13           8.72       (6.8%)
    Fuel consumption (litres)         205,847,264    173,222,765       18.8%
    Fuel costs/litre (cents)               103.77          69.43       49.5%
    Segment guests                      3,546,184      3,229,146        9.8%
    Average stage length (miles)              906            834        8.6%
    Number of full-time equivalent
     employees at period end                6,156          5,350       15.1%
    -------------------------------------------------------------------------
    Fleet size at period end                   75             65       15.4%

    Operational Highlights                        Six Months Ended June 30
    -------------------------------------------------------------------------
                                             2008           2007     Change
    -------------------------------------------------------------------------
    ASMs                            8,299,617,667  6,937,533,552       19.6%
    RPMs                            6,696,736,600  5,619,542,312       19.2%
    Load factor                              80.7%          81.0% (0.3) pts
    Yield (cents)                           18.15          17.24        5.3%
    RASM (cents)                            14.64          13.97        4.8%
    CASM (cents)(i)                         12.97          12.11        7.1%
    CASM, excluding fuel and
     employee profit share (cents)(i)        8.20           8.62       (4.9%)
    Fuel consumption (litres)         408,002,930    345,381,068       18.1%
    Fuel costs/litre (cents)                93.46          66.73       40.1%
    Segment guests                      7,015,589      6,269,735       11.9%
    Average stage length (miles)              911            846        7.7%
    Number of full-time equivalent
     employees at period end                6,156          5,350       15.1%
    Fleet size at period end                   75             65       15.4%
    -------------------------------------------------------------------------
    (i) Excludes reservation system impairment of $31.9 million in the second
        quarter of 2007.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    Despite record fuel prices, we recorded net earnings of $30.2 million and
diluted earnings per share of $0.23.
    During the second quarter of 2008, total revenues increased by 23.6 per
cent to $616.0 million compared to $498.2 million in the same period of 2007.
The primary drivers of this growth were additional seat capacity in our
network, capture of additional guest traffic and improved yield.
Notwithstanding our capacity increase of 21.4 per cent, our RASM for the first
quarter of 2008 was 14.55 cents, up from 14.28 cents in the same period in
2007.
    On May 13, 2008, in light of record fuel prices, we introduced a fuel
surcharge of $20, $30 and $45 on all short-, medium- and long-haul flights,
respectively, in order to partially offset the effect of unprecedented fuel
prices.
    Our load factor was down from 80.9 per cent in the second quarter of 2007
to 79.5 per cent for the second quarter of 2008 due to a softening in demand
for air travel. However, we did see our largest capacity increase since
November 2006 for the month of June and transported 9.8 per cent more guests
in the quarter.
    To see the Quarterly Load Factor chart, click here:
http://media3.marketwire.com/docs/728wja_qlf.pdf.
    Continued high fuel prices have driven aggressive actions within the
North American airline industry. During the first half of 2008, many airlines
announced reductions in capacity and employee layoffs. As well, certain
airlines have either grounded or announced plans to ground aircraft in order
to combat the rising costs of fuel, with some airlines filing for bankruptcy
protection or commencing merger discussions. Further, aggressive ancillary
revenue initiatives were announced by some airlines in response to record fuel
prices, such as charging for checked baggage. Although fuel costs are
negatively impacting net earnings, we remain committed to our strategic growth
plan. We will continue to take delivery of our fuel-efficient Boeing aircraft
and expand our network with new domestic and sun destinations. In addition to
the fuel-efficient Next-Generation aircraft we fly, we are a leader in the
adoption of Blended Winglet Technology, which significantly reduces fuel burn
and emissions. These fuel-saving strategies, combined with onboard
navigational technology and procedures designed to reduce flight times and
emissions, are key components to our strategy in combating rising fuel costs.
    Recently, we announced the introduction of four new international
destinations: Bridgetown, Barbados and La Romana, Dominican Republic, as well
as the Mexican destinations of Cancun and Puerto Vallarta. Non-stop seasonal
service to Barbados and La Romana will commence in the fourth quarter of 2008.
The introduction of service to Kamloops, beginning in December 2008, was also
announced in the second quarter of 2008. These announcements bring our
scheduled destinations to 51: 28 domestic, 12 U.S. and 11 international.
    Strong cost control has always been a core strategy and remains integral
to combating the impact of significantly higher fuel prices on our net
earnings. Adjusted for the second quarter reservation system impairment in
2007, our CASM increased by 7.3 per cent in the second quarter of 2008 to
13.22 cents from 12.32 cents in the same quarter of 2007. This increase almost
entirely resulted from significantly higher fuel costs. Excluding fuel and
employee profit share and the reservation system impairment in the second
quarter of 2007, our CASM has decreased to 8.13 cents in the second quarter of
2008 from 8.72 cents in the second quarter of 2007, an improvement of 6.8 per
cent. This decrease was achieved primarily as a result of a longer average
stage length, increased aircraft utilization, cost dilution over a greater
number of available seat miles and a stronger Canadian dollar in comparison to
the same period in 2007.
    As at June 30, 2008, our balance sheet was strong, as evidenced by our
cash and cash equivalents balance of $812.0 million, an increase of 24.2 per
cent from December 31, 2007. Our healthy liquidity position is demonstrated by
our current ratio of 1.20, which remained relatively flat compared to 1.22 as
at December 31, 2007. Additionally, our adjusted debt-to-equity ratio was
reduced to 1.95 from 2.07 as at December 31, 2007.
    During the second quarter of 2008, we assumed delivery of two leased
737-700s, increasing our total registered fleet to 75 aircraft. Additionally,
we signed an agreement with Boeing in the second quarter of 2008 to purchase
four new aircraft, with two scheduled for delivery in 2010 and two in 2011. We
continue to operate one of the youngest fleets of any large North American
commercial airline at an average age of 3.5 years.



    SELECTED QUARTERLY UNAUDITED FINANCIAL INFORMATION

    
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                    Three Months Ended
    -------------------------------------------------------------------------
    ($ in thousands,                   Jun. 30   Mar. 31   Dec. 31  Sept. 30
     except per share data)               2008      2008      2007      2007
    -------------------------------------------------------------------------
    Total revenues                   $ 616,000 $ 599,348 $ 552,004 $ 606,242
    Net earnings                     $  30,193 $  52,506 $  75,359 $  76,070
    Basic earnings per share         $    0.23 $    0.40 $    0.58 $    0.59
    Diluted earnings per share       $    0.23 $    0.40 $    0.57 $    0.58
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                    Three Months Ended
    -------------------------------------------------------------------------
                                       Jun. 30   Mar. 31   Dec. 31  Sept. 30
                                          2007      2007      2006      2006
    -------------------------------------------------------------------------
    Total revenues                   $ 498,200 $ 470,710 $ 446,720 $ 497,339
    Net earnings                     $  11,549 $  29,855 $  26,651 $  52,810
    Basic earnings per share         $    0.09 $    0.23 $    0.21 $    0.41
    Diluted earnings per share       $    0.09 $    0.23 $    0.21 $    0.41
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    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 reservation system project.



    RESULTS OF OPERATIONS
    Revenue

    
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                       Three Months Ended June 30   Six Months Ended June 30
    -------------------------------------------------------------------------
    ($ in thousands)      2008     2007    Change       2008     2007 Change
    -------------------------------------------------------------------------
    Guest revenues     557,305  449,312      24.0% 1,083,005  840,044   28.9%
    Charter and other
     revenues           58,695   48,888      20.1%   132,343  128,866    2.7%
    -------------------------------------------------------------------------
                       616,000  498,200      23.6% 1,215,348  968,910   25.4%
    -------------------------------------------------------------------------
    RASM (cents)         14.55    14.28       1.9%     14.64    13.97    4.8%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    During the three months ended June 30, 2008, total revenues increased by
23.6 per cent to $616.0 million compared to $498.2 million in the same period
of 2007. For the six months ended June 30, 2008, total revenues increased by
25.4 per cent to $1,215.3 million from $968.9 million in the same period of
2007. For the second quarter and first half of 2008, our RASM increased by 1.9
per cent and 4.8 per cent to 14.55 cents and 14.64 cents, respectively,
compared to the prior-year periods. We are encouraged by the progress made in
improving RASM when the increase in average stage length of 8.6 per cent is
considered. These increases in total revenues and RASM were driven primarily
by additional capacity and improved yield through the newly implemented fuel
surcharge.
    The second quarter is a transitional period where a large portion of our
transborder, international and charter capacity is shifted back into our
domestic markets. During the second quarter of 2008, we transitioned
approximately 40 per cent of our total network capacity from our winter
schedule back into Canada. Further, this capacity shift occurred as we
experienced a 21.4 per cent year-over-year quarterly capacity increase.
Additionally, as the Easter holiday in 2008 fell in the month of March, versus
April in 2007, RASM for the second quarter of 2008 was negatively impacted,
offsetting the favourable impact from the first quarter of 2008. Also
affecting our RASM is our increase in average stage length for the three and
six months ended June 30, 2008 of 8.6 per cent and 7.7 per cent, respectively.
As average stage length increases, our revenue per mile decreases over a
larger number of miles flown. We have, however, seen a positive impact on our
RASM as a result of fuel surcharges. We continue to monitor the impact of the
higher fuel costs and will adjust the fuel surcharge if necessary in the
future. Fuel surcharges are included in guest revenues.
    Guest revenues from our scheduled flight operations increased by 24.0 per
cent for the three months ended June 30, 2008 to $557.3 million from $449.3
million and 28.9 per cent for the six months ended June 30, 2008 to $1,083.0
million from $840.0 million as compared to the prior year. These changes are
attributable to capacity growth, fuel surcharges and increased WestJet
Vacations air revenue.
    Charter and other revenues include charter, cargo, ancillary, WestJet
Vacations non-air and other revenue. Our charter and other revenues increased
on a dollar basis by 20.1 per cent to $58.7 million in the second quarter of
2008 from $48.9 million in the same quarter of 2007. Additionally, charter and
other revenues are up 2.7 per cent for the six months ended June 30, 2008. The
quarter-over-quarter improvement was driven primarily by a significant
increase in WestJet Vacations non-air revenue and improvements in charter
revenue due to increased fuel surcharges for third party carriers. The
year-to-date increase in charter and other revenues was mainly due to an
increase in WestJet Vacations non-air and ancillary revenue, offset by a
decrease in charter revenue due to increased capacity allocated to scheduled
sun destinations during the winter months, 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://media3.marketwire.com/docs/728wja_charter.pdf.
    Ancillary revenues, which include service fees, onboard sales, partner
and program revenue, increased by 8.2 per cent and 7.3 per cent for the second
quarter and first half of 2008 to $21.2 million and $41.2 million,
respectively, over the same periods of 2007. For the three months ended June
30, 2008, ancillary revenue per guest decreased from the same period of 2007
to $6.15 per guest from $6.25. Similarly, ancillary revenue per guest for the
first half of 2008 declined by 5.4 per cent to $6.11 from $6.46 per guest in
the first half of 2007. These decreases were largely attributable to the
discontinuation of the Unaccompanied Minor program in April 2008, as well as
lower revenue due to the announced termination of our BMO Mosaik MasterCard
partnership.
    We continually review our fee structure and as a result, we announced
increases to our change and cancellation fees, same-day cancellation fees and
certain buy-on-board product prices. As well, we introduced a lower weight
allowance for all checked baggage effective July 3, 2008. We also announced
the introduction of a new seat selection option on July 16, 2008, which for a
small fee, will allow guests to select their seat at the time of booking. This
service was not previously offered. Even with these changes to our fee
structure, our fees remain some of the lowest in the airline industry.

