WestJet Reports Second Quarter Results

CALGARY, ALBERTA, Jul 30, 2008 (Marketwire via COMTEX) -- WJA | Quote | Chart | News | PowerRating -- WestJet (TSX:WJA) today announced second quarter net earnings of $30.2 million. This compared to $11.5 million reported in the second quarter of 2007. Year to date, net earnings in 2008 were $82.7 million compared to $41.4 million earned in the same six months of 2007.

The airline's second quarter 2007 net earnings were impacted by the one-time non-recurring impairment loss related to costs previously capitalized for the aiRES project. Excluding this impairment, earnings for the quarter were $33.7 million; this represents a second quarter 2008 earnings decrease of 10.4 per cent. Year-to-date 2008 earnings improved 30.0 per cent when compared to the adjusted $63.6 million earned in the first six months of 2007.

The airline's diluted earnings per share (EPS) for the second quarter of 2008 was 23 cents compared to nine cents in the same period last year. Excluding the reservation-system impairment, diluted EPS for the quarter decreased 11.5 per cent from an EPS of 26 cents in 2007. Year to date, diluted EPS was 63 cents compared to 32 cents. Adjusted diluted EPS for the first half of 2007 was 49 cents, representing a 2008 improvement of 28.6 per cent.

The airline reported a second quarter earnings before tax (EBT) margin of 7.1 per cent and an operating margin of 9.1 per cent. Year to date, WestJet's EBT margin was 9.7 per cent and its operating margin was 11.4 per cent.

"We are very pleased with another quarter of results that will be among the best in North America; we feel confident we can continue to grow profitably and gain further market share domestically, transborder and internationally," said Sean Durfy, WestJet President and CEO. "We continued to implement our proven strategies of seasonally adjusting our capacity and carefully selecting destinations and markets that benefit our business and our guests. While we were not immune to the impacts of unprecedented and unrelenting oil prices and the effects of economic uncertainty softening demand, the hard work and dedication of over 7,300 WestJetters delivered financial results that demonstrate the merits of our business strategy. I thank them for continuing to deliver our WestJet experience to more and more guests."

Second quarter revenue for 2008 was $616.0 million compared to $498.2 million in the second quarter of 2007, an improvement of 23.6 per cent. Year to date, revenue was $1.215 billion compared to $968.9 million in 2007, an increase of 25.4 per cent.

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

Sean Durfy continued, "The price of oil continues to have a significant impact on our costs, as it has for all fuel-consuming sectors in the world economy. Economic uncertainties in North America, as well as the higher cost of air travel due to record fuel prices, are deterring some guests from travelling.

"Where we truly continue to shine is in our CASM (excluding fuel and employee profit share), which was down 6.8 per cent this quarter. At a time when other airlines are required to introduce cost-cutting initiatives, our true efficiencies are coming from the low-cost structure and philosophies we have had in place since we began operations in 1996.

"We have taken delivery of one of the remaining two aircraft slated for the second half of 2008, the second is arriving in the fourth quarter, for a 2008 total of 77 Boeing Next-Generation 737s. Capacity will increase 18 per cent in the third quarter, with a more modest 10 per cent increase in the fourth quarter.

"While we recognize that the unpredictable nature of our current operating environment may impact demand, we remain committed to our growth strategy. We recently announced that a code-share and distribution agreement is in the works with Southwest Airlines. This will allow us to meet our stated goal of gaining 20 to 25 per cent of the transborder market share over the next five years - demonstrating our commitment to executing our business plan and supporting the long-term positive outlook for our airline."

WestJet also reported second quarter operational performance. The airline calculates operational performance based on the U.S. Department of Transportation's standards for the North American airline industry.

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

Management's Discussion and Analysis of Financial Results

Advisories

The following Management's Discussion and Analysis of Financial Results (MD&A), dated July 29, 2008, should be read in conjunction with the unaudited consolidated financial statements and notes thereto as at and for the three and six months ended June 30, 2008 and 2007, as well as the audited consolidated financial statements, notes thereto and MD&A included in the Annual Report as at and for the year ended December 31, 2007. For a detailed description of risks, uncertainties and critical accounting estimates, please refer to the "Risks and Uncertainties" and "Accounting" sections in the 2007 annual MD&A dated February 22, 2008. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). All amounts in the following MD&A are stated in Canadian dollars unless otherwise stated. Certain prior-period balances in the consolidated financial statements have been reclassified to conform to current period's presentation. Additional information relating to WestJet Airlines Ltd. (WestJet, we, us or our), including Annual Information Forms and financial statements, is located on SEDAR at www.sedar.com. An additional advisory with respect to forward-looking information is set out below, and the use of non-GAAP measures is set out at the end of this MD&A under "Non-GAAP Measures".

