ANNUAL INFORMATION FORM
2009
March 15, 2010
OUR DESTINATIONS AT MARCH 15, 2010
WestJet Airlines Ltd. 2009 Annual Information Form - 1-
TABLE OF CONTENTS
EXPLANATORY NOTES ...... 3
ABOUT US...... 7
CORPORATE STRUCTURE ...... 7
OUR INDUSTRY AND COMPETITIVE ENVIRONMENT ...... 9
REGULATORY ENVIRONMENT ...... 10
DESCRIPTION OF OUR BUSINESS ...... 13
CAPITAL STRUCTURE ...... 37
DIVIDEND POLICY...... 43
MARKET FOR SECURITIES ...... 44
DIRECTORS AND EXECUTIVE OFFICERS...... 45
MATERIAL CONTRACTS ...... 53
LEGAL PROCEEDINGS...... 53
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS...... 54
INTERESTS OF EXPERTS...... 54
RISKS AND UNCERTAINTIES ...... 54
PRIVACY...... 60
TRANSFER AGENT AND REGISTRAR...... 60
ADDITIONAL INFORMATION...... 60
WestJet Airlines Ltd. 2009 Annual Information Form - 2 -
EXPLANATORY NOTES
Consolidation - References to “WestJet,” “our Company,” “our,” “we,” and “us” refer to WestJet Airlines Ltd. and its subsidiaries, including the WestJet Partnership (the “Partnership”) and the accounts of five special purpose entities, which are utilized to facilitate the financing of aircraft, as a combined entity, except where the context otherwise requires. We have no equity ownership in the special purpose entities; however, our Company is the primary beneficiary of the special purpose entities’ operations. All intercompany balances and transactions have been eliminated.
Currency - All currency amounts are stated in Canadian dollars, unless otherwise noted.
Effective - All information is stated as at December 31, 2009, unless otherwise indicated.
Cautionary statement regarding forward-looking information and statements - This Annual Information Form (“AIF”) offers our assessment of WestJet’s future plans and operations and contains forward-looking statements as defined under applicable Canadian securities legislation, including our expectation that security charges are expected to increase approximately 50 per cent effective April 1, 2010, referred to under the heading “The Security Charge” on page 12; our expectation that the amended Open Skies Agreement may provide us with expanded marketing opportunities to broaden our network and expand our reach, referred to under the heading “International and Transborder” on page 13; our expectation that we may need to undertake safety and operational audits by foreign carriers in order to demonstrate regulatory compliance for code-share implementation, referred to under the heading “Code- Share Agreements” on page 13; our expectation that we plan to continue expanding and to capitalize on the greater traffic opportunities available in the Canadian, transborder and international markets, referred to under the heading “Routes and Scheduling” on page 14; our expectation that we will serve 17 U.S. destinations and 21 international destinations based on our enhanced 2010 summer schedule, referred to under the heading “Routes and Scheduling” on page 14; our expectation that we anticipate demand will be stimulated from guests who would not otherwise travel, referred to under the heading “Routes and Scheduling” on page 15; our expectation that leisure markets will continue to provide significant growth opportunities through the strategies identified, referred to under the heading “Route Opportunities” on page 15; our expectation that our new WestJet Vacations reservation system should set the foundation for continued growth of all distribution channels for this business, referred to under the heading “WestJet Vacations” on page 16; our expectation that WestJet Vacations will be a key contributor to the future success of our airline, referred to under the heading “WestJet Vacations” on page 16; our expectation that we anticipate expanding our interline cargo agreement with Southwest Airlines Co. to include other markets where we connect with Southwest, referred to under the heading “Cargo” on page 16; our future confirmed aircraft deliveries, including timing of delivery, size of aircraft to be delivered, lease expiries and possible lease renewals, referred to under the heading “Fleet” on page 18; our expectation that our revised fleet plan aligns with the current and planned launch of interline and code-share partnerships, the continued rapid growth of our WestJet Vacations business and our plans to grow our share of the business-traveller market, referred to under the heading “Fleet” on page 19; our expectation that we will continue to develop value-added products aimed at making our guests more comfortable during their journey, referred to under the heading “Products and Services” on page 20; our expectation that our Frequent Guest and Credit Card programs will increase our competitive position in the business/frequent flyer market and, through mass-market participation in the credit card programs, contribute to our ancillary revenue streams, referred to under the heading “Frequent Guest and Credit Card Programs” on page 22; our expectation that SabreSonic will ensure we can properly support our evolving business model and allow us to continue to develop and deliver ancillary revenue opportunities and provide the platform to operate industry-standard airline partnerships, referred to under the heading “Reservation Systems” on page 22; our expectation that we are well on our way back to delivering the world-class
WestJet Airlines Ltd. 2009 Annual Information Form - 3 -
guest experience our guests deserve and have come to expect, referred to under the heading “Reservation Systems” on page 23; our expectation that Softvoyage’s suite of products will enable WestJet Vacations to successfully expand its sales and distribution, referred to under the heading “Reservation Systems” on page 23; our expectation that WestJet Vacations new web site provides future opportunity for a more media rich guest experience, referred to under the heading “Reservation Systems” on page 23; our expectation that we will expand our strategy globally of working closely with the travel trade as we enter new international and transborder markets, referred to under the heading “Travel Agents” on page 24; our expectation that Air Canada’s objective to become more active in the travel trade space through enhanced compensation models could potentially slow down the rate at which agencies move business to WestJet, referred to under the heading “Travel Agents” on page 24; our expectation that having our product on as many shelves as possible will contribute to our revenue growth and brand awareness, referred to under the heading “Travel Agents” on page 24; our expectation that through-checked bags and guests with China Airlines will significantly improve the guest experience versus what is currently in place, referred to under the heading “Airline Partnerships” on page 25; our expectation that our implementation of SabreSonic® enables us to be code-share ready from a system perspective, while Southwest Airlines’ readiness has pushed deployment of the code-share beyond the late 2010 date previously announced, referred to under the heading “Airline Partnerships” on page 25; our expectation that we plan to offer the majority of our domestic network for connectivity with Air France and KLM in the future, referred to under the heading “Airline Partnerships” on page 25; our expectation that in 2010, we plan add up to four additional interline partners, with a continued focus on non-reciprocal relationships, and complemented by an expansion of route offerings within our network to which our existing and new partners can connect as another step in our strategy to increase connectivity, and bring additional travellers to our network, referred to under the heading “Airline Partnerships” on page 25; our expectation that between 2010 and 2011, the majority of aircraft we acquire will be financed through operating leases with various leasing companies, including the Bank of China, International Lease Finance Company and the Aviation Capital Group Corp., referred to under the heading “Aircraft Financing” on page 26; our expectation that our leadership course catalogue will provide the company with a comprehensive overview of the core development courses available to all WestJetters, referred to under the heading “WestJetters” on page 29; our expectation that our labour relations are stable and we do not anticipate this to change in the foreseeable future, referred to under the heading “Compensation” on page 30; our expectation that our code-share with Southwest Airlines is an important step in the ability to offer our guests more destinations in the United States conveniently and cost effectively, referred to under the heading “2008” on page 36; and, our expectation that for 2010, our business plans are focused around leveraging the capabilities we implemented in 2009, including the launch of our Frequent Guest and credit card programs, additional airline partnerships and potentially new fare offerings with all of these items utilizing the additional functionality available through our reservation system implementation, referred to under the heading “2009” on page 37. These forward-looking statements typically contain the words “anticipate,” “believe,” “estimate,” “intend,” “expect,” “may,” “will,” “should,” “potential,” “plan” or other similar terms.
