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OWNERS’
MANUAL
2005 WESTJET ANNUAL REPORT

Table of contents

  • Page 1
    2005 WESTJET ANNUAL REPORT OWNERS' MANUAL

  • Page 2
    ...WestJet employed 4,973 people, and carried 9.4 million guests to its 23 Canadian destinations of Victoria, Comox, Vancouver, Abbotsford/Fraser Valley, Prince George, Kelowna, Grande Prairie, Calgary, Edmonton, Fort McMurray, Saskatoon, Regina, Winnipeg, Thunder Bay, London, Hamilton, Toronto, Ottawa...

  • Page 3
    ... done its job. THE INFORMATION ON THESE PAGES APPLIES SOLELY TO WESTJET AND MAY NOT BE COMPATIBLE WITH OTHER AIRLINES. Cover photos left to right: Jay Aguinaldo, Warranty Coordinator; Alexandra Korres, Customer Service Agent; Veronica Caldwell, Accounting Records Assistant 1 2005 WESTJET ANNUAL...

  • Page 4
    ... seat miles (ASM) Load factor Yield (¢) Revenue per ASM (¢) Operating cost per ASM (¢)(1) Average stage length (miles) Cost per passenger mile (¢)(1) Segment guests Fuel consumption (litres) Fuel cost per litre (¢) Number of full-time-equivalent employees at year end Fleet size at year end...

  • Page 5
    ... 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. Average Stage Length (MILES) 760 657 552 458 797 3 2005 WESTJET ANNUAL REPORT

  • Page 6
    Clive Beddoe President and Chief Executive Officer IMPORTANT INFORMATION FROM OUR PRESIDENT: "WestJetters have a vested interest in making our guests' travels with our airline exceptional because the majority of us are owners of the company." YOUR OWNERS' MANUAL 4

  • Page 7
    ... of 13 of these aircraft by year-end, replacing them with our new deliveries of Boeing Next-Generation 737s. Not only did we achieve this seamlessly, but we were also able to install fuel-saving winglets on each of the 700-series and 800-series aircraft WestJet Boeing Next-Generation 737-700...

  • Page 8
    ... in the future. During this last year, we also made a number of changes to our executive and senior management teams in order to help our company evolve and grow. On September 6, 2005, we were very pleased to welcome Russ Hall to our team as Executive Vice-President, Guest Services and Information...

  • Page 9
    ... year and our shareholders for their continued support of WestJet. On behalf of the Board, Our launch of these new transborder markets has been extremely successful, and is particularly rewarding after the many months of hard work... Clive Beddoe Executive Chairman, President and Chief Executive...

  • Page 10
    ... and support staff of the tsunami benefit concerts. In addition to flights, WestJet facilitated monetary donations to the Canadian Red Cross Carolyn Deniger, Judy Clark and Monica Solar Executive Administrative Assistants through our online donation link on westjet.com and through donation boxes at...

  • Page 11
    ... was contracted by Le Bas International Air Charter Worldwide on behalf of the US Federal Emergency Management Agency to airlift to safety evacuees in the path of hurricane Rita. Thirteen WestJet employees including pilots, flight attendants and maintenance personnel were in the air and on their way...

  • Page 12
    ... closer to home. Aside from ad hoc help to people and agencies that need assistance following unexpected acts of nature, WestJet is also a strong supporter of various charities throughout the year. HOPE AIR For a decade now, WestJet has proudly donated flights to Hope Air, an organization that is...

  • Page 13
    ...: Shawn Anderson, Aircraft Maintenance Engineer and Kim Kushner, Apprentice Aircraft Maintenance Engineer; Myrnie Sands-Malvin, Executive Assistant; Maiko Maruyama, Training and Standards Team Leader and Mary Giroux, Technical Standards Leader; Maria Brant-McMahon, Recruiter WESTJET ANNUAL REPORT

  • Page 14
    Josie Gentile Operations Manager For best results: maintain corporate-wide focus on producing a high-value experience for our guests in the most cost-efficient manner. YOUR OWNERS' MANUAL 12

  • Page 15
    ...yields that resulted from the irrational fare-pricing strategies employed by a competitor. Fuel prices continued to rise throughout the year but were partially offset by increased yields. Our ability to Masumi Jadwani Analyst, Network Planning Mike Rodomar X Team Agent 2005 WESTJET ANNUAL REPORT

  • Page 16
    ...The remaining leased aircraft were retired from figure 14-A revenue service on January 8, 2006, as we continued our transition to a younger, more efficient fleet. The retirement 1. ASSIST WITH the hurricane Katrina disaster, as WestJet did on August 31, 2005, by operating a charter from Vancouver...