    Expenses

    
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                               Three Months Ended       Six Months Ended
                                      June 30                June 30
    -------------------------------------------------------------------------
    CASM (cents)                  2008   2007 Change     2008   2007 Change
    -------------------------------------------------------------------------
    Aircraft fuel                 5.04   3.45   46.1%    4.59   3.32   38.3%
    Airport operations            1.94   2.06   (5.8%)   2.00   2.12   (5.7%)
    Flight operations and
     navigational charges         1.66   1.84   (9.8%)   1.67   1.82   (8.2%)
    Marketing, general and
     administration               1.14   1.23   (7.3%)   1.16   1.19   (2.5%)
    Sales and distribution        0.97   0.98   (1.0%)   0.98   0.93    5.4%
    Depreciation and
     amortization                 0.80   0.89  (10.1%)   0.80   0.89  (10.1%)
    Inflight                      0.64   0.60    6.7%    0.63   0.58    8.6%
    Aircraft leasing              0.51   0.57  (10.5%)   0.49   0.55  (10.9%)
    Maintenance                   0.47   0.55  (14.5%)   0.47   0.54  (13.0%)
    Employee profit share         0.05   0.15  (66.7%)   0.18   0.17    5.9%
    -------------------------------------------------------------------------
                                 13.22  12.32    7.3%   12.97  12.11    7.1%
    -------------------------------------------------------------------------
    CASM, excluding fuel and
     employee profit share(1)     8.13   8.72   (6.8%)   8.20   8.62   (4.9%)
    -------------------------------------------------------------------------
    (1) Excludes reservation system impairment of $31.9 million in the second
        quarter of 2007.
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    During the second quarter of 2008, fuel continued to increase at
unrelenting and unprecedented rates. As a result, our CASM increased for both
the three and six months ended June 30, 2008 to 13.22 cents and 12.97 cents
from 12.32 cents and 12.11 cents for the same periods of 2007, respectively.
The underlying low-cost structure of our business model plays an important
role in this period of record fuel prices and challenges in the airline
industry, as we are able to operate with lower costs than our competitors. Our
CASM, excluding fuel and employee profit share, decreased by 6.8 per cent for
the three months ended June 30, 2008, and 4.9 per cent for the first six
months of 2008 as compared to the same periods in 2007, excluding the
reservation system impairment of $31.9 million in 2007.
    A longer average stage length during the three and six months ended June
30, 2008 has helped reduce our CASM, excluding fuel and employee profit share.
During the second quarter, our average stage length increased by 8.6 per cent
to 906 miles from 834 miles in the same period of 2007. For the first half of
2008, average stage length increased to 911 miles from 846 miles, an increase
of 7.7 per cent over the first half of 2007. The increase in our average stage
length is attributable 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 costs of fuel for take-offs and landings over
a longer trip length.
    With our focus on productivity and cost control, our fleet optimization
continued during 2008. In the second quarter, we increased our aircraft
utilization by 24 minutes to 12.2 operating hours per day compared to 11.8
operating hours per day in the same period of 2007. We saw a similar
improvement during the first six months of 2008 to 12.3 operating hours per
day from 12.1 operating hours per day, an increased utilization of 12 minutes.
    During the three and six months ended June 30, 2008, we grew capacity,
measured in available seat miles, to 4.2 billion ASMs and 8.3 billion ASMs as
compared to 3.5 billion ASMs and 6.9 billion ASMs in the same periods of 2007.
The dilution of costs over a greater number of available seat miles, coupled
with the stronger Canadian dollar, continued to help reduce our CASM,
excluding fuel and employee profit share, in the second quarter and first half
of 2008.

    Aircraft fuel

    Fuel price increases continued to significantly impact our CASM during
the three and six months ended June 30, 2008, representing approximately 38
per cent of total operating costs for the second quarter of 2008 as compared
to 26 per cent for the same quarter of 2007. For the first half of 2008, fuel
comprised approximately 35 per cent of total operating costs versus 26 per
cent for the same period of 2007. Jet fuel prices reached US $175 per barrel
during the month of May 2008, setting a record high for the first half of
2008. During the second quarter of 2008, the average market price for jet fuel
was US $155.91 per barrel compared to US $87.37 per barrel in the same quarter
of 2007, an increase of 78.4 per cent, as depicted in the graph below. As a
result, our fuel cost per ASM reached 5.04 cents and 4.59 cents for the three
and six months ended June 30, 2008, respectively, versus 3.45 cents and 3.32
cents for the same periods of 2007. For the second quarter of 2008, this
represents a 46.1 per cent increase in our fuel cost per ASM and 38.3 per cent
increase for the first six months of 2008. The increase in fuel cost per ASM
was offset partially due to favourable foreign exchange adjustments.
    To see the Average Market Price of Jet Fuel chart, click here:
http://media3.marketwire.com/docs/728wja_jetfuel.pdf.
    Fuel costs per litre increased by 49.5 per cent to $1.04 per litre in the
second quarter of 2008 from $0.69 per litre in the second quarter of 2007.
This differs from our estimate of $1.01 per litre in the first quarter of 2008
due to further escalations in the price of jet fuel during the second quarter
of 2008. Similarly, we saw fuel costs per litre increase for the first half of
2008 by 40.1 per cent compared to the first half of 2007. These increases in
our fuel costs per litre were offset by approximately 20 per cent and 25 per
cent for the three and six months ended June 30, 2008, respectively, due to
the strengthening Canadian dollar relative to the same periods of 2007. To
further demonstrate the impact of rising fuel prices, we estimate that a
round-trip flight for one guest would cost us approximately $151 in average
fuel costs, as compared to the second quarter of 2007 at $95 in average fuel
costs per guest.
    To mitigate our exposure to fluctuations in jet fuel prices, we
periodically use short-term financial and physical derivatives. As at, and for
the three and six months ended June 30, 2008, we had no outstanding fuel
hedges. Subsequent to June 30, 2008, we have entered into a mixture of
costless collar structures with an approximate average crude oil call price of
US $159 per barrel and an average crude oil put price of US $128 per barrel,
and fixed swap agreements at an approximate average crude oil price of US $136
per barrel to hedge a portion of our anticipated jet fuel purchases to the end
of September 2008. These contracts settle monthly, and as of July 25, 2008, we
have hedged approximately 40 per cent of our July fuel requirements and
approximately 65 per cent and 50 per cent of our forecasted fuel requirements
for August and September, respectively.

    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 three months ended June 30, 2008, our cost per available seat
mile for airport operations decreased by 5.8 per cent to 1.94 cents from 2.06
cents in the same period of 2007. Similarly, year-to-date cost per available
seat mile was 2.00 cents as compared to 2.12 cents in the same period of 2007,
representing a decrease of 5.7 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 2.5 per cent in
the second quarter and first half of 2008, respectively, as compared to the
same periods of 2007. These increases were primarily due to higher costs for
glycol due to the harsh Canadian winter, higher average ground handling rates
and fees and higher meal, hotel and transportation costs for displaced guests.
Additionally, our employee expenses are higher on a per-departure basis for
these periods due to annual merit increases in May 2008.

    Flight operations and navigational charges

    For the second quarter of 2008, our flight operations and navigational
charge per ASM was 1.66 cents compared to 1.84 cents in the same quarter of
2007, a decrease of 9.8 per cent. For the first half of 2008, our cost per ASM
for flight operations and navigational charges decreased by 8.2 per cent to
1.67 cents from 1.82 cents in the first half of 2007. For both periods, the
decreases were largely attributable to lower NAV CANADA fees and pilot
stock-based compensation, as well as the dilutive impact of our capacity
growth.
    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 second quarter of 2008,
stock-based compensation expense relating to pilots' stock options decreased
by 38.1 per cent, to $2.6 million from $4.2 million in the second quarter of
2007, as more pilots elected to receive cash in lieu of stock options. During
the first half of 2008, pilots' stock-based compensation expense related to
options was $6.1 million, a decrease of 34.4 per cent from $9.3 million in the
first half of 2007. This decrease was partially offset by an increase in
salary costs due to this cash payout in the first quarter of 2008 compared to
the same period in 2007.
    Domestic air navigational charges relating to air traffic control are
administered by NAV CANADA on a per-flight basis. These fees are predominantly
driven by the size of aircraft and distance flown. For the second quarter of
2008, navigational charges have decreased on a CASM basis by 11.4 per cent to
0.78 cents from 0.88 cents in the second quarter of 2007. This decrease was
primarily due to the dilutive impact of our 21.4 per cent capacity growth and
a reduction in NAV rates that was effective September 2007. For the first six
months of 2008, navigational charges decreased by 9.6 per cent to 0.75 cents
per ASM from 0.83 cents per ASM in the same period of 2007. As our number of
transborder and international departures have increased during the first half
of 2008 over the same period of 2007, our NAV fees decreased during this
period. Of our total departures, transborder and international routes
comprised 16.8 per cent in the first six months of 2008 versus 14.5 per cent
of total departures in the first half of 2007, an increase of 2.3 points. Our
NAV CANADA charges decrease as we fly to more destinations outside of Canadian
airspace.

    Inflight

    Our inflight expense consists mainly of flight attendant salaries,
benefits, travel costs and training. During the second quarter of 2008, our
inflight cost per available seat mile increased to 0.64 cents from 0.60 cents
in the same period of 2007, an increase of 6.7 per cent. Similarly, there was
an increase of 8.6 per cent for the first half of 2008 to 0.63 cents from 0.58
cents in the same period of 2007. These increases for both periods were
attributable to merit and market increases to flight attendant salaries, as
well as an increase in the number of flight attendants. We also incurred
additional hotel and per diem costs relating to additional transborder and
international routes. As our average stage length increases, there are fewer
cycles returning in the same day, resulting in higher accommodation costs for
our inflight crews.