Readers are cautioned that our expectations, estimates, projections and assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. With respect to forward-looking statements contained within this AIF, we have made the following key assumptions:
• security charges are expected to increase approximately 50 per cent effective April 1, 2010, based on notification from the regulatory authorities of a change to security charges;
WestJet Airlines Ltd. 2009 Annual Information Form - 4 -
• the amended Open Skies Agreement may provide us with expanded marketing opportunities to broaden our network and expand our reach, based on the fifth freedom rights available from the agreement; • we may need to undertake safety and operational audits by foreign carriers in order to demonstrate regulatory compliance for code-share implementation, based on the aviation requirements of the foreign carriers regulatory bodies; • we plan to continue expanding and to capitalize on the greater traffic opportunities available in the Canadian, transborder and international markets, based on current experience and the additional aircraft to be delivered; • that we will serve 17 U.S. destinations and 21 international destinations based on our enhanced 2010 summer schedule, based on our current and forecasted schedule; • we anticipate demand will be stimulated from guests who would not otherwise travel, based on historical experience and marketing research; • that leisure markets will continue to provide significant growth opportunities through the strategies identified, based on current forecasts and our current strategic plan; • our new WestJet Vacations reservation system should set the foundation for continued growth of all distribution channels for this business, based on our current strategic plan and the functionalities of the system; • WestJet Vacations will be a key contributor to the future success of our airline, based on current strategic plan and forecast; • we anticipate expanding our interline cargo agreement with Southwest Airlines Co. to include other markets where we connect with Southwest, based on current results and forecasted demand; • our future aircraft deliveries, including timing of delivery, size of aircraft, lease expiries and possible renewals, based on the contractual terms of our agreements and the aircraft delivery schedule provide by Boeing; • our revised fleet plan aligns with the current and planned launch of interline and code-share partnerships, the continued rapid growth of our WestJet Vacations business and our plans to grow our share of the business-traveller market, based on our current forecast and strategic plan; • we will continue to develop value-added products aimed at making our guests more comfortable during their journey, based on the number of innovations completed to date and our strategic plan; • our Frequent Guest and Credit Card programs will increase our competitive position in the business/frequent flyer market and, through mass-market participation in the credit card programs, contribute to our ancillary revenue streams, based on market research and our current forecast; • that SabreSonic will ensure we can properly support our evolving business model and allow us to continue to develop and deliver ancillary revenue opportunities and provide the platform to operate industry-standard airline partnerships, based on system functionality and our current strategic plan and forecast; • we are well on our way back to delivering the world-class guest experience our guests deserve and have come to expect, based on key performance metrics at our call centres and airports; • Softvoyage’s suite of products will enable WestJet Vacations to successfully expand its sales and distribution, based on system functionality and our current strategic plan and forecast; • WestJet Vacations new web site provides future opportunity for a more media rich guest experience, based on system functionality; • we will expand our strategy globally of working closely with the travel trade as we enter new international and transborder markets;
WestJet Airlines Ltd. 2009 Annual Information Form - 5 -
• Air Canada’s objective to become more active in the travel trade space through enhanced compensation models could potentially slow down the rate at which agencies move business to WestJet, based on increased competitive pressure and market research; • having our product on as many shelves as possible will contribute to our revenue growth and brand awareness, based on our current strategic plan and forecast; • through-checked bags and guests with China Airlines will significantly improve the guest experience versus what is currently in place, based on market research; • our implementation of SabreSonic® enables us to be code-share ready from a system perspective, Southwest Airlines’ readiness has pushed deployment of the code-share beyond the late 2010 date previously announced, based on system functionality and discussions with Southwest Airlines; • we plan to offer the majority of our domestic network for connectivity with Air France and KLM in the future, based on our current strategic plan and forecast; • in 2010, we plan add up to four additional interline partners, with a continued focus on non- reciprocal relationships, and complemented by an expansion of route offerings within our network to which our existing and new partners can connect as another step in our strategy to increase connectivity, and bring additional travellers to our network, based on our current strategic plan and forecast; • between 2010 and 2011, the majority of aircraft we acquire will be financed through operating leases with various leasing companies, including the Bank of China, International Lease Finance Company and the Aviation Capital Group Corp., based on contract agreements with the various lessors; • our leadership course catalogue will provide the company with a comprehensive overview of the core development courses available to all WestJetters, based on our current strategic plan; • our labour relations are stable and we do not anticipate this to change in the foreseeable future, based on results from internal surveys and discussions with internal groups; • our future aircraft deliveries were based on a revised aircraft delivery schedule from Boeing; • our code-share with Southwest Airlines is an important step in the ability to offer our guests more destinations in the United States conveniently and cost effectively, based on Southwest Airlines current commercial schedule; and • for 2010, our business plans are focused around leveraging the capabilities we implemented in 2009, including the launch of our Frequent Guest and credit card programs, additional airline partnerships and potentially new fare offerings with all of these items utilizing the additional functionality available through our reservation system implementation, based on our current strategic plan and forecast.
Other forward-looking statements incorporated by reference from our 2009 annual Management’s Discussion and Analysis of Financial Results (“MD&A), are subject to and should be read in conjunction with the cautionary statement provided in the incorporated document.
Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements. We can give no assurance that any of the events anticipated will transpire or occur, or if any of them do, what benefits or costs we will derive from them. By their nature, forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the impact of general economic conditions, changing domestic and international industry conditions, volatility of fuel prices, terrorism, currency fluctuations, interest rates, competition from other industry participants (including new entrants and more generally in regards to capacity fluctuations and the pricing environment), labour matters, government regulation, stock-market volatility, pandemics, the ability to access sufficient capital from internal and external sources and additional risk factors discussed in our MD&A and other documents we file from time to time with securities regulatory authorities, which
WestJet Airlines Ltd. 2009 Annual Information Form - 6 -
are available through the internet on SEDAR at www.sedar.com or, upon request, without charge from us. Additionally, risks and uncertainties are discussed in detail within this AIF.
The forward-looking information contained in the AIF is expressly qualified by this cautionary statement. Our assumptions relating to the forward-looking statements referred to above are updated quarterly and, except as required by law, we do not undertake to update any other forward-looking statements.
ABOUT US
WestJet, Canada’s preferred airline, is also Canada’s leading high-value, low-cost airline, with scheduled service between 69 destinations across Canada, the United States, Mexico and the Caribbean. We offer travellers friendly, convenient and efficient air travel, while delivering an exceptional guest experience.
Our vision is to be one of the five most successful international airlines in the world by 2016, providing guests with a friendly and caring experience that will change air travel forever. Our mission, which is the heartbeat of everything we do, is to enhance the lives of everyone in WestJet’s world by providing safe, friendly and affordable air travel.
We continue to achieve success through:
• A strong corporate culture – WestJet was named one of Canada’s Most Admired Corporate Cultures for four years straight in a study that demonstrates the correlation between corporate culture and performance, and we were just inducted into the Corporate Culture Hall of Fame; • A dedicated team of more than 7,600 WestJetters committed to providing excellent guest service; • A high-efficiency strategic business model that drives affordable airfares; and • A modern fleet of 88 Boeing Next-Generation (“NG”) 737 aircraft as at March 15, 2010, with leather seats, increased legroom and live seatback television on our entire fleet.
WestJet was founded February 29, 1996, by a team of Calgary entrepreneurs headed by Clive Beddoe. We started with 220 WestJetters and three aircraft flying to the five cities of Vancouver, Kelowna, Calgary, Edmonton and Winnipeg. Today, we offer 31 Canadian destinations, 17 U.S. destinations, six Mexican destinations and 15 Caribbean destinations.
Our business is seasonal in nature with varying levels of activity throughout the year. We experience increased domestic travel in the summer months (second and third quarters) and more demand for sun destinations over the winter period (fourth and first quarters). With our transborder and international destinations, we have been able to partially alleviate the effects of seasonality on our net earnings.
We launched our subsidiary, WestJet Vacations Inc. (“WestJet Vacations”), in June 2006, offering a one- stop shop for affordable, reliable and easy-to-book travel packages to all of our destinations. WestJet Vacations has partnered with a wide selection of well-known and trusted companies to offer quality hotel products and vacation services. With the same guest-friendly, fun-loving travel experience as WestJet, our vacations guests can also count on outstanding service, excellent value and reliability.
CORPORATE STRUCTURE
Name, Address and Incorporation
Our Company was incorporated under the provisions of the Business Corporations Act (Alberta) (“ABCA”) on June 27, 1994 as 616373 Alberta Ltd. Our Company’s name was changed to "WestJet
WestJet Airlines Ltd. 2009 Annual Information Form - 7 -
Airlines Ltd." by Articles of Amendment dated May 30, 1995. On June 21, 1995, our Articles were further amended to alter our share capital, to delete the "private company" provisions and to affect certain other amendments to facilitate our offering of common shares for sale to the public. On August 30, 2005, we further amended our Articles to alter our share capital to create Common Voting Shares to be owned or controlled by Canadians and Variable Voting Shares to be owned and controlled by non-Canadians (Common Voting Shares and Variable Voting Shares are referred to collectively as the “Voting Shares”).
Our principal business address is 22 Aerial Place NE, Calgary, Alberta T2E 3J1 and our registered office is Suite 1400, 350 - 7 Avenue SW, Calgary, Alberta, T2P 3N9. Our website address is www.westjet.com.
Intercorporate Relationships
We have four directly wholly-owned subsidiaries: WestJet Investment Corp., WestJet Operations Corp., WestJet Aircraft Acquisition Corp. and WestJet Vacations Inc., all of which were incorporated under the ABCA . As well as an indirectly wholly-owned Alberta partnership, established under the laws of Alberta. Our airline business is operated by the partnership. These relationships are depicted in the chart below.
Intercorporate relationships
WestJet Airlines Ltd. Public Co TSX: WJA
WestJet Aircraft WestJet WestJet Acquisition Corp. Investment Corp. Operations Corp. WestJet Vacations Inc. Alberta Alberta Alberta Alberta 100% 100% 100% 100%
WestJet Partnership Alberta
We also utilize five special-purpose entities to facilitate the financing of our owned aircraft supported by the Export-Import Bank of the United States (“Ex-Im Bank”). Each special-purpose entity covers a group of owned aircraft. We have no equity ownership in these 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. Please refer to the “Aircraft Financing” section within this AIF for further information around our financing structures.