  • Page 17
    ... with major travel agents and by launching a very successful advertising campaign focused upon our service and our people. Successful initiatives included the introduction of self-service kiosks and web check-in. These methods now account for 40% of our check-ins at airports where kiosks...

  • Page 18
    ... Cost per available seat mile (CASM) (in cents) 2005 Aircraft fuel Airport operations Flight operations and navigational charges Sales and marketing Depreciation and amortization(1) Maintenance General and administration Aircraft leasing Interest expense Inflight Customer service (1) 2004 2.69 1.94...

  • Page 19
    ..., cost efficiencies are gained and we achieve a lower average cost per mile. This is because fixed costs, such as takeoff and landing fees, are shared over an increasing number of miles. Furthermore, fuel-burn decreases on a per-seat-mile basis the longer an aircraft spends in level flight, and...

  • Page 20
    .... We have found that the burn rates for aircraft equipped Energy-saving tip: Install winglets on our already fuel-efficient Next-Generation aircraft to help further reduce fuel burn and improve aerodynamic efficiency. with winglets have been measured at approximately 78% of what we used to burn...

  • Page 21
    ... year. The challenge that we face with respect to fuel costs relates to the length of time between a guest booking a flight and the date at which the guest actually travels. As airline travellers typically purchase seats for travel weeks or months in advance of their planned travel date, the price...

  • Page 22
    ... the number of seats in, as well as the weight of, an aircraft. The efforts of the airport operations team focused on the improvement of operational efficiencies in 2005. On April 14, 2005, we introduced our convenient and cost efficient online check-in service for domestic travellers. Online check...

  • Page 23
    Flight Operations and Inflight The flight operations and inflight categories relate to the cost of WestJetters onboard our aircraft, including pilots and flight attendants - their training salaries, wages, stock option expenses and travel costs. We also include the costs of the supporting ...

  • Page 24
    ... continued to decline. Matthew Kenley Customer Service Agent Navigational Charges Nav Canada and the Federal Aviation Administration (FAA) in the US provide North American air traffic control services. The costs of these services are predominantly driven by size of aircraft and distance flown, and...

  • Page 25
    ... that allows us to better manage seat inventory and ultimately provide the best pricing for our guests, while maximizing returns for our investors. We have always been supportive and appreciative of the large network of travel agents that book their clients on our flights, as travel agents provide...

  • Page 26
    ...-200 figure 24-A simulator that were part of the sales agreement. At year-end, we operated a total of 55 Boeing 737 THIS AIRLINE CAN BE USED FOR PURPOSES OTHER THAN JUST FLIGHT, LIKE ENTERTAINMENT, AS WAS DEMONSTRATED BY WESTJET IN 2005. HERE'S HOW: aircraft of which 51 are Next-Generation 737...

  • Page 27
    ... 737-600 aircraft. The average age of our Next-Generation aircraft was 2.0 years at year-end, the youngest fleet in North America of any large commercial airline. As at December 31, 2005, we had firm purchase orders for 12 aircraft in 2006 and four aircraft in 2007. Leather seats, winglets and live...

  • Page 28
    ... to our accounting, treasury, audit and advisory services, information technology, legal, "people" (human resources), facilities and training teams. Also included in these costs are executive compensation, professional fees and insurance. In 2005, total general and administrative costs decreased...

  • Page 29
    .... Linda Gagnon Executive Administrative Assistant Customer Service The focus of our customer service is on the overall experience of our guests. Our goal is to find ways to create pleasant, hassle-free experiences from the first encounter on the phones or online, to the time guests deplane at their...

  • Page 30
    ... November annually. Foreign Exchange The Canadian dollar continued to strengthen throughout the year, ending the year at $0.86 relative to the US dollar. WestJet's exposure to the US dollar primarily relates to aircraft lease payments, jet fuel, airport operations at our US destinations and certain...

  • Page 31
    ... and benefited from our compensation strategy of aligning corporate success with personal success. airport fees than domestic operations and additional costs associated with US pre-clearance services. The airport operations group incurred additional costs associated with our buy-on-board snack...