    Maintenance

    Our maintenance costs per available seat mile were 0.47 cents in the
second quarter of 2008, representing a decrease of 14.5 per cent from 0.55
cents per available seat mile in the second quarter of 2007. Similarly, our
year-to-date maintenance costs per available seat mile decreased by 13.0 per
cent to 0.47 cents from 0.54 cents in the first half of 2007. These favourable
decreases resulted from the stronger Canadian dollar, as approximately 40 per
cent of our maintenance costs were denominated in US dollars, and the dilutive
effect of our increased capacity of 21.4 per cent and 19.6 per cent for the
three and six months ended June 30, 2008, respectively. Partially offsetting
these decreases were an increased number of aircraft coming off warranty
during the first half of 2008 as compared to the same period in 2007, as well
as five events requiring engine maintenance in the second quarter of 2008.
    At June 30, 2008, 32 out of 75 aircraft were off warranty compared to 20
out of 65 aircraft at June 30, 2007. We expect our maintenance costs per
available seat mile to increase as more aircraft come off warranty.

    Compensation

    Our compensation philosophy is designed to align corporate and personal
success. We have designed a compensation plan whereby a portion of our
expenses are variable and are tied to our financial results. Our compensation
strategy encourages employees to become owners in WestJet, which inherently
creates a personal vested interest for our employees in our accomplishments.

    Salaries and benefits

    For the second quarter of 2008, salaries and benefits increased by 19.4
per cent to $89.2 million from $74.7 million in the second quarter of 2007.
For the first half of 2008, salaries and benefits were $176.8 million as
compared to $146.7 million, an increase of 20.5 per cent. These increases were
due to market and merit increases in base salaries and benefits, as well as
the greater number of WestJetters employed versus a year ago. 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 June 30, 2008 was $2.2 million, a 59.3 per cent
decrease from $5.4 million for the same quarter of 2007. This variance was
directly attributable to the lower earnings eligible for profit share due to
higher fuel costs. For the first six months of 2008, profit share expense was
$15.3 million as compared to $11.6 million in the first half of 2007, an
increase of 31.9 per cent.

    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 June 30, 2008, contributed an average of
15 per cent. We match contributions for every dollar contributed by employees.
Our matching expense for the period ended June 30, 2008 was $10.8 million, a
25.6 per cent increase from $8.6 million for the same quarter of 2007.
Similarly, our matching expense increased by 27.0 per cent in the first half
of 2008 compared to the first half of 2007, increasing to $20.7 million from
$16.3 million, respectively. Of our eligible employees, 83 per cent
participated in the ESPP as at June 30, 2008. The additional expense for both
periods was driven by an increase in 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 June 30, 2008 was $3.4 million compared to $5.4 million in the same
quarter of 2007, a decrease of 37.0 per cent. For the first half of 2008,
stock-based compensation expense for stock options was $7.6 million, a
decrease of 29.6 per cent from $10.8 million in the first half 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
six months ended June 30, 2008, a total of $0.2 million and $0.5 million of
compensation expense is included in marketing, general and administration
expense related to the 2008 Executive Share Unit Plan.

    Foreign exchange

    The foreign exchange gains and losses that we realize are largely
attributable to the effect of the changes in the value of the Canadian dollar,
relative to the US dollar, on our US-denominated net monetary assets over the
respective periods. These assets, totalling approximately US $116.9 million at
June 30, 2008 (December 31, 2007 - $103.4 million), consist of mainly
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 $0.1 million and $4.0 million during the
three and six months ended June 30, 2008, respectively, on the revaluation of
our US-dollar net monetary assets. This compares to losses of $6.9 million and
$7.2 million during the same periods in the prior year.

    Income taxes

    The effective consolidated income tax rates for the three and six months
ended June 30, 2008 were 30.6 per cent and 29.8 per cent, respectively, as
compared to 29.8 per cent and 34.1 per cent for the same periods in 2007. The
variances from 2007 are attributable to federal corporate income tax rate
reductions enacted in June and December 2007 and a reduced British Columbia
corporate income tax rate enacted in the first quarter of 2008.

    Guest experience

    Our focus on guests is one of the most important elements in our
continued growth strategy. We are committed to achieving strong operational
results in order to enhance guest experience. At the same time, positive guest
experience begins with safety, one of our core values. As we look for ways to
deliver exceptional guest service, the safety of our guests and crew is
uncompromised.



    Key Performance Indicators

    
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                Three Months Ended        Six Months Ended
                                       June 30                 June 30
    -------------------------------------------------------------------------
                             2008   2007     Change    2008   2007     Change
    -------------------------------------------------------------------------
    On-time performance
     (A15)                  84.3%  88.5%  (4.2 pts)   77.2%  82.3%  (5.1 pts)
    Completion rate         99.0%  99.4%  (0.4 pts)   98.6%  98.9%  (0.3 pts)
    Bag ratio               3.32   3.47      (4.3%)   4.23   4.37      (3.2%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    Key performance indicators are calculated based on the U.S. Department of
Transportation's standards of measurement for the U.S. airline industry.
    On-time performance is a key factor in measuring our guest experience.
During the second quarter of 2008, we continued to experience more severe
weather patterns which impacted our on-time performance when compared to the
same period of 2007. Similarly, for the first half of 2008, harsh winter
weather, particularly during the first quarter, contributed to the decline in
on-time performance. In the second quarter of 2008, 84.3 per cent of all our
flights arrived within 15 minutes of their scheduled time, compared to 88.5
per cent for the same period in 2007.
    Our completion rates remained relatively flat for the three and six
months ended June 30, 2008 at 99.0 per cent and 98.6 per cent versus 99.4 per
cent and 98.9 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 second quarter
and first half of 2008 of 3.32 and 4.23, respectively. This ratio represents
the number of delayed or lost baggage claims made per 1,000 guests. These were
improvements of 4.3 per cent and 3.2 per cent for the three and six month
periods ended June 30, 2008, respectively, over the same periods of 2007.