We have entered into nine arrangements whereby we participate with other airlines in fuel-facility corporations to contract for fuel services at major Canadian airports. The fuel-facility corporations operate on a cost-recovery basis. The purpose of these corporations is to own and finance the system that
WestJet Airlines Ltd. 2009 Annual Information Form - 8 -
distributes fuel to the contracting airlines, including the leasing of land rights, while providing the contracting airlines with preferential service and pricing over non-participating entities. The operating costs, including debt-service requirements, of the fuel-facility corporations are shared pro rata among the contracting airlines.
OUR INDUSTRY AND COMPETITIVE ENVIRONMENT
Industry Overview
The North American airline industry is highly sensitive to general economic conditions and international events. In addition, our revenue and net earnings are highly susceptible to weather conditions, changes in jet fuel prices, pricing actions taken by competitors, guest demand and industry capacity. We believe sustained profitability for an airline is a function of the business plan, ability to maintain a low-cost structure, level of guest service, skill of management, strong corporate culture and adequacy of financing and operating cash flow.
The Canadian airline industry is characterized by few barriers to entry. We believe profitability is impeded by restrictive taxes and fees on travellers, significant seasonality in passenger demand and geographic dispersion. Over the past two decades, the Canadian government has gradually removed economic regulation of commercial aviation within Canada, while the industry has moved towards a more open and competitive environment for domestic, transborder and international airline services, for both scheduled and charter operations.
Currently, minimal regulatory barriers exist to prevent a licensed Canadian carrier from serving any Canadian or transborder city-pair market. Additionally, competitors face no government-imposed restrictions regarding prices, aircraft types or frequency of routes. Despite the reduced regulatory barriers to entry, the high-risk nature of the airline industry tends to deter new entrants. Airlines inherently have high fixed costs relative to revenue earned .
Competition
Within the Canadian domestic market, we mostly compete with scheduled airlines such as Air Canada, Jazz Air and regional carriers, such as Porter Air. The competition in the transborder market comes primarily from Air Canada and Jazz Air, as well as larger U.S. airlines such as American Airlines, Delta Airlines, Continental Airlines, United Airlines and Alaska Airlines. Competition in the international markets comes primarily from Air Canada, any national flag carriers from the individual nations and Canadian based charter airlines. In the vacations space, Transat, Sunwing and Air Canada Vacations are major competitors, along with many smaller entities.
Competition and Markets Served
Within Canada To/from the U.S. To/from Mexico To/from Caribbean Air Canada X X X X Jazz Air X X Porter Air X X Transat X X X Other charter X X X X carriers US carriers X X X National carriers X X
WestJet Airlines Ltd. 2009 Annual Information Form - 9 -
We also compete with surface transportation alternatives in short-haul markets, and to a lesser degree, in medium-haul and long-haul markets. Surface transportation primarily consists of automobile, bus and rail transportation. When travellers choose their preferred mode of transportation, price is often a factor that influences their decision and is a competitive factor when contending with surface transportation alternatives. In addition, improvement in video and teleconferencing alternatives provides the business traveller with more options beyond physical travel, thereby potentially reducing the number of travellers.
Trends
During 2009, unprecedented capital market conditions in the early part of the year, a weak North American economy and volatile and elevated fuel prices resulted in capacity reductions, employee layoffs, grounding of aircraft, bankruptcy protection and aggressive ancillary revenue initiatives within the North American airline industry. As we move forward into 2010, reports of an economic rebound are starting to surface, however we remain cautious towards a recovery for the airline industry.
REGULATORY ENVIRONMENT
In addition to all of the customary legislation and regulation applicable to most corporations operating in Canada, the airline industry is also subject to additional legislation and regulation.
Domestic
The Aeronautics Act and the Canada Transportation Act
In Canada, civil air transportation, including the establishment of aviation policy, the establishment of maintenance and operations standards, safety, and the provision of ground and airways infrastructure, rests wholly within federal government jurisdiction and is the responsibility of the Minister of Transport (the "Minister"). The Aeronautics Act (Canada) is the principle legislation through which the Government of Canada regulates the aviation industry. It gives the Minister the authority to certify air carriers as being adequately equipped and capable of conducting a safe operation. Pursuant to the Aeronautics Act (Canada), we obtained our air operator certificate, which allows us to operate a commercial air service.
The Canada Transportation Act (the " CTA ") is the legislation pursuant to which the Canada Transportation Agency regulates transportation industries in Canada, including the air transport industry. The Canada Transportation Agency provides oversight and enforcement of the Aeronautics Act and applicable regulations, orders and measures.
The CTA requires that holders of licenses be Canadian, controlled in fact by Canadians and, through regulations, that at least 75 per cent of their voting interests be owned and controlled by Canadians (as defined in the CTA ). We have amended our Articles by the creation of Variable Voting Shares for any person owning or controlling common equity who is not Canadian, limiting their aggregate voting interests to 25 per cent of all voting interests at any time. See “Capital Structure” below for further information on how our voting structure meets these requirements.
In February 2009, legislation was introduced in Parliament to amend the CTA , to allow for different categories of foreign investors to own up to 49 per cent of the total issued common shares of a Canadian air carrier licensee and or its controlling holding company. WestJet is not in a position to determine if or when any necessary enabling regulations will be passed and brought into force. More detailed information can be found in the “Capital Structure” section of this AIF.
WestJet Airlines Ltd. 2009 Annual Information Form - 10 -
Commencing in January 1988, the deregulation of the airline industry in Canada allowed carriers to establish airfares and conditions of carriage without government regulation, making it easier for new airlines to start up and for existing ones to expand. The principle of free market entry under the CTA is presently limited only by the requirements that the carrier be Canadian, as defined in the CTA , that it hold an operating certificate and that it is suitably insured.
Competition Act
Competition in the Canadian airline industry is regulated under the Competition Act (Canada). This federal statute designed to maintain and encourage competition in Canada in order to, among other objectives, promote the efficiency and adaptability of the Canadian economy and provide consumers with competitive prices and product choices. Prior to March 12, 2009, the Competition Act contained both general criminal and civil provisions applicable in all industry sectors as well as several airline specific provisions. These airline specific provisions were enacted to address concerns arising out of the dominance of Air Canada in the airline industry following Air Canada's acquisition of Canadian Airlines in January 2000. On March 12, 2009, the Budget Implementation Act (Bill C-10) received Royal Assent. The Budget Implementation Act contained significant amendments to the Competition Act , including the repeal of all airline specific provisions.
All of the amendments to the Competition Act provided for in the Budget Implementation Act came into effect on March 12, 2009 with the exception of two new provisions: one criminal (cartel agreements) and one civil (agreements between competitors), which came into force on March 12, 2010. In addition to the repeal of all airline specific provisions, these amendments, among other things:
• increase penalties for deceptive marketing practices; • introduce administrative monetary penalties (“AMPS”) for abuse of dominance under section 79 of a maximum of $10 million for the first offense and $15 million for subsequent offences; • repeal the provisions dealing with price discrimination and predatory pricing and replace the criminal resale price maintenance provision with a new civil provision to address price maintenance practices that have an adverse effect on competition; • strengthen the bid-rigging provisions; • effective March 12, 2010, create a more effective mechanism for the criminal prosecution of the most egregious forms of cartel (conspiracy) agreements (price-fixing, market allocation, output restriction, for example) between or among competitors together with increased penalties to better deter these harmful activities; and • create new civil provisions dealing with agreements or arrangements between and among competitors if the agreements or arrangements result in a substantial lessening or prevention of competition.
Canadian Air Transport Security
The Canadian Air Transport Security Act (Canada) was brought into force in April 2002, and established the Canadian Air Transport Security Authority (“CATSA”). CATSA is mandated to take actions, either directly or through screening contractors, for the screening of persons accessing aircraft or restricted airport areas, including their carry-on possessions and baggage. CATSA is also responsible for such other air transport security functions as the Minister might assign to it from time to time. In connection with providing security functions, CATSA is entitled to enter into agreements with the RCMP for the provision of services, including services on aircraft. Airport authorities are required to maintain, free of charge, such space as CATSA may require in the airport facility to conduct its security operations.
WestJet Airlines Ltd. 2009 Annual Information Form - 11 -
The Aeronautics Act (Canada) establishes the framework under which aviation security regulations and security measures are developed and adopted. Under the Canadian Aviation Security Regulation s, the Minister is entitled to make rules in the form of "orders" and "measures" prescribing security measures applicable to CATSA and air carriers, among others. Extensive security and screening measures for airlines and airports have been enacted and updated under the Security Screening Order , Air Carrier Security Measures and Aerodrome Security Measures . These constitute the minimum security standards to be implemented by CATSA, air carriers and airport operators.
The Security Charge
The Air Traveller's Security Charge Act (the " Security Charge Act ") was brought into force in March 2002. The Security Charge Act stipulates that issuers of tickets are obligated to collect, as agent and trustee for the Government of Canada, a security charge (“Security Charge”). When first enacted, the Security Charge was $12.00 ($11.22 if GST was required to have been paid), for each "chargeable enplanement," which included connecting flights between the point of origin and the point of destination, to a maximum of $24.00 ($22.43 if GST was applicable) for round trips. We are required to file monthly returns, with respect to each preceding month, detailing prescribed information with respect to Security Charge collections and to pay that amount to the Government of Canada.
