CALGARY, ALBERTA--(CCNMatthews - Oct. 27, 2004) - WestJet today announced its 2004 third quarter results with net earnings of $21.1 million compared to $32.3 million achieved during the same period last year. In the first nine months of 2004, the airline achieved net earnings of $29.1 million compared to $47.8 million during the first nine months of 2003.
Operating revenue increased this quarter to $310.3 million from $254.8 million attained in the third quarter last year. Year to date, operating revenue grew to $784.3 million, an increase from $633.4 million during the same period in 2003.
WestJet reported diluted earnings per share of $0.17 during the third quarter of 2004, compared with $0.28 during the third quarter of 2003. Year to date, the airline reported diluted earnings per share of $0.23 compared to $0.42 during the same nine-month period in 2003. The number of common shares outstanding increased to 125,447,836 at the quarter's end compared to 114,180,078 on September 30, 2003, largely due to a $150.0 million equity issue in October 2003.
WestJet's capacity, measured in available seat miles (ASMs), grew this quarter by 26.9% to 2.41 billion from last year's 1.90 billion ASMs. Year to date, ASMs increased 30.0% to 6.47 billion from 4.98 billion ASMs during the first nine months of 2003. Revenue passenger miles (RPMs) increased 27.3% to 1.85 billion RPMs this quarter, up from 1.45 billion RPMs in the same quarter last year. For the first nine months of 2004, RPMs increased 30.5% to 4.60 billion RPMs from 3.52 billion RPMs during the first three quarters of 2003.
WestJet's load factor for the quarter was 76.6% compared with 76.4% in the third quarter of 2003, while the airline's year-to-date load factor was 71.0% compared with 70.7% during the first nine months of 2003.
Yield (revenue per revenue passenger mile) decreased 4.0% this quarter to 16.8 cents from 17.5 cents during third quarter 2003. Year to date, yield is down 5.0% to 17.1 cents from 18.0 cents during the first nine months of 2003. WestJet's average stage length increased 16.0% from 679.4 miles in the third quarter of 2003 to 788.0 miles this quarter.
Clive Beddoe, WestJet's President and CEO, commented, "Although we are pleased to report our 31st consecutive quarter of profitability, this quarter was nevertheless a disappointing one for WestJet. Two main factors contributed to our less than satisfactory level of profitability, the first being the record high price of fuel and the second being the diminishing yield environment in which all airlines are operating throughout North America.
"Historically, airlines have attempted to manage increases in fuel prices by adding fuel surcharges to base fares. In a price sensitive market, any increase in price has an impact on demand. Therefore, we pursued a strategy of maintaining our regular low fares while limiting the number of deep discount seat sales in hopes of leading the market to improved yields with higher average fares more aligned with the increased cost environment. This strategy fell short of our expectations.
"While we have little control over the high fuel prices and extremely low fares that create pressures on our margins, we have introduced initiatives to reduce our exposure to them. We continue to retire our 737-200 aircraft as we add new Next-Generation aircraft to our fleet. With blended winglet technology, these aircraft are approximately 33% more fuel efficient on a per-ASM basis.
"This quarter we added three new 737-700 aircraft and by this time next year, we will have acquired an additional 14 new Next-Generation aircraft including a combination of three versions of the 737 to provide us with the ability to adjust the size of aircraft deployed to meet the demands of the market being served. As these aircraft are all 737s that share virtually all major components, we will continue to benefit from the cost savings that come from operating a common fleet type.
"In this quarter we expanded our Check N' Go electronic check-in program at six major airports across Canada, launched a successful baggage drop program, and introduced new technology that will better support the sale of our seats to corporate Canada through a dedicated business-traveller website. We have also worked hard to strengthen our relationship with Canada's top travel agencies and continue to provide enhanced systems for these and all other travel agencies to utilize.
"Throughout this quarter we also focused on further strengthening our domestic flight network with more non-stop frequencies and better connectivity, flying 1,774 flights per week at quarter's end this year compared with 1,552 flights per week at September 30th last year. We are also pleased to report that load factors on most routes operating out of Toronto, Ottawa and Montreal have been strong, which reaffirms our belief that WestJet will continue to be very successful in eastern Canada.
"We achieved a major milestone this quarter with the launch of scheduled transborder service with flights to New York and Los Angeles and we will be launching five of our remaining six transborder destinations in the fourth quarter. Bookings to date indicate that our transborder flights are showing significant promise.
"The strong culture at WestJet continues and our people remain committed, working extremely hard as we grow our operations and further expand our customer base. We are on track to have 20 LiveTV-equipped aircraft in operation by the December holiday season. Feedback from the guests who have flown on our operational LiveTV aircraft has been extremely positive, and we remain confident this feature will lead to an increase in load factor as we continue to put these aircraft into service.
"The fundamentals of our business remain sound and despite the challenging cost environment that exists in a time of unprecedented fuel prices, I am confident that the new aircraft, new initiatives and exceptional culture of our organization will lead us to even further financial success."
WestJet serves the 24 Canadian cities of Victoria, Comox, Vancouver, Abbotsford/Fraser Valley, Prince George, Kelowna, Grande Prairie, Calgary, Edmonton, Fort McMurray, Saskatoon, Regina, Winnipeg, Thunder Bay, Windsor, London, Hamilton, Toronto, Ottawa, Montreal, Moncton, Halifax, Gander and St. John's, and the eight U.S. cities of Los Angeles, New York, Orlando, San Francisco, Phoenix, Fort Lauderdale, Tampa (beginning October 31, 2004) and Palm Springs (beginning January 7, 2005). The airline operates a growing fleet of 53 aircraft featuring 35 new Next-Generation Boeing 737-700 aircraft. WestJet is publicly traded on the Toronto Stock Exchange under the symbol WJA.
