WestJet stays the course with profitable first quarter results



    
    Airline continues its success, reporting first quarter 2009 net earnings
    of $37.4 million
    

    CALGARY, May 5 /CNW/ - WestJet (TSX:WJA) today announced first quarter
results for 2009. The airline reported net earnings of $37.4 million, or 29
cents per diluted share.
    "Thanks to the continued hard work and dedication of our WestJetters, we
once again differentiated ourselves as an industry leader, and we are
extremely pleased with our strong start to 2009," commented Sean Durfy,
WestJet President and CEO. "Our first quarter results demonstrate that our
business strategy is staying the course; we successfully continued our growth
and delivered profitable results while withstanding less than ideal economic
conditions."
    Compared to airlines who have reported their first quarter results,
WestJet continues to have one of the best pre-tax margins in North America,
having reported a first quarter earnings before tax (EBT) margin of 8.7 per
cent.
    "Our results reinforce the value of our healthy brand, unrivaled guest
experience and commitment to being cost efficient," added Sean Durfy.

    
              Operating highlights (stated in Canadian dollars)

    -------------------------------------------------------------------------
                                                 Q1          Q1
                                                2009        2008      Change
    -------------------------------------------------------------------------
    Net earnings (millions)                    $37.4       $52.5      (28.7%)
    -------------------------------------------------------------------------
    Diluted earnings per share                 $0.29       $0.40      (27.5%)
    -------------------------------------------------------------------------
    Revenue (millions)                        $579.3      $599.3       (3.3%)
    -------------------------------------------------------------------------
    ASM (available seat miles) (billions)      4.357       4.065        7.2%
    -------------------------------------------------------------------------
    RPM (revenue passenger miles) (billions)   3.502       3.331        5.1%
    -------------------------------------------------------------------------
    Load factor                                80.4%       81.9%   (1.5 pts.)
    -------------------------------------------------------------------------
    Yield (revenue per revenue passenger
     mile) (cents)                             16.54       17.99       (8.1%)
    -------------------------------------------------------------------------
    RASM (revenue per available seat mile)
     (cents)                                   13.30       14.74       (9.8%)
    -------------------------------------------------------------------------
    CASM (cost per available seat mile)
     (cents)                                   11.90       12.71       (6.4%)
    -------------------------------------------------------------------------
    CASM excluding fuel and employee
     profit share (cents)                       8.50        8.26        2.9%
    -------------------------------------------------------------------------
    

    Sean Durfy continued, "While the weakened economy had a negative impact
on our first quarter financial results, our margins continued to be among the
strongest in North America. Softening demand, aggressive competitor pricing
and Easter falling in the second quarter of 2009, versus the first quarter of
2008, all contributed to our decline in RASM. However, lower fuel prices
resulted in a decline in CASM and contributed to our overall profitability."
    WestJet took delivery of two 800-series aircraft in the first quarter;
and in early April, it took delivery of its only aircraft scheduled to arrive
in the second quarter, bringing its fleet size to 79. For the balance of the
year, WestJet plans to receive an additional seven aircraft, bringing its
fleet to 86.
    "The flexibility of our fleet deployment strategy allows us to react to
changes in market demand by adjusting our schedule for more favourable
flying," explained Sean Durfy. "In the second quarter, we have adjusted our
flight schedules to reduce some of our flying as we take into consideration
the current demand environment. This will lower our previously planned second
quarter capacity growth to between one and two per cent. We anticipate that
competitors will continue to withdraw capacity, which we believe will allow us
to capture additional market share as we continue to grow into domestic,
transborder and international markets."
    This morning, in a separate news release, the airline reported its April
traffic results and expectations for second quarter RASM. Sean Durfy said,
"With the weakened economy, second quarter RASM is tracking to year-over-year
declines that are, at best, similar to what we experienced in the first
quarter of 2009. The recent H1N1 influenza virus outbreak appears to be
delaying some consumers' travel bookings; however, it is too early to
determine how it will impact RASM. Despite these conditions, we are confident
in our business model and our organization's ability to continue on our
profitable path."
    "Our recently introduced WestJet Care-antee, which is a set of promises
we vow to uphold, is setting a new standard for service and value in the
Canadian airline industry," added Sean Durfy. "Thanks to our dedicated team of
WestJetters, we will continue to profitably grow our business by providing an
unrivalled guest experience and by enhancing our airline in ways that truly
benefit our guests."
    WestJet also reported first quarter operational performance. WestJet
calculates on-time performance and completion rate based on the U.S.
Department of Transportation's standards. WestJet's baggage ratio represents
the number of delayed or lost baggage claims made per 1,000 guests.

    
    -------------------------------------------------------------------------
                                             Q1 2009     Q1 2008      Change
    -------------------------------------------------------------------------
    On-time performance                        70.6%       69.0%    1.6 pts.
    -------------------------------------------------------------------------
    Completion rate                            97.5%       98.1%   (0.6 pts.)
    -------------------------------------------------------------------------
    Bag ratio                                   4.41        5.15       14.4%
    -------------------------------------------------------------------------
    

    Caution regarding forward-looking statements

    Certain information set forth in this press release, including
information regarding WestJet's anticipated aircraft delivery schedule,
adjustments of flights schedules in the second quarter, expected capacity
growth, projections as to RASM and traffic in the second quarter of 2009 and
the anticipated impact of the H1N1 virus, contain forward-looking statements.
By their nature, forward-looking statements are subject to numerous risks and
uncertainties, some of which are beyond WestJet's control. These
forward-looking statements are based on currently available implementation
plans, agreements and bookings but may vary due to factors including, but not
limited to, delay in aircraft delivery, change in customer demand, general
economic conditions and availability of personnel and outside consultants.
These and additional risk factors are discussed in WestJet's most recent
Annual Information Form (AIF) and in other documents WestJet files from time
to time with securities regulatory authorities, which are available through
the Internet on WestJet's SEDAR profile at www.sedar.com.
    Readers are cautioned that undue reliance should not be placed on
forward-looking statements as actual results may vary materially from the
forward-looking statements. WestJet does not undertake to update any
forward-looking statements, except as is required by law.

    Conference call

    WestJet will hold a live analysts' conference call today at 9 a.m. MDT
(11 a.m. EDT). Sean Durfy, President and CEO, and Vito Culmone, Executive
Vice-President of Finance and CFO, will discuss WestJet's first quarter 2009
results and answer questions from financial analysts. The conference call is
available through the toll-free telephone number 1-800-731-5319. The call can
also be heard live through an Internet webcast in the Investor Relations
section of westjet.com.

    Annual and Special Meeting (AGM)

    WestJet will hold its annual and special meeting at 2 p.m. MDT at
WestJet's Calgary Campus located at 22 Aerial Place, NE. The AGM will be
webcast and will be available in the Investor Relations section of
westjet.com.

    About WestJet

    WestJet is Canada's leading high-value low-cost airline offering
scheduled service throughout its 55-city North American and Caribbean network.
Named one of Canada's most admired corporate cultures in 2005, 2006, 2007 and
2008, WestJet pioneered low-cost flying in Canada. WestJet offers increased
legroom and leather seats on its modern fleet of 79 Boeing Next-Generation 737
aircraft, and live seatback television provided by Bell TV. With future
confirmed deliveries for an additional 42 aircraft, bringing its fleet to 121
by 2013, WestJet strives to be the number one choice for travellers.



    
          Management's Discussion and Analysis of Financial Results

                  For the three months ended March 31, 2009
    

    Advisories

    The following Management's Discussion and Analysis of Financial Results
(MD&A), dated May 4, 2009, should be read in conjunction with the cautionary
statement regarding forward-looking statements below, as well as the unaudited
interim consolidated financial statements and notes thereto as at and for the
three months ended March 31, 2009, and the consolidated financial statements,
notes thereto and MD&A included in the Annual Report as at and for the year
ended December 31, 2008. For a detailed description of risks and
uncertainties, financial instruments and risk management and critical
accounting estimates, please refer to these sections within the 2008 MD&A
dated February 10, 2009. The consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles
(GAAP). All amounts in the following MD&A are stated in Canadian dollars
unless otherwise stated. Certain prior-period balances in the consolidated
financial statements have been reclassified to conform to current period's
presentation. References to "WestJet," "we," "us" or "our" mean WestJet
Airlines Ltd., its subsidiaries, partnership and special-purpose entities,
unless the context otherwise requires. Additional information relating to
WestJet filed with Canadian securities commissions, including periodic
quarterly and annual reports and Annual Information Forms (AIF), is available
on SEDAR at www.sedar.com and our website at www.westjet.com. An additional
advisory with respect to the use of non-GAAP measures is set out at the end of
this MD&A under Non-GAAP Measures.

    Cautionary statement regarding forward-looking information and statements

    This MD&A offers our assessment of WestJet's future plans and operations
and contains forward-looking statements as defined under applicable Canadian
securities legislation, including our expectation that our financial results
for the first quarter of 2009 are among the best of any North American airline
referred to under the Overview and the Outlook; our expectation that our
network will absorb the capacity used for Transat referred to under Results of
Operations - Revenue; our expectation that WestJet Vacations and our
commercial schedule will support our own flying to existing sun destinations
and a number of new destinations to which we can fly referred to under Results
of Operations - Revenue; our hedging expectations and the intent to hedge
anticipated jet fuel purchases referred to under Results of Operations -
Aircraft Fuel; our sensitivity to changes in crude oil and fuel pricing
referred to under Results of Operations - Aircraft; our expectation that
aircraft maintenance costs will increase as our fleet ages referred to under
Results of Operations - Maintenance; our sensitivity to the change in the
value of the Canadian dollar versus the US dollar referred to under Results of
Operations - Foreign Exchange; our future aircraft deliveries referred to
under Liquidity and Capital Resources; our expected capacity increase for the
second quarter of 2009 referred to under the Outlook; our anticipated
scheduling and capacity changes by us and our competitors in 2009 referred to
under the Outlook; our anticipation that demand for air travel will be
negatively impacted during the second quarter of 2009 referred to under the
Outlook; our revenue per available seat mile (RASM) decline in the second
quarter of 2009 referred to under the Outlook; and our expected fuel costs per
litre referred to under the Outlook. These forward-looking statements
typically contain the words "anticipate," "believe," "estimate," "intend,"
"expect," "may," "will," "should," "potential," "plan" or other similar terms.

    Readers are cautioned that our expectations, estimates, projections and
assumptions used in the preparation of such information, although considered
reasonable at the time of preparation, may prove to be imprecise and, as such,
undue reliance should not be placed on forward-looking statements. With
respect to forward-looking statements contained within this MD&A, we have made
the following key assumptions:

    
    -   our expectation that our financial results for the first quarter of
        2009 were among the best of any North American airline was based on
        reported first quarter financial results of North American airlines;

    -   our expectation that our network will absorb the capacity used for
        Transat was based on our actual and forecasted commercial schedules;

    -   our expectation that WestJet Vacations and our commercial schedule
        will support our own flying to existing sun destinations and a number
        of new destinations to which we can fly was based on current
        financial results and our current strategic plan;

    -   our hedging expectations and intent to hedge anticipated jet fuel
        purchases was based on our current approved hedging strategy;

    -   our sensitivity to changes in crude oil and fuel pricing was based on
        our fuel consumption for our existing schedule and historical fuel
        burn, as well as a Canadian-US dollar exchange rate similar to the
        current market rate;

    -   our expectation that aircraft maintenance costs will increase as our
        fleet ages was based on requirements specified in our maintenance
        program and the number of aircraft off warranty;

    -   our sensitivity to the change in the value of the Canadian dollar
        versus the US dollar was based on forecasted US-dollar spend for
        2009, excluding a percentage of aircraft leasing expense hedged under
        foreign exchange forward contracts and option arrangements, as well
        as the exchange rate for the Canadian dollar similar to the current
        market rate;

    -   our future aircraft deliveries were based on a revised aircraft
        delivery schedule from Boeing;

    -   our expected capacity increase for the second quarter of 2009 was
        based on our actual and forecasted commercial schedules;

    -   our anticipated scheduling and capacity changes by us and our
        competitors in 2009 was based on actual and forecasted bookings;

    -   our anticipation that demand for air travel will be negatively
        impacted was based on actual and forecasted bookings;

    -   our RASM guidance for the second quarter of 2009 was based on actual
        and forecasted bookings for the same period; and

    -   our expected fuel costs per litre for the second quarter of 2009 were
        based on realized jet fuel prices for April 2009 and forward curve
        prices for May and June 2009, as well as the exchange rate for the
        Canadian dollar in the second quarter similar to the current market
        rate.
    

    Our actual results, performance or achievements could differ materially
from those expressed in, or implied by, these forward-looking statements. We
can give no assurance that any of the events anticipated will transpire or
occur or, if any of them do, what benefits or costs we will derive from them.
By their nature, forward-looking statements are subject to numerous risks and
uncertainties including, but not limited to, the impact of general economic
conditions, changing domestic and international industry conditions,
volatility of fuel prices, terrorism, currency fluctuations, interest rates,
competition from other industry participants (including new entrants and
generally as to capacity fluctuations and the pricing environment), labour
matters, government regulation, stock-market volatility, the ability to access
sufficient capital from internal and external sources and additional risk
factors discussed in our AIF and other documents we file from time to time
with securities regulatory authorities, which are available through the
Internet on SEDAR at www.sedar.com or, upon request, without charge from us.
Additionally, risks and uncertainties are discussed in detail within the 2008
MD&A dated February 10, 2009.
    The forward-looking information contained in this MD&A is expressly
qualified by this cautionary statement. Our assumptions relating to the
forward-looking statements referred to above are updated quarterly and, except
as required by law, we do not undertake to update any other forward-looking
statements.

    Definition of key operating indicators

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

    
    Flight leg: A segment of a flight involving a stopover, change of
    aircraft or change of airline from one landing site to another.

    Segment guest: Any person who has been booked to occupy a seat on a
    flight leg and is not a member of the crew assigned to the flight.

    Average stage length: The average distance of a non-stop flight leg
    between take-off and landing as defined by International Air Transport
    Association (IATA) guidelines.

    Available seat miles (ASM): A measure of total guest capacity, calculated
    by multiplying the number of seats available for guest use in an aircraft
    by stage length.

    Revenue passenger miles (RPM): A measure of guest traffic, calculated by
    multiplying the number of segment guests by stage length.

    Load factor: A measure of total capacity utilization, calculated by
    dividing revenue passenger miles by total available seat miles.

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

    Revenue per available seat mile (RASM): Total revenues divided by
    available seat miles.

    Cost per available seat mile (CASM): Operating expenses divided by
    available seat miles.

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

    Utilization: Operating hours per day per operating aircraft.
    

    OVERVIEW

    Despite the continued worldwide recession, we are pleased to report our
16th consecutive quarter of profitability. We expect our financial results
once again to be among the best of any North American airline.
    During the first quarter of 2009, we saw overall demand for air travel
soften, and as such, we adjusted our pricing in order to maintain our desired
load factors. The reduction in the market price of jet fuel provided
significant cost relief and partially offset the impact of the weak revenue
environment. Additionally, we grew our cash balance from December 31, 2008,
generated positive net earnings and cash flows from operations and lowered
CASM. Our low-cost business model allowed us to successfully navigate through
a less than ideal external environment, while producing industry-leading
results. At a time of economic uncertainty, the fortitude of our WestJetters
remained constant and unwavering, as evidenced by the delivery of our
award-winning guest experience and commitment to high-value service.

    
    Quarterly highlights

    -   Recognized total revenues of $579.3 million, a decrease of
        3.3 per cent over the same period of 2008.

    -   Recorded RASM of 13.30 cents, down 9.8 per cent from the comparable
        period of 2008.

    -   Increased capacity by 7.2 per cent as compared to the same period of
        2008.

    -   Decreased CASM to 11.90 cents from 12.71 cents in the first quarter
        of 2008, an improvement of 6.4 per cent.

    -   Realized CASM, excluding fuel and employee profit share, of
        8.50 cents, up 2.9 per cent over the same period of 2008.

    -   Recorded an earnings before tax (EBT) margin of 8.7 per cent, down
        3.7 points from the same quarter in 2008.

    -   Realized net earnings of $37.4 million, a decrease of 28.7 per cent
        from the same period of 2008.

    -   Diluted earnings per share were $0.29, a decrease of 27.5 per cent
        compared to the first quarter of 2008.

    -   Grew our cash balance to $835.8 million, an increase of 1.9 per cent
        from December 31, 2008.

    -   Generated cash flows from operations of $95.5 million, a decrease
        from $184.8 million for the three months ended March 31, 2008.
    