Forward-looking information

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

Definition of key operating indicators

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

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

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

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

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

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

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

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

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

Utilization: Operating hours per day per operating aircraft.

OVERVIEW

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

Quarterly Highlights

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

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

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

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

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

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

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

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

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

---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operational Highlights Three Months Ended June 30 ---------------------------------------------------------------------------- 2008 2007 Change ---------------------------------------------------------------------------- ASMs 4,234,625,866 3,488,485,738 21.4% RPMs 3,365,923,157 2,822,372,023 19.3% Load factor 79.5% 80.9% (1.4) pts Yield (cents) 18.30 17.65 3.7% RASM (cents) 14.55 14.28 1.9% CASM (cents)(i) 13.22 12.32 7.3% CASM, excluding fuel and employee profit share (cents)(i) 8.13 8.72 (6.8%) Fuel consumption (litres) 205,847,264 173,222,765 18.8% Fuel costs/litre (cents) 103.77 69.43 49.5% Segment guests 3,546,184 3,229,146 9.8% Average stage length (miles) 906 834 8.6% Number of full-time equivalent employees at period end 6,156 5,350 15.1% ---------------------------------------------------------------------------- Fleet size at period end 75 65 15.4% Operational Highlights Six Months Ended June 30 ---------------------------------------------------------------------------- 2008 2007 Change ---------------------------------------------------------------------------- ASMs 8,299,617,667 6,937,533,552 19.6% RPMs 6,696,736,600 5,619,542,312 19.2% Load factor 80.7% 81.0% (0.3) pts Yield (cents) 18.15 17.24 5.3% RASM (cents) 14.64 13.97 4.8% CASM (cents)(i) 12.97 12.11 7.1% CASM, excluding fuel and employee profit share (cents)(i) 8.20 8.62 (4.9%) Fuel consumption (litres) 408,002,930 345,381,068 18.1% Fuel costs/litre (cents) 93.46 66.73 40.1% Segment guests 7,015,589 6,269,735 11.9% Average stage length (miles) 911 846 7.7% Number of full-time equivalent employees at period end 6,156 5,350 15.1% Fleet size at period end 75 65 15.4% ---------------------------------------------------------------------------- (i) Excludes reservation system impairment of $31.9 million in the second quarter of 2007. ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Despite record fuel prices, we recorded net earnings of $30.2 million and diluted earnings per share of $0.23.

During the second quarter of 2008, total revenues increased by 23.6 per cent to $616.0 million compared to $498.2 million in the same period of 2007. The primary drivers of this growth were additional seat capacity in our network, capture of additional guest traffic and improved yield. Notwithstanding our capacity increase of 21.4 per cent, our RASM for the first quarter of 2008 was 14.55 cents, up from 14.28 cents in the same period in 2007.

On May 13, 2008, in light of record fuel prices, we introduced a fuel surcharge of $20, $30 and $45 on all short-, medium- and long-haul flights, respectively, in order to partially offset the effect of unprecedented fuel prices.

Our load factor was down from 80.9 per cent in the second quarter of 2007 to 79.5 per cent for the second quarter of 2008 due to a softening in demand for air travel. However, we did see our largest capacity increase since November 2006 for the month of June and transported 9.8 per cent more guests in the quarter.

To see the Quarterly Load Factor chart, click here: http://media3.marketwire.com/docs/728wja_qlf.pdf.

Continued high fuel prices have driven aggressive actions within the North American airline industry. During the first half of 2008, many airlines announced reductions in capacity and employee layoffs. As well, certain airlines have either grounded or announced plans to ground aircraft in order to combat the rising costs of fuel, with some airlines filing for bankruptcy protection or commencing merger discussions. Further, aggressive ancillary revenue initiatives were announced by some airlines in response to record fuel prices, such as charging for checked baggage. Although fuel costs are negatively impacting net earnings, we remain committed to our strategic growth plan. We will continue to take delivery of our fuel-efficient Boeing aircraft and expand our network with new domestic and sun destinations. In addition to the fuel-efficient Next-Generation aircraft we fly, we are a leader in the adoption of Blended Winglet Technology, which significantly reduces fuel burn and emissions. These fuel-saving strategies, combined with onboard navigational technology and procedures designed to reduce flight times and emissions, are key components to our strategy in combating rising fuel costs.

Recently, we announced the introduction of four new international destinations: Bridgetown, Barbados and La Romana, Dominican Republic, as well as the Mexican destinations of Cancun and Puerto Vallarta. Non-stop seasonal service to Barbados and La Romana will commence in the fourth quarter of 2008. The introduction of service to Kamloops, beginning in December 2008, was also announced in the second quarter of 2008. These announcements bring our scheduled destinations to 51: 28 domestic, 12 U.S. and 11 international.