As of March 15 2010, the level of security charge for air travel within Canada is $4.90 one-way and $9.80 for round-trip travel. The level of security charge for transborder air travel is $8.34 and for other international air travel the rate is $17.00. Where applicable, these figures include GST. These fees are expected to increase approximately 50 per cent effective April 1, 2010.
Consumer Legislation
From time to time legislation is introduced in Parliament dealing with consumer issues impacting the travelling public. Such legislation can seek to impose financial penalties on carriers for such things as flight delays, tarmac delays, overbooking, advertising practices, etc. WestJet is not in a position to determine if or when any such legislation will become law, whether material changes would be proposed to such legislation or if and when any necessary enabling regulations would be passed and brought into force.
International and Transborder
International scheduled air services are regulated by the national governments involved. International route rights are obtained through bilateral negotiations between Canada and foreign countries. Bilateral agreements provide for the rights that may be exercised over an agreed routing and the conditions, under which the airlines may operate, including, among others, the number of airlines that may operate, the capacity and or flight frequencies that may be provided, and the controls over tariffs to be charged. Many bilateral agreements, to which Canada is a party, provide for the designation of more than one Canadian airline, while some provide for the designation of only one Canadian airline. The Transport Minister has the authority to designate which carriers have the right to serve scheduled international routes, except routes to the U.S., which are governed by the Air Transportation Agreement between Canada and the U.S., originally signed in February 1995 (the "Open Skies Agreement").
Under the Open Skies Agreement, the Canadian government may designate as many carriers as it wishes to service U.S. destinations. Prior to commencing service, a designated airline must make an application to U.S. government authorities. The appropriate authorizations and permissions are required to be granted by such authorities with minimal procedural delay, provided Canadian ownership requirements,
WestJet Airlines Ltd. 2009 Annual Information Form - 12 -
qualifications under laws normally applicable to international air transportation, and safety and aviation security requirements under the Open Skies Agreement are met by the airline. No restrictions as to capacity, frequency or aircraft size are imposed under the Open Skies Agreement. Designated airlines may, at their option, combine two or more points in the U.S. in a through service. However, the ability of foreign domiciled airlines to carry new guests between domestic points in another country is prohibited in Canada and the U.S.
On November 11, 2005, as a result of negotiations between Canada and U.S. officials, the Canadian government announced amendments to the Open Skies Agreement. While the 1995 Open Skies Agreement created an open system for air services between the two countries, certain restrictions remained in place. The most significant amendment from the November 2005 negotiations involves the introduction of "fifth freedom rights," which refer to the right of an air carrier to carry passenger traffic from one country to and from any third country on any flight originating, traversing or ending in its home country. The ability for a Canadian carrier to take advantage of this right requires equivalent rights from the third country. The amendments agreed to in the November 2005 negotiations came into force on March 12, 2007. As we continue to look at new destinations and examine potential strategic alliances with other carriers, this amended agreement may provide us with expanded marketing opportunities to broaden our network and expand our reach.
In addition to the Open Skies Agreement, WestJet continues to engage the federal government as it seeks to expand existing or establish new bilateral air agreements with other nations.
The Agreement on Air Transport between Canada and the European Community and its Member States was signed on December 18, 2009, with administrative application immediately enabled. On January 14, 2010, the CTA granted designation for all Canadian air carriers, including WestJet, to offer scheduled air services to the European Union from Canada. While licensing requirements still have to be met for both contracting parties, this essentially grants WestJet access for direct owned aircraft or code-share services from Canada to all 27 member states of the European Union.
Code-Share Agreements
As we enter into code-share agreements with foreign carriers, a foreign carrier’s domestic regulator often requires that safety and operational audits be carried out on the code-share partner before code-share flights can formally commence. It may be necessary in 2010 for us to undertake such audits by foreign carriers in order to demonstrate regulatory compliance for code-share implementation. The audit requirements can vary from country to country.
DESCRIPTION OF OUR BUSINESS
We are a Canadian high-value, low-cost airline based in Calgary, Alberta. We offer scheduled flights, vacation packages, charter and cargo service across North America and the Caribbean. We are the second-largest Canadian carrier behind Air Canada, in addition to a leading Canadian vacation operator. The table on the next page highlights some of our key operating parameters, including available seat miles (“ASMs”), revenue passenger miles (“RPMs”), revenue per available seat mile (“RASM”) and cost per available seat mile (“CASM”).
WestJet Airlines Ltd. 2009 Annual Information Form - 13 -
Operational highlights Three months ended December 31 Twelve months ended December 31 2009 2008 Change 2009 2008 Change
ASMs 4,412,573,833 4,288,054,528 2.9% 17,587,640,902 17,138,883,465 2.6%
RPMs 3,460,905,058 3,328,856,003 4.0% 13,834,761,211 13,730,960,234 0.8%
Load factor 78.4% 77.6% 0.8 pts. 78.7% 80.1% (1.4 pts.) Yield (cents) 16.47 18.50 (11.0%) 16.49 18.57 (11.2%)
RASM (cents) 12.92 14.36 (10.0%) 12.97 14.88 (12.8%)
CASM (cents) 12.10 12.98* (6.8%) 11.77 13.17* (10.6%)
CASM, excluding fuel and employee profit share (cents) 8.67 8.68* (0.1%) 8.45 8.29* 1.9%
Fuel consumption (litres) 216,871,585 210,090,434 3.2% 859,115,698 839,699,921 2.3%
Fuel costs per litre (dollars) 0.69 0.84 (17.9%) 0.66 0.96 (31.3%)
Segment guests 3,515,168 3,518,362 (0.1%) 14,038,827 14,283,630 (1.7%)
Average stage length (miles) 923 899 2.7% 923 913 1.1%
Utilization (hours) 11.4 12.1 (5.8%) 11.7 12.3 (4.9%)
Number of full-time equivalent employees at period end 6,291 6,187 1.7% 6,291 6,187 1.7%
Fleet size at period end 86 76 13.2% 86 76 13.2%
*Restated
Routes and Scheduling
We began operating scheduled short-haul point-to-point flights in Western Canada in 1996. In December 1999, we made a decision to expand our route network into Eastern Canada, in order to take advantage of the lack of low-fare capacity on long-haul routes. Our average stage length has more than doubled since 1999, from 383 miles to 923 miles in 2009 because of increased, longer-haul, coast-to- coast, transborder and international flying and the ability of our new aircraft to fly greater distances than our original aircraft.
Similar to the opportunities that existed when we commenced domestic service to Canada’s eastern and western provinces, the opportunity existed for successful route expansion across the border to the U.S. and Caribbean and Mexico markets. In comparison to the U.S., the intensity of domestic travel within Canada is lower, necessitating growth beyond just domestic travel. With the greater range capabilities of our aircraft, we can fly longer distances and efficiently serve destinations that were previously beyond our non-stop range. For us to further expand operations and fully utilize the increased operational capabilities of our growing fleet of 737 aircraft, we plan to continue expanding and to capitalize on the greater traffic opportunities available in the Canadian, transborder and international markets.
Due to Canada’s harsh winters, the domestic airline market is highly seasonal and vulnerable to periods of weak demand during the country’s coldest months. These times of lower domestic travel by Canadians presented us with an opportunity to utilize excess capacity by introducing flights to warmer destinations in the U.S. and internationally to maximize profitability on a year-round basis.
To offset the seasonality of the Canadian domestic market and to capitalize on an opportunity to bring low-cost service to underserved markets, we introduced transborder and international service in 2004. Based on our enhanced 2010 summer schedule, we will serve 17 U.S. destinations and 21 international destinations. During the fourth quarter of 2009 approximately 35 per cent of our capacity was allocated to our transborder, international and charter service.
WestJet Airlines Ltd. 2009 Annual Information Form - 14 -
Charter & scheduled transborder and international as a percentage of total ASMs 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09
Charter & scheduled transborder and international
We feel that the route structure of an airline is one of the most significant factors of its marketing strategy. Travellers often use criteria such as non-stop service, time of day and frequency when selecting an airline. We strive to design a route structure that meets the needs of our guests and provides affordable air travel that stimulates demand. We continue to add non-stop routes to our network to increase the travel convenience for our guests. We supplement non-stop routes or provide service in markets that we do not offer non-stop service by providing through flights or connection services for our guests. To maximize our aircraft utilization, we look for opportunities to operate our fleet in off-peak times, like the evening, when the aircraft would otherwise be idle, to serve markets that may not be as time sensitive or may be better served by evening flights.
Through our route structure and competitive fares, we anticipate demand will be stimulated from guests who would not otherwise travel or those guests who would select another airline. We estimate when we enter a new market that the net effect to that market is an overall increase in traffic. This means we are often able to create new demand.
As our NG 737 fleet expands with new aircraft of varying sizes, we can establish additional profitable routes within Canada, to the U.S. and internationally. We can also offer increased frequency, non-stop routes and improved connectivity on our current routes.