    Please refer to the end of this MD&A for a reconciliation of CASM,
excluding fuel and employee profit share, a non-GAAP measure, to the nearest
measure under Canadian GAAP.
    Our strong corporate culture allowed us to execute on our growth strategy
and provided the momentum to face the economic challenges presented during the
first quarter of the year. The actions of every WestJetter contributed to the
continued success of our airline. Additionally, with the construction of our
new Campus facility completed, many of our WestJetters moved into our new
office space during the first quarter of 2009, contributing further to the
enviable culture of our airline.

    
    -------------------------------------------------------------------------

    Operational highlights                     Three months ended March 31
    -------------------------------------------------------------------------
                                             2009            2008     Change
    -------------------------------------------------------------------------

    ASMs                            4,356,805,139   4,064,991,801       7.2%
    RPMs                            3,501,929,143   3,330,813,443       5.1%
    Load factor                             80.4%           81.9%   (1.5 pts)
    Yield (cents)                           16.54           17.99      (8.1%)
    RASM (cents)                            13.30           14.74      (9.8%)
    CASM (cents)                            11.90           12.71      (6.4%)
    CASM, excluding fuel and
     employee profit share (cents)           8.50            8.26       2.9%
    Fuel consumption (litres)         215,760,880     202,155,666       6.7%
    Fuel costs per litre (cents)            65.99           82.96     (20.5%)
    Segment guests                      3,451,685       3,469,405      (0.5%)
    Average stage length (miles)              938             917       2.3%
    Utilization (hours)                      12.2            12.5      (2.4%)
    Number of full-time equivalent
     employees at period end                6,224           5,939       4.8%
    Fleet size at period end                   78              73       6.8%
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The first quarter of 2009 saw the continuation of unprecedented worldwide
economic conditions, resulting in significant challenges for the airline
industry. The North American economy is in a recession, and similar to the
latter half of 2008, this has resulted in capacity reductions, grounded
aircraft, employee lay-offs, deep price discounting and aggressive ancillary
revenue initiatives to stimulate demand within the airline industry. We have
seen fuel costs continue to subside from the record-high levels of 2008, which
provided substantial relief; however, not enough to offset the impact of
weakening demand. Notwithstanding these external pressures, we continued to
execute on our strategic growth plan throughout the first quarter, as
evidenced by the addition of two leased fuel-efficient Boeing Next-Generation
aircraft, new airline partnerships and increased frequency of routes and new
destinations, all while providing high-value service to our guests.
    Despite the challenges presented to us during the first quarter of 2009,
we produced positive net earnings of $37.4 million and diluted earnings per
share of $0.29. We were one of only a few North American airlines to generate
a profit during the quarter. Our EBT margin of 8.7 per cent for the first
quarter of 2009 was once again among the best in the North American airline
industry.
    During the three months ended March 31, 2009, total revenues decreased by
3.3 per cent to $579.3 million as compared to $599.3 million in the same
period of 2008, attributable primarily to the weakening economy, pricing
competition, Easter falling in the second quarter of 2009 versus the first
quarter of 2008 and an extra day in the 2008 comparable period. Overall, we
are pleased with our ability to increase RPMs by 5.1 per cent for the first
quarter of 2009 in a more challenging economic environment than the same
period of 2008.
    Our load factor declined by 1.5 points to 80.4 per cent for the first
quarter of 2009 from 81.9 per cent in the same quarter of 2008, as depicted in
the following graph. However, this load factor remained within our optimal
operating range of 78 per cent to 82 per cent and was achieved on capacity
growth of 7.2 per cent quarter over quarter.

    
    To see the Quarterly Load Factor chart, click here:
    http://files.newswire.ca/762/WestJet_load_factor.doc
    

    We experienced a significant decrease in RASM during the first quarter of
2009 of 9.8 per cent, making cost containment critical to our continued
success and remaining one of our key focuses. For the three months ended March
31, 2009, our CASM improved by 6.4 per cent to 11.90 cents from 12.71 cents in
the same period of 2008, attributable primarily to lower fuel costs quarter
over quarter. Excluding fuel and employee profit share, our CASM increased to
8.50 cents from 8.26 cents in the first quarter of 2008, representing a change
of 2.9 per cent, due mainly to inclement winter weather conditions,
incremental maintenance costs, lower aircraft utilization and a weaker
Canadian dollar.
    We maintained a healthy cash balance of $835.8 million as at March 31,
2009, an increase of 1.9 per cent from December 31, 2008. Additionally, our
current ratio, defined as current assets over current liabilities, remained
strong at 1.24 as compared to 1.25 at the end of 2008. Our adjusted
debt-to-equity ratio decreased to 1.72 from 1.78 as at December 31, 2008.
Please refer to the end of this MD&A for a reconciliation of our adjusted
debt-to-equity ratio, a non-GAAP measure, to the nearest measure under
Canadian GAAP. We continue to generate positive cash flow from operations to
fund our working capital needs and capital funding requirements, related
primarily to our Campus and aircraft deposits, as well as to make our debt
payments without requiring external financing.
    During the first quarter of 2009, we assumed delivery of two leased
737-800s, increasing our total registered fleet to 78 aircraft. With an
average age of 4.2 years, we continue to operate one of the youngest fleets of
any large North American commercial airline.

    
    SELECTED QUARTERLY UNAUDITED FINANCIAL INFORMATION

    -------------------------------------------------------------------------
                                               Three Months Ended
    -------------------------------------------------------------------------
    ($ in thousands, except         Mar. 31    Dec. 31   Sept. 30    Jun. 30
     per share data)                   2009       2008       2008       2008
    -------------------------------------------------------------------------

    Total revenues                $ 579,285  $ 615,783  $ 718,375  $ 616,000
    Net earnings                  $  37,432  $  40,771  $  54,665  $  30,193
    Basic earnings per share      $    0.29  $    0.32  $    0.43  $    0.23
    Diluted earnings per share    $    0.29  $    0.32  $    0.42  $    0.23
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                               Three months ended
    -------------------------------------------------------------------------
    ($ in thousands, except         Mar. 31    Dec. 31   Sept. 30    Jun. 30
     per share data)                   2008       2007       2007       2007
    -------------------------------------------------------------------------

    Total revenues                $ 599,348  $ 552,004  $ 606,242  $ 498,200
    Net earnings                  $  52,506  $  75,359  $  76,070  $  11,549
    Basic earnings per share      $    0.40  $    0.58  $    0.59  $    0.09
    Diluted earnings per share    $    0.40  $    0.57  $    0.58  $    0.09
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Our business is seasonal in nature, with varying levels of activity
throughout the year. We experience increased domestic travel in the summer
months (second and third quarters) and more demand for sun destinations over
the winter period (fourth and first quarters). With our transborder and
international destinations, we have been able to partially alleviate the
effects of seasonality on our net earnings.
    In the quarter ended December 31, 2007, our reported net earnings of
$75.4 million were positively impacted by a non-cash adjustment in the amount
of $33.7 million, or 25 cents per share, to future income tax expense as a
result of the enactment of income tax rate reductions. In the quarter ended
June 30, 2007, our reported net earnings of $11.5 million were negatively
impacted by a non-cash write-down of $31.9 million ($22.2 million after tax or
17 cents per share) for the capitalized costs associated with our former
reservation system project.

    
    RESULTS OF OPERATIONS

    Revenue

    -------------------------------------------------------------------------

                                                 Three months ended March 31
    -------------------------------------------------------------------------
    ($ in thousands)                              2009         2008   Change
    -------------------------------------------------------------------------

    Guest revenues                         $   497,095  $   525,700    (5.4%)
    Charter and other revenues                  82,190       73,648    11.6%
    -------------------------------------------------------------------------
                                           $   579,285  $   599,348    (3.3%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    RASM (cents)                                 13.30        14.74    (9.8%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    During the quarter ended March 31, 2009, total revenues decreased by 3.3
per cent to $579.3 million from $599.3 million in the same period of 2008.
This quarter-over-quarter decline in total revenues was largely attributable
to the weakening economic environment and the resulting softness in demand for
air travel. One of the key indicators of revenue growth is RASM, as it takes
into consideration load factor and yield. Our RASM decreased significantly by
9.8 per cent in the first quarter of 2009 to 13.30 cents from 14.74 cents in
the same period of 2008, due mainly to the deteriorating economy, pricing
competition and the negative effect of Easter falling in the second quarter of
2009 versus the first quarter of 2008. Additionally, we experienced declines
in both yield and load factor quarter over quarter, attributable to the
economic recession. This decline in RASM was offset partially by lower fuel
costs, allowing us to produce another quarter of profitable financial results.
    Guest revenues from our scheduled flight operations, our largest
component of total revenues, declined for the first quarter of 2009 by 5.4 per
cent to $497.1 million, as compared to $525.7 million in the same quarter of
2008. We continued our effective seasonal deployment strategy during the first
quarter of 2009, shifting capacity to higher-demand transborder and
international markets during the Canadian winter months while maintaining an
attractive schedule, frequent flights and sufficient capacity for our domestic
guests. Of our quarter-over-quarter increase in ASMs of 7.2 per cent, we
deployed more capacity to scheduled transborder and international destinations
than existing domestic markets in order to create revenue opportunities in a
number of new markets. This strategy of profitable market expansion remained a
continued focus as competitors withdrew capacity, allowing us to gain market
share, as well as partially mitigate the impact of a deteriorating economy and
pricing competition. The majority of our 7.2 per cent increase in ASMs for the
first quarter of 2009 as compared to the same period of 2008 was deployed
equally to new transborder and international markets and existing transborder
and international markets.
    During the first quarter of 2009, aircraft utilization decreased by 18
minutes to 12.2 operating hours per day, compared to 12.5 operating hours per
day in the same period of 2008, due to optimization of our schedule to adjust
to the weaker demand environment. Our lower aircraft utilization negatively
impacted both revenue and CASM for the first quarter of 2009.

    
    To see the Charter and Scheduled Transborder and International as a
    Percentage of Total ASMs chart, click here:
    http://files.newswire.ca/762/WestJetCharter.doc
    

    For the three months ended March 31, 2009, charter and other revenues,
which include charter, cargo, ancillary, WestJet Vacations Inc. (WVI) non-air
and other revenue, increased by 11.6 per cent to $82.2 million from $73.6
million in the comparable period of 2008. This improvement was driven mainly
by increases in ancillary revenue and WVI non-air revenue, resulting from an
expanded destination base, which is in line with our market expansion
strategy. These improvements were partially offset by a decrease in charter
revenue, as charter saw similar pressure on yields as guest revenue.
    WVI continued to play a significant role in our growth strategy in the
first quarter of 2009, as evidenced by its quarter-over-quarter increase in
revenues. In February 2009, WestJet and Transat terminated the Transat Charter
Agreement, effective May 10, 2009. As we continue to grow our domestic,
transborder and international network, we are confident that our network will
absorb the capacity used for Transat. With the termination of the charter
agreement, there will be more opportunity for WVI, as well as our commercial
schedule, to support our own flying to existing sun destinations and a number
of new destinations to which we can fly.
    Ancillary revenues, which include service fees, onboard sales, and
partner and program revenue, provide an opportunity to maximize our profits
through the sale of higher-margin goods and services, while also enhancing our
overall guest experience. In the first quarter of 2009, ancillary revenues
increased by 24.0 per cent to $24.8 million from $20.0 million in the same
period of 2008. Ancillary revenue per guest was $7.63 for the three months
ended March 31, 2009, an improvement of 25.9 per cent from $6.06 per guest in
the first quarter of 2008. This increase was mainly attributable to higher
revenue from fees in the first quarter of 2009, offset somewhat by the
termination of our tri-branded BMO Mosaik AIR MILES MasterCard credit card
partnership on July 31, 2008. With revenue of $5.6 million, our pre-reserved
seating option introduced in the third quarter of 2008 accounted for
approximately 70 per cent of our quarter-over-quarter increase in fees.
Additionally, increases to our change and cancellation fees contributed to
increased revenue from fees in the first quarter of 2009, versus the
comparable period of the prior year.

    
    Expenses

    -------------------------------------------------------------------------

                                                 Three months ended March 31
    -------------------------------------------------------------------------
    CASM (cents)                                  2009       2008     Change
    -------------------------------------------------------------------------

    Aircraft fuel                                 3.27       4.13     (20.8%)
    Airport operations                            2.15       2.06       4.4%
    Flight operations and navigational charges    1.64       1.66      (1.2%)
    Marketing, general and administration         1.21       1.17       3.4%
    Sales and distribution                        0.94       0.99      (5.1%)
    Depreciation and amortization                 0.78       0.81      (3.7%)
    Inflight                                      0.66       0.62       6.5%
    Aircraft leasing                              0.58       0.47      23.4%
    Maintenance                                   0.54       0.48      12.5%
    Employee profit share                         0.13       0.32     (59.4%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                 11.90      12.71      (6.4%)
    -------------------------------------------------------------------------
    CASM, excluding fuel and employee
     profit share                                 8.50       8.26       2.9%
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    For the first quarter of 2009, our CASM decreased by 6.4 per cent, due
largely to the 20.8 per cent decline in aircraft fuel expense per ASM. Our
CASM, excluding fuel and employee profit share, increased slightly by 2.9 per
cent to 8.50 cents in the first quarter of 2009 from 8.26 cents in the first
quarter of 2008, led primarily by increases in aircraft leasing, airport
operations and maintenance.
    Our longer average stage length, which increased by 2.3 per cent in the
first quarter of 2009 to 938 miles from 917 miles in the same period of 2008,
helped play a role in creating cost efficiencies. Average stage length has a
significant impact on our unit costs. As average stage length increases, cost
efficiencies are gained, and we achieve a lower average cost per mile because
our fixed costs of operations are allocated over an increasing number of miles
flown. Likewise, longer-haul routes typically achieve higher fuel economy, as
we are able to absorb the higher costs of fuel for take-offs and landings over
a longer trip length. This increase in average stage length was offset
partially by the 18 minute decline in our aircraft utilization quarter over
quarter.

    Aircraft fuel

    During the first quarter of 2009, we experienced substantial relief from
the elevated fuel prices that negatively impacted our CASM during 2008. During
the three months ended March 31, 2009, the average market price for jet fuel
was US $57.11 per barrel as compared to US $119.85 per barrel in the first
quarter of 2008, representing a decrease of 52.3 per cent. We saw a
corresponding decrease in our fuel cost per ASM of 20.8 per cent to 3.27 cents
in the first quarter of 2009 as compared to 4.13 cents in the same period in
2008, as result of significant quarter-over-quarter reductions in both
US-dollar West Texas Intermediate (WTI) crude oil prices and refining costs.
This was offset partially by the devaluation of the Canadian dollar versus the
US dollar, incremental costs incurred to transport fuel into the prairie
provinces and the impact of realized losses on the settlement of fuel
derivative contracts. Although market prices have subsided from their previous
levels, fuel remains our most significant cost, representing approximately 27
per cent of total operating costs for the first quarter of 2009, down from
approximately 32 per cent in the same period in 2008.
    The following table displays our fuel costs per litre, including and
excluding fuel hedging, for the three months ended March 31, 2009. Please
refer to the end of this MD&A for a discussion on the use of non-GAAP
measures, including aircraft fuel expense, excluding hedging, which is
reconciled to GAAP in the table below.

    
    -------------------------------------------------------------------------

                                                 Three months ended March 31
    -------------------------------------------------------------------------
    ($ in thousands, except
     per litre data)                              2009         2008   Change
    -------------------------------------------------------------------------

    Aircraft fuel expense - GAAP           $   142,391  $   167,717   (15.1%)
    Realized loss on fuel derivatives -
     effective portion                         (11,974)           -      N/A
    -------------------------------------------------------------------------
    Aircraft fuel expense, excluding
     hedging - Non-GAAP                    $   130,417  $   167,717   (22.2%)

    Fuel consumption (thousands of litres)     215,761      202,156     6.7%
    -------------------------------------------------------------------------
    Fuel costs per litre (dollars)
     - including fuel hedging                     0.66         0.83   (20.5%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Fuel costs per litre (dollars)
     - excluding fuel hedging                     0.60         0.83   (27.7%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Our fuel costs decreased to $0.66 per litre during the first quarter of
2009, including fuel hedging, representing an improvement of 20.5 per cent
from $0.83 per litre in the same period of 2008. Excluding the effects of the
realized loss on fuel derivatives designated in an effective relationship
under cash flow hedge accounting, our fuel costs per litre were $0.60 for the
first quarter of 2009, a decrease of 27.7 per cent from the first quarter of
2008. This differs from our previous estimate of fuel costs for the first
quarter of 2009, excluding the impact of fuel hedging, to be between $0.65 and
$0.67 per litre, due to decreases in crude oil refining costs during the
quarter.
    As at March 31, 2009, we had a mixture of fixed swap agreements and
costless collar structures in Canadian-dollar WTI crude oil derivative
contracts to hedge approximately 30 per cent (December 31, 2008 - 30 per cent)
of our remaining anticipated jet fuel requirements for 2009 and approximately
14 per cent (December 31, 2008 - 14 per cent) of our anticipated jet fuel
requirements for 2010. The following table outlines, as at March 31, 2009, the
notional volumes per barrel (bbl) and the weighted average strike price for
fixed swap agreements and the weighted average call and put prices for
costless collar structures for each year we are hedged.