Strong cost control has always been a core strategy and remains integral to combating the impact of significantly higher fuel prices on our net earnings. Adjusted for the second quarter reservation system impairment in 2007, our CASM increased by 7.3 per cent in the second quarter of 2008 to 13.22 cents from 12.32 cents in the same quarter of 2007. This increase almost entirely resulted from significantly higher fuel costs. Excluding fuel and employee profit share and the reservation system impairment in the second quarter of 2007, our CASM has decreased to 8.13 cents in the second quarter of 2008 from 8.72 cents in the second quarter of 2007, an improvement of 6.8 per cent. This decrease was achieved primarily as a result of a longer average stage length, increased aircraft utilization, cost dilution over a greater number of available seat miles and a stronger Canadian dollar in comparison to the same period in 2007.

As at June 30, 2008, our balance sheet was strong, as evidenced by our cash and cash equivalents balance of $812.0 million, an increase of 24.2 per cent from December 31, 2007. Our healthy liquidity position is demonstrated by our current ratio of 1.20, which remained relatively flat compared to 1.22 as at December 31, 2007. Additionally, our adjusted debt-to-equity ratio was reduced to 1.95 from 2.07 as at December 31, 2007.

During the second quarter of 2008, we assumed delivery of two leased 737-700s, increasing our total registered fleet to 75 aircraft. Additionally, we signed an agreement with Boeing in the second quarter of 2008 to purchase four new aircraft, with two scheduled for delivery in 2010 and two in 2011. We continue to operate one of the youngest fleets of any large North American commercial airline at an average age of 3.5 years.

SELECTED QUARTERLY UNAUDITED FINANCIAL INFORMATION ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Ended ---------------------------------------------------------------------------- ($ in thousands, except per share Jun. 30 Mar. 31 Dec. 31 Sept. 30 data) 2008 2008 2007 2007 ---------------------------------------------------------------------------- Total revenues $ 616,000 $ 599,348 $ 552,004 $ 606,242 Net earnings $ 30,193 $ 52,506 $ 75,359 $ 76,070 Basic earnings per share $ 0.23 $ 0.40 $ 0.58 $ 0.59 Diluted earnings per share $ 0.23 $ 0.40 $ 0.57 $ 0.58 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Ended ---------------------------------------------------------------------------- Jun. 30 Mar. 31 Dec. 31 Sept. 30 2007 2007 2006 2006 ---------------------------------------------------------------------------- Total revenues $ 498,200 $ 470,710 $ 446,720 $ 497,339 Net earnings $ 11,549 $ 29,855 $ 26,651 $ 52,810 Basic earnings per share $ 0.09 $ 0.23 $ 0.21 $ 0.41 Diluted earnings per share $ 0.09 $ 0.23 $ 0.21 $ 0.41 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

Our business is seasonal in nature with varying levels of activity throughout the year. We experience increased domestic travel in the summer months (second and third quarters) and more demand for sun destinations over the winter period (fourth and first quarters). With the introduction of transborder and international destinations, we have been able to alleviate some of the effects of seasonality on our net earnings.

In the quarter ended December 31, 2007, our reported net earnings of $75.4 million were positively impacted by a non-cash adjustment in the amount of $33.7 million, or 25 cents per share, to future income tax expense as a result of the enactment of income tax rate reductions.

In the quarter ended June 30, 2007, our reported net earnings of $11.5 million were negatively impacted by a non-cash impairment of $31.9 million ($22.2 million after tax or 17 cents per share) for the capitalized costs associated with our reservation system project.

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

During the three months ended June 30, 2008, total revenues increased by 23.6 per cent to $616.0 million compared to $498.2 million in the same period of 2007. For the six months ended June 30, 2008, total revenues increased by 25.4 per cent to $1,215.3 million from $968.9 million in the same period of 2007. For the second quarter and first half of 2008, our RASM increased by 1.9 per cent and 4.8 per cent to 14.55 cents and 14.64 cents, respectively, compared to the prior-year periods. We are encouraged by the progress made in improving RASM when the increase in average stage length of 8.6 per cent is considered. These increases in total revenues and RASM were driven primarily by additional capacity and improved yield through the newly implemented fuel surcharge.

The second quarter is a transitional period where a large portion of our transborder, international and charter capacity is shifted back into our domestic markets. During the second quarter of 2008, we transitioned approximately 40 per cent of our total network capacity from our winter schedule back into Canada. Further, this capacity shift occurred as we experienced a 21.4 per cent year-over-year quarterly capacity increase. Additionally, as the Easter holiday in 2008 fell in the month of March, versus April in 2007, RASM for the second quarter of 2008 was negatively impacted, offsetting the favourable impact from the first quarter of 2008. Also affecting our RASM is our increase in average stage length for the three and six months ended June 30, 2008 of 8.6 per cent and 7.7 per cent, respectively. As average stage length increases, our revenue per mile decreases over a larger number of miles flown. We have, however, seen a positive impact on our RASM as a result of fuel surcharges. We continue to monitor the impact of the higher fuel costs and will adjust the fuel surcharge if necessary in the future. Fuel surcharges are included in guest revenues.