    LIQUIDITY AND CAPITAL RE

SOURCES Our financial strength is demonstrated by our healthy balance sheet, ability to generate positive cash flows, substantial cash balance, the repurchase of 2.0 million shares and positive leverage ratios. Despite record fuel prices, we remain profitable, and our balance sheet has remained one of the strongest in the airline industry. As at June 30, 2008, total cash and cash equivalents were $812.0 million compared to $653.6 million at December 31, 2007. Part of this cash balance relates to cash collected with respect to advance ticket sales for which the balance at June 30, 2008 was $323.4 million as compared to $194.9 million at December 31, 2007. Our working capital ratio of 1.20 compared to 1.22 as at December 31, 2007 indicates healthy liquidity and a favourable financial position. As at, and for the three and six months ended June 30, 2008, we did not have any investments in asset-backed commercial paper. We monitor capital on a number of measures, including adjusted debt-to-equity and adjusted net debt to EBITDAR. As at June 30, 2008, our adjusted debt-to-equity ratio was 1.95 to 1.00, including $580.7 million in off-balance-sheet aircraft operating leases. This is an improvement of 5.8 per cent from 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 first half of 2008. As at June 30, 2008, our adjusted net debt to EBITDAR ratio was 2.15 as compared to 2.51 as at December 31, 2007, an improvement of 14.3 per cent. This change resulted from increased EBITDAR and cash and cash equivalents. Both of these ratios met our targets for June 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://media3.marketwire.com/docs/728wja_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 Despite the soaring prices of jet fuel, we continued to generate positive cash flow from operations. During the second quarter of 2008, our operating cash flow was $125.9 million compared to $148.9 million in the same period of 2007, a decrease of 15.4 per cent. This decline was primarily due to higher fuel expenses. For the first half of 2008, operating cash flow increased by 7.6 per cent to $315.7 million from $293.5 million in the first half of 2007, due to growth in our earnings and improved working capital. Financing cash flow For the second quarter of 2008, our total cash flow used in financing activities was $71.8 million, attributable largely to $41.5 million in long-term debt repayments related to our aircraft and $29.4 million for shares repurchased under our normal course issuer bid. Similarly, the $50.4 million cash flow used in financing activities during the second quarter of 2007 related primarily to $37.0 million in long-term debt repayments and $11.8 million towards share repurchases. During the first half of 2008, our cash flow used in financing activities was comprised primarily of $82.9 million in long-term debt repayments largely relating to our aircraft, the consideration of $29.4 million to repurchase shares and $2.7 million in deposits mainly related to future leased aircraft. The outflows were partially offset by the issuance of $67.9 million in long-term debt to finance two owned aircraft. In the comparable period of 2007, our financing cash flow was used towards $80.1 million in long-term debt repayments, $11.8 million in consideration under our previous normal course issuer bid and $9.3 million in deposits relating mainly to future leased aircraft. In addition to having strong cash liquidity, we have been successful in financing our growth through aircraft acquisitions financed by low-interest-rate debt supported by the Export-Import Bank of the United States (Ex-Im Bank). On July 17, 2008, we took delivery of one owned aircraft supported by US $33.7 million in debt guaranteed by Ex-Im Bank. 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 second quarter and first six months of 2008 was $26.6 million and $110.0 million, respectively, compared to $18.3 million and $19.2 million in the comparable periods of 2007. During the second quarter of 2008, the majority of our investing activities included $14.8 million in expenditures relating to the construction of our new office space, the Calgary "Campus", and deposits made to Boeing for four future aircraft commitments signed in the second quarter. For the comparable period in 2007, investing activities related primarily to similar Boeing deposits. For the first half of 2008, our investing activities related to the addition of two new owned aircraft totalling $71.3 million, as well as $28.7 million in expenditures relating to Campus construction. We paid deposits towards owned aircraft deliveries during the first half of 2007, partially offset by $13.8 million in proceeds received on the sale of two engines. Capital resources On June 18, 2008, we signed an agreement to purchase four Boeing 737-700 aircraft, with two scheduled for delivery in 2010 and two in 2011, bringing our total committed fleet to 120 by 2013. On February 29, 2008, we signed a Letter of Intent to lease an additional 737-800 aircraft scheduled for delivery in 2011. This has not been reflected as a commitment in the table below as the lease agreement has not yet been signed; however, if included, our future deliveries would be 121 aircraft by 2013. During the second quarter of 2008, we assumed delivery of two leased 737-700 aircraft, bringing the total number of deliveries to five aircraft for the first half of 2008. As at June 30, 2008, we had existing firm commitments to take delivery of an additional 45 aircraft as summarized below: At June 30, 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Series ------------------------------------ 600s 700s ------------------------------------ Leased Owned Total Leased Owned Total ------------------------------------------------------------------------- Fleet at December 31, 2007 - 13 13 16 35 51 ------------------------------------------------------------------------- Fleet at June 30, 2008 - 13 13 18 37 55 Commitments: 2008 - - - - 1 1 2009 - - - 7 - 7 2010 - - - 4 2(1) 6 2011 - - - 4 2(1) 6 2012 - - - - 14(1) 14 2013 - - - - 6(1) 6 ------------------------------------------------------------------------- Total Commitments - - - 15 25 40 ------------------------------------------------------------------------- Committed fleet as of 2013 - 13 13 33 62 95 ------------------------------------------------------------------------- (1) We have an option to convert any of these future aircraft to 737-800s. ------------------------------------------------------------------------- ------------------------------------------------------------------------- At June 30, 2008 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Series ------------------------------------ 800s Total Fleet ------------------------------------ Leased Owned Total Leased Owned Total ------------------------------------------------------------------------- Fleet at December 31, 2007 5 1 6 21 49 70 ------------------------------------------------------------------------- Fleet at June 30, 2008 6 1 7 24 51 75 Commitments: 2008 1 - 1 1 1 2 2009 3 - 3 10 - 10 2010 1 - 1 5 2 7 2011 - - - 4 2 6 2012 - - - - 14 14 2013 - - - - 6 6 ------------------------------------------------------------------------- Total Commitments 5 - 5 20 25 45 ------------------------------------------------------------------------- Committed fleet as of 2013 11 1 12 44 76 120 ------------------------------------------------------------------------- (1) We have an option to convert any of these future aircraft to 737-800s. ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at June 30, 2008, our total purchased aircraft commitment, including amounts to be paid for live satellite television systems on purchased and leased aircraft, was $1,098.4 million, or US $1,077.2 million. Additionally, our commitment relating to aircraft operating leases was $1,431.4 million, or US $1,403.8 million as at June 30, 2008. Significant progress was made in the construction of our Campus adjacent to the Calgary hangar during the second quarter of 2008. Financed through our operating cash flow, we incurred $14.8 million in Campus-related expenditures during the second quarter of 2008. For the six months ended June 30, 2008, we spent $28.7 million with respect to the Campus, for a total spend of $40.6 million as at June 30, 2008. Our budget for the Campus construction is approximately $100 million. Occupancy remains on track for the first quarter of 2009. The Campus is being constructed in accordance with certification guidelines from the Leadership in Energy and Environmental Design (LEED) system. LEED rates the design, construction and operations of high-performance green buildings. We aim to be an environmentally responsible company and construct a building that will be cost-efficient to operate. With respect to the Campus, we intend to achieve a Gold certification from LEED, which requires strict documentation and standards in order to be awarded that level of rating. 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, to be delivered throughout 2008 to 2011. Although the current obligations related to our aircraft operating lease agreements are not recognized on our balance sheet, we include these commitments in assessing our leverage through our adjusted debt-to-equity and net debt to EBITDAR ratios. Contingencies We are party to certain legal proceedings and claims that arise during the ordinary course of business. It is the opinion of management that the ultimate outcome of these matters will not have a material effect upon our financial position, results of operations or cash flows. 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 six month periods ended June 30, 2008, we purchased 2,005,084 shares under the bid for total consideration of $29.4 million. The average book value for the shares repurchased of $7.1 million was charged to share capital with the $22.3 million excess of the market price over the average book value charged to retained earnings. Share capital As at July 25, 2008, the number of common voting shares and variable voting shares amounted to 121,927,570 and 5,966,617, respectively. Related party transactions We have debt financing and investments in short-term deposits with a financial institution which is related through two common directors, one of whom is also the president of the financial institution. As at June 30, 2008, total long-term debt includes an amount of $21.8 million (December 31, 2007 - $23.3 million) due to the financial institution. Included in cash and cash equivalents as at June 30, 2008 are short-term investments of $234.1 million (December 31, 2007 - $189.4 million) owing from the financial institution. These transactions occurred in the normal course of operations with terms consistent with those offered to arm's length parties and are measured at the exchange amount. ACCOUNTING Changes in accounting policies Effective January 1, 2008, we adopted CICA Section 3031, Inventories, which replaces Section 3030, Inventories, and harmonizes the Canadian standards related to inventories with International Financial Reporting Standards (IFRS). This section provides more extensive guidance on the determination of cost, narrows the permitted cost formulas, requires impairment testing and expands the disclosure requirements to increase transparency. There was no impact on our financial results from the adoption of Section 3031. Effective January 1, 2008, we adopted CICA Section 1535, Capital Disclosures, which establishes guidelines for the disclosure of information on an entity's capital and how it is managed. This enhanced disclosure enables users to evaluate the entity's objectives, policies and processes for managing capital. This new requirement is for disclosure purposes only and upon adoption did not impact our financial results for the three and six months ended June 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 months and six months ended June 30, 2008. See note 10 to the consolidated financial statements for further disclosure. Future accounting policy changes In February 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 AcSB issued the "omnibus" exposure draft of IFRS with comments due by July 31, 2008, wherein early adoption by Canadian entities is also permitted. The Canadian Securities Administrators (CSA) has also issued Concept Paper 52-402, which requested feedback on the early adoption of IFRS. The eventual changeover to IFRS represents changes due to new accounting standards. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect our reported financial position and results of operations. Although we have not completed development of our IFRS changeover plan, when finalized, it will address project structure and governance, resourcing and training, analysis of key GAAP differences and a phased plan to assess accounting policies under IFRS, as well as potential IFRS 1 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. 