    
    -------------------------------------------------------------------------
                                             WTI          WTI          WTI
                                           average      average      average
                              Notional     strike        call          put
                               volumes      price        price        price
    Year   Instrument           (bbl)    (CAD$/bbl)   (CAD$/bbl)   (CAD$/bbl)
    -------------------------------------------------------------------------

    2009   Swaps               871,500       90.10            -            -
           Costless collars    410,000           -       114.27        79.15
    2010   Swaps               381,000      103.09            -            -
           Costless collars    483,000           -       111.21        77.94
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table presents the financial impact and statement
presentation of our fuel derivatives on the consolidated balance sheet as at
March 31, 2009, and December 31, 2008.

    -------------------------------------------------------------------------
                                                      March 31,  December 31,
    ($ in thousands)       Statement presentation         2009          2008
    -------------------------------------------------------------------------

    Fair value of fuel     Accounts payable and    $    29,361   $    37,811
     derivatives -          accrued liabilities
     current portion
    Fair value of fuel     Other liabilities             9,006        14,487
     derivatives -
     long-term portion
    Payable to             Accounts payable and          3,768             -
     counterparties for     accrued liabilities
     settled fuel
     contracts
    Net unrealized loss    Accumulated other           (33,052)      (44,711)
     from fuel              comprehensive loss
     derivatives            (AOCL) - before tax
                            impact
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table presents the financial impact and statement
presentation of our fuel derivatives on the consolidated statement of earnings
for the three months ended March 31, 2009, and 2008.

    -------------------------------------------------------------------------
                                                          Three months ended
                                                               March 31
    ($ in thousands)       Statement presentation         2009          2008
    -------------------------------------------------------------------------

    Realized loss on       Aircraft fuel           $    11,974   $         -
     fuel derivatives -
     effective portion
    Realized loss on       Gain on derivatives             846             -
     fuel derivatives -
     ineffective portion
    Unrealized gain on     Gain on derivatives            (949)            -
     fuel derivatives -
     ineffective portion
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The fair value of the fuel derivatives designated in an effective hedging
relationship is determined using inputs, including quoted forward prices for
commodities, foreign exchange rates and interest rates, which can be observed
or corroborated in the marketplace. The fair value of the fixed swap
agreements is estimated by discounting the difference between the contractual
strike price and the current forward price. The fair value of the costless
collar structures is estimated by the use of a standard option valuation
technique. As at March 31, 2009, for the 21-month period that we are hedged,
the closing forward curve for crude oil ranged from approximately US $50 to US
$65 (December 31, 2008 - US $45 to US $67) with the average forward foreign
exchange rate used in determining the fair value being 1.2545 US dollars to
Canadian dollars (December 31, 2008 - 1.2136).
    The estimated amount reported in AOCL that is expected to be reclassified
to net earnings as a component of aircraft fuel expense when the underlying
jet fuel is consumed during the next 12 months is a loss after tax of $18.3
million.
    For 2009, excluding the impact of fuel hedging, we estimate the
sensitivity to changes in crude oil and fuel pricing to be approximately $7
million annually to our fuel costs for every one US-dollar change per barrel
of WTI crude oil and $9 million for every one-cent change per litre of fuel.

    Airport operations

    Airport operations expense consists primarily of airport landing and
terminal fees, and ground handling costs for our scheduled service and charter
operations. These expenditures typically fluctuate depending on the
destinations serviced, aircraft weights, inclement weather conditions and
number of guests. Transborder and international flights are more expensive
than domestic flights due to the higher terminal and pre-clearance fees
charged by domestic airports for transborder and international flights. Also
included in airport operations are costs relating to flight cancellations and
accommodations for displaced guests for situations beyond our control, such as
inclement weather conditions. Because the majority of expenses are levied on a
per-flight basis, the cost per departure is also a relevant performance driver
for airport operations.
    For the three months ended March 31, 2009, our cost per ASM for airport
operations increased by 4.4 per cent to 2.15 cents from 2.06 cents in the same
period of 2008. Similarly, our quarter-over-quarter cost per departure
increased by approximately eight per cent in 2009, versus the comparable
period of 2008, due mainly to increased third-party ground handling rates
relating to transborder and international airports resulting from a greater
percentage of departures to sun destinations; higher meal, hotel and
transportation costs for displaced guests; and the higher costs of de-icing
from unfavourable weather conditions in the first quarter of 2009.
Additionally, due to annual merit and market increases, our employee expenses
are higher on both an ASM and per departure basis.

    Marketing, general and administration

    Marketing encompasses a wide variety of expenses, including advertising
and promotions, onboard products, live satellite television licensing fees and
catering. General and administration costs consist of our corporate office
departments, professional fees, insurance costs and transaction costs related
to aircraft acquisitions. During the first quarter of 2009, our marketing,
general and administration charge per ASM increased by 3.4 per cent to 1.21
cents, compared to 1.17 cents in the same period of 2008. This increase was
attributable mainly to the cost of the $500 future travel credit awarded to
each of our WestJetters for their hard work and dedication during the 2008
Christmas holiday travel season, where much of Canada was impacted by harsh
winter weather; increased professional fees resulting primarily from our
International Financial Reporting Standards (IFRS) transition project; and
costs incurred relating to our new reservation system to be implemented in
2009. These increases were offset partially by lower aircraft acquisition
costs versus the first quarter of 2008, when we assumed delivery of two owned
aircraft.

    Aircraft leasing

    During the first quarter of 2009, we assumed delivery of two leased
737-800 aircraft, bringing our total leased aircraft to 26 as at March 31,
2009. This represents 33.3 per cent of our total fleet. At the end of the
first quarter of 2008, we had a total of 22 aircraft under operating leases,
representing 30.1 per cent of our total registered fleet.
    Our aircraft leasing costs per ASM increased by 23.4 per cent in the
first quarter of 2009 to 0.58 cents from 0.47 cents in the same period of
2008. This change relates mainly to incremental leasing costs on four
additional leased aircraft in the first quarter of 2009, versus the comparable
period of the prior year, as well as the weaker Canadian dollar relative to
the US dollar, which was mostly offset by our foreign exchange hedging
program.

    Maintenance

    Our maintenance expense per ASM increased to 0.54 cents in the first
quarter of 2009 from 0.48 cents in the same period of 2008, representing an
increase of 12.5 per cent, primarily attributable to the weaker Canadian
dollar, as approximately 40 per cent of our maintenance costs were denominated
in US dollars, and incremental scheduled maintenance requirements as our
aircraft continue to age. As at March 31, 2009, 39 out of 78 aircraft, or 50.0
per cent, were off warranty compared to 28 out of 73 aircraft, or 38.4 per
cent, as at March 31, 2008. We anticipate our unit maintenance costs will
continue to increase as our fleet ages.

    Compensation

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

    
    -------------------------------------------------------------------------

                                                 Three months ended March 31
    -------------------------------------------------------------------------
    ($ in thousands)                              2009         2008   Change
    -------------------------------------------------------------------------

    Salaries and benefits                  $    98,825  $    88,236    12.0%
    Employee share purchase plan                11,091        9,937    11.6%
    Employee profit share                        5,717       13,146   (56.5%)
    Stock options                                2,446        4,147   (41.0%)
    Executive share unit plan                      189          376   (49.7%)
    -------------------------------------------------------------------------
                                           $   118,268  $   115,842     2.1%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Salaries and benefits

    Salaries and benefits are determined via a framework of job levels based
on internal experience and external market data. During the first quarter of
2009, salaries and benefits increased by 12.0 per cent to $98.8 million from
$88.2 million in the comparable period of 2008. This increase was due to the
employment of a greater number of WestJetters, versus a year ago, to support
our capacity growth; annual market and merit increases; and the costs relating
to the future travel credits our WestJetters were awarded during the quarter.
Salaries and benefits expense for each department is included in the
respective department's operating expense line item.

    Employee share purchase plan

    Our Employee Share Purchase Plan (ESPP) encourages employees to become
owners of WestJet shares. WestJetters may contribute up to 20 per cent of
their base salaries to the ESPP. As at March 31, 2009, WestJetters contributed
an average of 14 per cent. We match contributions for every dollar contributed
by our employees, and as at March 31, 2009, 83 per cent of our eligible
employees participated in the ESPP. Our matching expense for the three months
ended March 31, 2009 was $11.1 million, an increase of 11.6 per cent from $9.9
million for the same period of 2008, driven primarily by an increased number
of WestJetters.

    Employee profit share

    All employees are eligible to participate in the employee profit sharing
plan. As the profit share system is a variable cost, employees receive larger
awards when we are highly profitable. Conversely, the amount distributed to
employees is reduced and adjusted in less profitable periods. Our profit share
expense for the quarter ended March 31, 2009 was $5.7 million, a 56.5 per cent
decrease from $13.1 million in the same period of 2008. This decrease was
directly attributable to the lower earnings eligible for profit share, due
primarily to the decrease in revenues quarter over quarter.

    Stock options

    Pilots, executives and certain non-executive employees participate in
stock option plans. The fair value of these options, as determined by the
Black-Scholes option pricing model, is expensed over the vesting period.
Stock-based compensation expense related to stock options for the first
quarter of 2009 was $2.4 million compared to $4.1 million in the comparable
period of 2008, representing a decrease of 41.0 per cent. This decrease
related primarily to the vesting of options granted under the 2006 pilot
agreement in which a significant number of stock options were granted.
Stock-based compensation expense related to pilots' options is included in
flight operations and navigational charges, while the expense related to
executives' and certain non-executive employees' options is included in
marketing, general and administration expense.

    Executive share unit plan

    We have an equity-based executive share unit plan whereby up to a maximum
of 550,000 restricted share units (RSU) and performance share units (PSU)
combined may be issued to senior executive officers. The maximum number of
units reserved and issuable under the executive share unit plan is subject to
shareholder approval, which is expected to occur at the Annual and Special
Meeting of Shareholders on May 5, 2009.
    Each RSU and PSU entitles the executive to receive payment upon vesting
in the form of voting shares. We determine compensation expense for the RSUs
and PSUs based on the fair market value of our voting shares at the time of
grant, which is equal to the weighted average trading price of our voting
shares for the five trading days immediately preceding the grant date. The
RSUs time vest at the end of a three-year period, with compensation expense
being recognized in net earnings over the vesting period. PSUs time vest at
the end of a three-year term and incorporate performance criteria based on
achieving compounded average diluted earnings per share growth rate targets
established at the time of grant. Compensation expense is recognized in net
earnings over the vesting period based on the number of units expected to
vest. For the first quarter of 2009, $0.2 million in compensation expense was
included in marketing, general and administration expense related to the
executive share unit plan as compared to $0.4 million in the same period of
2008.

    Foreign exchange

    We are exposed to foreign currency exchange risks arising from
fluctuations in exchange rates on our US-dollar denominated net monetary
assets and our operating expenditures, mainly aircraft fuel, aircraft leasing
expense, certain maintenance costs and a portion of airport operations costs.
During the three months ended March 31, 2009, the average US-dollar exchange
rate was 1.2448 (three months ended March 31, 2008 - 1.0036), with the
period-end exchange rate at 1.2613 (March 31, 2008 - 1.0235), representing
increases of approximately 24 per cent and 23 per cent, respectively.
    The gain on foreign exchange line item on our consolidated statement of
earnings was mainly attributable to the effect of the changes in the value of
our US-dollar denominated net monetary assets. As at March 31, 2009, US-dollar
net monetary assets totalled approximately US $89.3 million (December 31, 2008
- US $99.5 million) and consist mainly of US-dollar cash and cash equivalents
and security deposits on various leased and financed aircraft, as well as
US-dollar accounts payable and accrued liabilities. We hold US-denominated
cash and short-term investments to reduce the foreign currency risk inherent
in our US-dollar expenditures. We reported a foreign exchange gain of $4.6
million for the first quarter of 2009 on the revaluation of our US-dollar net
monetary assets as compared to a gain of $3.9 million for the same period of
2008.
    We periodically use financial derivatives to manage our exposure to
foreign currency exchange risk. As at March 31, 2009, we had a mixture of
US-dollar forward contracts and option arrangements to offset our US-dollar
denominated aircraft lease payments for the next six months of 2009 on our
current leased aircraft. As at March 31, 2009, we had entered into financial
derivative instruments to purchase on average US $6.6 million per month for
six months for a total of US $39.5 million. Of this total, approximately 45
per cent is hedged using forward contracts at a weighted average strike price
of 1.0463 per US dollar, and approximately 55 per cent is hedged using option
arrangements at a weighted average range of 1.1248 to 1.2151 per US dollar.
    Upon proper qualification, we designated our forward contracts as
effective cash flow hedges for accounting purposes. Under cash flow hedge
accounting, the effective portion of the change in the fair value of the
hedging instrument is recognized in AOCL, while the ineffective portion is
recognized in non-operating income (expense). Upon maturity of the derivative
instrument, the effective gains and losses previously recognized in AOCL are
recorded in net earnings as a component of aircraft leasing. Maturity dates
for all of the foreign exchange forward contracts are within 2009. As at March
31, 2009, no portion of the forward contracts is considered ineffective.
    For the three months ended March 31, 2009, we realized a gain before tax
on the forward contracts of $3.3 million (three months ended March 31, 2008 -
$0.3 million), included as a deduction to aircraft leasing expense. As at
March 31, 2009, the estimated fair market value of the remaining forward
contracts recorded in prepaid expenses, deposits and other is a gain of $3.8
million (December 31, 2008 - $5.9 million). The estimated amount reported in
AOCL that is expected to be reclassified to net earnings as a reduction to
aircraft leasing expense during the next 12 months is a gain after tax of $2.7
million.
    Our foreign exchange option arrangements are not designated as hedges for
accounting purposes and are recorded at fair value on the consolidated balance
sheet, with changes in fair value recorded in non-operating income (expense).
As at March 31, 2009, the estimated fair market value of the option
arrangements recorded in prepaid expenses, deposits and other is a gain of
$1.4 million (December 31, 2008 - $0.9 million). For the three months ended
March 31, 2009, we realized a gain of $6,000 on our foreign exchange option
arrangements and reported an unrealized gain of $0.5 million, both included in
non-operating income (expense). Maturity dates for all of the foreign exchange
option arrangements are within 2009.
    The fair value of the foreign exchange option arrangements was determined
through a standard option valuation technique used by the counterparty based
on inputs, including foreign exchange rates, interest rates and volatilities.
Contracts outstanding as at March 31, 2009 were at a weighted average
contracted range of 1.1248 to 1.2151 US dollars to Canadian dollars (December
31, 2008 - 1.1333 to 1.2254). The fair value of the foreign exchange forward
contracts designated in an effective hedging relationship was measured based
on the difference between the contracted rate and the current forward price
obtained from the counterparty, which can be observed and corroborated in the
marketplace. As at March 31, 2009, the average contracted rate on the
outstanding forward contracts was 1.0463 (December 31, 2008 - 1.0519) US
dollars to Canadian dollars and the average forward rate used in determining
the fair value was 1.2606 (December 31, 2008 - 1.2178) US dollars to Canadian
dollars. Due to the short-term nature of the outstanding forward contracts, no
discount rate was applied.
    For 2009, including the impact of foreign exchange hedging, we estimate
that every one-cent change in the value of the Canadian dollar versus the US
dollar will have an approximate $7 million impact on our annual costs
(approximately $5 million for fuel and $2 million related to other US-dollar
denominated expenses). This differs from our estimate in the fourth quarter of
2008 of $6 million for fuel, due to softening in the price of jet fuel.

    Income taxes

    Our operations span several Canadian tax jurisdictions, subjecting our
income to various rates of taxation. As such, the computation of the provision
for income taxes involves judgments based on the analysis of several different
pieces of legislation and regulation.
    Our effective consolidated income tax rate for the quarter ended March
31, 2009 was 25.8 per cent, as compared to 29.2 per cent for the same period
of 2008. The variance was driven primarily by British Columbia provincial
income tax rate reductions substantively enacted in the first quarter of 2009,
as well as adjustments to previous future tax estimates, for an overall
reduction of future income tax expense recognized during this period of $2.3
million. Excluding these non-recurring items, the effective consolidated
income tax rate for the first quarter of 2009 would have been 30.3 per cent,
which is consistent with our expected effective tax rate of 30 to 31 per cent.

    Guest experience

    As an airline, we are focused on meeting the needs of our guests while
maintaining the highest safety standards. We are committed to delivering a
positive guest experience during every aspect of our service, from the time
the flight is booked to completion of the flight.