Route Opportunities
An important objective for us is growing our transborder and international operations, while managing the seasonality of demand by shifting capacity to sun destinations in the winter months. Travel to southern leisure markets and charter flying have partially offset this seasonality. We transition as much as 25 per cent of our total capacity from domestic service in the summer months, towards southern destinations in the winter months. These markets will continue to provide significant growth opportunities through our potential to: • add new domestic non-stop routes and frequencies; • increase frequency to existing sun destinations in the Southern U.S.; • add new routes to sun destinations in the U.S., Mexico and Caribbean; and • add new routes to business destinations in the U.S.
WestJet Airlines Ltd. 2009 Annual Information Form - 15 -
WestJet Vacations
In 2009, we continued growing our WestJet Vacations business and its brand by leveraging our existing scheduled network. WestJet Vacations has continued to partner with a selection of quality hotels and activity partners in order to provide vacation options that aim to meet all of our guests’ needs. In 2009, WestJet Vacations delivered significant year-over-year gross revenue growth. The contracted travel trade plays an important role in this continued growth. A new WestJet Vacations reservation system was implemented in 2009. This should set the foundation for continued growth of all distribution channels for this business.
WestJet Vacations continues to expand its product offering and channel distribution with the release of the 2009/2010 winter brochure, which features new destinations and products. With the introduction of many new sun destinations in the last few years, WestJet Vacations has become a significant player in the Canadian tour operator industry. In three short years, WestJet Vacations has become the number one Canadian provider of hotel rooms into Las Vegas, with additional strength into the Orlando and Hawaii markets, along with popular Caribbean and Mexico markets. WestJet Vacations, since its inception, has been important in our growth and will be a key contributor to the future success of our airline.
Charter
We currently provide Canadian domestic charter service on an ad hoc basis and international charter service on both a scheduled and ad-hoc basis. These flights generally operate during off-peak hours to ensure that our scheduled services are not impacted while simultaneously maximizing available capacity.
Our charter operation allows us to enhance the productivity of our aircraft. We earn a fixed amount of charter revenue on a per-chartered-flight basis. Charter agreements are based on a pre-determined revenue amount that is generally adequate to provide us with a reasonable margin after covering the fixed costs related to a particular route, landing fees and navigational charges, and are normally subject to adjustments for fuel.
Today, we provide ad-hoc charters to corporations, forestry-based fire fighters, professional sports teams as well as municipal, provincial and federal governments. We are not restricted, either contractually or within the Canadian aviation regulations, from providing charter services to any entity.
Cargo
WestJet is a belly-space cargo operator, servicing shippers of non-containerized products in the belly of its NG 737 aircraft, excluding dangerous goods. Effective January 1, 2010, WestJet entered into a new agreement to have the cargo marketing and sales functions managed by EXP-AIR Cargo. Established in 1990, EXP-AIR Cargo provides cargo sales and service domestically and internationally, with offices in Montreal, Toronto, Calgary and Vancouver. EXP-AIR enables WestJet to automate its cargo handling services, allowing for: real-time tracking and tracing of all shipments in WestJet’s network, electronic transfer of data to its flight planning system, and open the opportunities for bilateral transborder and international cargo shipments with electronic transfer of data to both customs and security authorities.
Additionally, WestJet Cargo has an interline cargo agreement with Southwest Airlines Co. (“Southwest”) to move cargo northbound out of Las Vegas into Canadian gateways. This service has been in operation since June 2009, and we anticipate expanding it to include other markets where we connect with Southwest.
WestJet Airlines Ltd. 2009 Annual Information Form - 16 -
Our Business Strategy
Our mission
To enrich the lives of everyone in WestJet's world by providing safe, friendly and affordable air travel.
Our vision
By 2016, WestJet will be one of the five most successful international airlines in the world providing our guests with a friendly and caring experience that will change air travel forever.
Our values • Commitment to safety • Positive and passionate in everything we do • Appreciative of our people and our guests • Fun, friendly and caring • Align the interests of WestJetters with the interests of the company • Honest, open and keep our commitments
Every WestJetter is aware of our focus, and each WestJetter works towards meeting our mission and vision on a daily basis. Since profit share is available to all WestJetters and approximately 84 per cent of our active WestJetters participate in our Employee Share Purchase Plan, making them WestJet shareholders, the personal success of our people is directly tied to our Company’s success. This helps nurture a corporate culture that is focused on safety, exceptional guest service and cost containment.
Our Strategic Focus
To accomplish our mission and vision, we have organized our key areas of focus into four main strategic pillars:
• People and culture – fundamental drivers of our success • Guest experience and performance – uncompromised guest experience and performance builds loyalty • Margins and costs – continuing our low-cost commitment • Revenue and growth – delivering results
The purpose of the four pillars is to provide a clear and aligned direction to all WestJetters.
Our Competitive Strengths
Focusing on our four strategic pillars, we built a successful operating structure that allows us to be Canada’s leading high-value, low-cost airline. We established our competitive strengths and business model through:
• a strong corporate culture; • an engaged and committed workforce; • a modern single fleet-type based on a single-class configuration; • strong and growing relationship with corporate Canada for the business traveller segment; • strong and growing WestJet Vacations business model;
WestJet Airlines Ltd. 2009 Annual Information Form - 17 -
• low-cost structure; • consistently striving to be among the top carriers for on-time performance, baggage ratio and completion rate; • exceptional guest experience resulting from our guest-centric corporate culture; and • a strong balance sheet.
Fleet
Fleet performance is critical for an airline to be successful and particularly important in an environment of increasing fuel costs, navigational and landing charges. A cornerstone to our business plan is to operate a single type of fleet comprised of three variants of the Boeing NG 737 narrow-body aircraft in a single- class configuration. Operating a uniform fleet minimizes training, staffing, inventory and maintenance, while providing for better aircraft utilization. Selected for its operational success rate and ability to accommodate quick turn times on the ground, the Boeing NG 737 aircraft is the preferred aircraft of many successful low-cost carriers.
As we continue expanding into new markets, a significant component of our success is to match demand with capacity. The population distribution of Canada is spread over large distances between major and secondary cities. A fleet consisting of only 136-seat 737-700s would not adequately suit Canada’s diverse demographics. To provide additional fleet flexibility, we have two other variants of the NG 737, in addition to the 737-700, the 737-600 with 119 seats and 737-800 with 166 seats. These aircraft, while different in size, are all the same aircraft type, allowing us to maintain all of the benefits of a single type of fleet while at the same time allowing us to improve the utilization of our fleet by matching the diverse demand of our different routes with a complementary aircraft size.
We operate one of North America’s most modern fleet, with an average age of 4.4 years at December 31, 2009. Even with such an efficient fleet, we are always evaluating opportunities to further enhance the efficiencies from our fleet to save additional costs and further reduce fuel usage and emissions.
Our operating fleet and aircraft commitments, as at December 31, 2009, are summarized below:
Series 600s 700s 800s Total Fleet Leased Owned Total Leased Owned Total Leased Owned Total Leased Owned Total Fleet at December 31, 2008 - 13 13 18 38 56 6 1 7 24 52 76 Fleet at December 31, 2009 - 13 13 25 38 63 8 2 10 33 53 86 Commitments: 2010 - - - 2 - 2 3 - 3 5 - 5 2011 - - - 4 2* 6 1 - 1 5 2 7 2012 - - - - 6* 6 1 - 1 1 6 7 2013 - - - - 6* 6 - - - - 6 6 2014 - - - - 6* 6 - - - - 6 6 2015 - - - - 10* 10 - - - - 10 10 2016 - - - - 8* 8 - - - - 8 8 Total Commitments - - - 6 38 44 5 - 5 11 38 49 Committed fleet as of 2016 - 13 13 31 76 107 13 2 15 44 91 135 *We have an option to convert any of these future aircraft to 737-800s.
In 2009, we announced enhancements to our fleet plan, which includes the rescheduled delivery of 16 aircraft and the purchase of an additional 14 Boeing Next-Generation 737 aircraft. These changes provide for a smoother aircraft delivery schedule and a more flexible fleet plan. The combination of deferred delivery dates on our existing orders, 14 new orders and 23 leases expiring between 2013 and 2016 - each with the option to renew – gives us the flexibility to end 2016 with a fleet size between 112 and 135 aircraft. With a current fleet of 88 aircraft, having taken two additional leased aircraft since December 31, 2009, we have future confirmed deliveries for an additional 47 aircraft.
WestJet Airlines Ltd. 2009 Annual Information Form - 18 -
We believe this revised fleet plan aligns with the current and planned launch of interline and code-share partnerships, the continued growth of our WestJet Vacations business and our plans to grow our share of the business-traveller market. We assessed aircraft buying opportunities in the current market and placed the order for the 14 additional aircraft from Boeing, to be delivered in 2015 and 2016, to help offset lease expiries and provide greater overall fleet flexibility.