Third Quarter 2004 Management's Discussion and Analysis
Forward-looking Information
This Management's Discussion and Analysis contains forward-looking statements that are based on management's current expectations, estimates, projections and assumptions. In light of the current state of affairs in the domestic and international airline industry, forward-looking statements must be understood to involve a number of risks and uncertainties.
As a result of many factors, including competition, governmental regulations, fuel pricing, the airline pricing environment, industry capacity fluctuations, new entrants, foreign exchange rates, interest rates, labour matters, terrorism, actions by third parties, and external events, expected results could differ from actual results and differences could be material. The foregoing list of factors should not be considered exhaustive.
To supplement our consolidated financial statements presented in accordance with Canadian generally accepted accounting principles ("GAAP"), the Company uses various non-GAAP performance measures, including cost per available seat mile ("CASM"), revenue per available seat mile ("RASM") and yield ("revenue per revenue passenger mile"). These measures are provided to enhance the user's overall understanding of our current financial performance and are included to provide investors and management with an alternative method for assessing the Company's operating results in a manner that is focused on the performance of the Company's ongoing operations and to provide a more consistent basis for comparison between quarters. These measures are not in accordance with or an alternative for, GAAP and may be different from measures used by other companies.
We profitably completed our 31st quarter of operations amid many challenges in our industry. The summer period is typically our strongest time of the year and although our gross revenues during the quarter grew by 21.8%, the high fuel prices and diminished yields have reduced our profits during this period from that which we would have normally expected. Our net earnings for the third quarter of 2004 declined 34.5% over the same quarter in 2003, and year to date were 39.1% less than the first nine months of last year.
The table below sets forth selected data derived from our consolidated financial statements prepared in accordance with Canadian generally accepted accounting principles for the eight previous quarters ended September 30, 2004. This information should be read in conjunction with the consolidated financial statements and related notes thereto.
Quarterly unaudited financial information
(In millions except per share data)
---------------------------------------------
12/31/2003 3/31/2004 6/30/2004 9/30/2004
---------------------------------------------
Total revenues $ 229 $ 217 $ 257 $ 310
Net earnings $ 13 $ 1 $ 7 $ 21
Basic earnings per share $0.11 $0.01 $0.06 $0.17
Diluted earnings per share $0.10 $0.01 $0.06 $0.17
---------------------------------------------
12/31/2002 3/31/2003 6/30/2003 9/30/2003
---------------------------------------------
Total revenues $ 176 $ 173 $ 206 $ 255
Net earnings $ 9 $ 1 $ 15 $ 32
Basic earnings per share $0.08 $0.01 $0.13 $0.28
Diluted earnings per share $0.08 $0.01 $0.13 $0.28
Highlights
For the first time in our operating history, we added scheduled service to two destinations in the United States during the quarter, Los Angeles and New York. In October we also added scheduled service to the four additional transborder destinations of Orlando, San Francisco, Phoenix and Fort Lauderdale, and we will start service to Palm Springs in January 2005.
There is currently very little low-cost transborder capacity between Canada and the United States, and we believe there is an opportunity for us to stimulate the transborder market by offering our guests low-fares to and from US markets. The addition of these transborder routes also provides us with the opportunity to ease the seasonality on our business by maximizing the utilization of our capacity during the winter months by offering scheduled flights to warmer destinations across the border.
With the expansion of our network to the United States, and in consideration of our current routes, it was necessary for us to reassess the composition of our fleet. The profitability we realize on each route is dependent on several factors, including our ability to minimize our operating costs on specific routes. Until recently, our future fleet plan included only adding more 737-700 aircraft, which, because of its larger size compared to our 737-200 aircraft, can be less efficient to operate on short-haul routes to smaller cities. To ensure that we maintain ideal aircraft size on each route as we retire our 737-200 aircraft, we announced plans to introduce new Boeing Next-Generation 737 variants to our family of aircraft. In 2005, we will be adding seven new 737-700s, three 737-600s and five 737-800s, with the 600s being configured to seat 119 guests, the 700s to seat 136 guests and the 800s to seat 166 guests.
Larger aircraft incur higher operating costs such as increased landing fees and fuel consumption, and are therefore best suited for operating on longer-haul routes. The increase in length of a flight contributes to a decline in unit costs as these fixed charges are distributed over more available seat miles.
We want to optimize the cost economics of aircraft size operating a particular stage length in order to minimize the cost of operating our various routes. With the addition of smaller 119-seat 737-600 aircraft, we will better serve our short-haul routes by realizing the reduced costs of operating a smaller size aircraft for shorter-distance of travel. Similarly, the 737-800s, with their 166-seat configuration, will reduce unit cost per seat mile which maximizes the revenue potential of longer-haul flights between larger city pairs.