Guest revenues from our scheduled flight operations increased by 24.0 per cent for the three months ended June 30, 2008 to $557.3 million from $449.3 million and 28.9 per cent for the six months ended June 30, 2008 to $1,083.0 million from $840.0 million as compared to the prior year. These changes are attributable to capacity growth, fuel surcharges and increased WestJet Vacations air revenue.

Charter and other revenues include charter, cargo, ancillary, WestJet Vacations non-air and other revenue. Our charter and other revenues increased on a dollar basis by 20.1 per cent to $58.7 million in the second quarter of 2008 from $48.9 million in the same quarter of 2007. Additionally, charter and other revenues are up 2.7 per cent for the six months ended June 30, 2008. The quarter-over-quarter improvement was driven primarily by a significant increase in WestJet Vacations non-air revenue and improvements in charter revenue due to increased fuel surcharges for third party carriers. The year-to-date increase in charter and other revenues was mainly due to an increase in WestJet Vacations non-air and ancillary revenue, offset by a decrease in charter revenue due to increased capacity allocated to scheduled sun destinations during the winter months, as depicted in the graph below.

To see the Charter and Scheduled Transborder and International as a Percentage of Total ASMs chart, click here: http://media3.marketwire.com/docs/728wja_charter.pdf.

Ancillary revenues, which include service fees, onboard sales, partner and program revenue, increased by 8.2 per cent and 7.3 per cent for the second quarter and first half of 2008 to $21.2 million and $41.2 million, respectively, over the same periods of 2007. For the three months ended June 30, 2008, ancillary revenue per guest decreased from the same period of 2007 to $6.15 per guest from $6.25. Similarly, ancillary revenue per guest for the first half of 2008 declined by 5.4 per cent to $6.11 from $6.46 per guest in the first half of 2007. These decreases were largely attributable to the discontinuation of the Unaccompanied Minor program in April 2008, as well as lower revenue due to the announced termination of our BMO Mosaik MasterCard partnership.

We continually review our fee structure and as a result, we announced increases to our change and cancellation fees, same-day cancellation fees and certain buy-on-board product prices. As well, we introduced a lower weight allowance for all checked baggage effective July 3, 2008. We also announced the introduction of a new seat selection option on July 16, 2008, which for a small fee, will allow guests to select their seat at the time of booking. This service was not previously offered. Even with these changes to our fee structure, our fees remain some of the lowest in the airline industry.

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

During the second quarter of 2008, fuel continued to increase at unrelenting and unprecedented rates. As a result, our CASM increased for both the three and six months ended June 30, 2008 to 13.22 cents and 12.97 cents from 12.32 cents and 12.11 cents for the same periods of 2007, respectively. The underlying low-cost structure of our business model plays an important role in this period of record fuel prices and challenges in the airline industry, as we are able to operate with lower costs than our competitors. Our CASM, excluding fuel and employee profit share, decreased by 6.8 per cent for the three months ended June 30, 2008, and 4.9 per cent for the first six months of 2008 as compared to the same periods in 2007, excluding the reservation system impairment of $31.9 million in 2007.

A longer average stage length during the three and six months ended June 30, 2008 has helped reduce our CASM, excluding fuel and employee profit share. During the second quarter, our average stage length increased by 8.6 per cent to 906 miles from 834 miles in the same period of 2007. For the first half of 2008, average stage length increased to 911 miles from 846 miles, an increase of 7.7 per cent over the first half of 2007. The increase in our average stage length is attributable to additional transborder and international departures, new routes and new destinations. As average stage length increases, cost efficiencies are gained, and we achieve a lower cost per mile because our fixed costs of operations are allocated over an increasing number of miles flown. Likewise, longer-haul routes typically achieve higher fuel economy, as we are able to absorb the higher costs of fuel for take-offs and landings over a longer trip length.

With our focus on productivity and cost control, our fleet optimization continued during 2008. In the second quarter, we increased our aircraft utilization by 24 minutes to 12.2 operating hours per day compared to 11.8 operating hours per day in the same period of 2007. We saw a similar improvement during the first six months of 2008 to 12.3 operating hours per day from 12.1 operating hours per day, an increased utilization of 12 minutes.