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 June 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 April 18, 2008, the CSA released a revised proposal to repeal and replace Multilateral Instrument 52-109 with a revised version of National Instrument 52-109. Based on this new proposal, there is a requirement to evaluate the operating effectiveness of ICFR in addition to design effectiveness. Furthermore, the CEO and CFO will have a requirement to certify over the design and operating effectiveness of DC&P and ICFR for the year ended December 31, 2008. We expect the proposal to be finalized by the CSA and become effective in the third quarter of 2008 and have therefore incorporated the revisions into the current annual certification process. OUTLOOK During the second quarter of 2008, the soaring cost of fuel affected our margins. Despite these pressures negatively impacting the airline industry, our quarterly profit margins are expected to be near the top of the industry. Our dedicated WestJetters help set us apart from our competition, and our low-cost, high-efficiency business model continues to shine in even the most difficult economic environments. During these challenges, our WestJet brand has remained strong with a focus on high-value service to our guests. We will continue to execute and carry out our strategic plan. At current unprecedented and elevated levels, fuel prices will negatively impact our margins during the remainder of 2008. Economic uncertainty in North America, as well as the higher cost of air travel due to record fuel prices, is deterring some guests from travelling. Despite these challenges, we are positioned well within the North American airline industry to endure the high cost of jet fuel and potential economic downturn. In the third quarter of 2008, our total fleet will increase to 76 as we take delivery of one additional purchased aircraft. During the same period, we expect our capacity to increase by 18 per cent as compared to the third quarter of 2007. We expect our third quarter RASM levels to be comparable to that of the third quarter of 2007. Based on jet fuel pricing at the end of July 2008, we expect our fuel cost per litre to be approximately $1.12, net of fuel hedges. This represents an increase of approximately 60 per cent from the same quarter of 2007. Of our total operating costs, we expect fuel to comprise approximately 40 per cent, an increase of approximately 10 percentage points from the third quarter of 2007. For 2008, we estimate the sensitivity to changes in crude oil and fuel pricing to be approximately $5 million annually to our fuel costs for every US-dollar change per barrel of crude oil and $9 million for every one-cent change per litre of fuel. We also estimate that every one-cent change in the value of the Canadian dollar versus the US dollar will have an approximate $10 million impact on our annual costs (approximately $8 million for fuel and $2 million related to other US-dollar denominated expenses). NON-GAAP MEASURES To supplement our consolidated financial statements presented in accordance with Canadian GAAP, we use various non-GAAP performance measures. These measures are provided to enhance the user's overall understanding of our current financial performance and are included to provide investors and management with an alternative method for assessing our operating results in a manner that is focused on the performance of our ongoing operations and to provide a more consistent basis for comparison between quarters. These measures are not in accordance with or an alternative for GAAP and may be different from measures used by other entities. The following non-GAAP measures are used to monitor our financial performance: Adjusted debt: Long-term debt and obligations under capital lease include off-balance-sheet aircraft operating leases. Our practice, consistent with common industry practice, is to multiply the trailing twelve months of aircraft leasing expense by 7.5 to derive a present value debt equivalent. Adjusted equity: The sum of share capital, contributed surplus and retained earnings, excluding accumulated other comprehensive loss. Adjusted net debt: Adjusted 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 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 ratio June 30, December 31, amounts) 2008 2007 Change ------------------------------------------------------------------------- Adjusted debt-to-equity: Long-term debt (i) $ 1,414,583 $ 1,429,518 $ (14,935) Obligations under capital lease(ii) 1,298 1,483 (185) Off-balance-sheet aircraft leases(iii) 580,740 564,008 16,732 ------------------------------------------------------------------------- Adjusted debt $ 1,996,621 $ 1,995,009 $ 1,612 ------------------------------------------------------------------------- Total shareholders' equity 1,012,446 949,908 62,538 Add: accumulated other comprehensive loss (AOCL) 11,001 11,914 (913) ------------------------------------------------------------------------- Adjusted equity $ 1,023,447 $ 961,822 $ 61,625 ------------------------------------------------------------------------- Adjusted debt-to-equity 1.95 2.07 (5.8%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted net debt to EBITDAR: (iv) Net earnings $ 234,128 $ 192,833 $ 41,295 Add: Net interest (v) 48,838 51,448 (2,610) Taxes 57,563 43,925 13,638 Depreciation and amortization 131,848 127,223 4,625 Aircraft leasing 77,432 75,201 2,231 Other (vi) 1,519 44,631 (43,112) ------------------------------------------------------------------------- EBITDAR $ 551,328 $ 535,261 $ 16,067 ------------------------------------------------------------------------- Adjusted debt (as per above) 1,996,621 1,995,009 1,612 Less: Cash and cash equivalents 811,990 653,558 158,432 ------------------------------------------------------------------------- Adjusted net debt $ 1,184,631 $ 1,341,451 ($156,820) ------------------------------------------------------------------------- Adjusted net debt to EBITDAR 2.15 2.51 (14.3%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) At June 30, 2008, long-term debt includes the current portion of long-term debt of $177,449 (December 31, 2007 - $172,992) and long-term debt of $1,237,134 (December 31, 2007 - $1,256,526). (ii) At June 30, 2008, obligations under capital lease includes the current portion of obligations under capital lease of $385 (December 31, 2007 - $375) and obligations under capital lease of $913 (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 June 30, 2008, the trailing twelve months of aircraft leasing costs totalled $77,432 (December 31, 2007 - $75,201). (iv) The trailing twelve months are used in the calculation of EBITDAR. (v) For the twelve months ended June 30, 2008, net interest includes interest income of $28,402 (December 31, 2007 - $24,301) and interest expense of $77,240 (December 31, 2007 - $75,749). (vi) For the twelve months ended June 30, 2008, other includes foreign exchange loss of $1,519 (December 31, 2007 - reservation system impairment of $31,881 and foreign exchange loss of $12,750). Consolidated Statement of Earnings (Stated in thousands of Canadian dollars, except per share amounts) (Unaudited) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenues: Guest revenues $ 557,305 $ 449,312 $ 1,083,005 $ 840,044 Charter and other revenues 58,695 48,888 132,343 128,866 ------------------------------------------------------------------------- 616,000 498,200 1,215,348 968,910 Expenses: Aircraft fuel 213,610 120,271 381,327 230,482 Airport operations 82,293 72,022 166,221 146,744 Flight operations and navigational charges 70,297 63,978 137,872 126,547 Marketing, general and administration 48,513 43,160 95,918 81,708 Sales and distribution 40,938 34,229 81,216 64,734 Depreciation and amortization 33,807 31,009 66,656 62,031 Inflight 26,987 20,811 52,386 40,296 Aircraft leasing 21,458 19,835 40,541 38,310 Maintenance 19,717 19,144 39,123 37,558 Employee profit share 2,187 5,364 15,334 11,587 Loss on impairment of property and equipment - 31,881 - 31,881 ------------------------------------------------------------------------- 559,807 461,704 1,076,594 871,878 ------------------------------------------------------------------------- Earnings from operations 56,193 36,496 138,754 97,032 Non-operating income (expense): Interest income 6,478 5,284 13,784 9,683 Interest expense (19,148) (18,418) (38,681) (37,190) Gain (loss) on foreign exchange 60 (6,912) 3,997 (7,234) Gain (loss) on disposal of property and equipment (63) (6) (133) 497 ------------------------------------------------------------------------- (12,673) (20,052) (21,033) (34,244) ------------------------------------------------------------------------- Earnings before income taxes 43,520 16,444 117,721 62,788 Income tax expense: Current 1,162 747 2,153 1,188 Future 12,165 4,148 32,869 20,196 ------------------------------------------------------------------------- 13,327 4,895 35,022 21,384 ------------------------------------------------------------------------- Net earnings $ 30,193 $ 11,549 $ 82,699 $ 41,404 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share: Basic $ 0.23 $ 0.09 $ 0.64 $ 0.32 Diluted $ 0.23 $ 0.09 $ 0.63 $ 0.32 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. Consolidated Balance Sheet (Stated in thousands of Canadian dollars) (Unaudited) ------------------------------------------------------------------------- ------------------------------------------------------------------------- June 30, December 31, 2008 2007 ------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (note 4) $ 811,990 $ 653,558 Accounts receivable 21,450 15,009 Prepaid expenses, deposits and other 44,904 39,019 Inventory 26,973 10,202 ------------------------------------------------------------------------- 905,317 717,788 Property and equipment (note 5 2,255,488 2,213,063 Other assets 58,348 53,371 ------------------------------------------------------------------------- $ 3,219,153 $ 2,984,222 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities: Accounts payable and accrued liabilities $ 192,958 $ 168,171 Advance ticket sales 323,372 194,929 Non-refundable guest credits 58,004 54,139 Current portion of long-term debt (note 6) 177,449 172,992 Current portion of obligations under capital lease 385 375 ------------------------------------------------------------------------- 752,168 590,606 Long-term debt (note 6) 1,237,134 1,256,526 Obligations under capital lease 913 1,108 Other liabilities 8,744 11,337 Future income tax 207,748 174,737 ------------------------------------------------------------------------- 2,206,707 2,034,314 Shareholders' equity: Share capital (note 7) 452,318 448,568 Contributed surplus 55,394 57,889 Accumulated other comprehensive loss (11,001) (11,914) Retained earnings 515,735 455,365 ------------------------------------------------------------------------- 1,012,446 949,908 Commitments and contingencies (note 9) ------------------------------------------------------------------------- $ 3,219,153 $ 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 Six Months Ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Share capital: Balance, beginning of period $ 453,192 $ 435,016 $ 448,568 $ 431,248 Issuance of shares pursuant to stock option plans (note 7) 227 1,343 227 1,467 Stock-based compensation on stock options exercised (note 7) 5,990 5,232 10,614 8,876 Shares repurchased (note 7) (7,091) (2,503) (7,091) (2,503) ------------------------------------------------------------------------- 452,318 439,088 452,318 439,088 Contributed surplus: Balance, beginning of period 57,788 60,462 57,889 58,656 Stock-based compensation expense (note 7) 3,596 5,351 8,119 10,801 Stock-based compensation on stock options exercised (note 7) (5,990) (5,232) (10,614) (8,876) ------------------------------------------------------------------------- 55,394 60,581 55,394 60,581 Accumulated other comprehensive loss: Balance, beginning of period (11,200) (13,070) (11,914) - Change in accounting policy - - - (13,420) Other comprehensive income 199 350 913 700 ------------------------------------------------------------------------- (11,001) (12,720) (11,001) (12,720) Retained earnings: Balance, beginning of period 507,871 309,366 455,365 316,123 Change in accounting policy - - - (36,612) Shares repurchased (note 7) (22,329) (9,303) (22,329) (9,303) Net earnings 30,193 11,549 82,699 41,404 ------------------------------------------------------------------------- 515,735 311,612 515,735 311,612 Total accumulated other comprehensive loss and retained earnings 504,734 298,892 504,734 298,892 ------------------------------------------------------------------------- Total shareholders' equity $ 1,012,446 $ 798,561 $ 1,012,446 $ 798,561 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 Six Months Ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Net earnings $ 30,193 $ 11,549 $ 82,699 $ 41,404 Other comprehensive income, net of tax: Amortization of hedge settlements to aircraft leasing 350 350 700 700 Unrealized change in fair value on cash flow hedges (net of tax of $(21); $280) (48) - 544 - Reclassification of net realized gains on cash flow hedges to net earnings (net of tax of $(45); $(138)) (103) - (331) - ------------------------------------------------------------------------- 199 350 913 700 ------------------------------------------------------------------------- Total comprehensive income $ 30,392 $ 11,899 $ 83,612 $ 42,104 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 Six Months Ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Operating activities Net earnings $ 30,193 $ 11,549 $ 82,699 $ 41,404 Items not involving cash: Depreciation and amortization 33,807 31,009 66,656 62,031 Amortization of other liabilities (234) (217) (469) (434) Amortization of hedge settlements 350 350 700 700 Loss on disposal of property, equipment and aircraft parts 210 32,001 1,087 31,581 Stock-based compensation expense 3,395 5,730 7,916 11,180 Future income tax expense 12,165 4,148 32,869 20,196 Unrealized foreign exchange loss (gain) 98 7,764 (4,203) 8,064 Change in non-cash working capital 45,938 56,571 128,468 118,812 ------------------------------------------------------------------------- 125,922 148,905 315,723 293,534 ------------------------------------------------------------------------- Financing activities Increase in long-term debt - - 67,948 - Repayment of long-term debt (41,455) (37,046) (82,883) (80,104) Decrease in obligations under capital lease (93) (88) (185) (176) Increase in other assets (593) (133) (2,665) (9,264) Shares repurchased (29,420) (11,806) (29,420) (11,806) Issuance of common shares 227 1,343 227 1,467 Change in non-cash working capital (491) (2,627) (2,206) (2,627) ------------------------------------------------------------------------- (71,825) (50,357) (49,184) (102,510) ------------------------------------------------------------------------- Investing activities Aircraft additions (6,492) (9,946) (73,956) (22,174) Other property and equipment additions (20,070) (8,347) (36,207) (10,772) Other property and equipment disposals 10 21 165 13,781 ------------------------------------------------------------------------- (26,552) (18,272) (109,998) (19,165) ------------------------------------------------------------------------- Cash flow from operating, financing and investing activities 27,545 80,276 156,541 171,859 Effect of exchange rate on cash and cash equivalents 93 (3,344) 1,891 (3,400) ------------------------------------------------------------------------- Net change in cash and cash equivalents 27,638 76,932 158,432 168,459 Cash and cash equivalents, beginning of period 784,352 469,044 653,558 377,517 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 811,990 $ 545,976 $ 811,990 $ 545,976 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash interest paid $ (19,340) $ (18,462) $ (38,973) $ (37,798) Cash taxes received (paid) $ (594) $ 1,269 $ (1,362) $ 11,089 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. Notes to Consolidated Financial Statements (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 operating items. 