Cost per Available Seat Mile (Dollars)
Three Months Ended
----------------------------------------------
% (Increase)
Sept. 30, 2004 Sept. 30, 2003 Decrease
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Aircraft fuel 0.027 0.022 (22.7%)
Airport operations 0.019 0.017 (11.8%)
Flight operations and
navigational charges 0.016 0.015 (6.7%)
Sales and marketing 0.009 0.008 (12.5%)
Maintenance 0.008 0.010 20.0%
Amortization 0.008 0.009 11.1%
General and administration 0.007 0.005 (40.0%)
Aircraft leasing 0.004 0.006 33.3%
Interest expense 0.005 0.004 (25.0%)
Inflight 0.005 0.005 0.0%
Customer service 0.003 0.003 0.0%
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Total 0.111 0.104 (6.7%)
Nine Months Ended
----------------------------------------------
% (Increase)
Sept. 30, 2004 Sept. 30, 2003 Decrease
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Aircraft fuel 0.026 0.023 (13.0%)
Airport operations 0.019 0.018 (5.6%)
Flight operations and
navigational charges 0.017 0.015 (13.3%)
Sales and marketing 0.010 0.008 (25.0%)
Maintenance 0.009 0.012 25.0%
Amortization 0.009 0.009 0.0%
General and administration 0.007 0.007 0.0%
Aircraft leasing 0.005 0.007 28.6%
Interest expense 0.004 0.003 (33.3%)
Inflight 0.005 0.005 0.0%
Customer service 0.002 0.003 33.3%
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Total 0.113 0.110 (2.7%)
Three Months Ended
----------------------------------------------
% (Increase)
Sept. 30, 2004 June 30, 2004 Decrease
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Aircraft fuel 0.027 0.025 (8.0%)
Airport operations 0.019 0.020 5.0%
Flight operations and
navigational charges 0.016 0.017 5.9%
Sales and marketing 0.009 0.013 30.8%
Maintenance 0.008 0.009 11.1%
Amortization 0.008 0.009 11.1%
General and administration 0.007 0.008 12.5%
Aircraft leasing 0.004 0.005 20.0%
Interest expense 0.005 0.005 0.0%
Inflight 0.005 0.005 0.0%
Customer service 0.003 0.003 0.0%
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Total 0.111 0.119 6.7%
Challenging The Environment
We strive to maximize the revenue obtained from the sale of seats on every flight, which is why we are disappointed with the lack of development in our yield performance this quarter. Our three-month yield declined by 4.0% compared to the third quarter of 2003 and deteriorated by 5.0% during the nine-months ended September 30, 2004 from the same period last year. The cause of the decline in our yield results can be attributed to an increase of capacity in the market along with our increasing average trip length.
Increasing average trip length reduces yield in the same manner as increasing average stage length reduces unit costs. Average trip length is defined as the average distance on a one-way trip that a guest flies from a point of origin to final destination, inclusive of stopovers and transfers onto at least one other flight.
In the third quarter, we estimate a significant portion of yield decline that occurred from last year to this year was related to this increasing trip length. Similar increases in trip length during the first nine months of 2004 led to approximately 3% of the 5% yield decline.
Our yield was also driven down by an increase in the number of seats that we sold at a discount compared to the previous year as we endeavoured to respond to increased capacity in the market. During this quarter, 43% of our seat inventory was sold at seat sale fares while only 39% were sold at discounted fares in the same period last year. Similarly, 47% of our seats were sold at reduced fares for the year-to-date period, an increase of six percentage points from the same nine-month period last year.
Our overall cost per available seat mile ("CASM") increased by 6.7% and 2.7% in the three and nine-month period ended September 30, 2004 respectively, compared to the same periods last year. Persistently high fuel prices represented the single largest impact in our variable costs and have negated the reduction we would have realized from our increased stage length and have contributed to the majority of our CASM increase. Our average stage length has increased by approximately 16% from 679 miles in the third quarter of 2003 to 788 miles in the same quarter of this year. Similarly, for the nine-month period ended September 30, 2004, our average stage length also increased 16% over the same period in the prior year. We estimate that our increased stage length caused an approximate decrease to our quarterly CASM by approximately 8% and approximately 8% to our year-to-date CASM, however, this benefit has been offset by higher fuel prices.
At $65.6 million, fuel cost accounts for 24% of our total operating costs. We incurred a 32% increase in fuel cost per litre in our operations during the third quarter of this year compared to the same quarter one year ago.
We estimate that for every US $1.00 change in the price of crude oil, our net earnings before employee profit share and taxes for the nine-months ended September 30, 2004 is impacted by $3.8 million. The average WTI US$ per barrel for the nine months ended September 30, 2004 was $39.41 which represents on average an increase of approximately $7 WTI US per barrel during the year-to-date period. This increase in fuel prices has caused an additional cost to our Company of approximately $27 million since the beginning of 2004.
In this high fuel cost environment, we believe it is not advantageous for us in the long-term to commit to fuel prices which we believe will eventually fall. We will continue to monitor the viability of entering into fuel hedges in the future and at this time we do not have any fuel hedges in place.
The cost pressure from fuel price increases not only impacts our Company but also other carriers within our industry. Although we have not hedged any fuel, we have to some extent been able to alleviate the impact of increasing fuel costs on our bottom line by managing our overall infrastructure costs. Since the second quarter of this year, our CASM has improved in all cost categories with the exception of fuel. Overall, our CASM improved by 6.7% since the second quarter of 2004, illustrating our ability to continually improve our fundamental cost structure exclusive of fuel.
We depend upon maximizing the efficiency of our aircraft to optimize our costs. With fuel being one of our largest and most unpredictable expenses, maximizing fuel efficiency is a necessity. We have further improved the new aircraft joining our fleet by adding fuel-saving blended winglet technology to these aircraft. By lowering drag and improving aerodynamic efficiency, winglets reduce required thrust and thereby extend engine life, a benefit that will be realized in a reduction to our future maintenance costs.
As at September 30, 2004 our fleet consisted of 35 fuel-efficient Boeing Next-Generation aircraft, with half of these aircraft retrofitted with winglets. We anticipate that all of our Next-Generation aircraft will be retrofitted with winglets by the middle of 2005. Future aircraft that we receive commencing November 2004 will already have factory-installed winglets when delivered. This will eliminate the need for us to remove aircraft from operating service, thereby maximizing revenue-generating opportunities by fully utilizing our capacity in our network at all times.
As our fleet is replenished with new aircraft and we retire our older 737-200 aircraft, the average age of our fleet decreases. Along with the fuel savings, we also realize an improvement in maintenance unit costs, as new aircraft require less maintenance than older aircraft. Clearly, our unit maintenance costs have benefited from our investment in a newer fleet, as we see a 20.0% decrease in maintenance CASM in the third quarter of 2004 compared to the third quarter of 2003. Correspondingly, our nine-month CASM for maintenance has improved by 25.0% compared to the same period last year.
In comparing the current third quarter and year-to-date results to the same periods last year, we must consider the impact of stock-based compensation expense we had to incur this year to comply with changes in Canadian generally accepted accounting principles. For the three and nine months ended September 30, 2004, we recognized $3.4 million and $8.9 million in stock-based compensation expense respectively, while for the same periods in the previous year, no stock-based compensation expense was required to be recognized. This caused our third quarter CASM to increase by approximately 1% over the same period one year ago.