Corporate Culture and Guest Service
We believe our strong corporate culture is one of our fundamental competitive advantages. We strive to maintain an innovative culture where WestJetters are committed to, and passionately pursue, our mission and vision, while living by our values. We also foster a unique culture of caring and compassion for our guests and fellow WestJetters that sets us apart from our competitors. We plan for our culture at the strategic level, ensuring that culture objectives are captured and executed for each department across the airline. We have been named one of Canada's most admired corporate cultures for four years straight and were recently inducted into the Corporate Culture Hall of Fame.
Our exceptional guest experience is delivered by dedicated and caring employees known as WestJetters. Through our extensive guest research, we understand the needs of the travelling public and work collaboratively with other departments within WestJet to ensure that all guest touch points, across the entire experience with us, are well thought out and consistently delivered.
All guest initiatives are overseen by the Guest Experience Management team. This cross departmental team ensures that all guest-experience elements are understood by each group that has responsibility for the delivery of the service. While individuality within each role in WestJet is key to our success, collectively WestJetters understand and focus on our guests’ needs.
Products and Services
In today’s market, with price often being equal, the consumer’s decision-making process focuses on other aspects of the travel experience, such as the quality of product and guest relationships. In addition to providing low fares and exceptional guest service on a continual basis, we believe it is important to pursue other means to add value in order to differentiate our product and sustain a competitive advantage. From a total-product perspective, we offer:
• above-average on-time operational performance relating to arrival time and baggage handling; • in-seat entertainment system, providing 24 channels of live satellite television from Bell ExpressVu and four pay-per-view movie channels; • comfortable cabins featuring leather seats and a generous seat pitch; • self-serve check-in options, including airport kiosks at major airports, web check-in, flow-through check-in and electronic boarding passes; • buy-on-board food products; • multiple sales channels for booking, including website, Sales Super Centre (call centre), airport counters and travel agents; and • third-party owned and operated pay-per-use departure lounges, which are located near our gates in Calgary, Toronto, Winnipeg and Vancouver.
In 2007, we further expanded our self-service check-in options with the addition of flow-through check- in. With flow-through check-in guests keep their baggage with them after it is tagged and then they place it on a belt themselves. This creates less congestion than the traditional counter set-up. In Canada, during
WestJet Airlines Ltd. 2009 Annual Information Form - 19 -
the check-in process, our guests with personal digital assistants (“PDAs”) and short message service capable cell phones can now select the electronic boarding pass option to have an e-mail sent directly to their mobile device. They will then show the boarding pass displayed on their device to proceed through security and to board their flight. We were the first airline in North America to introduce this innovative and environmentally friendly boarding pass option.
As we utilize the increased range capabilities of our aircraft and flights become longer in length, we will continue to develop value-added products aimed at making our guests more comfortable during their journey.
Marketing and Advertising
Our marketing and advertising strategy builds and maintains awareness of our brand promise, which is to deliver a quality product and experience in a caring, friendly and guest-focused way.
We use various mediums to advertise our brand to both the consumer and the travel trade. Consumer advertising mediums include print, radio, television, outdoor, e-marketing, point-of-sale signage, digital video boards, elevator TV, news networks and speciality publications. Trade advertising involves dedicated messaging to travel agents in trade magazines and online mediums.
Our marketing and advertising efforts are used to aid new or existing routes, build brand and product awareness, increase sales during non-peak times (we develop proprietary promotions in this instance) and support key partnerships. These efforts also include partnerships with local, regional and national radio, television, and print, as well as partnering with car, hotel and major tourist attraction companies to reach both potential and existing guests and support our marketing objectives throughout Canada and the U.S.
Care-antee
In April 2009, we introduced a unique brand position based on care attributes and a high-value-for-price paid approach to our products and services, which we believe set a new standard in the Canadian airline industry. The WestJet Care-antee is a public commitment to our guests that we will continue to deliver exceptional service and value.
Fares
We strive to offer low fares while maintaining a high-quality distinguished product comprised of friendly service and a comfortable and entertaining flight experience. Fares are based on one-way travel in order to avoid penalizing guests for not booking a round-trip flight. Seats must be paid for at the time of reservation and are non-refundable, allowing us to avoid having to overbook our flights. Guests may cancel or change their itinerary for a nominal fee in addition to any difference in fare.
Our revenue management process aims to maximize long-term guest revenues by balancing average fares offered with flight demand. This is accomplished by offering multiple fare levels. Historically, lower fares are offered to guests who book well in advance, with the price of airfare increasing as fewer seats are available for that flight. To stimulate demand, and in response to competitors’ pricing, temporary seat sales are offered in the marketplace and can feature fares lower than those booked further in advance of the travel date. Our last minute and walk-up fares are typically our highest, although they are generally lower than our competitors and offer very good value for money, especially for the business traveller.
WestJet Airlines Ltd. 2009 Annual Information Form - 20 -
Key Operational Performance Indicators
An important component of high-quality guest service is ensuring all our guests arrive at their destination on schedule. One of our key objectives is to maintain on-time flight operations in a safe and efficient environment. On-time performance, an important measure of the reliability of an airline, ensures guests are not inconvenienced and that costs associated with delayed flights, such as guest compensation for hotel stays, meals and other incidentals, are minimized.
We continue to strive to rank among the top North American airlines in the three key operational performance measures for the industry, as follows:
• On-time performance - the percentage of scheduled flights that arrive within 15 minutes of the scheduled arrival time or earlier. • Completion rate - the percentage of scheduled flight legs completed, calculated as the number of scheduled flight legs operated divided by the total number of scheduled flight legs. • Baggage ratio - the number of delayed or lost baggage claims made per 1,000 guests.
Three months ended December 31 Twelve months ended December 31 2009 2008 Change 2009 2008 Change
On-time performance 63.8% 68.9% (5.1 pts.) 78.6% 77.0% 1.6 pts. Completion rate 99.1% 98.1% 1.0 pts. 98.9% 98.7% 0.2 pts. Bag ratio 4.36 4.68 6.8% 3.57 4.12 13.3% Additionally, we have an Operations Control Centre (“OCC”) that operates 24 hours a day to assist with on-time performance goals, by minimizing ground time through efficient flight, crew, weight and balance planning. The OCC also controls and monitors our aircraft movement across our network. If poor weather conditions, crew delays or mechanical issues force an unexpected change in the schedule, the OCC works in conjunction with our Guest Relations department to make alternate plans to ensure guests are re-accommodated with as little inconvenience as possible.
Live Satellite Television
To enhance our product value and differentiate ourselves further, we have installed live satellite television in the seatbacks of our entire fleet. Guests enjoy up to 24 channels of live satellite television from Bell ExpressVu. The system also has four pay-per-view movie channels guests can access from the comfort of their own seat. From children’s shows, sports, business, learning channels to movies, each guest can select the channel they are most interested in viewing.
Live satellite television is a low-cost solution for us to offer entertainment options to our guests. It enables the delivery of a wide variety of content for our guests, and it is a differentiation over our primary competitors. Competitors are installing in-seat screen systems where the content is pre-recorded and stored on servers on the aircraft. With a live system, there is minimal content development, management and system uploading, making it easier to maintain than a stored system.
We have secured an exclusivity agreement, subject to certain conditions, with the live satellite television system hardware provider (“LiveTV”). This agreement allows us to be the only airline to offer the LiveTV system within Canada and is currently secured to the end of 2013.
WestJet Airlines Ltd. 2009 Annual Information Form - 21 -
Inflight Food and Beverage Services
We offer complimentary snacks and non-alcoholic beverages on all of our flights. On longer flights, we offer alcoholic beverages and food products to our guests for purchase. In 2009, we launched a new on- board point-of-sale system, which enables guests to purchase their buy-on-board items with credit cards in addition to cash. This program continues to be enhanced with new and different products and our revenue from this program is steadily increasing.
Frequent Guest and Credit Card Programs
In March 2010, we launched the WestJet Frequent Guest Program™ and the WestJet Credit Card Program™. We have partnered with RBC Royal Bank ® and MasterCard ± for our credit card program, and we will offer a basic and a premium card. Both of these programs will give our guests the opportunity to earn our new reward currency, WestJet dollars™ through their everyday purchases on the WestJet RBC ® MasterCard and/or through their spend on WestJet flights and WestJet Vacations packages. Currently, our guests will only be able to redeem WestJet dollars towards WestJet flights and WestJet Vacations packages.
We expect these two programs to increase our competitive position in the business and frequent flyer market segment and, through mass-market participation in the credit card program, contribute to our ancillary revenue streams.
Reservation Systems
The role of our main reservation system is to enable our guests to efficiently book on WestJet and ensure the timely flow of information into various other computer systems that are critical for the efficient operation of the airline. Our original reservation system was sufficient to meet the original needs of the airline, but the vendor had decided to retire the product so that it could focus on developing a new reservation system. Given our strategic growth plans and the functional gaps created, along with the vendor’s decision, it was necessary for WestJet to evaluate a replacement reservation system. These functional gaps reflected the original system’s focus on a simple point-to-point low-cost carrier business model in a ticketless environment. In order to achieve our long-term goals, WestJet decided to replace the original system. Given the importance of this decision, a cross functional Steering Committee of senior management was chosen to complete a full assessment of airline reservation system products with a focus on the ability of these products to support our current business model and strategic plan, with the flexibility to allow unconstrained market growth.