    Key operating performance indicators

    On-time performance and completion rates are calculated based on the U.S.
Department of Transportation's standards of measurement for the North American
airline industry. Our bag ratio represents the number of delayed or lost
baggage claims made per 1,000 guests.

    
    -------------------------------------------------------------------------

                                                 Three months ended March 31
    -------------------------------------------------------------------------
                                                  2009       2008     Change
    -------------------------------------------------------------------------

    On-time performance                          70.6%      69.0%    1.6 pts
    Completion rate                              97.5%      98.1%   (0.6 pts)
    Bag ratio                                     4.41       5.15      14.4%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    On-time performance, indicating the percentage of flights that arrived
within 15 minutes of their scheduled time, is a key factor in measuring our
guest experience. Despite harsh winter weather during the first quarter of
2009, our on-time performance improved by 1.6 points during the quarter as
compared to the same period in 2008.
    Our completion rate was down slightly for the first quarter of 2009 at
97.5 per cent versus 98.1 per cent in the comparable period of 2008, due to
inclement weather and resulting flight cancellations. This indicator
represents the percentage of flights completed from flights originally
scheduled.
    We continued to see our bag ratio improve by 14.4 per cent for the three
months ended March 31, 2009, as compared to the same period in 2008.

    LIQUIDITY AND CAPITAL RE

SOURCES Despite the economic environment, we achieved another quarter of profitable financial results. Our substantial cash on hand and continued generation of positive cash flows from operations position us well to execute our strategy and withstand the economic recession. Additionally, our strong leverage ratios reflect our financial health and stability. We ended the first quarter of 2009 with a cash balance of $835.8 million, an increase of 1.9 per cent as compared to $820.2 million as at December 31, 2008. Part of this cash balance relates to cash collected with respect to advance ticket sales, for which the balance at March 31, 2009 was $263.7 million, as compared to $251.4 million as at December 31, 2008. Typically, we have cash and cash equivalents on hand to have sufficient liquidity to meet our liabilities when due, under both normal and stressed conditions. As at March 31, 2009, we had cash on hand of 3.17 times (December 31, 2008 - 3.26 times) the advance ticket sales balance. Our working capital ratio of 1.24 as at March 31, 2009 remained strong and demonstrates our financial stability. Credit risk associated with cash and cash equivalents is minimized substantially by ensuring that these financial assets are invested primarily in debt instruments with highly-rated financial institutions. Additionally, we have not been required to post collateral with respect to any of our derivative contracts. We monitor capital on a number of measures, including adjusted debt-to-equity and adjusted net debt to Earnings Before Interest, Taxes, Depreciation, Aircraft Rent and other items (EBITDAR). Our adjusted debt-to-equity ratio improved by 3.4 per cent to 1.72 as at March 31, 2009, which included $690.3 million in off-balance-sheet aircraft operating leases. This compared favourably to an adjusted debt-to-equity ratio of 1.78 as at December 31, 2008, attributable to the increase in shareholders' equity more than offsetting the addition of new aircraft financing during the period. As at March 31, 2009, our adjusted net debt to EBITDAR ratio was 2.33, representing a decline of 1.7 per cent as compared to 2.29 as at December 31, 2008, due primarily to the decrease in EBITDAR being slightly greater than the decrease in adjusted net debt. Both of these ratios met our internal targets for March 31, 2009 and December 31, 2008 of an adjusted debt-to-equity measure and an adjusted net debt to EBITDAR ratio of no more than 3.00. Please refer to the end of this MD&A for a reconciliation of the non-GAAP measures listed above, including our adjusted debt-to-equity and adjusted net debt to EBITDAR ratios, to the nearest measure under Canadian GAAP. To see the Adjusted Debt-To-Equity and Adjusted Net Debt to EBITDAR charts, click here: http://files.newswire.ca/762/WestJet_EBITDAR.doc Operating cash flow We continued to generate positive cash flows from operations to fund our working capital requirements. In the first quarter of 2009, cash from operations decreased to $95.5 million compared to $184.8 million for the same period of 2008, representing a decline of 48.4 per cent. This quarter-over-quarter decrease related primarily to lower earnings from operations due to the weakening economy, as well as a decrease in non-cash working capital due to lower advance ticket sales and accounts payable and accrued liabilities balances, versus amounts as at March 31, 2008. Financing cash flow For the first quarter of 2009, our total cash flow used in financing activities was $41.6 million, consisting substantially of repayments of long-term debt. During the comparable quarter of 2008, our cash flow from financing activities was $24.4 million, comprised mainly of $67.9 million in long-term debt issued to finance two owned aircraft, partially offset by $41.4 million in long-term debt repayments and $2.1 million in deposits relating mainly to leased aircraft. In addition to having strong cash liquidity, we have grown through aircraft acquisitions financed by low-interest-rate debt supported by the Export-Import Bank of the United States (Ex-Im Bank). We have yet to pursue financing agreements for our remaining aircraft commitments, as our next purchased aircraft delivery is not expected until September 2010. The loan guarantees from the U.S. government represent approximately 85 per cent of the purchase price of these aircraft. This financing activity brings the cumulative number of aircraft financed with loan guarantees to 52, with an outstanding debt balance of $1.3 billion associated with those aircraft. All of this debt has been financed in Canadian dollars at fixed interest rates, thus eliminating all future foreign exchange and interest rate exposure on these US-dollar aircraft purchases. To facilitate the financing of our Ex-Im Bank-supported aircraft, we utilize five special-purpose entities. We have no equity ownership in the special-purpose entities; however, we are the beneficiary of the special-purpose entities' operations. The accounts of the special-purpose entities have been consolidated in the financial statements. Investing cash flow Cash used in investing activities for the first quarter of 2009 totalled $45.0 million compared to $80.2 million in the same period of 2008. During the three months ended March 31, 2009, our investing activities consisted of $27.0 million in aircraft additions, largely resulting from the conversion to an accelerated deposit schedule with Boeing, toward four future owned aircraft in order to mitigate carrying costs. Additionally, we incurred $18.0 million in other property and equipment additions, mainly related to our new office space, the Campus, adjacent to the Calgary hangar. Cash used in investing activities for the first quarter of 2008 included $70.8 million related primarily to the addition of two owned 737-700 aircraft, as well as $11.6 million in capital spending, mainly associated with the Campus facility. Capital Resources During the first quarter of 2009, we took delivery of two leased 737-800s, increasing our total registered fleet to 78 aircraft with an average age of 4.2 years. As at March 31, 2009, we had existing commitments to take delivery of an additional 42 aircraft as summarized below, for a total committed fleet of 120 by 2013. On February 29, 2008, we signed a Letter of Intent to lease an additional 737-800 aircraft scheduled for delivery in 2011. This has not been reflected as a commitment in the following table as the lease agreement has not yet been signed; however, if included, our future deliveries would be 121 aircraft by 2013. ------------------------------------------------------------------------- Series ------------------------------------------------ 600s 700s ------------------------------------------------ Leased Owned Total Leased Owned Total ------------------------------------------------------------------------- Fleet at December 31, 2008 - 13 13 18 38 56 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Fleet at March 31, 2009 - 13 13 18 38 56 Commitments: 2009 - - - 7 - 7 2010 - - - 4 2(*) 6 2011 - - - 4 2(*) 6 2012 - - - - 14(*) 14 2013 - - - - 6(*) 6 ------------------------------------------------------------------------- Total Commitments - - - 15 24 39 ------------------------------------------------------------------------- Committed fleet as of 2013 - 13 13 33 62 95 ------------------------------------------------------------------------- (*)We have an option to convert any of these future aircraft to 737-800s. ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Series ------------------------------------------------ 800s Total Fleet ------------------------------------------------ Leased Owned Total Leased Owned Total ------------------------------------------------------------------------- Fleet at December 31, 2008 6 1 7 24 52 76 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Fleet at March 31, 2009 8 1 9 26 52 78 Commitments: 2009 1 - 1 8 - 8 2010 2 - 2 6 2 8 2011 - - - 4 2 6 2012 - - - - 14 14 2013 - - - - 6 6 ------------------------------------------------------------------------- Total Commitments 3 - 3 18 24 42 ------------------------------------------------------------------------- Committed fleet as of 2013 11 1 12 44 76 120 ------------------------------------------------------------------------- (*)We have an option to convert any of these future aircraft to 737-800s. ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at March 31, 2009, our total purchased aircraft commitment, including amounts to be paid for live satellite television systems on purchased and leased aircraft, was $1,286.6 million (US $1,020.0 million). Additionally, our commitment relating to aircraft operating leases was $1,586.8 million (US $1,258.0 million) as at March 31, 2009, to be funded through our operating cash flow. Amounts relating to the previously mentioned unsigned lease have not been included in these commitments. During 2008, we signed a three-year revolving operating line of credit with a syndicate of three Canadian banks. The line of credit is available for up to a maximum of $85 million, commencing in the second quarter of 2009. It is subject to various customary conditions precedent being satisfied, and will be secured by our new Campus facility. The line of credit will bear interest at prime plus 0.50 per cent per annum or a bankers acceptance rate at 2.0 per cent annual stamping fee and will be available for general corporate expenditures and working capital purposes. We are required to pay a standby fee of 15 basis points, based on the average unused portion of the line of credit for the previous quarter, payable quarterly. As at March 31, 2009, no amounts were drawn on this facility. Contingencies We are party to certain legal proceedings that arise during the ordinary course of business. It is the opinion of management that the ultimate outcome of these matters will not have a material effect upon our financial position, results of operations or cash flows. Share capital Our issued and outstanding common shares, along with common shares potentially issuable, are as follows: ------------------------------------------------------------------------- Number of shares ------------------------------------------------------------------------- May 1, March 31, 2009 2009 ------------------------------------------------------------------------- Issued and outstanding: Common voting shares 123,827,080 124,132,879 Variable voting shares 4,102,255 3,796,100 ------------------------------------------------------------------------- Total common shares issued and outstanding 127,929,335 127,928,979 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Common shares potentially issuable: Stock options 11,729,630 11,735,130 RSUs 157,938 157,938 PSUs 210,579 210,579 ------------------------------------------------------------------------- Total common shares potentially issuable 12,098,147 12,103,647 ------------------------------------------------------------------------- Total outstanding and potentially issuable common shares 140,027,482 140,032,626 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Related-party transactions We have debt financing and investments in short-term deposits with a financial institution that is related through two common directors, one of whom is also the president of the financial institution. As at March 31, 2009, total long-term debt includes an amount of $7.1 million (December 31, 2008 - $7.3 million) due to the financial institution. Included in cash and cash equivalents as at March 31, 2009 are short-term investments of $125.2 million (December 31, 2008 - $96.5 million) owing from the financial institution. In 2008, we signed a three-year revolving operating line of credit agreement with a banking syndicate, of which one of the members is the related-party financial institution. These transactions occurred in the normal course of operations with terms consistent with those offered to arm's length parties and are measured at the exchange amount. ACCOUNTING Changes in accounting policies Goodwill and intangible assets Effective January 1, 2009, we adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3064, Goodwill and Intangible Assets. This section provides guidance on the recognition, measurement, presentation and disclosure for goodwill and intangible assets, other than the initial recognition of goodwill or intangible assets acquired in a business combination. Upon adoption of Section 3064, we reclassified the net book value of purchased software that was previously recognized in property and equipment of $13.2 million as at March 31, 2009 (December 31, 2008 - $12.1 million) to intangible assets on our consolidated balance sheet. There was no impact to current or prior-period net earnings. See note 6 to the consolidated financial statements for further disclosure. Business combinations In January 2009, the CICA Accounting Standards Board (AcSB) issued Section 1582, Business Combinations. Section 1582 replaces Section 1581, Business Combinations and harmonizes the Canadian standards with IFRS. Section 1582 establishes principles and requirements of the acquisition method for business combinations and related disclosures. This section is effective January 1, 2011, and applies prospectively to business combinations for which the acquisition date is on or after our first annual reporting period beginning on or after January 1, 2011. Early adoption is permitted. We elected to adopt Section 1582 prospectively effective January 1, 2009. Adoption of this section did not impact our results of operations or financial position. Consolidated statements and non-controlling interests In January 2009, the AcSB issued Sections 1601, Consolidated Financial Statements and Section 1602, Non-controlling Interests, which together replace Section 1600, Consolidated Financial Statements and harmonizes the Canadian standards with IFRS. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 provides guidance on accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These sections are effective on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. Early adoption is permitted. We elected to adopt Section 1601 and Section 1602 prospectively effective January 1, 2009. Adoption of these sections did not impact our results of operations or financial position. Future accounting policy changes IFRS On February 13, 2008, the CICA AcSB confirmed that the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises for interim and annual financial statements, effective for fiscal years beginning on or after January 1, 2011, including comparatives for 2010. The objective is to improve financial reporting by having one single set of accounting standards that are comparable with other entities on an international basis. We commenced our IFRS conversion project during 2008 and established a formal project governance structure, including an IFRS Steering Committee, to monitor the progress and critical decisions in the transition to IFRS. The Steering Committee consists of senior levels of management from Finance, Treasury and Investor Relations, among others. An external advisor has been engaged to work with our dedicated project staff to complete the conversion. Regular reporting is provided by the project team to senior management, the Steering Committee and the Audit Committee of the Board of Directors. Our IFRS conversion project consists of three phases: Diagnostic, Solution Development and Implementation and Execution. We have completed the Diagnostic phase, which involved a high-level preliminary assessment of the differences between Canadian GAAP and IFRS and the potential effects of IFRS to accounting and reporting processes, information systems, business processes and external disclosures. This assessment has provided insight as to the most significant areas of difference applicable to us and include property and equipment, provisions and leases, as well as the more extensive presentation and disclosure requirements under IFRS. We have finalized our IFRS transition plan including a timetable for assessing the impact on systems, internal controls over financial reporting (ICFR) and business activities. Currently, we are engaged in the Solution Development phase of the project and are working in issue-specific teams to focus on generating options and making recommendations in the identified areas. We have begun to roll out our staff training programs and have begun to perform an in-depth review of accounting policy impacts, as well as the associated impacts of the IFRS transition on business activities. A full review of our information systems is in progress to assess IFRS conversion impacts and we continue to evaluate the available alternatives within our current financial systems. Our target is to complete the Solution Development phase by the third quarter of 2009. We continue to monitor standards development as issued by the International Accounting Standards Board and the AcSB, as well as regulatory developments as issued by the Canadian Securities Administrators (CSA), which may affect the timing, nature or disclosure of the our adoption of IFRS. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect our reported financial position and results of operations. As we are still in the Solution Development phase and have not yet selected our accounting policy choices and IFRS 1 exemptions, we are unable to quantify the impact of IFRS on our financial statements. The areas of significance identified above are based on available information and our expectations as of the date of this MD&A and thus, are subject to change for new facts and circumstances. Please see the following table for certain elements of our IFRS transition plan and an assessment of progress towards achieving these. The project team is working through a detailed IFRS transition plan and certain project activities and milestones could change. We have begun to highlight certain key activities below to provide insights into the IFRS project. Given the progress of the project and outcomes identified, we could change our intentions between the time of communicating these key milestones below and the changeover date. Further, changes in regulation or economic conditions at the date of the changeover or throughout the project could result in changes to the transition plan being different from those communicated here. ------------------------------------------------------------------------- Key activity Key milestones Status ------------------------------------------------------------------------- Financial statement preparation ------------------------------------------------------------------------- - Identify differences Senior management and Completed the IFRS in Canadian GAAP/IFRS Steering Committee Diagnostic phase during accounting policies sign-off for all key 2008, which involved a - Select ongoing IFRS IFRS accounting high-level review of the policies policy choices to major differences - Select IFRS 1 choices occur during the third between Canadian GAAP - Develop financial quarter of 2009. and IFRS. statement format - Quantify effects of Development of draft Currently engaged in the change in initial financial statement Solution Development IFRS disclosure and format to occur phase, which includes an 2010 comparative during the latter in-depth analysis of financial statements part of 2009. issues and accounting policy choices. ------------------------------------------------------------------------- Training ------------------------------------------------------------------------- Define and introduce Controller's Group Project team expert appropriate level of and business unit resources have been IFRS expertise for accounting personnel identified to provide each of the following: training to occur insights and training. during the third and Training for project - Controller's Group fourth quarters of team members is and business unit 2009 as needed. occurring throughout the accounting personnel Additional training project. - Audit Committee will occur throughout the project as needed. Audit Committee training tentatively scheduled to occur during the second half of 2009. ------------------------------------------------------------------------- Information technology (IT) infrastructure ------------------------------------------------------------------------- Confirm that business Confirm that systems Diagnostic analysis processes and systems can address 2010 dual regarding current IT are IFRS compliant, reporting requirements systems completed. including: by the third quarter of 2009. Currently reviewing - Program upgrades/ options to address changes Confirm that business business process - Gathering data for processes and systems changes. Proof of disclosures are IFRS compliant concept for dual throughout the project. reporting during 2010 is currently being developed. ------------------------------------------------------------------------- Control environment ------------------------------------------------------------------------- - For all accounting All key control and Analysis of control policy changes design effectiveness issues is underway in identified, assess implications are conjunction with review control design and being assessed as part of accounting issues and effectiveness of the key IFRS policies. implications differences and - Implement appropriate accounting policy changes choices through to the fourth quarter of 2009. ------------------------------------------------------------------------- DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING Disclosure controls and procedures Disclosure controls and procedures (DC&P) are designed to provide reasonable assurance that all relevant information is gathered and reported to management, including the President and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of our DC&P was conducted, as at March 31, 2009, by management under the supervision of the CEO and the CFO. Based on this evaluation, the CEO and the CFO have concluded that, as at March 31, 2009, our DC&P, as defined by the CSA in National Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, are effective to ensure that information required to be disclosed in reports that we file or submit under Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified therein. Internal control over financial reporting ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian GAAP. Management is responsible for establishing and maintaining adequate ICFR. Our ICFR includes policies and procedures that pertain to the maintenance of records that provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with Canadian GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors; pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; and are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our annual and interim consolidated financial statements. Because of its inherent limitations, ICFR can provide only reasonable assurance and may not prevent or detect misstatements. Furthermore, projections of an evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Management, under the supervision of the CEO and the CFO, has evaluated the effectiveness of our ICFR using the framework and criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the design of our ICFR was effective as at March 31, 2009. There were no changes in our ICFR during the quarter ended March 31, 2009, that have materially affected, or are reasonably likely to affect, our ICFR. OUTLOOK During the first quarter of 2009, we continued to see the impact of the weak economic environment, putting substantial pressure on yield and pricing. Despite this, we remain profitable and are reporting what we believe to be one of the top margins within the North American airline industry. Our second quarter capacity is expected to increase between one and two per cent from the second quarter of 2008. During the second quarter, we have adjusted our flight schedules to reduce some of our flying as we take into consideration the current demand and revenue environment. We anticipate that competitors will continue to withdraw capacity in the domestic, transborder and international markets; however, we continue to add additional capacity into these markets, which we believe will allow us to capture additional market share. As we move further into 2009, we do not anticipate a dramatic improvement in external economic conditions in the short term, and thus, we believe that demand for air travel in the second quarter of 2009 will continue to be negatively impacted. Additionally, we are not seeing any improvement in the revenue environment. As a result, it is expected that second quarter RASM will show year-over-year declines that are, at best, similar to what we saw in the first quarter of 2009. The recent H1N1 influenza virus outbreak appears to be delaying some consumers' travel bookings; however, it is too early to determine how it will impact RASM. The price of jet fuel has declined from the record levels of 2008 and at current levels, is providing substantial relief on costs. Fuel prices have increased slightly since the start of the year, but with significantly less volatility than seen during 2008. Due to lower jet fuel prices, we expect our second quarter 2009 fuel costs, excluding hedging, to range between $0.60 and $0.62 per litre, representing a 40 per cent decline or greater from the same period last year, partially offset by a weaker Canadian dollar and slightly higher fuel transportation costs. For the second quarter of 2009, we have hedged approximately 30 per cent of our anticipated fuel requirements using Canadian-dollar WTI fixed swap agreements and costless collar structures. The fixed swap agreements represent approximately 70 per cent of the total volume hedged for the second quarter and are at an average of CAD $91 per barrel. The costless collar structures represent the remaining 30 per cent and have a weighted average call price of CAD $114 per barrel and a weighted average put price of CAD $77 per barrel. The settlements of these hedging contracts are anticipated to add between $0.04 and $0.06 per litre to our cost of fuel. In spite of the unprecedented events, we remain confident that we will effectively manage through the economic challenges as they are presented in 2009. We are well positioned to adapt our capacity during this period, with our seasonal deployment strategy, a number of newly-introduced destinations and the opportunity to increase our market share in a number of markets. Moreover, during these challenging times, our WestJet brand has remained strong, making us the airline of choice for many travellers who are seeking stability in their travel plans, which has in turn resulted in market share gains. We continue capitalizing on our low-cost structure, maintaining a strong balance sheet and delivering high-value service to our guests. With our airline's healthy underlying fundamentals, including continued profitability, a healthy cash position, enviable corporate culture and people providing an award-winning guest experience, we believe that 2009 will be another successful and profitable year for WestJet. NON-GAAP MEASURES To supplement our consolidated financial statements presented in accordance with Canadian GAAP, we use various non-GAAP performance measures as discussed below. These measures are provided to enhance the reader's overall understanding of our current financial performance and are included to provide investors and management with an alternative method for assessing our operating results in a manner that is focused on the performance of our ongoing operations and to provide a more consistent basis for comparison between quarters. These measures are not in accordance with, or an alternative to, Canadian GAAP and do not have standardized meanings. Therefore, they are not likely to be comparable to similar measures presented by other entities. The following non-GAAP measures are used to monitor our financial performance: Adjusted debt: The sum of long-term debt, obligations under capital lease and off-balance-sheet aircraft operating leases. Our practice, consistent with common industry practice, is to multiply the trailing twelve months of aircraft leasing expense by 7.5 to derive a present value debt equivalent. This measure is used in the calculation of adjusted debt-to- equity and adjusted net debt to Earnings Before Interest, Taxes, Depreciation, Aircraft Rent and other items, as defined below. Adjusted equity: The sum of share capital, contributed surplus and retained earnings, excluding accumulated other comprehensive loss (AOCL). This measure is used in the calculation of adjusted debt-to-equity. Adjusted net debt: Adjusted debt less cash and cash equivalents. This measure is used in the calculation of adjusted net debt to Earnings Before Interest, Taxes, Depreciation, Aircraft Rent and other items, as defined below. EBITDAR: Earnings Before Interest, Taxes, Depreciation, Aircraft Rent and other items, such as asset impairments, gains and losses on derivatives and foreign exchange gains or losses. EBITDAR is a non-GAAP measure commonly used in the airline industry to evaluate results by excluding differences in the method in which an airline finances its aircraft. CASM, excluding fuel and employee profit share: We exclude the effects of aircraft fuel expense and employee profit share expense to assess the operating performance of our business. Fuel expense is excluded from our operating results due to the fact that fuel prices are impacted by a host of factors outside our control, such as significant weather events, geopolitical tensions, refinery capacity and global demand and supply. Excluding this expense allows us to analyze our operating results on a comparable basis. Employee profit share expense is excluded from our operating results due to its variable nature and excluding this expense allows greater comparability. Aircraft fuel expense, excluding hedging: As presented in the non-GAAP measures to GAAP reconciliation in Results of Operations - Aircraft Fuel, we believe it is useful to reflect aircraft fuel expense excluding hedging, which excludes the effective portion of realized losses on fuel derivatives and excludes ineffectiveness, as defined, for future period derivative instruments. Since fuel expense is highly volatile, we believe presenting the cost of fuel, both including and excluding the effects of hedging, is useful to a reader. This table has not been repeated in this section. Reconciliation of non-GAAP measures to GAAP ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ in thousands, except March 31, December 31, ratio amounts) 2009 2008 Change ------------------------------------------------------------------------- Adjusted debt-to-equity: Long-term debt(i) $ 1,310,313 $ 1,351,903 $ (41,590) Obligations under capital lease(ii) 1,011 1,108 (97) Off-balance-sheet aircraft leases(iii) 690,323 645,375 44,948 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted debt $ 2,001,647 $ 1,998,386 $ 3,261 ------------------------------------------------------------------------- Total shareholders' equity 1,133,256 1,086,137 47,119 Add: AOCL 31,060 38,112 (7,052) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted equity $ 1,164,316 $ 1,124,249 $ 40,067 ------------------------------------------------------------------------- Adjusted debt-to-equity 1.72 1.78 (3.4%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted net debt to EBITDAR(iv): Net earnings $ 163,061 $ 178,135 $ (15,074) Add: Net interest(v) 53,733 50,593 3,140 Taxes 68,018 76,702 (8,684) Depreciation and amortization 137,529 136,485 1,044 Aircraft leasing 92,043 86,050 5,993 Other(vi) (14,574) (13,256) (1,318) ------------------------------------------------------------------------- EBITDAR $ 499,810 $ 514,709 $ (14,899) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted debt (as above) 2,001,647 1,998,386 3,261 Less: Cash and cash equivalents (835,791) (820,214) (15,577) ------------------------------------------------------------------------- Adjusted net debt $ 1,165,856 $ 1,178,172 $ (12,316) ------------------------------------------------------------------------- Adjusted net debt to EBITDAR 2.33 2.29 (1.7%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) As at March 31, 2009, long-term debt includes the current portion of long-term debt of $165,413 (December 31, 2008 - $165,721) and long-term debt of $1,144,900 (December 31, 2008 - $1,186,182). (ii) As at March 31, 2009, obligations under capital lease includes the current portion of obligations under capital lease of $400 (December 31, 2008 - $395) and obligations under capital lease of $611 (December 31, 2008 - $713). (iii) Off-balance-sheet aircraft leases is calculated by multiplying the trailing twelve months of aircraft leasing expense by 7.5. As at March 31, 2009, the trailing twelve months of aircraft leasing costs totalled $92,043 (December 31, 2008 - $86,050). (iv) The trailing twelve months are used in the calculation of EBITDAR. (v) As at March 31, 2009, net interest include the trailing twelve months of interest income of $20,297 (December 31, 2008 - $25,485) and the trailing twelve months of interest expense of $74,030 (December 31, 2008 - $76,078). (vi) As at March 31, 2009, other includes the trailing twelve month foreign exchange gain of $31,271 and the trailing twelve month loss on derivatives of $16,697 (December 31, 2008 - $30,587 foreign exchange gain and $17,331 loss on derivatives). ------------------------------------------------------------------------- Three months ended March 31 ------------------------------------------------------------------------- ($ in thousands, except per unit data) 2009 2008 ------------------------------------------------------------------------- CASM, excluding fuel and employee profit share ------------------------------------------------------------------------- Operating expenses - GAAP $ 518,624 $ 516,787 Adjusted for: Aircraft fuel expense (142,391) (167,717) Employee profit share expense (5,717) (13,146) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses, excluding above items - Non-GAAP $ 370,516 $ 335,924 ------------------------------------------------------------------------- ASMs (in thousands) 4,356,805 4,064,992 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CASM, excluding above items - Non-GAAP (cents) 8.50 8.26 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Financial Statements and Notes For the three months ended March 31, 2009, and 2008 Consolidated Statement of Earnings (Stated in thousands of Canadian dollars, except per share amounts) (Unaudited) ------------------------------------------------------------------------- Three months ended March 31 2009 2008 ------------------------------------------------------------------------- Revenues: Guest revenues $ 497,095 $ 525,700 Charter and other revenues 82,190 73,648 ------------------------------------------------------------------------- 579,285 599,348 Expenses: Aircraft fuel 142,391 167,717 Airport operations 93,657 83,928 Flight operations and navigational charges 71,707 67,575 Marketing, general and administration 52,866 47,406 Sales and distribution 40,914 40,278 Depreciation and amortization 33,893 32,849 Inflight 28,884 25,399 Aircraft leasing 25,076 19,083 Maintenance 23,519 19,406 Employee profit share 5,717 13,146 ------------------------------------------------------------------------- 518,624 516,787 ------------------------------------------------------------------------- Earnings from operations 60,661 82,561 Non-operating income (expense): Interest income 2,118 7,306 Interest expense (17,485) (19,533) Gain on foreign exchange 4,621 3,937 Loss on disposal of property and equipment (106) (70) Gain on derivatives (note 11) 634 - ------------------------------------------------------------------------- (10,218) (8,360) ------------------------------------------------------------------------- Earnings before income taxes 50,443 74,201 Income tax expense: Current 706 991 Future 12,305 20,704 ------------------------------------------------------------------------- 13,011 21,695 ------------------------------------------------------------------------- Net earnings $ 37,432 $ 52,506 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share (note 8): Basic $ 0.29 $ 0.40 Diluted $ 0.29 $ 0.40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. Consolidated Balance Sheet (Stated in thousands of Canadian dollars) (Unaudited) ------------------------------------------------------------------------- March 31, December 31, 2009 2008 ------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (note 4) $ 835,791 $ 820,214 Accounts receivable 25,365 16,837 Future income tax 2,344 4,196 Prepaid expenses, deposits and other 57,214 67,693 Inventory 7,919 17,054 ------------------------------------------------------------------------- 928,633 925,994 Property and equipment (note 5) 2,282,642 2,269,790 Intangible assets (note 6) 13,237 12,060 Other assets 75,970 71,005 ------------------------------------------------------------------------- $ 3,300,482 $ 3,278,849 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities: Accounts payable and accrued liabilities $ 251,080 $ 249,354 Advance ticket sales 263,748 251,354 Non-refundable guest credits 67,529 73,020 Current portion of long-term debt (note 7) 165,413 165,721 Current portion of obligations under capital lease 400 395 ------------------------------------------------------------------------- 748,170 739,844 Long-term debt (note 7) 1,144,900 1,186,182 Obligations under capital lease 611 713 Other liabilities 18,485 24,233 Future income tax 255,060 241,740 ------------------------------------------------------------------------- 2,167,226 2,192,712 Shareholders' equity: Share capital (note 8) 453,638 452,885 Contributed surplus 62,075 60,193 Accumulated other comprehensive loss (note 12) (31,060) (38,112) Retained earnings 648,603 611,171 ------------------------------------------------------------------------- 1,133,256 1,086,137 Commitments and contingencies (note 10) ------------------------------------------------------------------------- $ 3,300,482 $ 3,278,849 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. Consolidated Statement of Shareholders' Equity (Stated in thousands of Canadian dollars) (Unaudited) ------------------------------------------------------------------------- Three months ended March 31 2009 2008 ------------------------------------------------------------------------- Share capital: Balance, beginning of period $ 452,885 $ 448,568 Stock-based compensation on stock options exercised (note 8) 753 4,624 ------------------------------------------------------------------------- 453,638 453,192 Contributed surplus: Balance, beginning of period 60,193 57,889 Stock-based compensation expense (note 8) 2,635 4,523 Stock-based compensation on stock options exercised (note 8) (753) (4,624) ------------------------------------------------------------------------- 62,075 57,788 Accumulated other comprehensive loss (note 12): Balance, beginning of period (38,112) (11,914) Other comprehensive income 7,052 714 ------------------------------------------------------------------------- (31,060) (11,200) Retained earnings: Balance, beginning of period 611,171 455,365 Net earnings 37,432 52,506 ------------------------------------------------------------------------- 648,603 507,871 Total accumulated other comprehensive loss and retained earnings 617,543 496,671 ------------------------------------------------------------------------- Total shareholders' equity $ 1,133,256 $ 1,007,651 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. Consolidated Statement of Comprehensive Income (Stated in thousands of Canadian dollars) (Unaudited) ------------------------------------------------------------------------- Three months ended March 31 2009 2008 ------------------------------------------------------------------------- Net earnings $ 37,432 $ 52,506 Other comprehensive income, net of tax: Amortization of hedge settlements to aircraft leasing 350 350 Net unrealized gain on foreign exchange derivatives under cash flow hedge accounting (net of tax of ($283); 2008 - ($208)) 910 592 Reclassification of net realized gains on foreign exchange derivatives to net earnings (net of tax of $907; 2008 - $92) (2,376) (228) Net unrealized loss on fuel derivatives under cash flow hedge accounting (net of tax of $32) (283) - Reclassification of net realized losses on fuel derivatives to net earnings (net of tax of ($3,523)) 8,451 - ------------------------------------------------------------------------- 7,052 714 ------------------------------------------------------------------------- Total comprehensive income $ 44,484 $ 53,220 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. Consolidated Statement of Cash Flows (Stated in thousands of Canadian dollars) (Unaudited) ------------------------------------------------------------------------- Three months ended March 31 2009 2008 ------------------------------------------------------------------------- Operating activities: Net earnings $ 37,432 $ 52,506 Items not involving cash: Depreciation and amortization 33,893 32,849 Amortization of other liabilities (235) (235) Amortization of hedge settlements 350 350 Unrealized gain on derivative instruments (1,474) - Loss on disposal of property, equipment and aircraft parts 205 877 Stock-based compensation expense 2,635 4,521 Income tax credit receivable (1,952) - Future income tax expense 12,305 20,704 Unrealized foreign exchange gain (9,441) (4,301) Change in non-cash working capital 21,808 77,563 ------------------------------------------------------------------------- 95,526 184,834 ------------------------------------------------------------------------- Financing activities: Increase in long-term debt - 67,948 Repayment of long-term debt (41,590) (41,428) Decrease in obligations under capital lease (97) (92) Increase in other assets (700) (2,072) Change in non-cash working capital 830 - ------------------------------------------------------------------------- (41,557) 24,356 ------------------------------------------------------------------------- Investing activities: Aircraft additions (26,994) (70,840) Aircraft disposals - 2,131 Other property and equipment additions (18,048) (11,640) Other property and equipment disposals - 155 ------------------------------------------------------------------------- (45,042) (80,194) ------------------------------------------------------------------------- Cash flow from operating, financing and investing activities 8,927 128,996 Effect of foreign exchange on cash and cash equivalents 6,650 1,798 ------------------------------------------------------------------------- Net change in cash and cash equivalents 15,577 130,794 Cash and cash equivalents, beginning of period 820,214 653,558 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 835,791 $ 784,352 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash interest paid $ 18,006 $ 19,633 Cash taxes paid $ 1,240 $ 768 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. Notes to Consolidated Financial Statements For the three months ended March 31, 2009, and 2008 (Stated in thousands of Canadian dollars, except share and per share data) (Unaudited) ------------------------------------------------------------------------- 1. Basis of presentation The interim consolidated financial statements of WestJet Airlines Ltd. (the Corporation) have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP). The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the consolidated financial statements for the year ended December 31, 2008, except as described below. The disclosures provided below are incremental to those included with the annual consolidated financial statements. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in the Corporation's Annual Report for the year ended December 31, 2008. The Corporation's business is seasonal in nature with varying levels of activity throughout the year. The Corporation experiences increased domestic travel in the summer months and more demand for transborder and sun destinations over the winter period. Amounts presented in the Corporation's interim consolidated financial statements and the notes thereto are in Canadian dollars unless otherwise stated. Certain prior-period balances have been reclassified to conform to current period's presentation. 2. Recent accounting pronouncements (a) Change in accounting policies (i) Goodwill and intangible assets Effective January 1, 2009, the Corporation adopted Canadian Institute of Chartered Accountants (CICA) Handbook Section 3064, Goodwill and Intangible Assets. This section provides guidance on the recognition, measurement, presentation and disclosure for goodwill and intangible assets, other than the initial recognition of goodwill or intangible assets acquired in a business combination. Upon adoption of Section 3064, the Corporation reclassified the net book value of purchased software that was previously recognized in property and equipment to intangible assets as shown on the Corporation's consolidated balance sheet. Prior period balances were reclassified. There was no impact to current or prior period net earnings. Software is carried at cost less accumulated depreciation and is amortized on a straight-line basis over its useful life of five years. See note 6, intangible assets, for further disclosure. (ii) Business combinations In January 2009, the CICA Accounting Standards Board (AcSB) issued Section 1582, Business Combinations. Section 1582 replaces Section 1581, Business Combinations and harmonizes the Canadian standards with International Financial Reporting Standards (IFRS). Section 1582 establishes principles and requirements of the acquisition method for business combinations and related disclosures. This section is effective January 1, 2011, and applies prospectively to business combinations for which the acquisition date is on or after the first reporting period of the Corporation beginning on or after January 1, 2011. Early adoption is permitted. The Corporation elected to adopt Section 1582 prospectively effective January 1, 2009. Adoption of this section did not impact the Corporation's results of operations or financial position. (iii) Consolidated statements and non-controlling interests In January 2009, the AcSB issued Section 1601, Consolidated Financial Statements and Section 1602, Non-controlling Interests, which together replace Section 1600, Consolidated Financial Statements and harmonizes the Canadian standards with IFRS. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 provides guidance on accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These sections are effective on or after the beginning of the first reporting period beginning on or after January 1, 2011. Early adoption is permitted. The Corporation elected to adopt Section 1601 and Section 1602 prospectively effective January 1, 2009. Adoption of these sections did not impact the Corporation's results of operations or financial position. (b) International financial reporting standards (IFRS) On February 13, 2008, the AcSB confirmed that the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises for interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011, including comparatives for 2010. The objective is to improve financial reporting by having one single set of accounting standards that are comparable with other entities on an international basis. The Corporation commenced its IFRS conversion project during 2008 and established a formal project governance structure, including an IFRS Steering Committee, to monitor the progress and critical decisions in the transition to IFRS. The Steering Committee consists of senior levels of management from Finance, Treasury and Investor Relations, among others. An external advisor has been engaged to work with the Corporation's dedicated project staff to complete the conversion. Regular reporting is provided by the project team to senior management, the Steering Committee and the Audit Committee of the Board of Directors. The Corporation's IFRS conversion project consists of three phases: Diagnostic, Solution Development and Implementation and Execution. The Corporation has completed the Diagnostic phase, which involved a high- level preliminary assessment of the differences between Canadian GAAP and IFRS and the potential effects of IFRS to accounting and reporting processes, information systems, business processes and external disclosures. This assessment has provided insight as to the most significant areas of difference applicable to the Corporation and includes property and equipment, provisions and leases, as well as the more extensive presentation and disclosure requirements under IFRS. The Corporation has finalized its IFRS transition plan including a timetable for assessing the impact on systems, internal controls over financial reporting and business activities. Currently, the Corporation is engaged in the Solution Development phase of the project and is working in issue-specific teams to focus on generating options and making recommendations in the identified areas. The Corporation has begun to roll out its staff training programs and has begun to perform an in-depth review of accounting policy impacts, as well as the associated impacts of the IFRS transition on business activities. A full review of the Corporation's information systems is in progress to assess IFRS conversion impacts and is continuing to evaluate the available alternatives within its current financial systems. The Corporation's target is to complete the Solution Development phase by third quarter of 2009. The Corporation continues to monitor standards development as issued by the International Accounting Standards Board and the AcSB, as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of the Corporation's adoption of IFRS. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Corporation's reported financial position and results of operations. As the Corporation is still in the Solution Development phase and has not yet selected its accounting policy choices and IFRS 1 exemptions, the Corporation is unable to quantify the impact of IFRS on its financial statements. The areas of significance identified above are based on available information and the Corporation's expectations as of the date of this disclosure and thus, are subject to change for new facts and circumstances. Please see the table on the following page for certain elements of the Corporation's IFRS transition plan, and an assessment of progress towards achieving these. The project team is working through a detailed IFRS transition plan and certain project activities and milestones could change. The Corporation has begun to highlight certain key activities below to provide insights into the IFRS project. Given the progress of the project and outcomes identified, the Corporation could change its intentions between the time of communicating these key milestones below and the changeover date. Further, changes in regulation or economic conditions at the date of the changeover or throughout the project could result in changes to the transition plan being different from those communicated here. ------------------------------------------------------------------------- Key activity Key milestones Status ------------------------------------------------------------------------- Financial statement preparation ------------------------------------------------------------------------- - Identify differences Senior management and Completed the IFRS in Canadian GAAP/IFRS Steering Committee Diagnostic phase during accounting policies sign-off for all key 2008, which involved a - Select ongoing IFRS IFRS accounting policy high-level review of policies choices to occur the major differences - Select IFRS 1 choices during the third between Canadian GAAP - Develop financial quarter of 2009. and IFRS. statement format - Quantify effects of Development of draft Currently engaged in the change in initial financial statement Solution Development IFRS disclosure and format to occur during phase, which includes an 2010 comparative the latter part of in-depth analysis of financial statements 2009. issues and accounting policy choices. ------------------------------------------------------------------------- Training ------------------------------------------------------------------------- Define and introduce Controller's Group and Project team expert appropriate level of business unit resources have been IFRS expertise for each accounting personnel identified to provide of the following: training to occur insights and training. - Controller's Group during the third and Training for project and business unit fourth quarters of team members is accounting personnel 2009 as needed. occurring throughout the - Audit Committee Additional training project. will occur throughout the project as needed. Audit Committee training tentatively scheduled to occur during the second half of 2009. ------------------------------------------------------------------------- Information technology (IT) infrastructure ------------------------------------------------------------------------- Confirm that business Confirm that systems Diagnostic analysis processes and systems can address 2010 regarding current IT are IFRS compliant, parallel processing systems completed. including: requirements by the - Program upgrades/ third quarter of 2009. Currently reviewing changes options to address - Gathering data for Confirm that business business process. Proof disclosures processes and systems of concept for dual are IFRS compliant reporting during 2010 throughout the is currently being project. developed. ------------------------------------------------------------------------- Control environment ------------------------------------------------------------------------- - For all accounting All key control and Analysis of control policy changes design effectiveness issues is underway in identified, assess implications are being conjunction with review control design and assessed as part of of accounting issues effectiveness the key IFRS and policies. implications differences and - Implement appropriate accounting policy changes choices through to the fourth quarter of 2009. ------------------------------------------------------------------------- ------------------------------------------------------------------------- 3. Capital management The Corporation's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the airline. The Corporation manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Corporation may from time to time purchase shares for cancellation pursuant to normal course issuer bids, issue new shares and adjust current and projected debt levels. In the management of capital, the Corporation includes shareholders' equity (excluding accumulated other comprehensive loss (AOCL)), long-term debt, capital leases, cash and cash equivalents and the Corporation's off-balance-sheet obligations related to its aircraft operating leases, all of which are presented in detail below. The Corporation monitors capital on a number of bases, including adjusted debt-to-equity and adjusted net debt to Earnings Before Interest, Taxes, Depreciation and Aircraft Rent (EBITDAR). EBITDAR is a non-GAAP financial measure commonly used in the airline industry to evaluate results by excluding differences in the method by which an airline finances its aircraft. In addition, the Corporation will adjust EBITDAR for one-time special items, for non-operating gains and losses on derivatives and for gains and losses on foreign exchange. The calculation of EBITDAR is a measure that does not have a standardized meaning prescribed under GAAP and is therefore not likely to be comparable to similar measures presented by other issuers. The Corporation adjusts debt to include its off-balance-sheet aircraft operating leases. Common industry practice is to multiply the trailing twelve months of aircraft leasing expense by 7.5 to derive a present value debt equivalent. The Corporation defines adjusted net debt as adjusted debt less cash and cash equivalents. The Corporation defines equity as the sum of share capital, contributed surplus and retained earnings, and excludes AOCL. ------------------------------------------------------------------------- March 31, 2009 December 31, 2008 Change ------------------------------------------------------------------------- Adjusted debt-to-equity: Long-term debt(i) $ 1,310,313 $ 1,351,903 $ (41,590) Obligations under capital lease(ii) 1,011 1,108 (97) Off-balance-sheet aircraft leases(iii) 690,323 645,375 44,948 ------------------------------------------------------------------------- Adjusted debt $ 2,001,647 $ 1,998,386 $ 3,261 ------------------------------------------------------------------------- Total shareholders' equity 1,133,256 1,086,137 47,119 Add: AOCL 31,060 38,112 (7,052) ------------------------------------------------------------------------- Adjusted equity $ 1,164,316 $ 1,124,249 $ 40,067 ------------------------------------------------------------------------- Adjusted debt-to-equity 1.72 1.78 (3.4%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted net debt to EBITDAR(iv): Net earnings $ 163,061 $ 178,135 $ (15,074) Add: Net interest(v) 53,733 50,593 3,140 Taxes 68,018 76,702 (8,684) Depreciation and amortization 137,529 136,485 1,044 Aircraft leasing 92,043 86,050 5,993 Other(vi) (14,574) (13,256) (1,318) ------------------------------------------------------------------------- EBITDAR $ 499,810 $ 514,709 $ (14,899) ------------------------------------------------------------------------- Adjusted debt (as above) 2,001,647 1,998,386 3,261 Less: Cash and cash equivalents (835,791) (820,214) (15,577) ------------------------------------------------------------------------- Adjusted net debt $ 1,165,856 $ 1,178,172 $ (12,316) ------------------------------------------------------------------------- Adjusted net debt to EBITDAR 2.33 2.29 1.7% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) As at March 31, 2009, long-term debt includes the current portion of long-term debt of $165,413 (December 31, 2008 - $165,721) and long-term debt of $1,144,900 (December 31, 2008 - $1,186,182). (ii) As at March 31, 2009, obligations under capital lease includes the current portion of obligations under capital lease of $400 (December 31, 2008 - $395) and obligations under capital lease of $611 (December 31, 2008 - $713). (iii) Off-balance-sheet aircraft leases is calculated by multiplying the trailing twelve months of aircraft leasing expense by 7.5. As at March 31, 2009, the trailing twelve months of aircraft leasing costs totalled $92,043 (December 31, 2008 - $86,050). (iv) The trailing twelve months are used in the calculation of EBITDAR. (v) As at March 31, 2009, net interest includes the trailing twelve months of interest income of $20,297 (December 31, 2008 - $25,485) and the trailing twelve months of interest expense of $74,030 (December 31, 2008 - $76,078). (vi) As at March 31, 2009, other includes the trailing twelve month foreign exchange gain of $31,271 and the trailing twelve month loss on derivatives of $16,697 (December 31, 2008 - $30,587 foreign exchange gain and $17,331 loss on derivatives). As at March 31, 2009, and December 31, 2008, the Corporation's internal targets were an adjusted debt-to-equity measure of no more than 3.00 and an adjusted net debt to EBITDAR of no more than 3.00. As at March 31, 2009, the Corporation's adjusted debt-to-equity ratio improved by 3.4% compared to December 31, 2008, attributable to the increase in shareholders' equity more than offsetting the net increase in financing in the period. As at March 31, 2009, the Corporation's adjusted net debt to EBITDAR increased by 1.7% compared to December 31, 2008, as a result of the decrease in EBITDAR being slightly greater than the decease in adjusted net debt. As part of the long-term debt agreements for the Calgary hangar facility and the flight simulator, the Corporation monitors certain financial covenants to ensure compliance with these debt agreements. As at March 31, 2009, and December 31, 2008, the Corporation was in compliance with these financial covenants. There are no financial covenant compliance requirements for the facilities guaranteed by the Export-Import Bank of the United States (Ex-Im Bank). There were no changes in the Corporation's approach to capital management during the three months ended March 31, 2009. 4. Cash and cash equivalents As at March 31, 2009, cash and cash equivalents includes bank balances of $56,532 (December 31, 2008 - $98,998) and short-term investments of $779,259 (December 31, 2008 - $721,216). Included in these balances, as at March 31, 2009, the Corporation has US-dollar cash and cash equivalents totaling US $55,227 (December 31, 2008 - US $56,920). As at March 31, 2009, cash and cash equivalents includes total restricted cash of $13,130 (December 31, 2008 - $10,748). Included in this amount is $8,574 (December 31, 2008 - $6,062), representing cash held in trust by WestJet Vacations Inc., a wholly owned subsidiary of the Corporation, in accordance with regulatory requirements governing advance ticket sales for certain travel-related activities; $4,083 (December 31, 2008 - $4,222) for security on the Corporation's facilities for letters of guarantee; and, in accordance with U.S. regulatory requirements, US $375 (December 31, 2008 - US $381) in restricted cash representing cash not yet remitted for passenger facility charges. 