Overall, fuel price increases had the largest impact on our CASM, accounting for 0.5 cents of our unit cost increase from this quarter compared to the same quarter in the prior year, and 0.3 cents of the increase in our year-to-date CASM compared to the nine-month period in 2003. Excluding the impact of these increases, CASM would have been 10.6 cents and 11.0 cents for the three-months ended and nine-months ended September 30, 2004, respectively, bringing our unit costs during these periods in line with that of the previous year's.
Building the future with a strong balance sheet
Cash flow management is imperative for the long-term success of our Company. The airline industry's financial health is highly sensitive to external factors, including volatility in fuel prices, weather conditions, health epidemics, such as SARS, and threats and acts of terrorism. Consequently, there is a high degree of uncertainty in our business due to unpredictable events in our environment. Consequently our ability to maintain a strong cash position is critical to our continued success by allowing us to weather the impact of unforeseen events on our operations.
Throughout the course of the past year we have been successful in stabilizing our cash flow. We have been able to maintain a strong liquidity position, ending each quarter with a cash balance in excess of $225 million. We ended this quarter with a healthy cash position by having $227.9 million in cash and cash equivalents on hand.
Our short-term liquidity position remains healthy as indicated by our current ratio. We ended the third quarter of this year with a working capital ratio of 0.9:1 compared to 1.2:1 at December 31, 2003 and 0.7:1 at September 30, 2003.
We place high importance on maintaining a strong balance sheet in order to endure negative economic elements. We measure the strength of our balance by targeting a debt-to-equity ratio of no more than 3:1, including off-balance sheet financing, which is a conservative standard within our industry.
As we evolve our fleet to new Next-Generation aircraft, we will continue to incur more debt to finance this growth. We added an additional $121.4 million in Canadian dollar debt to finance the acquisition of three aircraft deliveries during the third quarter of this year. For the nine months ended September 30, 2004 we incurred $388.9 million in additional Canadian dollar debt to support the purchase of 10 aircraft. We completed the quarter with $996.1 million of debt on our balance sheet, including obligations related to capital leases, and $278.7 million of off-balance sheet debt associated to operating leases on 11 aircraft.
We ended this quarter with a debt-to-equity ratio 2.0:1 compared to 1.7:1 at the commencement of this year, after incorporating off-balance sheet debt. This is well within our self-imposed limit of 3.0:1. As at October 20, 2004, we had 125,453,275 outstanding common shares.
For the remainder of this year, we will be incurring additional Canadian dollar debt for the acquisition of our last scheduled aircraft delivery during 2004. Through the use of a foreign exchange forward fixing agreement, we have fixed the foreign exchange rate on US$29 million of the US dollar purchase price of this aircraft at a rate of 1.36 for settlement in November 2004, with the remainder of the purchase price to be fixed at the foreign exchange rate prevalent at the time of delivery. Our ability to acquire Canadian dollar debt for US dollar aircraft purchases has significantly reduced our exposure to fluctuations in the foreign exchange rate.
Our contractual obligations for each of the next five years, which do not include commitments for goods and services required in the ordinary course of business, are indicated in the table below:
(Millions) 2004 2005 2006 2007 2008 Thereafter Total
------------------------------------------------------------------------
------------------------------------------------------------------------
Long-term debt $ 23 $ 94 $ 89 $ 89 $ 89 $ 601 $ 985
Capital lease
obligations (1)(2) 2 5 3 1 1 - 12
Operating leases (3) 15 55 52 51 50 354 577
Purchase obligations (4) 56 493 131 - - - 680
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Total contractual
obligations $ 96 $ 647 $ 275 $ 141 $ 140 $ 955 $ 2,254
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(1) The Corporation's capital leases are denominated in US dollars. The
obligations in US dollars are 2004 - $1,353,000, 2005 - $4,220,000,
2006 - $2,743,000, 2007 - $900,000, 2008 - $375,000
(2) Includes imputed interest at 7.74% totalling $1,061,000
(3) Included in operating leases are US dollar operating leases
primarily related to aircraft. The obligations of these operating
leases in US dollars are 2004 - $7,741,000, 2005 - $30,822,000, 2006
- $29,162,000, 2007 - $29,096,000, 2008 - $29,096,000, 2009 and
thereafter - $209,320,000.
(4) Relates to purchases of aircraft, LiveTV systems and winglets
Although we signed an agreement in August 2003 with Ontario Teachers' Pension Plan for a $100 million equity line, we opted not to exercise this upon its expiry this year. At the time we entered into the agreement, our intention was to secure a back-up resource to finance our future growth. Since that time, we have successfully issued $150 million of new equity and have been able to generate sufficient cash from operations to meet the required pre-payments on our future aircraft deliveries, while maintaining a healthy balance sheet.
During the quarter we continued to move forward with investments in our infrastructure growth. We finished the quarter with 35 Next-Generation aircraft and 18 737-200 aircraft, increasing our total fleet by 20% since the start of this year. We spent an additional $23.4 million during the quarter to pre-pay a portion of our committed future aircraft purchases, bringing the total amount on deposit with Boeing to $132.4 million. We expended $121.4 million to support the purchase of the three aircraft we received during the quarter, and for payments related to LiveTV and winglets. Furthermore, we incurred cash outlays of $12.6 million on spare parts, facility equipment, and training equipment to support our growing fleet.
Our success to date has been rooted in our low-cost structure and unique corporate culture. We are now entering the winter months, a period when the December holiday season is the only strong time amid months of a lower demand for travel domestically. This will pose additional challenges to our Company, along with the necessity to deal with economic pressures brought about by high fuel prices and price competition. Offsetting these negative factors, however, we will be increasing our charter flying by 100% this winter which will improve our earnings potential, fleet utilization and load factors.