2. Recent accounting pronouncements (a) Change in accounting policies Effective January 1, 2008, the Corporation adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants (CICA): (i) Inventory CICA Section 3031, Inventories, replaces Section 3030, Inventories, and harmonizes the Canadian standards related to inventories with International Financial Reporting Standards (IFRS). This section provides more extensive guidance on the determination of cost, narrows the permitted cost formulas, requires impairment testing and expands the disclosure requirements to increase transparency. There was no impact on the financial results of the Corporation from the adoption of Section 3031. (ii) Capital disclosures CICA Section 1535, Capital Disclosures, establishes guidelines for the disclosure of information on an entity's capital and how it is managed. This enhanced disclosure enables users to evaluate the entity's objectives, policies and processes for managing capital. This new requirement is for disclosure purposes only and upon adoption did not impact the financial results of the Corporation. See note 3, capital management, for further disclosure. (iii) Financial instruments - disclosure and presentation CICA Section 3862, Financial Instruments - Disclosure, and Section 3863, Financial Instruments - Presentation, replace the existing Section 3861, Financial Instruments - Disclosure and Presentation. Section 3862 requires enhanced disclosure on the nature and extent of financial instrument risks and how an entity manages those risks. Section 3863 carries forward the existing presentation requirements and provides additional guidance for the classification of financial instruments. This new requirement is for disclosure purposes only and upon adoption did not impact the financial results of the Corporation. See note 10, financial instruments and risk management, for further disclosure. (b) Future accounting policies International Financial Reporting Standards In February 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 AcSB issued the "omnibus" exposure draft of IFRS with comments due by July 31, 2008, wherein early adoption by Canadian entities is also permitted. The Canadian Securities Administrators has also issued Concept Paper 52-402, which requested feedback on the early adoption of IFRS. The eventual changeover to IFRS represents changes due to new accounting standards. 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. Although the Corporation has not completed development of its IFRS changeover plan, when finalized, it will address project structure and governance, resourcing and training, analysis of key GAAP differences and a phased plan to assess accounting policies under IFRS, as well as potential IFRS 1 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. 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. The Corporation monitors capital on a number of bases, including adjusted debt-to-equity and adjusted net debt to Earnings Before Interest, Taxes, Depreciation and Aircraft Rent (EBITDAR). EBITDAR is a non-GAAP financial measure commonly used in the airline industry to evaluate results by excluding differences in the method by which an airline finances its aircraft. In addition, the Corporation will adjust EBITDAR for one-time special items and for gains and losses on foreign exchange. The Corporation adjusts debt to include its off-balance-sheet aircraft operating leases. Common industry practice is to multiply the trailing twelve months of aircraft leasing expense by 7.5 to derive a present value debt equivalent. The Corporation defines adjusted net debt as adjusted 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). ------------------------------------------------------------------------- ------------------------------------------------------------------------- June 30, December 31, 2008 2007 Change ------------------------------------------------------------------------- Adjusted debt-to-equity: Long-term debt(i) $ 1,414,583 $ 1,429,518 $ (14,935) Obligations under capital lease(ii) 1,298 1,483 (185) Off-balance-sheet aircraft leases(iii) 580,740 564,008 16,732 ------------------------------------------------------------------------- Adjusted debt $ 1,996,621 $ 1,995,009 $ 1,612 ------------------------------------------------------------------------- Total shareholders' equity 1,012,446 949,908 62,538 Add: AOCL 11,001 11,914 (913) ------------------------------------------------------------------------- Adjusted equity $ 1,023,447 $ 961,822 $ 61,625 ------------------------------------------------------------------------- Adjusted debt-to-equity 1.95 2.07 (5.8%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted net debt to EBITDAR(iv): Net earnings $ 234,128 $ 192,833 $ 41,295 Add: Net interest(v) 48,838 51,448 (2,610) Taxes 57,563 43,925 13,638 Depreciation and amortization 131,848 127,223 4,625 Aircraft leasing 77,432 75,201 2,231 Other(vi) 1,519 44,631 (43,112) ------------------------------------------------------------------------- EBITDAR $ 551,328 $ 535,261 $ 16,067 ------------------------------------------------------------------------- Adjusted debt (as per above) $ 1,996,621 1,995,009 1,612 Less: Cash and cash equivalents 811,990 653,558 158,432 ------------------------------------------------------------------------- Adjusted net debt $ 1,184,631 $ 1,341,451 $ (156,820) ------------------------------------------------------------------------- Adjusted net debt to EBITDAR 2.15 2.51 (14.3%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) At June 30, 2008, long-term debt includes the current portion of long-term debt of $177,449 (December 31, 2007 - $172,992) and long-term debt of $1,237,134 (December 31, 2007 - $1,256,526). (ii) At June 30, 2008, obligations under capital lease includes the current portion of obligations under capital lease of $385 (December 31, 2007 - $375) and obligations under capital lease of $913 (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 June 30, 2008, the trailing twelve months of aircraft leasing costs totalled $77,432 (December 31, 2007 - $75,201). (iv) The trailing twelve months are used in the calculation of EBITDAR. (v) For the twelve months ended June 30, 2008, net interest includes interest income of $28,402 (December 31, 2007 - $24,301) and interest expense of $77,240 (December 31, 2007 - $75,749). (vi) For the twelve months ended June 30, 2008, other includes foreign exchange loss of $1,519 (December 31, 2007 - reservation system impairment of $31,881 and foreign exchange loss of $12,750). For June 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 June 30, 2008, the Corporation's adjusted debt-to-equity ratio improved by 5.8%, attributable to the increase in shareholders' equity (mainly net earnings) more than offsetting the addition of new aircraft financing in the six months. As at June 30, 2008, the Corporation's adjusted net debt to EBITDAR improved by 14.3% as a result of increased EBITDAR and cash and cash equivalents. No dividends have been paid or declared on any of the Corporation's shares since the date of incorporation. This policy is based on operational results, financial policy and financing requirements for future growth and is continuously reviewed by the Corporation. The Corporation is subject to an externally imposed capital requirement under the provisions of the Canada Transportation Act. Under the Act, the Corporation must, as a corporation which indirectly wholly owns the holder of a domestic licence, a scheduled international licence and a non-scheduled international licence, be Canadian, that is, be controlled, in fact, by Canadians with at least 75% of its voting interest 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 June 30, 2008, the Corporation is in compliance with this requirement. There were no changes in the Corporation's approach to capital management during the three and six months ended June 30, 2008. 4. Cash and cash equivalents As at June 30, 2008, cash and cash equivalents included bank balances of $67,751 (December 31, 2007 - $37,395) and short-term investments of $744,239 (December 31, 2007 - $616,163). Included in these balances, as at June 30, 2008, the Corporation has US-dollar cash and cash equivalents of US $58,933 (December 31, 2007 - US $59,843). As at June 30, 2008, cash and cash equivalents included restricted cash of $3,417 (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 $167 (December 31, 2007 - US $295) in restricted cash representing cash not yet remitted for passenger facility charges. For June 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 June 30, 2008, the Corporation's adjusted debt-to-equity ratio improved by 5.8%, attributable to the increase in shareholders' equity (mainly net earnings) more than offsetting the addition of new aircraft financing in the six months. As at June 30, 2008, the Corporation's adjusted net debt to EBITDAR improved by 14.3% as a result of increased EBITDAR and cash and cash equivalents. No dividends have been paid or declared on any of the Corporation's shares since the date of incorporation. This policy is based on operational results, financial policy and financing requirements for future growth and is continuously reviewed by the Corporation. The Corporation is subject to an externally imposed capital requirement under the provisions of the Canada Transportation Act. Under the Act, the Corporation must, as a corporation which indirectly wholly owns the holder of a domestic licence, a scheduled international licence and a non-scheduled international licence, be Canadian, that is, be controlled, in fact, by Canadians with at least 75% of its voting interest 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 June 30, 2008, the Corporation is in compliance with this requirement. There were no changes in the Corporation's approach to capital management during the three and six months ended June 30, 2008. 4. Cash and cash equivalents As at June 30, 2008, cash and cash equivalents included bank balances of $67,751 (December 31, 2007 - $37,395) and short-term investments of $744,239 (December 31, 2007 - $616,163). Included in these balances, as at June 30, 2008, the Corporation has US-dollar cash and cash equivalents of US $58,933 (December 31, 2007 - US $59,843). As at June 30, 2008, cash and cash equivalents included restricted cash of $3,417 (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 $167 (December 31, 2007 - US $295) in restricted cash representing cash not yet remitted for passenger facility charges. 5. Property and equipment ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accumulated June 30, 2008 Cost depreciation Net book value ------------------------------------------------------------------------- Aircraft $ 2,359,929 $ 344,143 $ 2,015,786 Ground property and equipment 154,293 84,096 70,197 Spare engines and parts 76,726 15,120 61,606 Buildings 40,028 6,327 33,701 Leasehold improvements 7,284 5,396 1,888 Assets under capital lease 2,481 1,440 1,041 ------------------------------------------------------------------------- 2,640,741 456,522 2,184,219 Deposits on aircraft 26,072 - 26,072 Assets under development 45,197 - 45,197 ------------------------------------------------------------------------- $ 2,712,010 $ 456,522 $ 2,255,488 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accumulated December 31, 2007 Cost depreciation Net book value ------------------------------------------------------------------------- Aircraft $ 2,273,509 $ 288,909 $ 1,984,600 Ground property and equipment 158,477 81,345 77,132 Spare engines and parts 76,862 13,610 63,252 Buildings 40,028 5,825 34,203 Leasehold improvements 7,039 5,112 1,927 Assets under capital lease 2,481 1,191 1,290 ------------------------------------------------------------------------- 2,558,396 395,992 2,162,404 Deposits on aircraft 38,795 - 38,795 Assets under development 11,864 - 11,864 ------------------------------------------------------------------------- $ 2,609,055 $ 395,992 $ 2,213,063 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at June 30, 2008, assets under development include $40,586 (December 31, 2007 - $11,850) in amounts capitalized in conjunction with the Corporation's new Campus facility. 