  • Page 32
    ... OPERATED 51 Next-Generation Boeing 737 aircraft AVERAGED 1,877 flights per week INTRODUCED technology that allowed 390,855 guests to print their own boarding pass thanks to Web check-in, launched April 14, 2005 2005 NUMBERS: 2 Average age of WestJet's Next-Generation aircraft at year-end 2005...

  • Page 33
    ...consisting of five Boeing 737-700s and eight Boeing 737-600s. With the support of the Ex-Im Bank guarantee, we completed financing arrangements for US $386 million for the delivery of all 13 aircraft. This facility will be drawn in Canadian dollars in separate instalments with 12-year terms for each...

  • Page 34
    ... February 28, 2006, we had 120,028,091 common voting shares outstanding, 9,550,214 variable voting shares outstanding and 11,359,986 stock options outstanding. To facilitate the financing of our Ex-Im Bank supported aircraft, we utilize three special-purpose entities. We have no equity ownership in...

  • Page 35
    ... 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 are seeking disgorgement of any incremental revenue, profits and other benefits acquired by the Defendants as a result of...

  • Page 36
    ... the assets may be impaired. We also make estimates in accounting for our liability related to certain types of non-refundable guest credits. We may issue future travel credits related to guest compensation for flight delays, missing baggage and other inconveniences as a gesture of good faith. These...

  • Page 37
    ... our transborder service from Vancouver to Honolulu and Maui. figure 35-A Proud moments at WestJet in 2005 2. WHEN WE CELEBRATED the arrival of our 50th Boeing Next-Generation aircraft, giving us the most advanced fleet of any major North American Airline. 3. WHEN WE IMPROVED our market share to...

  • Page 38
    ...with regulatory changes and the continued review and update of the existing governance materials. During 2005, the Board of Directors continued to take steps to ensure that good corporate governance practices were employed by WestJet... Nataly Paredes Customer Service Agent YOUR OWNERS' MANUAL 36

  • Page 39
    ...the Company's Disclosure, Confidentiality and Trading Policy, which was finalized early in 2006. In addition, management, in consultation with external advisors, began the preparation of a mandate and procedures for a management Disclosure Committee, which were presented to and approved by the Board...

  • Page 40
    ... the Corporation's assets. The systems of internal control are monitored by management, and further supported by an internal audit department whose functions include reviewing internal controls and their application. The Board of Directors is responsible for the overall stewardship and governance of...

  • Page 41
    ... position of the Corporation as at December 31, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Calgary, Canada February 7, 2006 39 2005 WESTJET ANNUAL REPORT

  • Page 42
    ... Advance ticket sales Non-refundable guest credits Current portion of long-term debt (note 4) Current portion of obligations under capital lease (note 6) Long-term debt (note 4) Obligations under capital lease (note 6) Other liabilities (note 5) Future income tax (note 8) Shareholders' equity: Share...

  • Page 43
    ... EARNINGS WestJet Airlines Ltd. Years ended December 31, 2005 and 2004 (Stated in Thousands of Dollars, Except Per Share Amounts) 2005 Revenues: Guest revenues Charter and other Interest income Expenses: Aircraft fuel Airport operations Flight operations and navigational charges Sales and marketing...

  • Page 44
    CONSOLIDATED STATEMENTS OF CASH FLOWS WestJet Airlines Ltd. Years ended December 31, 2005 and 2004 (Stated in Thousands of Dollars) 2005 Cash provided by (used in): Operating activities: Net earnings (loss) Items not involving cash: Depreciation and amortization Amortization of other liabilities ...

  • Page 45
    ... restricted cash. (c) Revenue recognition: Guest and charter revenue is recognized when air transportation is provided. Tickets sold but not yet used are included in the consolidated balance sheet as advance ticket sales. The Corporation earns revenue under the tri-branded credit card agreement and...

  • Page 46
    ...WestJet Airlines Ltd. Years ended December 31, 2005 and 2004 (Tabular Amounts are Stated in Thousands of Dollars, Except Share and Per Share Data) 1. Significant accounting policies (continued): (g) Deferred costs: Sales and marketing and customer service expenses attributed to advance ticket sales...

  • Page 47
    ...rate and fuel price exposures. The Corporation's policy is not to utilize derivative financial instruments for trading or speculative purposes. The Corporation formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for...

  • Page 48
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WestJet Airlines Ltd. Years ended December 31, 2005 and 2004 (Tabular Amounts are Stated in Thousands of Dollars, Except Share and Per Share Data) 2. Property and equipment: 2005 Aircraft - Next-Generation Ground property and equipment Spare engines and ...