Despite these pressures, we will continue to focus on our long-term plans to continually improve our cost structure and the quality of service we provide our guests, and not allow current hindrances to distract us. By improving on our fundamental strengths, we will be better equipped to overcome future hurdles. And as we have proven in the past, challenges will only serve to renew the resolve of our motivated and loyal team of people to work harder at making WestJet even more successful.
October 20, 2004
WestJet Airlines Ltd.
Consolidated Financial Statements
September 30, 2004
(Unaudited)
WestJet Airlines Ltd.
Consolidated Balance Sheets
September 30, 2004, December 31, 2003 and September 30, 2003
(Stated in Thousands of Dollars)
-----------------------------------------------------------------------
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September December September
2004 2003 2003
(unaudited) (unaudited)
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Assets
Current assets:
Cash and cash equivalents $ 227,887 $ 241,384 $ 145,851
Accounts receivable 12,935 11,781 7,123
Income taxes recoverable 3,423 - -
Prepaid expenses and deposits 24,612 19,928 10,563
Inventory 5,369 3,764 3,516
----------------------------------------------------------------------
274,226 276,857 167,053
Property and equipment (note 3) 1,573,785 1,140,226 1,031,434
Other long-term assets
79,398 59,775 50,095
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$ 1,927,409 $ 1,476,858 $ 1,248,582
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities $ 82,434 $ 82,822 $ 79,120
Income taxes payable - 9,820 8,216
Advance ticket sales 95,724 58,086 72,655
Non-refundable guest credits 23,386 21,718 18,917
Current portion of long-term
debt (note 4) 92,190 59,334 52,762
Current portion of obligations
under capital lease (note 8(b)) 5,211 6,297 6,536
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298,945 238,077 238,206
Long-term debt (note 4) 892,780 589,531 528,734
Obligations under capital lease
(note 8(b)) 5,894 7,015 9,012
Long-term liabilities (note 5) 10,000 - -
Future income tax 87,068 61,423 54,457
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1,294,687 896,046 830,409
Shareholders' equity:
Share capital (note 7) 390,465 376,081 226,205
Contributed surplus (note 7(d)) 18,542 - -
Retained earnings 223,715 204,731 191,968
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632,722 580,812 418,173
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Commitments and contingencies
(note 8) $ 1,927,409 $ 1,476,858 $ 1,248,582
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WestJet Airlines Ltd.
Consolidated Statements of Earnings and Retained Earnings
For the periods ended September 30, 2004 and 2003
(Unaudited)
(Stated in Thousands of Dollars, Except Per Share Data)
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Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
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Revenues:
Guest revenues $ 283,949 $ 237,497 $ 693,054 $ 584,168
Charter
and other 25,059 16,355 87,074 46,850
Interest Income 1,265 978 4,128 2,421
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310,273 254,830 784,256 633,439
Expenses:
Aircraft fuel 65,601 41,461 165,532 115,122
Airport
operations 45,362 31,519 123,512 87,281
Flight
operations
and
navigational
charges 39,294 28,173 107,326 75,387
Sales and
marketing 20,508 16,006 62,332 41,713
Maintenance 19,516 19,053 57,089 57,779
Amortization 19,890 17,357 56,762 46,415
General
and
administration 17,413 11,771 44,713 33,706
Aircraft leasing 10,487 10,745 31,538 33,830
Interest expense 11,682 7,036 31,036 16,611
Inflight 11,534 8,590 31,517 23,098
Customer service 6,581 6,047 17,020 15,880
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267,868 197,758 728,377 546,822
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Earnings from
operations 42,405 57,072 55,879 86,617
Non-operating
income
(expense):
Gain (loss)
on foreign
exchange (2,668) 2,001 (637) (47)
Gain (loss) on
disposal of
property and
equipment 32 214 (23) 436
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(2,636) 2,215 (660) 389
Employee profit
share (note 9) 4,135 9,888 5,839 13,136
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Earnings before
income taxes 35,634 49,399 49,380 73,870
Income tax
expense
(reduction):
Current 1,479 (1,692) (5,366) 9,654
Future 13,032 18,835 25,645 16,440
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14,511 17,143 20,279 26,094
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Net earnings 21,123 32,256 29,101 47,776
Retained
earnings,
beginning
of period 202,592 159,712 204,731 144,192
Change in
accounting
policy
(note 7(d)) - - (10,117) -
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Retained
earnings,
end of period $ 223,715 $ 191,968 $ 223,715 $ 191,968
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Earnings per share
(note 7(c)):
Basic $ 0.17 $ 0.28 $ 0.23 $ 0.42
Diluted $ 0.17 $ 0.28 $ 0.23 $ 0.42
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Operating highlights:
Available
seat miles 2,411,184,937 1,900,486,662 6,474,433,930 4,981,041,679
Revenue
passenger
miles 1,847,831,718 1,452,035,835 4,597,575,973 3,523,708,733
Load factor 76.6% 76.4% 71.0% 70.7%
Revenue per
passenger
mile (cents) 16.8 17.5 17.1 18.0
Revenue per
available
seat mile
(cents) 12.9 13.4 12.1 12.7
Cost per
passenger
mile (cents) 14.5 13.6 15.8 15.5
Cost per
available seat
mile (cents) 11.1 10.4 11.3 11.0
Fuel
consumption
(litres) 131,666,890 109,673,410 356,121,880 288,244,265
Fuel cost/litre
(cents) 49.8 37.8 46.5 39.9
Segment guests 2,174,582 1,991,486 5,742,767 5,122,749
Average stage
length 788.0 679.4 749.8 644.9
Number of full
time equivalent
employees at
quarter end 3,923 3,217 3,923 3,217
Fleet size at
quarter end 53 43 53 43
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WestJet Airlines Ltd.