During the three and six months ended June 30, 2008, we grew capacity, measured in available seat miles, to 4.2 billion ASMs and 8.3 billion ASMs as compared to 3.5 billion ASMs and 6.9 billion ASMs in the same periods of 2007. The dilution of costs over a greater number of available seat miles, coupled with the stronger Canadian dollar, continued to help reduce our CASM, excluding fuel and employee profit share, in the second quarter and first half of 2008.

Aircraft fuel

Fuel price increases continued to significantly impact our CASM during the three and six months ended June 30, 2008, representing approximately 38 per cent of total operating costs for the second quarter of 2008 as compared to 26 per cent for the same quarter of 2007. For the first half of 2008, fuel comprised approximately 35 per cent of total operating costs versus 26 per cent for the same period of 2007. Jet fuel prices reached US $175 per barrel during the month of May 2008, setting a record high for the first half of 2008. During the second quarter of 2008, the average market price for jet fuel was US $155.91 per barrel compared to US $87.37 per barrel in the same quarter of 2007, an increase of 78.4 per cent, as depicted in the graph below. As a result, our fuel cost per ASM reached 5.04 cents and 4.59 cents for the three and six months ended June 30, 2008, respectively, versus 3.45 cents and 3.32 cents for the same periods of 2007. For the second quarter of 2008, this represents a 46.1 per cent increase in our fuel cost per ASM and 38.3 per cent increase for the first six months of 2008. The increase in fuel cost per ASM was offset partially due to favourable foreign exchange adjustments.

To see the Average Market Price of Jet Fuel chart, click here: http://media3.marketwire.com/docs/728wja_jetfuel.pdf.

Fuel costs per litre increased by 49.5 per cent to $1.04 per litre in the second quarter of 2008 from $0.69 per litre in the second quarter of 2007. This differs from our estimate of $1.01 per litre in the first quarter of 2008 due to further escalations in the price of jet fuel during the second quarter of 2008. Similarly, we saw fuel costs per litre increase for the first half of 2008 by 40.1 per cent compared to the first half of 2007. These increases in our fuel costs per litre were offset by approximately 20 per cent and 25 per cent for the three and six months ended June 30, 2008, respectively, due to the strengthening Canadian dollar relative to the same periods of 2007. To further demonstrate the impact of rising fuel prices, we estimate that a round-trip flight for one guest would cost us approximately $151 in average fuel costs, as compared to the second quarter of 2007 at $95 in average fuel costs per guest.

To mitigate our exposure to fluctuations in jet fuel prices, we periodically use short-term financial and physical derivatives. As at, and for the three and six months ended June 30, 2008, we had no outstanding fuel hedges. Subsequent to June 30, 2008, we have entered into a mixture of costless collar structures with an approximate average crude oil call price of US $159 per barrel and an average crude oil put price of US $128 per barrel, and fixed swap agreements at an approximate average crude oil price of US $136 per barrel to hedge a portion of our anticipated jet fuel purchases to the end of September 2008. These contracts settle monthly, and as of July 25, 2008, we have hedged approximately 40 per cent of our July fuel requirements and approximately 65 per cent and 50 per cent of our forecasted fuel requirements for August and September, respectively.

Airport operations

Airport operations expense consists primarily of airport landing and terminal fees and ground handling costs for our scheduled service and charter operations. These expenditures typically fluctuate depending on the destinations, aircraft weights, inclement weather conditions and number of guests. Transborder flights are more expensive than domestic flights due to increased charges from domestic airports for higher terminal and pre-clearance fees from transborder flights. Also included in airport operations are costs relating to flight cancellations and accommodations for displaced guests for situations beyond our control, such as inclement weather conditions. Because the majority of expenses are levied on a per-flight basis, the cost per departure is also a relevant performance driver for airport operations.

For the three months ended June 30, 2008, our cost per available seat mile for airport operations decreased by 5.8 per cent to 1.94 cents from 2.06 cents in the same period of 2007. Similarly, year-to-date cost per available seat mile was 2.00 cents as compared to 2.12 cents in the same period of 2007, representing a decrease of 5.7 per cent. These decreases were primarily attributable to dilution of costs over a greater number of available seat miles. Our cost per departure increased by 2.7 per cent and 2.5 per cent in the second quarter and first half of 2008, respectively, as compared to the same periods of 2007. These increases were primarily due to higher costs for glycol due to the harsh Canadian winter, higher average ground handling rates and fees and higher meal, hotel and transportation costs for displaced guests. Additionally, our employee expenses are higher on a per-departure basis for these periods due to annual merit increases in May 2008.

Flight operations and navigational charges

For the second quarter of 2008, our flight operations and navigational charge per ASM was 1.66 cents compared to 1.84 cents in the same quarter of 2007, a decrease of 9.8 per cent. For the first half of 2008, our cost per ASM for flight operations and navigational charges decreased by 8.2 per cent to 1.67 cents from 1.82 cents in the first half of 2007. For both periods, the decreases were largely attributable to lower NAV CANADA fees and pilot stock-based compensation, as well as the dilutive impact of our capacity growth.