5. Property and equipment ------------------------------------------------------------------------- Accumulated March 31, 2009 Cost depreciation Net book value ------------------------------------------------------------------------- Aircraft $ 2,394,894 $ 429,309 $ 1,965,585 Ground property and equipment 121,864 53,993 67,871 Spare engines and parts 88,429 18,148 70,281 Buildings 130,944 7,253 123,691 Leasehold improvements 10,881 4,710 6,171 Assets under capital lease 2,482 1,814 668 ------------------------------------------------------------------------- 2,749,494 515,227 2,234,267 Deposits on aircraft 47,999 - 47,999 Assets under development 376 - 376 ------------------------------------------------------------------------- $ 2,797,869 $ 515,227 $ 2,282,642 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accumulated December 31, 2008 Cost depreciation Net book value ------------------------------------------------------------------------- Aircraft $ 2,394,098 $ 402,095 $ 1,992,003 Ground property and equipment 116,990 53,873 63,117 Spare engines and parts 86,728 17,099 69,629 Buildings 40,028 6,828 33,200 Leasehold improvements 12,019 5,692 6,327 Assets under capital lease 2,482 1,690 792 ------------------------------------------------------------------------- 2,652,345 487,277 2,165,068 Deposits on aircraft 23,982 - 23,982 Assets under development 80,740 - 80,740 ------------------------------------------------------------------------- $ 2,757,067 $ 487,277 $ 2,269,790 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During the three months ended March 31, 2009, the Corporation began amortization of its Campus facility. As at March 31, 2009, a total cost of $90,916 has been capitalized and included in buildings (December 31, 2008 - $80,725 was included in assets under development). 6. Intangible assets ------------------------------------------------------------------------- Accumulated Cost depreciation Net book value ------------------------------------------------------------------------- March 31, 2009 Software $ 44,228 $ 30,991 $ 13,237 December 31, 2008 Software $ 41,835 $ 29,775 $ 12,060 ------------------------------------------------------------------------- For the three months ended March 31, 2009, the Corporation recognized $1,430 (three months ended March 31, 2008 - $1,599) of depreciation expense related to software. 7. Long-term debt ------------------------------------------------------------------------- March 31, 2009 December 31, 2008 ------------------------------------------------------------------------- Term loans - purchased aircraft (i) $ 1,290,406 $ 1,331,083 Term loan - flight simulator (ii) 7,056 7,265 Term loans - live satellite television equipment (iii) 1,269 1,740 Term loan - Calgary hangar facility (iv) 9,535 9,648 Term loan - Calgary hangar facility (v) 2,047 2,167 ------------------------------------------------------------------------- 1,310,313 1,351,903 Current portion 165,413 165,721 ------------------------------------------------------------------------- $ 1,144,900 $ 1,186,182 ------------------------------------------------------------------------- (i) 52 individual term loans, amortized on a straight-line basis over a 12-year term, each repayable in quarterly principal instalments ranging from $668 to $955, including fixed interest at a weighted average rate of 5.32%, maturing between 2014 and 2020. These facilities are guaranteed by Ex-Im Bank and secured by one 800- series aircraft, 38 700-series aircraft and 13 600-series aircraft. (ii) Term loan repayable in monthly instalments of $93 including floating interest at the bank's prime rate plus 0.88%, with an effective interest rate of 3.38% as at March 31, 2009, maturing in 2011, secured by one flight simulator. (iii) 11 individual term loans, amortized on a straight-line basis over a five-year term, repayable in quarterly principal instalments ranging from $29 to $42, including floating interest at the Canadian LIBOR rate plus 0.08%, with a weighted average effective interest rate of 1.54% as at March 31, 2009, maturing between 2009 and 2011. These facilities are for the purchase of live satellite television equipment and are guaranteed by the Ex-Im Bank and secured by certain 700-series and 600-series aircraft. (iv) Term loan repayable in monthly instalments of $108, including fixed interest at 9.03%, maturing April 2011, secured by the Calgary hangar facility. (v) Term loan repayable in monthly instalments of $50, including floating interest at the bank's prime rate plus 0.50%, with an effective interest rate of 3.00% as at March 31, 2009, maturing April 2013, secured by the Calgary hangar facility. The net book value of the property and equipment pledged as collateral for the Corporation's secured borrowings was $1,988,494 as at March 31, 2009 (December 31, 2008 - $2,012,915). Future scheduled repayments of long-term debt are as follows: ------------------------------------------------------------------------- 2009 $ 124,145 2010 165,045 2011 177,533 2012 163,279 2013 162,740 2014 and thereafter 517,571 ------------------------------------------------------------------------- $ 1,310,313 ------------------------------------------------------------------------- 8. Share capital (a) Issued and outstanding ------------------------------------------------------------------------- Three months ended Three months ended March 31, 2009 March 31, 2008 ------------------------------------------------------------------------- Number Amount Number Amount ------------------------------------------------------------------------- Common and variable voting shares: Balance, beginning of period 127,913,580 $ 452,885 129,571,570 $ 448,568 Issuance of shares pursuant to stock option plans 15,399 - 193,925 - Stock-based compensation expense on stock options exercised - 753 - 4,624 ------------------------------------------------------------------------- Balance, end of period 127,928,979 $ 453,638 129,765,495 $ 435,192 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at March 31, 2009, the number of common voting shares outstanding was 124,132,879 (March 31, 2008 - 125,725,013) and the number of variable voting shares was 3,796,100 (March 31, 2008 - 4,040,482). (b) Per share amounts The following table summarizes the shares used in calculating net earnings per share: ------------------------------------------------------------------------- Three months ended March 31 2009 2008 ------------------------------------------------------------------------- Weighted average number of shares outstanding - basic 127,924,018 129,694,432 Effect of dilutive employee stock options and unit plans 367,661 2,752,634 ------------------------------------------------------------------------- Weighted average number of shares outstanding - diluted 128,291,679 132,447,066 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ended March 31, 2009, 6,511,629 employee stock options (three months ended March 31, 2008 - 1,537,273 employee stock options and 48,300 restricted share units) were not included in the calculation of dilutive potential shares as the result would be anti- dilutive. (c) Stock option plan ------------------------------------------------------------------------- Three months ended Three months ended March 31, 2009 March 31, 2008 ------------------------------------------------------------------------- Weighted Weighted average average Number of exercise Number of exercise options price options price ------------------------------------------------------------------------- Stock options outstanding, beginning of period 11,918,168 $ 13.90 12,226,232 $ 13.66 Granted 6,793 11.35 8,156 19.45 Exercised (181,194) 11.92 (813,827) 15.43 Forfeited (1,103) 16.65 (26,791) 13.06 Expired (7,534) 14.60 - - ------------------------------------------------------------------------- Stock options outstanding, end of period 11,735,130 $ 13.93 11,393,770 $ 13.54 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Exercisable, end of period 7,669,672 $ 12.89 3,694,816 $ 14.78 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Under the terms of the Corporation's stock option plan, option holders can either (i) elect to receive shares by delivering cash to the Corporation in the amount of the options, or (ii) choose a cashless settlement alternative whereby they can elect to receive a number of shares equivalent to the market value of the options over the exercise price. For the three months ended March 31, 2009, option holders exercised 181,194 options (three months ended March 31, 2008 - 813,827) on a cashless settlement basis and received 15,399 shares (three months ended March 31, 2008 - 193,925). (d) Stock option compensation As new options are granted, the fair value of the options is expensed over the vesting period, with an offsetting entry to contributed surplus. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. Upon the exercise of stock options, consideration received, together with amounts previously recorded in contributed surplus, is recorded as an increase to share capital. Stock-based compensation expense related to stock options included in: flight operations and navigational charges; and marketing, general and administration expenses totalled $2,446 for the three months ended March 31, 2009 (three months ended March 31, 2008 - $4,147). The fair value of options granted during the three months ended March 31, 2009 and 2008 and the assumptions used in their determination, are as follows: ------------------------------------------------------------------------- Three months ended March 31 2009 2008 ------------------------------------------------------------------------- Weighted average fair value per option $ 3.40 $ 6.11 Weighted average risk-free interest rate 1.7% 3.3% Weighted average volatility 37.2% 36.0% Expected life (years) 3.6 3.6 Dividends per share $ - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Corporation has not incorporated an estimated forfeiture rate for stock options that will not vest. Rather, the Corporation accounts for actual forfeitures as they occur. (e) Executive share unit plan The Corporation has an equity-based executive share unit plan, whereby up to a maximum of 550,000 restricted share units (RSU) and performance share units (PSU) combined may be issued to senior executive officers of the Corporation. The maximum number of units reserved and issuable under the executive share unit plan is subject to shareholder approval, which is expected to occur at the Annual and Special Meeting of Shareholders on May 5, 2009. The fair market value of the RSUs and PSUs at the time of grant is equal to the weighted average trading price of the Corporation's voting shares for the five trading days immediately preceding the grant date. Each RSU entitles the senior executive to receive payment upon vesting in the form of voting shares of the Corporation. The RSUs time vest at the end of a three-year period, with compensation expense being recognized in net earnings over the vesting period. Each PSU entitles the senior executive to receive payment upon vesting in the form of voting shares of the Corporation. PSUs time vest at the end of a three-year term and incorporate performance criteria based on achieving compounded average diluted earnings per share growth rate targets established at the time of grant. Compensation expense is recognized in net earnings over the vesting period based on the number of units expected to vest. ------------------------------------------------------------------------- Three months ended March 31, 2009 ------------------------------------------------------------------------- RSUs PSUs Weighted Weighted average average Number of grant date Number of grant date units fair value units fair value ------------------------------------------------------------------------- Units outstanding, beginning of period 55,181 $ 19.37 73,574 $ 19.37 Granted 102,757 11.35 137,005 11.35 ------------------------------------------------------------------------- Units outstanding, end of period 157,938 $ 14.15 210,579 $ 14.15 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Vested, end of period - $ - - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended March 31, 2008 RSUs PSUs Weighted Weighted average average Number of grant date Number of grant date units fair value units fair value ------------------------------------------------------------------------- Units outstanding, beginning of period - $ - - $ - Granted 54,277 19.45 72,369 19.45 ------------------------------------------------------------------------- Units outstanding, end of period 54,277 $ 19.45 72,369 $ 19.45 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Vested, end of period - $ - - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Stock-based compensation expense related to the executive share unit plan included in marketing, general and administration expense totalled $189 for the three months ended March 31, 2009 (three months ended March 31, 2008 - $376). 9. Related-party transactions The Corporation has debt financing and investments in short-term deposits with a financial institution that is related through two common directors, one of whom is also the president of the financial institution. As at March 31, 2009, total long-term debt includes an amount of $7,056 (December 31, 2008 - $7,265) due to the financial institution. See note 7, long-term debt, for further disclosure. Included in cash and cash equivalents as at March 31, 2009, are short-term investments of $125,195 (December 31, 2008 - $96,500) owing from the financial institution. In 2008, the Corporation signed a three-year revolving operating line of credit agreement with a banking syndicate, of which one of the members is the related-party financial institution. See note 10, commitments and contingencies, for further information. These transactions occurred in the normal course of operations with terms consistent with those offered to arm's length parties and are measured at the exchange amount. 10. Commitments and contingencies (a) Purchased aircraft and live satellite television systems As at March 31, 2009, the Corporation is committed to purchase 24 737-700 aircraft for delivery between 2010 and 2013. The remaining estimated amounts to be paid in deposits and purchase prices for the 24 aircraft, as well as amounts to be paid for live satellite television systems on purchased and leased aircraft in Canadian dollars and the US-dollar equivalents, are as follows: ------------------------------------------------------------------------- US dollar CAD dollar ------------------------------------------------------------------------- 2009 $ 34,460 $ 43,464 2010 111,014 140,022 2011 122,503 154,513 2012 529,562 667,937 2013 222,503 280,643 ------------------------------------------------------------------------- $ 1,020,042 $ 1,286,579 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Corporation has yet to pursue financing agreements for the remaining 24 purchased aircraft included in the above totals. The next purchased aircraft delivery is not expected until September 2010. (b) Operating leases and commitments The Corporation has entered into operating leases and commitments for aircraft, land, buildings, equipment, computer hardware, software licences and satellite programming. As at March 31, 2009, the future payments in Canadian dollars, and when applicable the US-dollar equivalents under operating leases and commitments are as follows: ------------------------------------------------------------------------- US dollar CAD dollar ------------------------------------------------------------------------- 2009 $ 94,275 $ 135,318 2010 163,602 219,818 2011 184,300 238,980 2012 190,332 245,635 2013 179,987 231,500 2014 and thereafter 601,213 809,271 ------------------------------------------------------------------------- $ 1,413,709 $ 1,880,522 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at March 31, 2009, the Corporation is committed to lease an additional 15 737-700 aircraft and three 737-800 aircraft for terms ranging between eight and 10 years in US dollars. These aircraft have been included in the above totals. (c) Operating line of credit During 2008, the Corporation signed a three-year revolving operating line of credit with a syndicate of three Canadian banks. The line of credit is available for up to a maximum of $85 million commencing in the second quarter of 2009 subject to various customary conditions precedent being satisfied, and will be secured by the Corporation's new Campus facility. The line of credit will bear interest at prime plus 0.50% per annum, or a bankers acceptance rate at 2.0% annual stamping fee or equivalent and will be available for general corporate expenditures and working capital purposes. The Corporation is required to pay a standby fee of 15 basis points, based on the average unused portion of the line of credit for the previous quarter, payable quarterly. As at March 31, 2009, no amounts were drawn on this facility. (d) Contingencies On February 29, 2008, the Corporation signed a letter of intent to lease one 737-800 aircraft over a term of eight years commencing in March 2011, for an estimated total commitment of US $39 million. The Corporation is party to legal proceedings and claims that arise during the ordinary course of business. It is the opinion of management that the ultimate outcome of these and any outstanding matters will not have a material effect upon the Corporation's financial position, results of operations or cash flows. 11. Financial instruments and risk management (a) Fair value of financial assets and financial liabilities The Corporation's financial assets and liabilities consist primarily of cash and cash equivalents, accounts receivable, derivatives both designated and not designated in an effective hedging relationship, US- dollar deposits, accounts payable and accrued liabilities and long-term debt. The following tables set out the Corporation's classification and the carrying amount for each of its financial assets and liabilities as at March 31, 2009, and December 31, 2008: ------------------------------------------------------------------------- Held- Other Total March 31, for- Loans and financial carrying 2009 trading Derivatives receivables liabilities amount ------------------------------------------------------------------------- Asset (liability) Cash and cash equivalents $ 835,791 $ - $ - $ - $ 835,791 Accounts receivable - - 25,365 - 25,365 Foreign exchange options(i) - 1,387 - - 1,387 Cash flow hedges:(ii) Foreign exchange forwards(iii) - 3,783 - - 3,783 Fuel derivatives(iv) - (42,135) - - (42,135) US-dollar deposits(v) 25,154 - - - 25,154 Accounts payable and accrued liabilities(vi) - - - (217,951) (217,951) Long-term debt(vii) - - - (1,310,313) (1,310,313) ------------------------------------------------------------------------- $ 860,945 $ (36,965) $ 25,365 $(1,528,264) $ (678,919) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Held- Other Total December 31, for- Loans and financial carrying 2008 trading Derivatives receivables liabilities amount ------------------------------------------------------------------------- Asset(liability) Cash and cash equivalents $ 820,214 $ - $ - $ - $ 820,214 Accounts receivable - - 16,837 - 16,837 Foreign exchange options(i) - 862 - - 862 Cash flow hedges:(ii) Foreign exchange forwards(iii) - 5,873 - - 5,873 Fuel derivatives(iv) - (52,298) - - (52,298) US-dollar deposits(v) 24,309 - - - 24,309 Accounts payable and accrued liabilities(vi) - - - (211,543) (211,543) Long-term debt(vii) - - - (1,351,903) (1,351,903) ------------------------------------------------------------------------- $ 844,523 $ (45,563) $ 16,837 $(1,563,446) $ (747,649) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) Foreign exchange option arrangements not designated in a hedging relationship included in prepaid expenses, deposits and other. (ii) Derivatives designated in an effective cash flow hedging relationship. (iii) Foreign exchange forward contracts included in prepaid expenses, deposits and other. (iv) As at March 31, 2009, balance includes $33,129 (December 31, 2008 - $37,811) classified in accounts payable and accrued liabilities and $9,006 (December 31, 2008 - $14,487) classified in other liabilities. (v) As at March 31, 2009, balance includes $419 (December 31, 2008 - $404) classified in prepaid expenses, deposits and other and $24,735 (December 31, 2008 - $23,905) classified in other assets. (vi) As at March 31, 2009, balance excludes fuel derivative liabilities of $33,129 (December 31, 2008 - $37,811). (vii) As at March 31, 2009, balance includes current portion of long-term debt of $165,413 (December 31, 2008 - $165,721) and long-term portion of $1,144,900 (December 31, 2008 - $1,186,182). The fair values of financial assets and liabilities, together with carrying amounts, shown in the balance sheet as at March 31, 2009, and December 31, 2008, are as follows: ------------------------------------------------------------------------- March 31, 2009 December 31, 2008 ------------------------------------------------------------------------- Carrying Fair Carrying Fair amount value amount value ------------------------------------------------------------------------- Asset (liability) Cash and cash equivalents(i) $ 835,791 $ 835,791 $ 820,214 $ 820,214 Accounts receivable(i) 25,365 25,365 16,837 16,837 Foreign exchange options(ii) 1,387 1,387 862 862 Cash flow hedges: Foreign exchange forwards(iii) 3,783 3,783 5,873 5,873 Fuel derivatives(iv) (42,135) (42,135) (52,298) (52,298) US-dollar deposits(v) 25,154 25,154 24,309 24,309 Accounts payable and accrued liabilities(i) (217,951) (217,951) (211,543) (211,543) Long-term debt(vi) (1,310,313) (1,474,236) (1,351,903) (1,515,487) ------------------------------------------------------------------------- $ (678,919) $ (842,842) $ (747,649) $ (911,233) ------------------------------------------------------------------------- Unrecognized loss $ (163,923) $ (163,584) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The fair values of financial assets and financial liabilities are calculated on the basis of information available at the balance sheet date using the following