Consolidated Statements of Cash Flows
For the periods ended September 30, 2004 and 2003
(Unaudited)
(Stated in Thousands of Dollars)
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Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
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Cash flows from (used in):
Operations:
Net earnings $ 21,123 $ 32,256 $ 29,101 $ 47,776
Items not involving cash:
Amortization 19,890 17,357 56,762 46,415
(Gain) loss on
disposal of property
and equipment (32) (214) 23 (436)
Stock-based compensation
expense 3,411 - 8,869 -
Issued from treasury stock - - - 3,062
Future income tax expense 13,032 18,835 25,645 16,440
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57,424 68,234 120,400 113,257
(Increase) Decrease in
non-cash working
capital (30,441) (9,281) 18,101 62,056
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26,983 58,953 138,501 175,313
Financing:
Repayment of long-term
debt (20,395) (14,622) (52,830) (35,847)
Increase in long-term
debt 121,376 120,862 388,935 385,673
Decrease in obligations
under capital lease (1,590) (1,593) (4,826) (4,939)
Increase in long-term
liabilities - - 10,000 -
Share issuance costs - - (10) (55)
Increase in other
long-term assets (5,122) (5,117) (21,562) (14,955)
Issuance of common
shares 142 7,405 13,950 11,614
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94,411 106,935 333,657 341,491
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Investing:
Aircraft additions (149,689) (156,353) (455,275) (446,048)
Other property and
equipment additions (7,956) (11,889) (33,224) (26,801)
Other property and
equipment disposals 237 683 2,842 1,486
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(157,408) (167,559) (485,657) (471,363)
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Net change in cash (36,014) (1,671) (13,499) 45,441
Cash, beginning of period 263,899 147,522 241,384 100,410
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Cash, end of period $ 227,885 $ 145,851 $ 227,885 $ 145,851
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Cash interest and taxes paid during the nine months ended September 30,
2004 were $21,321,000 (2003 - $14,217,000) and $7,878,000 (2003 -
$9,420,000) respectively.
As at September 30, 2004 cash and cash equivalents include US $8,238,000
(2003 - $nil) of restricted cash.
WestJet Airlines Ltd.
Notes to Consolidated Financial Statements,
For the periods ended September 30, 2004 and 2003
(Unaudited)
(Tabular Dollar Amounts are Stated in Thousands, Except Per Share Data)
The interim consolidated financial statements of WestJet Airlines Ltd.
("WestJet" or "the Corporation") have been prepared by management in
accordance with accounting principles generally accepted in Canada. The
interim consolidated financial statements have been prepared following
the same accounting policies and methods of computation as the
consolidated financial statements for the fiscal year ended December 31,
2003, except as disclosed 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, 2003.
The Corporation's business is seasonal in nature, with the highest
activity in the summer (third quarter) and the lowest activity in the
winter (first quarter) due to the high number of leisure travelers and
their preference to travel during the summer months.
1. Comparative figures:
Certain prior period balances have been reclassified to conform to
current period's presentation.
2. Maintenance costs:
Heavy maintenance ("D" check) costs incurred on the 200-series
aircraft are capitalized and amortized over the remaining useful
service life of the "D" check. Future "D" checks are not expected to
occur on the 200-series aircraft based on the Corporation's aircraft
retirement plan.
As with the 200-series aircraft, the 700-series aircraft are
maintained under a maintenance program approved by Transport Canada.
This program entails portions of services required under "D" checks
to be performed throughout the service period of the 700-series
aircraft, and therefore the traditional "D" check will not be
performed on the 700-series aircraft. All heavy maintenance costs
related to 700-series aircraft are expensed as incurred.
3. Property and equipment:
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September 30, 2004 Accumulated
Cost Depreciation Net book value
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Aircraft - 700 series $ 1,210,274 $ 37,263 $ 1,173,011
Aircraft - 200 series 144,424 76,627 67,797
Ground property and equipment 105,766 32,419 73,347
Spare engines and parts - 700
series 52,556 4,167 48,389
Buildings 39,401 2,593 36,808
Aircraft under capital lease 29,442 18,046 11,396
Spare engines and parts - 200
series 25,370 13,833 11,537
Leasehold improvements 5,422 2,949 2,473
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1,612,655 187,897 1,424,758
Deposits on aircraft 140,882 - 140,882
Assets under construction 8,145 - 8,145
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$ 1,761,682 $ 187,897 $ 1,573,785
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December 31, 2003 Accumulated
Cost Depreciation Net book value
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Aircraft - 700 series $ 758,135 $ 17,265 $ 740,870
Aircraft - 200 series 152,487 70,424 82,063
Ground property and equipment 93,636 22,524 71,112
Spare engines and parts - 700
series 36,754 2,518 34,236
Buildings 39,474 1,852 37,622
Aircraft under capital lease 31,135 17,221 13,914
Spare engines and parts - 200
series 26,376 11,634 14,742
Leasehold improvements 5,055 2,377 2,678
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1,143,052 145,815 997,237
Deposits on aircraft 141,640 - 141,640
Assets under construction 1,349 - 1,349
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$ 1,286,041 $ 145,815 $ 1,140,226
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September 30, 2003 Accumulated
Cost Depreciation Net book value
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Aircraft - 700 series $ 659,236 $ 12,022 $ 647,214
Aircraft - 200 series 157,978 70,971 87,007
Ground property and equipment 87,744 19,861 67,883
Spare engines and parts - 700
series 35,367 1,946 33,421
Buildings 39,772 1,603 38,169
Aircraft under capital lease 31,093 15,424 15,669
Spare engines and parts - 200
series 26,925 10,871 16,054
Leasehold improvements 4,901 2,105 2,796
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1,043,016 134,803 908,213
Deposits on aircraft 122,756 - 122,756
Assets under construction 465 - 465
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$ 1,166,237 $ 134,803 $ 1,031,434
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4. Long-term debt:
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September December September
30 31 30
2004 2003 2003
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$1,013,159,000 in 25 individual term
loans, amortized on a straight-line
basis over a 12-year term, repayable in
quarterly principal instalments ranging
from $768,000 to $955,000, guaranteed
by the Ex-Im Bank and secured by 25
700-series aircraft, and maturing
between 2014 and 2016. 22 of these
facilities include fixed rate weighted
average interest at 5.43%. The remaining
three facilities, totalling
$119,502,000, include weighted average
floating interest at the Canadian LIBOR
rate plus 0.08% (effective weighted
interest rate of 2.37% as at September
30, 2004) until after the first
scheduled repayment dates in December
2004, after such time the interest rate
on the loans will be fixed at an average
rate of 5.72% for the remaining period