Flight operations expenses consist primarily of pilot compensation, including salaries, training and stock-based compensation, as well as salaries and benefits for operations control centre staff. Pursuant to the 2006 pilot agreement, pilots may elect to receive a certain amount of cash in lieu of a selected portion of their stock options. For the second quarter of 2008, stock-based compensation expense relating to pilots' stock options decreased by 38.1 per cent, to $2.6 million from $4.2 million in the second quarter of 2007, as more pilots elected to receive cash in lieu of stock options. During the first half of 2008, pilots' stock-based compensation expense related to options was $6.1 million, a decrease of 34.4 per cent from $9.3 million in the first half of 2007. This decrease was partially offset by an increase in salary costs due to this cash payout in the first quarter of 2008 compared to the same period in 2007.

Domestic air navigational charges relating to air traffic control are administered by NAV CANADA on a per-flight basis. These fees are predominantly driven by the size of aircraft and distance flown. For the second quarter of 2008, navigational charges have decreased on a CASM basis by 11.4 per cent to 0.78 cents from 0.88 cents in the second quarter of 2007. This decrease was primarily due to the dilutive impact of our 21.4 per cent capacity growth and a reduction in NAV rates that was effective September 2007. For the first six months of 2008, navigational charges decreased by 9.6 per cent to 0.75 cents per ASM from 0.83 cents per ASM in the same period of 2007. As our number of transborder and international departures have increased during the first half of 2008 over the same period of 2007, our NAV fees decreased during this period. Of our total departures, transborder and international routes comprised 16.8 per cent in the first six months of 2008 versus 14.5 per cent of total departures in the first half of 2007, an increase of 2.3 points. Our NAV CANADA charges decrease as we fly to more destinations outside of Canadian airspace.

Inflight

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

Maintenance

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

At June 30, 2008, 32 out of 75 aircraft were off warranty compared to 20 out of 65 aircraft at June 30, 2007. We expect our maintenance costs per available seat mile to increase as more aircraft come off warranty.

Compensation

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

Salaries and benefits

For the second quarter of 2008, salaries and benefits increased by 19.4 per cent to $89.2 million from $74.7 million in the second quarter of 2007. For the first half of 2008, salaries and benefits were $176.8 million as compared to $146.7 million, an increase of 20.5 per cent. These increases were due to market and merit increases in base salaries and benefits, as well as the greater number of WestJetters employed versus a year ago. Salaries and benefits expense for each department is included in the respective department's operating expense line item.

Employee profit share

All employees are eligible to participate in the employee profit sharing plan. As the profit share system is a variable cost, employees will be generously rewarded during good years. Conversely, the amount distributed to employees is reduced and adjusted in less profitable times. Our profit share expense for the quarter ended June 30, 2008 was $2.2 million, a 59.3 per cent decrease from $5.4 million for the same quarter of 2007. This variance was directly attributable to the lower earnings eligible for profit share due to higher fuel costs. For the first six months of 2008, profit share expense was $15.3 million as compared to $11.6 million in the first half of 2007, an increase of 31.9 per cent.

Employee Share Purchase Plan

Our Employee Share Purchase Plan (ESPP) allows employees to participate in WestJet's success. WestJetters may contribute up to 20 per cent of their base salaries in the ESPP, and as at June 30, 2008, contributed an average of 15 per cent. We match contributions for every dollar contributed by employees. Our matching expense for the period ended June 30, 2008 was $10.8 million, a 25.6 per cent increase from $8.6 million for the same quarter of 2007. Similarly, our matching expense increased by 27.0 per cent in the first half of 2008 compared to the first half of 2007, increasing to $20.7 million from $16.3 million, respectively. Of our eligible employees, 83 per cent participated in the ESPP as at June 30, 2008. The additional expense for both periods was driven by an increase in WestJetters over the same periods of 2007.

Stock options

Pilots, executives and certain non-executive employees participate in stock option plans. The fair value of these options, as determined by the Black-Scholes option pricing model, is expensed over the vesting period. Stock-based compensation expense related to stock options for the quarter ended June 30, 2008 was $3.4 million compared to $5.4 million in the same quarter of 2007, a decrease of 37.0 per cent. For the first half of 2008, stock-based compensation expense for stock options was $7.6 million, a decrease of 29.6 per cent from $10.8 million in the first half of 2007. The primary reason for the decrease in stock option expense relates to pilots electing to receive a certain amount of cash in lieu of a selected portion of their stock options, which is partially offset by an increase to salary costs.