In the fourth quarter of 2008, the reservation system Steering Committee recommended Sabre Airline Solutions Inc.® (“Sabre”) reservation system platform SabreSonic®. Sabre was chosen for their system’s broad functional capabilities and their experience in the North American and global airline industry.
On October 17, 2009, WestJet and Sabre implemented our new SabreSonic® reservation system, representing a foundational step in achieving our future growth objectives. We believe this system will ensure we can properly support our evolving business model. It will allow us to continue to develop and deliver new ancillary revenue opportunities and provide the platform to operate industry-standard airline partnerships. On the initial implementation, we did experience significant operational challenges in relation to the new reservation system that impacted our typically high level of guest service during the period. In particular, our call centre was significantly impacted for several weeks as a result of the initial cutover due to difficulty in dealing with certain reservations migrated from our old system and some early technical issues. The guest impact from other technical issues were mostly contained to printer and kiosk
WestJet Airlines Ltd. 2009 Annual Information Form - 22 -
functionality at the airports and two website outages in the early weeks of implementation. Travel agents billings, commissions and exchange/refund bookings are additional areas impacted by the implementation. With WestJetters becoming more familiar with SabreSonic® and the technical issues resolved, we are well on our way back to delivering the world-class guest experience our guests deserve and have come to expect.
In early 2009, WestJet Vacations, through a cross-functional team, undertook a robust assessment of new reservations systems, choosing Softvoyage as the successful vendor. On September 13, 2009, WestJet Vacations cut over to Softvoyage’s dynamic packaging software, known as The Travel System (“TTS”) and SIREV, its travel agency distribution system. TTS allows WestJet Vacations to package together air inventory with hotel, activity, and excursion offerings across WestJet’s entire network. We believe that Softvoyage’s suite of products will enable WestJet Vacations to successfully expand its sales and distribution while continuing to deliver superior service to our guests. The SIREV shopping and distribution tool makes it easier and faster for travel agencies nationwide to book. Additionally, WestJet Vacations launched a new vacations website including increased vacation destination content, a more robust search engine and future opportunity for a more media rich guest experience.
Distribution
We utilize various distribution channels to sell our products. Guests can purchase flights by booking on westjet.com, vacations by booking on westjetvacations.com, calling our Sales Super Centre (“SSC”), or booking through a travel agent or at the airport. WestJet relies heavily on its web storefronts to reach guests. Significant attention has been paid to building these storefronts as we migrated to new reservation systems. In addition, WestJet continues to grow its business with online travel agencies, such as Expedia and Travelocity, through a more robust level of system access, in part from our implementation of SabreSonic®. In 2008, WestJet signed a distribution agreement with Southwest that allows Southwest to sell WestJet operated flights on the Southwest website (www.southwest.com).
Internet – westjet.com, westjetvacations.com
The internet is our largest distribution channel. In 2009, we focused on migrating our websites to the new Softvoyage and SabreSonic® reservation systems. With these changes completed in September and October, respectively, our attention is now on web functionality enhancements and improved service- levels for our guests. The continuous improvement of the websites supports the importance of this channel and the value of having robust and easy-to-use sites for guests to transact quickly and confidently.
Airport self-service capabilities continue to add convenience to our guest experience and help to relieve congestion at airport check-in counters, especially during peak travel periods.
Sales Super Agents
We currently operate five call centres (WestJet sales, WestJet group sales, WestJet Vacations, WestJet Vacations groups and Help desk) staffed by our Sales Super Agents (“SSA”). These call centres answer approximately seven million calls a year and our main call centre provides support seven days a week, 24 hours a day with service in English and French. They are a key distribution channel with 45 per cent of the calls concluding in some type of revenue transaction. This team is also a key part of our guest services recovery team and supports sales activity in all other channels. SSAs are committed to providing a great experience to all guests who call one of our call centres.
WestJet Airlines Ltd. 2009 Annual Information Form - 23 -
The importance of balancing sales and service while staying consistent with our brand is emphasized in our training and compensation of SSAs. The SSC has a comprehensive quality program in place which allows individual SSAs to be evaluated on a blend of guest interaction, sales activity and core key performance indicators. We believe this drives a balanced approach to our results.
Over the past year, we have made substantial investments in technology to offer our guests more self- serve options, creating less need to speak with one of our SSAs, when it may be unnecessary to do so.
Travel Agents
We continue to work closely with the travel trade in North America and we plan to further expand this strategy as we enter new international and transborder markets. Revenue growth through the travel agency distribution channel slowed, with the exception of bookings for WestJet Vacations, in 2009 due to a number of factors, including the economy. Due to our continued year-over-year capacity growth, this makes it more difficult to see high-growth rates from travel agencies in domestic Canada. Air Canada’s objective to become more active in the travel trade space through enhanced compensation models could potentially slow down the rate at which agencies move business to WestJet. We believe that Air Canada’s objective is achieved by demanding larger market share commitments, leveraging the strength of their network and those of their Star Alliance partners and by offering package or bulk seat programs. Business travellers are continuing to be attracted by AeroPlan, frequency, the combined network of the Star Alliance, business class and airport lounges.
In conjunction with oneWorld, we have joined “Canada Connect” to help address some of these issues. This corporate travel program combines our comprehensive Canadian network with oneWorld’s transborder and international reach to offer companies across Canada special rates on their business air travel right around the globe with some of the best airlines in the world.
We work very closely with our travel agent partners and regard the travel agency community as key, strategic partners who help us achieve continued success. We believe that having our product on as many “shelves” as possible will contribute to our revenue growth and brand awareness. While most airlines have either reduced or eliminated travel agent base commissions, we continue to recognize and support our travel agent partners by paying commissions that are directly tied to revenue outcomes.
Effective July 1, 2009, in response to the weak economic conditions, we reduced our travel trade compensation from a base commission of nine per cent to a base commission of seven per cent. Air Canada responded to that commission adjustment by introducing a new seven per cent base commission on its Tango fare levels.
In 2008, we entered into a distribution agreement with Southwest Airlines that allows visitors to Southwest.com to also book flights on westjet.com. This agreement is similar to arrangements we have with our other on-line travel trade partners (Expedia and Travelocity).
We have signed independent agreements with Sabre, Amadeus and Travelport Global Distribution Systems that allow direct real-time access to WestJet flight inventory for our travel agency partners. This was part of the motivation behind moving to a new reservation system. These agreements make it easier for the travel trade to conduct business with us.
WestJet Airlines Ltd. 2009 Annual Information Form - 24 -
Airline Partnerships
Our relationship with China Airlines continues to improve as we streamline our processes and improve the overall experience for both the guest and carrier. We are working with China Airlines to introduce through checked bags, as well as through checked guests. We believe this will significantly improve the guest experience versus what is currently in place. WestJet and China Airlines also plan to increase the number of markets that our mutual customers can connect to out of Vancouver.
In 2008, we entered into a code-share agreement with Southwest Airlines. Significant work has already been completed by WestJet and Southwest Airlines to define the project scope, work-plan and accountabilities for both carriers. While our implementation of SabreSonic® enables us to be code-share ready from a system perspective, Southwest Airlines’ readiness has pushed deployment of the code-share beyond the late 2010 date previously announced and exact timing is not currently defined. The compensation model for both the code-share and distribution agreements are performance based and will be evaluated on a calendar year basis.
On February 4, 2009, we announced the signing of a memorandum of understanding with Air France and KLM to build a new commercial relationship between the three airlines. This led to the implementation of a non-reciprocal interline relationship, namely acceptance of each other’s electronic tickets and through check-in of baggage and guests, in summer 2009.
We recently expanded the connectivity of our limited inbound interline agreement with Air France and KLM from three to 11 destination cities. Now the key gateways of the agreement are Calgary, Vancouver, Toronto and Montreal. We plan to offer the majority of our domestic network for connectivity with Air France and KLM in the future.
We continue to be approached by airlines around the world asking us to enter into code-share or interline agreements in order to gain access to our Canadian network. In 2010, we plan add up to four additional interline partners, with a continued focus on non-reciprocal relationships, whereby the partner airline delivers passengers into the WestJet network. This addition of partners will be complemented by an expansion of route offerings within the WestJet network to which our existing and new partners can connect. This is another step in our strategy to increase connectivity, bringing additional travellers to our network.
Aircraft Financing
As we continue to focus on maintaining our low-cost structure, we regularly analyze the costs and benefits of leasing versus debt-financing our aircraft.
As at December 31, 2009, we had 33 leased aircraft, financed through operating leases, and 53 owned aircraft, with 52 financed by low-interest-rate debt supported by Ex-Im Bank, for a total fleet of 86 aircraft.
Ex-Im Bank supported debt has allowed us to access debt financing for aircraft at competitive interest rates from lenders that may otherwise be hesitant to offer financing in the airline industry. We have also been able to manage foreign currency fluctuations on debt through our ability to secure lending facilities denominated in Canadian dollars.