  • Page 49
    ... dates of its older Boeing 737-200 aircraft to have virtually all 200-series aircraft retired by the end of 2005 rather than in 2008 as contemplated under the previous fleet plan. As a result of the accelerated retirement dates on the 200-series aircraft, the Corporation evaluated the recoverability...

  • Page 50
    ... TO CONSOLIDATED FINANCIAL STATEMENTS WestJet Airlines Ltd. Years ended December 31, 2005 and 2004 (Tabular Amounts are Stated in Thousands of Dollars, Except Share and Per Share Data) 4. Long-term debt: 2005 $1,304,197,000 in 33 individual term loans, amortized on a straight-line basis over a 12...

  • Page 51
    ... is charged a 3% exposure fee on the financed portion of the aircraft price, payable upon delivery of an aircraft. The Corporation has available a facility with a Canadian chartered bank of $8,000,000 (2004 - $8,000,000) for letters of guarantee. At December 31, 2005, letters of guarantee totaling...

  • Page 52
    ...® MasterCard®* with the AIR MILES®†Reward Option for future net retail sales and for bounty on newly activated credit cards. During the year ended December 31, 2005, the Corporation recognized $2,000,000 (2004 - $NIL) of this unearned revenue. The remaining unearned revenue balance will be...

  • Page 53
    ... the Governor in Council may specify pursuant to the Canada Transportation Act) of the total voting rights attached to the aggregate number of issued and outstanding variable voting shares and common voting shares of the Corporation. Under the circumstances described above, the variable voting...

  • Page 54
    ... FINANCIAL STATEMENTS WestJet Airlines Ltd. Years ended December 31, 2005 and 2004 (Tabular Amounts are Stated in Thousands of Dollars, Except Share and Per Share Data) 7. Share capital (continued): (b) Issued and outstanding: On August 30, 2005, the Corporation's common shares were restructured...

  • Page 55
    ... whereby option holders can either (a) elect to receive shares by delivering cash to the Corporation or (b) elect to receive a number of shares equivalent to the difference between the market value of the options and the aggregate exercise price. For the year ended December 31, 2005, options holders...

  • Page 56
    ...Current market price for common shares issued from treasury is determined based on weighted average trading price of the common shares on the Toronto Stock Exchange for the five trading days preceding the issuance. The Corporation has the option to acquire common voting shares on behalf of employees...

  • Page 57
    ... option Average risk-free interest rate Average volatility Expected life (years) Dividend per share $ $ 2005 5.26 3.4% 43% 3.7 0.00 $ $ 2004 5.83 3.7% 45% 3.5 0.00 Employee stock option compensation expense is included in flight operations and general and administration expenses and totaled...

  • Page 58
    ...WestJet Airlines Ltd. Years ended December 31, 2005 and 2004 (Tabular Amounts are Stated in Thousands of Dollars, Except Share and Per Share... expenses Non-deductible stock-based compensation Non-taxable portion of capital gains Large corporation tax and capital taxes Future tax rate reductions ...

  • Page 59
    ... 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 are seeking disgorgement of any incremental revenue, profits and other benefits acquired by the Defendants as a result of...

  • Page 60
    ... and physical derivative instruments to mitigate its exposure to fluctuations in jet fuel prices and accounts for these derivatives as cash flow hedges. For the year ended December 31, 2005, the Corporation recognized a net gain of $155,000 in aircraft fuel resulting from hedging transactions...

  • Page 61
    ... result from tickets sold to individual guests through the use of major credit cards and travel agents. These receivables are short-term, generally being settled shortly after the sale. The Corporation manages the credit exposure related to financial instruments by selecting counter parties based...

  • Page 62
    ... Vice-President Guest Services & Finance Marketing & Sales Information Technology & Chief Financial Officer Fred Ring Executive Vice-President Corporate Projects Matthew Handford Executive Vice-President People Board of Directors Clive Beddoe Executive Chairman President and CEO WestJet Airlines...

  • Page 63
    ...at WestJet's Hangar, 21 Aerial Place NE, Calgary, AB. Transfer Agent and Registrar: CIBC Mellon Trust Company Toll Free Phone Number: North America: 1-800-387-0825 Outside North America: 416-643-5500 E-mail: [email protected] Website: www.cibcmellon.com Auditors: KPMG LLP, Calgary, AB Legal...

  • Page 64
    westjet.com