2008 Executive Share Unit Plan

Senior executive officers participate in the 2008 Executive Share Unit Plan whereby they receive Restricted Share Units (RSU) and Performance Share Units (PSU). Each RSU and PSU entitles the executive to receive payment upon vesting in the form of voting shares. We determine compensation expense for the 2008 RSUs based on the fair market value of our voting shares on the date of grant. Compensation expense for RSUs is recognized in earnings on a straight-line basis over the three-year vesting period. The value of the PSUs is based on the fair market value of our voting shares on the date of grant. PSUs time vest at the end of a three-year term and incorporate performance criteria based upon achieving the compounded average diluted earnings per share growth rate targets established at the time of grant. For the three and six months ended June 30, 2008, a total of $0.2 million and $0.5 million of compensation expense is included in marketing, general and administration expense related to the 2008 Executive Share Unit Plan.

Foreign exchange

The foreign exchange gains and losses that we realize are largely attributable to the effect of the changes in the value of the Canadian dollar, relative to the US dollar, on our US-denominated net monetary assets over the respective periods. These assets, totalling approximately US $116.9 million at June 30, 2008 (December 31, 2007 - $103.4 million), consist of mainly US-dollar cash and cash equivalents and security deposits on various leased and financed aircraft. We hold US-denominated cash and short-term investments to reduce the foreign currency risk inherent in our US-dollar expenditures. We reported foreign exchange gains of $0.1 million and $4.0 million during the three and six months ended June 30, 2008, respectively, on the revaluation of our US-dollar net monetary assets. This compares to losses of $6.9 million and $7.2 million during the same periods in the prior year.

Income taxes

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

Guest experience

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

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

Key performance indicators are calculated based on the U.S. Department of Transportation's standards of measurement for the U.S. airline industry.

On-time performance is a key factor in measuring our guest experience. During the second quarter of 2008, we continued to experience more severe weather patterns which impacted our on-time performance when compared to the same period of 2007. Similarly, for the first half of 2008, harsh winter weather, particularly during the first quarter, contributed to the decline in on-time performance. In the second quarter of 2008, 84.3 per cent of all our flights arrived within 15 minutes of their scheduled time, compared to 88.5 per cent for the same period in 2007.

Our completion rates remained relatively flat for the three and six months ended June 30, 2008 at 99.0 per cent and 98.6 per cent versus 99.4 per cent and 98.9 per cent, respectively, in the same periods of 2007. This indicator represents the percentage of flights completed from flights originally scheduled.

We continued to see improvements in our bag ratios for the second quarter and first half of 2008 of 3.32 and 4.23, respectively. This ratio represents the number of delayed or lost baggage claims made per 1,000 guests. These were improvements of 4.3 per cent and 3.2 per cent for the three and six month periods ended June 30, 2008, respectively, over the same periods of 2007.

LIQUIDITY AND CAPITAL RESOURCES

Our financial strength is demonstrated by our healthy balance sheet, ability to generate positive cash flows, substantial cash balance, the repurchase of 2.0 million shares and positive leverage ratios. Despite record fuel prices, we remain profitable, and our balance sheet has remained one of the strongest in the airline industry.

As at June 30, 2008, total cash and cash equivalents were $812.0 million compared to $653.6 million at December 31, 2007. Part of this cash balance relates to cash collected with respect to advance ticket sales for which the balance at June 30, 2008 was $323.4 million as compared to $194.9 million at December 31, 2007. Our working capital ratio of 1.20 compared to 1.22 as at December 31, 2007 indicates healthy liquidity and a favourable financial position. As at, and for the three and six months ended June 30, 2008, we did not have any investments in asset-backed commercial paper.

We monitor capital on a number of measures, including adjusted debt-to-equity and adjusted net debt to EBITDAR. As at June 30, 2008, our adjusted debt-to-equity ratio was 1.95 to 1.00, including $580.7 million in off-balance-sheet aircraft operating leases. This is an improvement of 5.8 per cent from 2.07 to 1.00 at December 31, 2007, attributable to the increase in net earnings more than offsetting the addition of new aircraft financing during the first half of 2008. As at June 30, 2008, our adjusted net debt to EBITDAR ratio was 2.15 as compared to 2.51 as at December 31, 2007, an improvement of 14.3 per cent. This change resulted from increased EBITDAR and cash and cash equivalents. Both of these ratios met our targets for June 30, 2008 and December 31, 2007 of an adjusted debt-to-equity measure and an adjusted net debt to EBITDAR ratio of no more than 3.00.

To see the Adjusted Net Debt to EBITDAR chart, click here: http://media3.marketwire.com/docs/728wja_ebitdar.pdf.

(i) The trailing twelve months are used in the calculation of EBITDAR. See "Reconciliation of Non-GAAP Measures to GAAP" at the end of this MD&A for further information.