6. Long-term debt ------------------------------------------------------------------------- ------------------------------------------------------------------------- June 30, December 31, 2008 2007 ------------------------------------------------------------------------- Term loans - purchased aircraft (i) $ 1,377,894 $ 1,389,888 Term loans - flight simulators (ii) 21,754 23,325 Term loans - live satellite television equipment (iii) 2,680 3,621 Term loan - Calgary hangar facility (iv) 9,853 10,054 Term loan - Calgary hangar facility (v) 2,402 2,630 ------------------------------------------------------------------------- 1,414,583 1,429,518 Current portion 177,449 172,992 ------------------------------------------------------------------------- $ 1,237,134 $ 1,256,526 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) 51 individual term loans, amortized on a straight-line basis over a 12-year term, each repayable in quarterly principal instalments ranging from $668 to $955, including fixed interest at a weighted average rate of 5.33%, maturing between 2014 and 2019. These facilities are guaranteed by the Export-Import Bank of the United States (Ex-Im Bank) and secured by one 800-series aircraft, 37 700- series aircraft and 13 600-series aircraft. (ii) Three individual term loans, repayable in monthly instalments ranging from $104 to $168, including floating interest at the bank's prime rate plus 0.88%, with an effective interest rate of 5.63% as at June 30, 2008, maturing in 2008 and 2011, secured by three flight simulators. (iii) 14 individual term loans, amortized on a straight-line basis over a five-year term, repayable in quarterly principal instalments ranging from $29 to $42, including floating interest at the Canadian LIBOR rate plus 0.08%, with a weighted average effective interest rate of 3.44% as at June 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 June 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 $2,056,311 as at June 30, 2008 (December 31, 2007 - $2,028,548). Future scheduled repayments of long-term debt are as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2008 $ 95,800 2009 162,867 2010 162,189 2011 174,808 2012 160,460 2013 and thereafter 658,459 ------------------------------------------------------------------------- $ 1,414,583 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at June 30, 2008, the Corporation has a final commitment of US $40.0 million from Ex-Im Bank for one 737-700 aircraft to be delivered in July 2008. The Corporation will be charged a commitment fee of 0.125% per annum on the unutilized and uncancelled balance of the Ex-Im Bank facility, payable at specified dates and upon delivery of each aircraft, and will be charged a 3% exposure fee on the financed portion of the aircraft price, payable upon delivery of an aircraft. Upon final delivery of the aircraft, any unused portion of the final commitment will be cancelled. 7. Share capital (a) Issued and outstanding ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended Six months ended June 30, 2008 June 30, 2008 ------------------------------------------------------------------------- Number Amount Number Amount ------------------------------------------------------------------------- Common and variable voting shares: Balance, beginning of period 129,765,495 $ 453,192 129,571,570 $ 448,568 Issuance of shares pursuant to stock option plans 130,815 227 324,740 227 Stock-based compensation expense on stock options exercised - 5,990 - 10,614 Shares repurchased (2,005,084) (7,091) (2,005,084) (7,091) ------------------------------------------------------------------------- Balance, end of period 127,891,226 $ 452,318 127,891,226 $ 452,318 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended Six months ended June 30, 2007 June 30, 2007 ------------------------------------------------------------------------- Number Amount Number Amount ------------------------------------------------------------------------- Common and variable voting shares: Balance, beginning of period 129,902,322 $ 435,016 129,648,688 $ 431,248 Issuance of shares pursuant to stock option plans 493,637 1,343 747,271 1,467 Stock-based compensation expense on stock options exercised - 5,232 - 8,876 Shares repurchased (745,700) (2,503) (745,700) (2,503) ------------------------------------------------------------------------- Balance, end of period 129,650,259 $ 439,088 129,650,259 $ 439,088 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at June 30, 2008, the number of common voting shares outstanding was 121,946,003 (June 30, 2007 - 125,178,225) and the number of variable voting shares was 5,945,223 (June 30, 2007 - 4,472,034). On March 12, 2008, WestJet filed a notice with the Toronto Stock Exchange (TSX) to make a normal course issuer bid to purchase outstanding shares on the open market. As approved by the TSX, WestJet is authorized to purchase up to 2,500,000 shares (representing approximately 1.9% of its issued and outstanding shares at the time of the bid) during the period of March 17, 2008 to March 16, 2009, or until such earlier time as the bid is completed or terminated at the option of WestJet. Any shares WestJet purchases under this bid will be purchased on the open market through the facilities of the TSX at the prevailing market price at the time of the transaction. Shares acquired under this bid will be cancelled. During the three and six months ended June 30, 2008, the Corporation purchased 2,005,084 shares under the bid for total consideration of $29,420. The average book value of the shares repurchased of $7,091 was charged to share capital with the $22,329 excess of the market price over the average book value charged to retained earnings. During the three and six months ended June 30, 2007, the Corporation purchased 745,700 shares under its previous normal course issuer bid, which expired on February 27, 2008, for total consideration of $11,806. The average book value for the shares repurchased of $2,503 was charged to share capital with the $9,303 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 Six months ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Weighted average number of shares outstanding - basic 129,269,317 129,870,817 129,481,874 129,827,284 Effect of dilutive employee stock options and unit plans 1,537,514 1,240,874 2,145,074 827,102 ------------------------------------------------------------------------- Weighted average number of shares outstanding - diluted 130,806,831 131,111,691 131,626,948 130,654,386 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three and six months ended June 30, 2008, 3,609,638 and 2,573,456 employee stock options, respectively, and 48,300 and 48,300 restricted share units, respectively, (three months ended June 30, 2007 - 2,041,356 employee stock options; six months ended June 30, 2007 - 4,823,034 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 Six months ended June 30, 2008 June 30, 2008 ------------------------------------------------------------------------- Weighted Weighted average average Number of exercise Number of exercise options price options price ------------------------------------------------------------------------- Stock options outstanding, beginning of period 11,393,770 $ 13.54 12,226,232 $ 13.66 Granted 1,957,423 16.68 1,965,579 16.69 Exercised (1,067,701) 15.18 (1,881,528) 15.28 Forfeited (36,551) 12.45 (63,342) 12.71 Expired (14,624) 15.58 (14,624) 15.58 ------------------------------------------------------------------------- Stock options outstanding, end of period 12,232,317 $ 13.90 12,232,317 $ 13.90 ------------------------------------------------------------------------- Exercisable, end of period 8,074,443 $ 12.87 8,074,443 $ 12.87 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended Six months ended June 30, 2007 June 30, 2007 ------------------------------------------------------------------------- Weighted Weighted average average Number of exercise Number of exercise options price options price ------------------------------------------------------------------------- Stock options outstanding, beginning of period 13,964,545 $ 13.35 15,046,201 $ 13.21 Granted 1,634,999 16.43 1,645,958 16.42 Exercised (1,342,644) 11.44 (2,304,196) 11.35 Forfeited (25,032) 13.98 (156,095) 13.00 ------------------------------------------------------------------------- Stock options outstanding, end of period 14,231,868 $ 13.89 14,231,868 $ 13.89 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Exercisable, end of period 6,351,375 $ 15.08 6,351,375 $ 15.08 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 six months ended June 30, 2008, option holders exercised 1,053,337 and 1,867,164 options, respectively, (three months ended June 30, 2007 - 1,222,877 options; six months ended June 30, 2007 - 2,173,400 options) on a cashless settlement basis and received 116,451 and 310,376 shares, respectively (three months ended June 30, 2007 - 373,870; six months ended June 30, 2008 - 616,475 shares). During the three and six months ended June 30, 2008, 14,364 options were exercised on a cash basis (three months ended June 30, 2007 - 119,767 options; six months ended June 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 $3,427 and $7,574 for the three and six months ended June 30, 2008, respectively (three months ended June 30, 2007 - $5,351; six months ended June 30, 2007 - $10,801). The fair market value of options granted during the three and six months ended June 30, 2008 and 2007 and the assumptions used in their determination are as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended Six months ended June 30 June 30 2008 2007 2008 2007 ------------------------------------------------------------------------- Weighted average fair market value per option $ 5.24 $ 5.65 $ 5.24 $ 5.65 Average risk-free interest rate 3.0% 4.2% 3.0% 4.2% Average volatility 37% 38% 37% 38% Expected life (years) 3.6 3.7 3.6 3.7 Dividends per share $ - $ - $ - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (e) Executive share unit plan During the six months ended June 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 six months ended June 30, 2008, nil and 54,277, respectively, RSUs were granted under this plan at a weighted average fair market value of $19.45 per unit, with $78 and $227, 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 six months ended June 30, 2008, nil and 72,369, respectively, PSUs were granted under this plan at a weighted average fair market value of $19.45 per unit, with $91 and $318, respectively, of ompensation 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 June 30, 2008, total long-term debt includes an amount of $21,754 (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 June 30, 2008 are short-term investments of $234,075 (December 31, 2007 - $189,389) owing from the financial institution. These transactions occurred in the normal course of operations with terms consistent with those offered to arm's length parties and are measured at the exchange amount. 9. Commitments and contingencies (a) Purchased aircraft As at June 30, 2008, the Corporation is committed to purchase 25 737-700 aircraft for delivery between 2008 and 2013. The remaining estimated amounts to be paid in deposits and purchase prices for the 25 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 $ 39,048 $ 39,817 2009 24,273 24,751 2010 113,666 115,906 2011 153,786 156,816 2012 525,760 536,117 2013 220,671 225,018 ------------------------------------------------------------------------- $ 1,077,204 $ 1,098,425 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (b) Operating leases The Corporation has entered into operating leases and agreements for aircraft, buildings, computer hardware, software licences and satellite programming. As at June 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 $ 52,039 $ 62,574 2009 127,040 142,210 2010 154,393 165,341 2011 172,815 180,239 2012 179,142 185,483 2013 and thereafter 743,173 775,937 ------------------------------------------------------------------------- $ 1,428,602 $ 1,511,784 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at June 30, 2008, the Corporation is committed to lease an additional 15 737-700 aircraft and five 737-800 aircraft to be delivered between 2008 and 2011 for terms ranging between eight and 10 years in US dollars. These aircraft have been included in the above totals. (c) Contingencies On February 29, 2008, the Corporation signed a letter of intent to lease one 737-800 aircraft over a term of eight years commencing in March 2011 for an estimated total commitment of 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, cash flow hedges, US- dollar deposits, accounts payable and accrued liabilities and long-term debt. The following table sets out the Corporation's classification based on the measurement categories found in CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement, and the carrying amount for each of its financial assets and liabilities as at June 30, 2008: ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other Total Held Loans and financial carrying for trading receivables liabilities amount ------------------------------------------------------------------------- Asset (liability) Cash and cash equivalents $ 811,990 $ - $ - $ 811,990 Accounts receivable - 21,450 - 21,450 Cash flow hedges(i) 461 - - 461 US-dollar deposits (ii) 23,972 - - 23,972 Accounts payable and accrued liabilities - - (192,958) (192,958) Long-term debt(iii) - - (1,414,583) (1,414,583) ------------------------------------------------------------------------- $ 836,423 $ 21,450 $(1,607,541) $ (749,668) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) Foreign exchange forward contracts used for hedging included in prepaid expenses, deposits and other. (ii) Includes $2,039 classified in prepaid expenses, deposits and other and $21,933 classified in other assets. (iii) Includes current portion of long-term debt of $177,449 and long- term portion of $1,237,134. The fair values of financial assets and liabilities, together with carrying amounts, shown in the balance sheet as at June 30, 2008 and December 31, 2007, are as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- June 30, 2008 December 31, 2007 Carrying Fair Carrying Fair amount value amount value ------------------------------------------------------------------------- Asset (liability) Cash and cash (i) equivalents $ 811,990 $ 811,990 $ 653,558 $ 653,558 Accounts receivable (i) 21,450 21,450 15,009 15,009 Cash flow hedges (ii) 461 461 106 106 US-dollar deposits (iii) 23,972 23,972 22,748 22,748 Accounts payable (iv) and accrued liabilities (192,958) (192,958) (168,171) (168,171) Long-term debt (v) (1,414,583) (1,487,293) (1,429,518) (1,473,997) ------------------------------------------------------------------------- $(749,668) $(822,378) $(906,268) $(950,747) ------------------------------------------------------------------------- Unrecognized loss $ (72,710) $ (44,479) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The fair values of financial instruments are calculated on the basis of information available on the balance sheet date using the following methods: (i) The fair value of cash and cash equivalents and accounts receivable approximates their carrying amounts due to the short- term nature of the instruments. (ii) The fair value of the forward exchange contracts is measured based on the difference between the contracted rate and the forward rate obtained from the counterparty at the balance-sheet date. Due to the short-term nature of the outstanding contracts, no discount rate has been applied. Forward rates at June 30, 2008, range between 0.9925 and 1.0136 (December 31, 2007 - between 0.9906 and 0.9909) US dollars to Canadian dollars. (iii) The fair value of the US-dollar deposits, which relate to purchased aircraft, approximates their carrying amounts as they are at a floating market rate of interest. (iv) The fair value of accounts payable and accrued liabilities approximates their carrying amounts due to the short-term nature of the instruments. (v) The fair value of the Corporation's fixed-rate long-term debt is determined by discounting the future contractual cash flows under current financing arrangements at discount rates obtained from the lender, which represent borrowing rates presently available to the Corporation for loans with similar terms and remaining maturities. At June 30, 2008, rates used in determining the fair value ranged from 3.98% to 4.19% (December 31, 2007 - from 4.52% to 4.61%). The fair value of the Corporation's variable rate long-term debt approximates its carrying value as it is at a floating market rate of interest. (b) Risk management The Corporation is exposed to market, credit and liquidity risks associated with its financial instruments. The Corporation will from time to time use various financial instruments to reduce market risk exposures from changes in foreign currency exchange rates, interest rates and 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 performs a risk assessment on a continual basis to ensure that all significant risks related to the Corporation and its operations have been reviewed and assessed to reflect changes in market conditions and the Corporation's operating activities. Fuel risk The airline industry is inherently dependent upon jet fuel to operate, and is therefore impacted by changes in jet fuel prices. Aircraft fuel expense for the three and six months ended June 30, 2008, represented approximately 38% and 35%, respectively, (three months ended June 30, 2007 - 26%; six months ended June 30, 2007 - 26%) of the Corporation's total operating expenses. For the three and six months ended June 30, 2008, the Corporation's average jet fuel cost per litre was $1.04 and $0.93, respectively (three months ended June 30, 2007 - $0.69; six months ended June 30, 2007 - $0.67). A significant change in the price of jet fuel could significantly impact the Corporation's financial results. For the three and six months ended June 30, 2008, WestJet estimates that a one-cent-per-litre change in the price of jet fuel would have increased or decreased the Corporation's net earnings by approximately $1.4 million and $2.8 million, respectively (three months ended June 30, 2007 - $1.2 million; six months ended June 30, 2007 - $2.3 million). This is assuming that all other variables, in particular, foreign currency rates, remain constant. The increase in sensitivity from 2007 is a result of the overall increase in the Corporation's capacity and fuel consumption during the period. Fuel prices will continue to be susceptible to political events, weather conditions, refinery capacity, worldwide demand and other factors that can affect the supply of jet fuel. To mitigate exposure to fluctuations in jet fuel prices, the Corporation periodically uses short-term financial and physical derivatives. As at, and for the three and six months ended June 30, 2008, the Corporation has no outstanding fuel hedges. Foreign currency exchange risk Foreign currency exchange risk is the risk that the fair value of recognized assets and liabilities or future cash flows 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 capital purchases and operating expenditures, mainly aircraft fuel, aircraft leasing expense, certain maintenance costs and a portion of airport operation costs. During the three and six month periods ended June 30, 2008, the average US-dollar rate was 1.0103 and 1.0070, respectively, (three months ended June 30, 2007 - 1.0990; six months ended June 30, 2007 - 1.1358) with the period- end exchange rate at 1.0197 (June 30, 2007 - 1.0588). For the three and six months ended June 30, 2008, WestJet estimates that a one-cent change in the value of the US dollar versus the Canadian dollar would have increased or decreased net earnings by $1.5 million and $2.7 million, respectively, (three months ended June 30, 2007 - $0.9 million; six months ended June 30, 2007 - $1.6 million) that is, $1.4 million and $2.4 million as a result of fuel (three months ended June 30, 2007 - $0.7 million; six months ended June 30, 2007 - $1.2 million) and $0.1 million and $0.3 million for all remaining costs (three months ended June 30, 2007 - $0.2 million; six months ended June 30, 2007 - $0.4 million). This is assuming that all other variables remain constant. The increase in sensitivity from 2007 is mainly a result of the increase in the price of jet fuel valued in US dollars. The foreign exchange gains and losses realized are mainly attributable to the effect of the changes in the value of our US-dollar denominated net monetary assets. As at June 30, 2008, US-dollar denominated net monetary assets totalled approximately US $116.9 million (June 30, 2007 - US $78.3 million). For the three and six months ended June 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 $0.7 million and $1.3 million, respectively, (three months ended June 30, 2007 - $0.5 million; six months ended June 30, 2007 - $0.9 million) as a result of the Corporation's US-dollar denominated net monetary assets. To manage its exposure to foreign currency, the Corporation periodically uses financial derivatives, including US-dollar forward contracts. Upon proper qualification, the forward contracts are designated as cash flow hedges and qualify for hedge accounting. As at June 30, 2008, to offset its US-dollar denominated aircraft lease payments, the Corporation entered into forward contracts to purchase US $5.9 million per month for four months for a total of US $23.6 million at an average forward rate of 1.0036 per US dollar. Maturity dates for all contracts are within 2008. For the three and six months ended June 30, 2008, the Corporation realized a total gain on the contracts of $150 and $470 respectively, included in aircraft leasing costs. As at June 30, 2008, the estimated fair market value of the remaining contracts recorded in prepaid expenses, deposits and other is a gain of $461 ($319 net of tax) to be realized in 2008. Due to the immaterial balance of the forward contracts, a change in the US-dollar exchange rate for the three and six months ended June 30, 2008, would not have significantly impacted the Corporation's net earnings and other comprehensive income. Interest rate risk Interest rate risk is the risk that earnings will fluctuate as a result of changes in market interest rates. (i) Long-term debt The fixed-rate nature of the majority of the Corporation's long-term debt reduces the risk of interest rate fluctuations over the term of the outstanding debt. The Corporation accounts for its long-term fixed-rate debt at amortized cost, and therefore, a change in interest rates at June 30, 2008, would not affect net earnings. The Corporation is exposed to interest rate fluctuations on its variable- rate long-term debt, which at June 30, 2008 totalled $26,836 (June 30, 2007 - $32,300) or 1.9% (June 30, 2007 - 2.4%) 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 six months ended June 30, 2008, would not have significantly impacted the Corporation's net earnings. (ii) Cash and cash equivalents The Corporation is exposed to interest rate fluctuations on its cash and cash equivalents balance, which at June 30, 2008 totalled $811,990 (June 30, 2007 - $545,976). A change of 50 basis points in the market interest rate would have had, for the three and six months ended June 30, 2008, an approximate impact on net earnings of $0.6 million and $1.2 million, respectively (three months ended June 30, 2007 - $0.4 million; six months ended June 30, 2007 - $0.7 million). 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. Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Corporation does not believe it is subject to significant concentration of credit risk on its cash and cash equivalents and accounts receivable balances. The carrying amount of accounts receivable and cash and cash equivalents balances represents the maximum credit exposure. (i) Cash and cash equivalents Cash and cash equivalents consist of cash bank balances and short-term investments with terms of up to 91 days. It is the Corporation's policy to hold investments with maturities of no more than 91 days with the majority between 30 and 60 days. The Corporation purchases short-term investments through Schedule I and selected Schedule II banks, as defined by the Canadian Bankers Association. As at June 30, 2008, the Corporation had a total principal amount invested of $692,696 in Canadian-dollar short-term investments with terms ranging between four and 91 days and a total of US $50,547 invested in US-dollar short-term investments with terms ranging between two and 90 days. As at, and for the three and six months ended June 30, 2008, the Corporation did not have any investments in asset-backed commercial paper. The Corporation does not expect any counterparties to fail to meet their obligations. (ii) Accounts receivable Generally, the Corporation's accounts receivable result from tickets sold to individual guests through the use of travel agents. Purchase limits are established for each agent and in some cases, when deemed necessary, a letter of credit is required. At June 30, 2008, the Corporation's accounts receivable totalled $21,450 (December 31, 2007 - $15,009), approximately 50% (December 31, 2007 - 30%) being due from travel agents. These receivables are short-term in nature, generally being settled within four weeks from the date of booking. As at June 30, 2008, the Corporation has a total of $2,074 (December 31, 2007 - $2,309) in letters of credit from travel agents. Liquidity risk Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with financial liabilities. The Corporation maintains a strong liquidity position and maintains sufficient financial resources to meet its obligations as they fall due. Inherent in the airline industry is the high cost of capital and the volatility of aircraft fuel prices. To mitigate exposure to this challenge, the Corporation has secured low-interest-rate fixed debt supported by Ex-Im Bank commitments on its aircraft acquisitions. See note 6, long-term debt, for further detail. The Corporation's total accounts payable and accrued liabilities are classified as current and as such will be settled within one year. For detailed information on the Corporation's long-term contractual financial liabilities, including a schedule of future repayments, see note 6, long- term debt. Refer to note 9, commitments and contingencies, for a commitment schedule of the Corporation's off-balance-sheet operating commitments, including its aircraft operating leases. A portion of the Corporation's cash and cash equivalents balance relates to cash collected with respect to advance ticket sales, for which the balance at June 30, 2008 was $323,372 (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 June 30, 2008, the Corporation had cash on hand of 2.51 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 June 30, 2008, the Corporation's current ratio was 1.20 (December 31, 2007 - 1.22). 11. Subsequent events Subsequent to June 30, 2008, the Corporation entered into a mixture of costless collar structures with an approximate average crude oil call price of US $159.00 per barrel and an average crude oil put price of US $128.00 per barrel, and fixed swap agreements at an approximate average crude oil price of US $136.00 per barrel to hedge a portion of its anticipated jet fuel purchases to the end of September 2008. Conference Call WestJet will hold a live analysts' conference call today at 9 a.m. MT (11 a.m. ET). Sean Durfy, President and CEO, and Vito Culmone, Executive Vice-President, Finance and CFO, will discuss WestJet's second quarter 2008 results and answer questions from financial analysts. The conference call is available through the toll-free telephone number 1-800-926-7748. Participants are encouraged to join the call 10 minutes prior to the scheduled start at 8:50 a.m. MT (10:50 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 ExpressVu. 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.

For further information:

For further information: WestJet, Media Relations, Gillian Bentley,
1-888-WJ 4 NEWS (1-888-954-6397), Email: gbentley@westjet.com, Website:
www.westjet.com


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