the loans are outstanding $ 935,410 $ 600,047 $ 530,822
$26,000,000 in two individual term
loans, repayable in monthly instalments
of $105,000 and $155,000 including
floating interest at the bank's prime
plus 0.88% with an effective interest
rate of 4.88% as at September 30, 2004,
maturing in July 2008 and July 2013,
secured by two Next-Generation flight
simulators and cross-collateralized by
one 200-series aircraft 22,188 23,751 24,258
$12,000,000 term loan repayable in
monthly instalments of $108,000
including interest at 9.03%, maturing
April 2011, secured by the Calgary
hangar facility 11,147 11,360 11,425
$22,073,000 in six individual term
loans, repayable in monthly instalments
ranging from $25,000 to $87,000
including fixed rate weighted average
interest at 8.43% with maturities in
October 2005, secured by three
200-series aircraft 6,188 9,390 10,586
$4,550,000 term loan repayable in
monthly instalments of $50,000,
including floating interest at the
bank's prime plus 0.50%, with an
effective interest rate of 4.50% as at
September 30, 2004, maturing April
2013, secured by the Calgary hangar
facility 4,000 4,317 4,405
$6,355,000 in 10 individual term loans,
amortized on a straight-line basis over
a five year term, repayable in
quarterly principal instalments ranging
from $30,000 to $33,000 including
floating interest at Canadian LIBOR
plus 0.08%, with a weighted average
effective interest rate of 2.26%,
maturing in 2009, guaranteed by the
Ex-Im Bank and secured by certain
700-series aircraft 6,037 - -
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984,970 648,865 581,496
Less current portion 92,190 59,334 52,762
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$ 892,780 $ 589,531 $ 528,734
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Future scheduled repayments of long-term debt are as follows:
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2004 $ 23,000
2005 93,866
2006 88,716
2007 88,878
2008 89,048
2009 and thereafter 601,462
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$ 984,970
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5. Long-term liabilities
The Corporation recorded $10 million of unearned revenue relating to
the tri-branded credit card. The unearned revenue will be drawn down
commencing in May 2005 under this five-year agreement.
6. Financial instruments:
(a) Foreign exchange risk management
At September 30, 2004, the Corporation had U.S. dollar cash and
cash equivalents totaling US $38,065,000 (2003 - $24,099,000).
The Corporation has entered into a contract to fix the exchange
rate on the future US dollar debt facility for the purchase of one
aircraft in November 2004. As at September 30, 2004, the total
amount of the debt facility fixed is US $29 million at a forward
rate of 1.36 for settlement in November 2004. The total estimated
fair value of the contract at September 30, 2004 is a loss of CDN
$2.8 million.
Gains and losses relating to derivatives that are hedges are
deferred in other long-term assets and recognized in the same
period and in the same financial category as the corresponding
hedged transactions.
(b) Interest rate risk management
The Corporation has entered into a forward starting interest rate
agreement at a rate of 5.93%, effective in February 2005, to fix
the interest rate on one future aircraft delivery during 2004.
(c) Financing agreement
The Corporation had an agreement with Ontario Teachers' Pension
Plan Board ("Ontario Teachers") for the right to require Ontario
Teachers to purchase up to $100,000,000 of common shares, which
expired on August 29,2004 and was extended to September 10, 2004.
The Corporation elected not to exercise the financing agreement
and has included the 1% annual standby fee in general and
administrative expenses for the period ended September 30, 2004.
7. Share capital:
(a) Issued:
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Three Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
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Number Amount Number Amount
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Common shares:
Balance, beginning
of period 125,409,291 $ 390,206 123,882,489 $ 376,081
Exercise of options 38,545 142 1,562,151 13,950
Stock-base
compensation 117 444
Issued on rounding
of stock split - - 3,196 -
Share issuance costs - (10)
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Balance, end of period 125,447,836 $ 390,465 125,447,836 $ 390,465
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Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
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Number Amount Number Amount
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Common shares:
Balance, beginning
of period 113,366,367 $ 218,800 112,349,414 $ 211,564
Exercise of options 813,711 7,405 1,248,595 8,552
Common shares issued
from treasury - - 582,069 6,124
Share issuance costs - (55)
Tax benefit of
issue costs - 20
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Balance, end of period 114,180,078 $ 226,205 114,180,078 $ 226,205
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(b) Stock option plan:
Changes in the number of options, with their weighted average exercise
prices, are summarized below:
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Three Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
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Weighted Weighted
Number average Number average
of exercise of exercise
Options price Options price
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Stock options outstanding,
beginning of period 11,053,974 $ 12.29 9,809,753 $ 10.78
Issued 13,637 12.96 2,904,677 15.77
Exercised (114,378) 10.12 (1,707,320) 9.36
Cancelled (34,344) 13.78 (88,221) 12.53
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Stock options outstanding,
end of period 10,918,889 $ 12.32 10,918,889 $ 12.32
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Exercisable, end of
period 4,946,039 $ 10.84 4,946,039 $ 10.84
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Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
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Weighted Weighted
Number average Number average
of exercise of exercise
Options price Options price
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Stock options outstanding,
beginning of period 11,048,199 $ 10.60 8,713,782 $ 9.99
Issued 8,174 10.68 2,904,420 11.21
Exercised (813,711) 9.10 (1,248,596) 6.85
Cancelled (4,307) 13.19 (131,252) 10.55
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Stock options outstanding,
end of period 10,238,355 $ 10.71 10,238,355 $ 10.71
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Exercisable, end of
period 1,768,364 $ 9.10 1,768,364 $ 9.10
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At the Annual General Meeting held in April 2004, Shareholders approved
the new 2004 stock option plan and an amendment to the 2003 stock
option plan. The terms of the approved plans allow the holders of vested
options a cashless settlement alternative whereby the option holder can
either (a) elect to receive shares by delivering cash to the
Corporation in the amount of the options or (b) elect to receive a
number of shares equivalent to the market value of the options over the
exercise price. For the three months ended September 30, 2004, option
holders exercised 99,987 options on a cashless settlement basis and
received 24,154 shares. For the nine months ended September 30, 2004,
option holders exercised 197,953 options on a cashless settlement basis
and received 52,784 shares.