methods: (i) The fair value of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximates their carrying amounts due to the short-term nature of the instruments. (ii) The fair value of the foreign exchange option arrangements is determined through a standard option valuation technique used by the counterparty based on inputs, including foreign exchange rates, interest rates and volatilities. Contracts outstanding as at March 31, 2009, are at a weighted average contracted range of 1.1248 to 1.2151 US dollars to Canadian dollars (December 31, 2008 - 1.1333 to 1.2254). (iii) The fair value of the foreign exchange forward contracts designated in an effective hedging relationship is measured based on the difference between the contracted rate and the current forward price obtained from the counterparty, which can be observed and corroborated in the marketplace. As at March 31, 2009, the average contracted rate on the outstanding forward contracts was 1.0463 (December 31, 2008 - 1.0519) US dollars to Canadian dollars and the average forward rate used in determining the fair value was 1.2606 (December 31, 2008 - 1.2178) US dollars to Canadian dollars. Due to the short-term nature of the outstanding contracts, no discount rate was applied. (iv) The fair value of the fuel derivatives designated in an effective hedging relationship is determined using inputs, including quoted forward prices for commodities, foreign exchange rates and interest rates, which can be observed or corroborated in the marketplace. The fair value of the fixed swap agreements is estimated by discounting the difference between the contractual strike price and the current forward price. The fair value of the costless collar structures is estimated by the use of a standard option valuation technique. As at March 31, 2009, for the 21-month period that the Corporation is hedged, the closing forward curve for crude oil ranged from approximately US $50 to US $65 (December 31, 2008 - US $45 to US $67) with the average forward foreign exchange rate used in determining the fair value being 1.2545 US dollars to Canadian dollars (December 31, 2008 - 1.2136). (v) The fair value of the US-dollar deposits, which relate to purchased aircraft, approximates their carrying amounts as they are at a floating market rate of interest. (vi) The fair value of the Corporation's fixed-rate long-term debt is determined by discounting the future contractual cash flows under current financing arrangements at discount rates obtained from the lender, which represent borrowing rates presently available to the Corporation for loans with similar terms and remaining maturities. As at March 31, 2009, rates used in determining the fair value ranged from 1.83% to 2.43% (December 31, 2008 - 2.08% to 2.58%). The fair value of the Corporation's variable-rate long-term debt approximates its carrying value as it is at a floating market rate of interest. (b) Risk management The Corporation is exposed to market, credit and liquidity risks associated with its financial assets and liabilities. The Corporation will from time to time use various financial derivatives to reduce market risk exposures from changes in foreign exchange rates, interest rates and jet fuel prices. The Corporation does not hold or use any derivative instruments for trading or speculative purposes. Overall, the Corporation's Board of Directors has responsibility for the establishment and approval of the Corporation's risk management policies. Management continually performs risk assessments to ensure that all significant risks related to the Corporation and its operations have been reviewed and assessed to reflect changes in market conditions and the Corporation's operating activities. Fuel risk The airline industry is inherently dependent upon jet fuel to operate and, therefore, the Corporation is exposed to the risk of volatile fuel prices. Fuel prices are impacted by a host of factors outside the Corporation's control, such as significant weather events, geopolitical tensions, refinery capacity and global demand and supply. For the three months ended March 31, 2009, aircraft fuel expense represented approximately 27% (three months ended March 31, 2008 - 32%) of the Corporation's total operating expenses. Under the Corporation's fuel price risk management policy, it is the Corporation's objective to hedge a portion of its anticipated jet fuel purchases in order to provide its management with reasonable foresight and predictability into operations and future cash flows. As jet fuel is not traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel; however, financial derivatives in other commodities, such as crude oil and heating oil, are useful in decreasing the risk of volatile fuel prices. As at March 31, 2009, the Corporation had a mixture of fixed swap agreements and costless collar structures in Canadian-dollar West Texas Intermediate (WTI) crude oil derivative contracts to hedge approximately 30% (December 31, 2008 - 30%) of its remaining anticipated jet fuel requirements for 2009 and approximately 14% (December 31, 2008 - 14%) of its anticipated jet fuel requirements for 2010. The following table outlines, as at March 31, 2009, the notional volumes per barrel (bbl) and the weighted average strike price for fixed swap agreements and the weighted average call and put prices for costless collar structures for each year the Corporation is hedged. ------------------------------------------------------------------------- Notional WTI average WTI average WTI average volumes strike price call price put price Year Instrument (bbl) (CAD$/bbl) (CAD$/bbl) (CAD$/bbl) ------------------------------------------------------------------------- 2009 Swaps 871,500 90.10 - - Costless collars 410,000 - 114.27 79.15 2010 Swaps 381,000 103.09 - - Costless collars 483,000 - 111.21 77.94 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Upon proper qualification, the Corporation accounts for its fuel derivatives as cash flow hedges. Under cash flow hedge accounting, the effective portion of the change in the fair value of the hedging instrument is recognized in AOCL, while the ineffective portion is recognized in non-operating income (expense). Upon maturity of the derivative instrument, the effective gains and losses previously recognized in AOCL are recorded in net earnings as a component of aircraft fuel expense. The following table presents the financial impact and statement presentation of the Corporation's fuel derivatives on the consolidated balance sheet as at March 31, 2009, and December 31, 2008: ------------------------------------------------------------------------- March 31, December 31, Statement presentation 2009 2008 ------------------------------------------------------------------------- Fair value of fuel Accounts payable derivatives - current and accrued portion liabilities $ 29,361 $ 37,811 Fair value of fuel derivatives - long-term portion Other liabilities 9,006 14,487 Payable to Accounts payable counterparties for and accrued settled fuel contracts liabilities 3,768 - Net unrealized loss from AOCL - before tax fuel derivatives impact (33,052) (44,711) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table presents the financial impact and statement presentation of the Corporation's fuel derivatives on the consolidated statement of earnings for the three months ended March 31, 2009, and 2008: ------------------------------------------------------------------------- Three months ended March 31 Statement presentation 2009 2008 ------------------------------------------------------------------------- Realized loss on fuel derivatives - effective portion Aircraft fuel $ 11,974 $ - Realized loss on fuel derivatives - ineffective portion Gain on derivatives 846 - Unrealized gain on fuel derivatives - ineffective portion Gain on derivatives (949) - ------------------------------------------------------------------------- ------------------------------------------------------------------------- The estimated amount reported in AOCL that is expected to be reclassified to net earnings as a component of aircraft fuel expense when the underlying jet fuel is consumed during the next 12 months is a loss after tax of $18,281. A 10% increase in the forward curve for WTI, the underlying commodity of the Corporation's fuel derivatives, as at March 31, 2009, would have decreased AOCL by approximately $9,685, net of taxes (December 31, 2008 - $11,546). A 10% decrease in the forward curve for WTI, as at March 31, 2009, would have increased AOCL by approximately $9,785, net of taxes (December 31, 2008 - $11,574). This is assuming that all other variables remain constant, particularly foreign exchange and interest rates. It also assumes that 100% of the change in price is considered effective under cash flow hedge accounting. These assumptions may not be representative of actual movements. Foreign exchange risk Foreign currency exchange risk is the risk that the fair value of recognized assets and liabilities or future cash flows would fluctuate as a result of changes in foreign exchange rates. The Corporation is exposed to foreign currency exchange risks arising from fluctuations in exchange rates on its US-dollar denominated net monetary assets and its operating expenditures, mainly aircraft fuel, aircraft leasing expense, certain maintenance costs and a portion of airport operations costs. During the three months ended March 31, 2009, the average US-dollar exchange rate was 1.2448 (three months ended March 31, 2008 - 1.0036), with the period-end exchange rate at 1.2613 (March 31, 2008 - 1.0235). The gain or loss on foreign exchange included on the Corporation's consolidated statement of earnings is mainly attributable to the effect of the changes in the value of the Corporation's US-dollar denominated net monetary assets. As at March 31, 2009, US-dollar denominated net monetary assets totalled approximately US $89,307 (December 31, 2008 - US $99,488). During the three months ended March 31, 2009, the Corporation estimates that a one-cent change in the value of the US dollar versus the Canadian dollar would have increased or decreased net earnings by $700 (three months ended March 31, 2008 - $572) as a result of the Corporation's US-dollar denominated net monetary assets. As at March 31, 2009, the Corporation had a mixture of US-dollar forward contracts and option arrangements to offset its US-dollar denominated aircraft lease payments for the next six months of 2009, on its current leased aircraft. As at March 31, 2009, the Corporation had entered into financial derivative instruments to purchase on average US $6,585 per month for six months for a total of US $39,510. Of this total, approximately 45% is hedged using forward contracts at a weighted average strike price of 1.0463 per US dollar and approximately 55% is hedged using option arrangements at a weighted average range of 1.1248 to 1.2151 per US dollar. Upon proper qualification, the Corporation designated its forward contracts as effective cash flow hedges for accounting purposes. Under cash flow hedge accounting, the effective portion of the change in the fair value of the hedging instrument is recognized in AOCL, while the ineffective portion is recognized in non-operating income (expense). Upon maturity of the derivative instrument, the effective gains and losses previously recognized in AOCL are recorded in net earnings as a component of aircraft leasing. Maturity dates for all of the foreign exchange forward contracts are within 2009. As at March 31, 2009, no portion of the forward contracts is considered ineffective. For the three months ended March 31, 2009, the Corporation realized a gain before tax on the forward contracts of $3,283 (three months ended March 31, 2008 - $320), included as a deduction to aircraft leasing expense. As at March 31, 2009, the estimated fair market value of the remaining forward contracts recorded in prepaid expenses, deposits and other is a gain of $3,783 (December 31, 2008 - $5,873). The estimated amount reported in AOCL that is expected to be reclassified to net earnings as a reduction to aircraft leasing expense during the next 12 months is a gain after tax of $2,667. The Corporation's foreign exchange option arrangements are not designated as hedges for accounting purposes and are recorded at fair value on the consolidated balance sheet with changes in fair value recorded in non- operating income (expense). As at March 31, 2009, the estimated fair market value of the option arrangements recorded in prepaid expenses, deposits and other is a gain of $1,387 (December 31, 2008 - $862). For the three months ended March 31, 2009, the Corporation realized a gain of $6 on its foreign exchange option arrangements and reported an unrealized gain of $525, both included in non-operating income (expense). Maturity dates for all of the foreign exchange option arrangements are within 2009. A one-cent change in the US-dollar exchange rate for the three months ended March 31, 2009, would not have significantly impacted the Corporation's net earnings and other comprehensive income as a result of the foreign exchange derivatives. Interest rate risk Interest rate risk is the risk that the value of financial assets and liabilities or future cash flows will fluctuate as a result of changes in market interest rates. (i) Cash and cash equivalents The Corporation is exposed to interest rate fluctuations on its cash and cash equivalents balance, which, as at March 31, 2009, totalled $835,791 (December 31, 2008 - $820,214). A change of 50 basis points in the market interest rate would have had, for the three months ended March 31, 2009, an approximate impact on net earnings of $681 (three months ended March 31, 2008 - $591). The increase in sensitivity from 2008 is a direct result of the increase in the balance of the Corporation's cash and cash equivalents balance. (ii) US-dollar deposits The Corporation is exposed to interest rate fluctuations on its US-dollar deposits that relate to purchased aircraft, which, as at March 31, 2009, totalled $25,154 (December 31, 2008 - $24,309). A reasonable change in market interest rates as at March 31, 2009, would not have significantly impacted the Corporation's net earnings as a result of the US-dollar deposits. (iii) Long-term debt The fixed-rate nature of the majority of the Corporation's long-term debt reduces the risk of interest rate fluctuations over the term of the outstanding debt. The Corporation accounts for its long-term fixed-rate debt at amortized cost, and therefore, a change in interest rates as at March 31, 2009, would not impact net earnings. The Corporation is exposed to interest rate fluctuations on its variable- rate long-term debt, which, as at March 31, 2009, totalled $10,372 (December 31, 2008 - $11,172) or 0.8% (December 31, 2008 - 0.8%) of the Corporation's total long-term debt. Due to the immaterial balance of the variable-rate long-term debt, a change in market interest rates as at March 31, 2009, would not have significantly impacted the Corporation's net earnings. Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. As at March 31, 2009, the Corporation's credit exposure consists primarily of the carrying amounts of cash and cash equivalents, accounts receivable and US-dollar deposits, as well as the fair value of derivative financial assets. (i) Cash and cash equivalents Cash and cash equivalents consist of bank balances and short-term investments with terms of up to 91 days. Credit risk associated with cash and cash equivalents is minimized substantially by ensuring that these financial assets are invested primarily in debt instruments with highly rated financial institutions. The Corporation manages its exposure risk by assessing the financial strength of its counterparties and by limiting the total exposure to any one individual counterparty. As at March 31, 2009, the Corporation had a total principal amount invested of $713,031 (December 31, 2008 - $692,188) in Canadian-dollar short-term investments with terms ranging between seven and 90 days and a total of US $52,508 (December 31, 2008 - US $23,832) invested in US-dollar short-term investments with terms ranging between 30 and 90 days. The Corporation performs an ongoing review to evaluate its counterparty risk. As at March 31, 2009, the Corporation does not expect any counterparties to fail to meet their obligations. (ii) Accounts receivable Generally, the Corporation's accounts receivable are the result of tickets sold to individual guests through the use of travel agents and other airlines. Purchase limits are established for each agent and in some cases, when deemed necessary, a letter of credit is obtained. As at March 31, 2009, $16,888 (December 31, 2008 - $7,403) is receivable from travel agents and other airlines. These receivables are short term in nature, generally being settled within four weeks from the date of booking. As at March 31, 2009, $982 (December 31, 2008 - $651) of the balance receivable is covered by letters of credit. (iii) Derivative financial assets The Corporation recognizes that it is subject to credit risk arising from derivative transactions that are in an asset position at the balance sheet date. The Corporation carefully monitors this risk by keeping close consideration to the size, credit rating and diversification of the counterparty. As at March 31, 2009, the fair value of foreign exchange derivative assets totalled $5,171 (December 31, 2008 - $6,735). As at March 31, 2009, outstanding fuel derivatives are in a net liability position by counterparty. (iv) US-dollar deposits The Corporation is not exposed to counterparty credit risk on its US- dollar deposits that relate to purchased aircraft, as the funds are held in a security trust separate from the assets of the financial institution. Liquidity risk Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with financial liabilities. The Corporation maintains a strong liquidity position and maintains sufficient financial resources to meet its obligations as they fall due. The Corporation has secured low-interest-rate fixed debt supported by Ex-Im Bank commitments on its aircraft acquisitions. This represents approximately 98% of the Corporation's total long-term debt. See note 7, long-term debt, for further detail. The following table details the Corporation's contractual maturities for its non-derivative and derivative financial liabilities, including those designated in an effective hedging relationship, as at March 31, 2009: ------------------------------------------------------------------------- Carrying Within 1 - 3 4 - 5 Over amount 1 year years years 5 years ------------------------------------------------------------------------- Accounts payable and accrued liabilities(i) $ 217,951 $ 217,951 $ - $ - $ - Long-term debt 1,310,313 165,413 342,127 325,878 476,895 Fuel derivatives 42,135 33,129 9,006 - - ------------------------------------------------------------------------- Total $ 1,570,399 $ 416,493 $ 351,133 $ 325,878 $ 476,895 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) Excludes fuel derivative liabilities of $33,129. A portion of the Corporation's cash and cash equivalents balance relates to cash collected with respect to advance ticket sales, for which the balance at March 31, 2009, was $263,748 (December 31, 2008 - $251,354). Typically, the Corporation has cash and cash equivalents on hand to have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions. As at March 31, 2009, the Corporation had cash on hand of 3.17 times (December 31, 2008 - 3.26 times) the advance ticket sales balance. The Corporation aims to maintain a current ratio, defined as current assets over current liabilities, of at least 1.00. As at March 31, 2009, the Corporation's current ratio was 1.24 (December 31, 2008 - 1.25). As at March 31, 2009, the Corporation has not been required to post collateral with respect to any of its outstanding derivative contracts. 12. Accumulated other comprehensive loss ------------------------------------------------------------------------- Cash flow hedges - Amortization foreign Cash flow of hedge exchange hedges - fuel settlements derivatives derivatives Total ------------------------------------------------------------------------- Balance as at December 31, 2007 $ (12,020) $ 106 $ - $ (11,914) Amortization of settlements 1,400 - - 1,400 Unrealized gain (loss) on derivatives - 10,321 (44,711) (34,390) Tax on unrealized portion - (3,097) 13,086 9,989 Realized gain on derivatives - (4,554) - (4,554) Tax on realized portion - 1,357 - 1,357 ------------------------------------------------------------------------- Balance as at December 31, 2008 (10,620) 4,133 (31,625) (38,112) Amortization of settlements 350 - - 350 Unrealized gain (loss) on derivatives - 1,193 (315) 878 Tax on unrealized portion - (283) 32 (251) Realized (gain) loss on derivatives - (3,283) 11,974 8,691 Tax on realized portion - 907 (3,523) (2,616) ------------------------------------------------------------------------- Balance as at March 31, 2009 $ (10,270) $ 2,667 $ (23,457) $ (31,060) ------------------------------------------------------------------------- ------------------------------------------------------------------------- %SEDAR: 00010649E

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(1-888-954-6397), E-mail: ropalmer@westjet.com; WestJet Investor Relations:
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