Operating cash flow

Despite the soaring prices of jet fuel, we continued to generate positive cash flow from operations. During the second quarter of 2008, our operating cash flow was $125.9 million compared to $148.9 million in the same period of 2007, a decrease of 15.4 per cent. This decline was primarily due to higher fuel expenses. For the first half of 2008, operating cash flow increased by 7.6 per cent to $315.7 million from $293.5 million in the first half of 2007, due to growth in our earnings and improved working capital.

Financing cash flow

For the second quarter of 2008, our total cash flow used in financing activities was $71.8 million, attributable largely to $41.5 million in long-term debt repayments related to our aircraft and $29.4 million for shares repurchased under our normal course issuer bid. Similarly, the $50.4 million cash flow used in financing activities during the second quarter of 2007 related primarily to $37.0 million in long-term debt repayments and $11.8 million towards share repurchases. During the first half of 2008, our cash flow used in financing activities was comprised primarily of $82.9 million in long-term debt repayments largely relating to our aircraft, the consideration of $29.4 million to repurchase shares and $2.7 million in deposits mainly related to future leased aircraft. The outflows were partially offset by the issuance of $67.9 million in long-term debt to finance two owned aircraft. In the comparable period of 2007, our financing cash flow was used towards $80.1 million in long-term debt repayments, $11.8 million in consideration under our previous normal course issuer bid and $9.3 million in deposits relating mainly to future leased aircraft.

In addition to having strong cash liquidity, we have been successful in financing our growth through aircraft acquisitions financed by low-interest-rate debt supported by the Export-Import Bank of the United States (Ex-Im Bank). On July 17, 2008, we took delivery of one owned aircraft supported by US $33.7 million in debt guaranteed by Ex-Im Bank.

These loan guarantees from the U.S. government represent approximately 85 per cent of the purchase price of these aircraft. This financing activity brings the cumulative number of aircraft financed with loan guarantees to 52, with an outstanding debt balance of $1.4 billion associated with those aircraft. All of this debt has been financed in Canadian dollars at fixed interest rates, thus eliminating all future foreign exchange and interest rate exposure on these US-dollar aircraft purchases.

To facilitate the financing of our Ex-Im Bank supported aircraft, we utilize five special-purpose entities. We have no equity ownership in the special-purpose entities; however, we are the beneficiary of the special-purpose entities' operations. The accounts of the special-purpose entities have been consolidated in the financial statements.

Investing cash flow

Cash used in investing activities for the second quarter and first six months of 2008 was $26.6 million and $110.0 million, respectively, compared to $18.3 million and $19.2 million in the comparable periods of 2007. During the second quarter of 2008, the majority of our investing activities included $14.8 million in expenditures relating to the construction of our new office space, the Calgary "Campus", and deposits made to Boeing for four future aircraft commitments signed in the second quarter. For the comparable period in 2007, investing activities related primarily to similar Boeing deposits. For the first half of 2008, our investing activities related to the addition of two new owned aircraft totalling $71.3 million, as well as $28.7 million in expenditures relating to Campus construction. We paid deposits towards owned aircraft deliveries during the first half of 2007, partially offset by $13.8 million in proceeds received on the sale of two engines.

Capital resources

On June 18, 2008, we signed an agreement to purchase four Boeing 737-700 aircraft, with two scheduled for delivery in 2010 and two in 2011, bringing our total committed fleet to 120 by 2013. On February 29, 2008, we signed a Letter of Intent to lease an additional 737-800 aircraft scheduled for delivery in 2011. This has not been reflected as a commitment in the table below as the lease agreement has not yet been signed; however, if included, our future deliveries would be 121 aircraft by 2013. During the second quarter of 2008, we assumed delivery of two leased 737-700 aircraft, bringing the total number of deliveries to five aircraft for the first half of 2008.

As at June 30, 2008, we had existing firm commitments to take delivery of an additional 45 aircraft as summarized below:

At June 30, 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Series --------------------------------------- 600s 700s --------------------------------------- Leased Owned Total Leased Owned Total ---------------------------------------------------------------------------- Fleet at December 31, 2007 - 13 13 16 35 51 ---------------------------------------------------------------------------- Fleet at June 30, 2008 - 13 13 18 37 55 Commitments: 2008 - - - - 1 1 2009 - - - 7 - 7 2010 - - - 4 2(1) 6 2011 - - - 4 2(1) 6 2012 - - - - 14(1) 14 2013 - - - - 6(1) 6 ---------------------------------------------------------------------------- Total Commitments - - - 15 25 40 ---------------------------------------------------------------------------- Committed fleet as of 2013 - 13 13 33 62 95 ---------------------------------------------------------------------------- (1) We have an option to convert any of these future aircraft to 737-800s. -------------------------------------------

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