(c) Per share amounts:
The following table summarizes the common shares used in calculating net
earnings per common share:
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Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
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Weighted average number
of common shares
outstanding - basic 125,423,627 113,711,288 124,938,868 113,167,013
Effect of dilutive
employee stock options 1,207,202 2,379,897 2,147,020 1,308,471
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Weighted average number
of common shares
outstanding - diluted 126,630,829 116,091,185 127,085,888 114,475,484
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(d) Stock-based compensation
On January 1, 2004 the Corporation changed its accounting policy
related to stock options granted on or after January 1, 2002. Under
the new policy, the Corporation determines the fair value of stock
options on their grant date and records this amount as compensation
expense over the period that the stock options vest, with a
corresponding increase to contributed surplus. The Corporation has
retroactively adopted the changes without restatement of prior
periods on January 1, 2004 which resulted in retained earnings
decreasing by $10.1 million and an offsetting entry to contributed
surplus.
As new options are granted, the fair value of these options will be
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 in share capital.
Employee compensation expense included in flight operations and
general and administrative expenses totalled $3.4 million and $8.9
million for the three and nine months ended September 30, 2004
respectively related to the vesting of the outstanding stock options
issued on or after January 1, 2002 to officers and certain employees
of the Corporation.
The fair market value of options granted during the three months
ended September 30, 2004 and the weighted average assumptions used
in their determination are as follows:
Fair market value per option $ 4.41
Risk free interest rate 3.86%
Expected stock price volatility 40%
Expected life of options 3.5 years
8. Commitments and contingencies:
(a) Aircraft:
The Corporation has committed to purchase nine 737-700s, five
737-800s and seven 737-600s for delivery between 2004 and 2006.
The remaining estimated amounts to be paid in deposits and
purchase prices in US dollars relating to the purchases of the
remaining aircraft, LiveTV systems and winglets are as follows:
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2004 $ 56,051
2005 493,091
2006 130,814
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$ 679,956
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(b) Leasehold commitments:
The Corporation has entered into operating leases and agreements
for aircraft, buildings, computer hardware and software licenses,
satellite programming, and capital leases relating to aircraft. The
obligations are as follows:
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Capital Operating
Leases Leases
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2004 $ 1,716 $ 15,147
2005 5,353 54,983
2006 3,479 52,332
2007 1,142 50,665
2008 476 50,264
2009 and thereafter - 353,305
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Total lease payments 12,166 $ 576,696
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Less imputed interest at 7.74% (1,061)
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Net minimum lease payments 11,105
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Less current portion of obligation
under capital lease (5,211)
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Obligations under capital lease $ 5,894
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The Corporation's capital leases are denominated in US dollars. The
obligations in US dollars are 2004 - $1,353,000, 2005 - $4,220,000,
2006 - $2,743,000, 2007 - $900,000, 2008 - $375,000.
Included in operating leases are US dollar operating leases
primarily related to aircraft. The obligations of these operating
leases in US dollars are 2004 - $7,741,000, 2005 - $30,822,000,
2006 - $29,162,000, 2007 - $29,096,000, 2008 - $29,096,000, 2009
and thereafter - $209,320,000.
(c) Contingencies:
An Amended Statement of Claim was filed by Air Canada and ZIP Air
Inc. in the Ontario Superior Court on July 22, 2004 against the
Corporation, an employee, and a former officer (the "Defendants").
The principal allegations are that the Defendants unlawfully
obtained confidential flight load and load factor information from
Air Canada's employee travel website and, as a result, the
Plaintiffs have suffered damages and the Defendants have benefited
from having access to the alleged confidential information. The
Plaintiffs are seeking damages, aggregating $220 million, but the
Plaintiffs have provided no details or evidence to substantiate
their damages claim.
A Statement of Claim was also filed by Jetsgo Corporation in the
Ontario Superior Court on October 15, 2004 against the Corporation,
an officer, and a former officer (the "defendants"). The principal
allegations are that the defendants conspired together to
unlawfully obtain Jetsgo's proprietary information and to use this
proprietary information to harm Jetsgo and benefit WestJet. The
Plaintiff is seeking damages, in an amount to be determined plus
$50 million, but the Plaintiff has provided no details or evidence
to substantiate its claim.
Based on the results to date of (i) an internal investigation, (ii)
advice from independent industry experts, and (iii) cross-
examinations of witnesses in the Air Canada proceedings, management
believes the damages claimed are substantially without merit. The
amount of loss, if any, to the Corporation as a result of these two
claims cannot be reasonably estimated. The defense and
investigation of these claims are continuing.
9. Employee profit share provision:
The provision for employee profit share is estimated based on actual
year-to-date earnings results. The actual employee profit share amount
is to be determined by the Board of Directors based on audited financial
results at the completion of the financial year.
FOR FURTHER INFORMATION PLEASE CONTACT:
WestJet Siobhan Vinish (Pronounced Sha-von) Director, Public Relations and Communications (403) 444-2615 (403) 444-2261 (FAX) Website: www.westjet.com