Orders for new aircraft typically need to be placed years in advance of delivery dates, and as we have seen, the economic conditions can change rapidly. In 2009, we revised our aircraft delivery schedule and
WestJet Airlines Ltd. 2009 Annual Information Form - 25 -
ordered an additional 14 new aircraft from Boeing. Shifting the new aircraft delivery dates allows us to spread our growth out more evenly between 2010 and 2016. It also helps to even out our pre-delivery payment schedule for aircraft deposits and gives us the time and flexibility to make decisions around our financing options for these aircraft. Our goal is to provide WestJet with maximum flexibility and our guests with one of the most modern fleet of aircraft in the world.
Additionally in 2009, we purchased one leased 737-800 aircraft from a lessor with cash, thus the aircraft became an unencumbered aircraft. Later in 2009, we arranged for secured financing against this aircraft. As at March 15, 2010, we have not yet attempted to secure financing for any future delivered owned aircraft.
In 2008, we signed a Term Sheet with an aircraft leasing company to lease one 737-800 for delivery in 2011. Also in 2008, we entered into a purchase agreement with Boeing for four 737-700s for delivery between 2010 and 2012.
In 2007, we signed an agreement with Boeing to purchase 20 737-700s for delivery in 2012 and 2013. Between 2009 and 2011, the majority of aircraft we acquire will be financed through operating leases with various leasing companies, including the Bank of China (“BOC”), the International Lease Finance Company (“ILFC”) and the Aviation Capital Group Corp (“ACG”). We believe that properly diversifying our fleet between owned and leased aircraft provides an appropriate balance of flexibility and capital deployment.
In 2007, we entered into US-dollar operating lease agreements for eight 737-700s and three 737-800s to be delivered between 2009 and 2011.
Insurance
We carry aviation and commercial insurance at levels deemed by management to be adequate and reasonable for the nature of our operations.
Following the events of September 11, 2001, insurers worldwide served notice that coverage for aircraft damage and for liability claims resulting from war and terrorist activities were cancelled. This coverage was later partially reinstated, at a cost, to the limits in force prior to September 11, 2001; however, the third-party bodily injury and damage to property coverage is now subject to a limit of US $150 million per occurrence and in the aggregate.
In addition to the limits that we purchase, the Canadian government, similar to other governmental bodies around the world, continues to indemnify Canadian airlines for third-party war-risks liability in excess of the sub-limits purchased. We are unable to predict the certainty of insurance coverage provided by the government on a go-forward basis; whether reasonably priced and comparable coverage would be provided commercially; and what impact this will have on the future performance of our Company.
Fuel Management
High fuel costs can significantly impact our operating results. Our average cost of fuel, including hedging, over the past five years is as follows on the next page:
WestJet Airlines Ltd. 2009 Annual Information Form - 26 -
Fuel Consumption Fuel Cost per Litre Per cent of operating (litres) ($/L) costs 2005 552,382,525 0.64 27 2006 617,963,429 0.69 27 2007 723,104,203 0.70 27 2008 839,699,921 0.96 36 2009 859,115,698 0.66 28
Over the last few years, fuel costs have contributed to an increasing portion of our operating costs. In the past, the price of fuel has fluctuated widely; however, over recent years prices have been very high and have adversely impacted our level of profitability. In 2008, world jet fuel prices reached record levels in the summer and subsequently, declined during the remainder of the year.
During the year ended December 31, 2008, we began a more extensive fuel-hedging program under a revised policy as approved by our Board of Directors. We are permitted to hedge a portion of our future anticipated jet fuel purchases for up to 36 months. The policy establishes maximum hedging limits based on time horizon; however, it does not include a minimum hedging requirement. Management continuously reviews and adjusts its strategy based on market conditions and competitors’ positions. Although jet fuel is not traded on an organized North American futures exchange, there are limited opportunities to hedge directly in jet fuel through the over-the-counter market; however, financial derivatives in other crude-oil-based commodities that are traded directly on organized exchanges, such as crude oil and heating oil, are also useful in decreasing the risk of volatile fuel prices. During the year ended December 31, 2009, we did not enter into any new fuel derivatives. Subsequent to December 31, 2009, we have entered into additional jet fuel derivatives instruments for 2010.
We have adopted measures, and continually investigate opportunities, to decrease the impacts of high fuel costs by reducing the weight on the aircraft, improving operating procedures to optimize fuel burn, such as required navigational procedures, and working with our aircraft and materials suppliers to adopt measures to improve fuel efficiency and reduce into-plane costs.
Our fuel management process also includes the constant evaluation of the supply of fuel in order to avoid an interruption to our supply by diversifying fuel sources and investing strategically in fuel-storage infrastructure.
Infrastructure
Our real estate infrastructure is comprised of three types of facilities: office space for administrative functions, hangar space for aircraft maintenance and airport terminal space for the airport operations. Facility needs are assessed based on fleet growth, aircraft destinations, maintenance requirements and planned expansion of operating departments. Details of facilities are listed in the below table:
Function Location Size ( ft 2) Owned or Leased Deerfoot Office Calgary, Alberta 65,000 Leased Training/Business Recovery Calgary, Alberta 13,000 Leased Hangar and Office Calgary, Alberta 189,000 Owned Hangar Edmonton, Alberta 37,000 Leased Hangar Toronto, Ontario 95,000 Leased Hangar Vancouver, BC 75,000 Leased Hangar, Office, Flight Supplies Hamilton, Ontario 51,000 Owned Campus Facility Calgary, Alberta 315,000 Owned
WestJet Airlines Ltd. 2009 Annual Information Form - 27 -
We operate hangar facilities in Calgary, Edmonton, Vancouver and Toronto and on an ad hoc basis in Winnipeg. The capacity of all of the hangar facilities we currently own or lease can accommodate 14 - 737 aircraft. Our future needs for additional hangars will be based on our fleet growth and the amount of activity in any given city.
We also maintain check-in, maintenance, air supply and minimal administrative office space at each airport leased from local airport authorities. Terminal space requirements are typically addressed when evaluating a destination city and/or growth at an existing city. Our needs are accommodated by the airport authorities to the best of their ability.
WestJet Campus
To accommodate our current and future growth and to ensure our people have an efficient work environment, we built a new office building adjacent to our existing hangar near the Calgary airport. The “Campus” has centralized our corporate office departments and can accommodate at least 1,250 WestJetters in addition to the 450 that can be accommodated at the Calgary hangar. The new building is six stories high and approximately 315,000 square feet, providing us with adequate space to accommodate several years of growth. A grand opening of the new office space was held in May 2009, at which point all WestJetters had moved in.
We decommissioned and terminated the leases for the buildings housing IT, retail, training, as well as the technical training centre, effective March 1, 2009. Subsequently, the Airport Corporate Centre space was decommissioned and the lease terminated in May 2009. The Deerfoot Building was decommissioned in May 2009, but this lease does not expire until June 30, 2010.
The Campus was constructed following the new Leadership in Energy and Environmental Design (“LEED”) program, which promotes buildings that are environmentally responsible and healthy places to live, work and play. The building was built to LEED gold level standards.
Business Recovery Centre and Training Centre
Our new consolidated Business Recovery Centre in Calgary was recently expanded to include the necessary technology and space to operate as a backup facility for our SSC, internet operations, operations control and dispatch and a business recovery command centre. This allows us to continue regular operations should any of our primary systems supporting these operations fail or otherwise become unavailable. The consolidated business recovery site was completed in early 2009.
To utilize the facility efficiently and to alleviate the costs associated with having the facility on standby, we use the Business Recovery Centre as a training facility. In the event of a business interruption in one of our other facilities, training would be postponed and the centre would be used for recovery purposes.
WestJetters
Our commitment to our people is as important as our commitment to our guests and stakeholders. We believe our most valuable asset is our people, and our unique team of WestJetters is what sets us apart. We aim to ensure our WestJetters’ work experience is fun, challenging and rewarding. As the industry continually changes and poses new challenges and opportunities, the dedication of WestJetters to our Company and our guests is unwavering.
WestJet Airlines Ltd. 2009 Annual Information Form - 28 -
Competitors may be able to replicate our technologies, products and low-cost infrastructure; however, it is much more difficult to assemble a team who can rival our highly-motivated people. The quality of guest service provided by our WestJetters influences the relationship between our Company and our guests, which causes many guests to return after experiencing the fun, friendly, casual atmosphere and the high level of guest service provided by our people.
Well-trained and highly-motivated employees are critical to the development and execution of our strategy, especially in our highly-competitive environment. For this reason, the ability to attract, train, motivate and retain the right individuals is very important. WestJetters are ambassadors, and in order to provide guests with the highest level of guest service, we ensure they appropriately reflect our high standards. To this end, we foster a culture of empowerment and encourage people to find solutions to the issues at hand. This allows them to make decisions to ensure each guest has an outstanding experience when flying with us.
WestJet’s Altitude Leadership Development Program was launched in 2007 and is focused on developing a community of leaders through business-focused, competency-driven development. This program is grounded in our competency model, our strategic platform and our award-winning culture. Focused work took place at the executive, vice-president and director levels throughout 2009 and will continue to remain a focus with those senior levels as well as a cascaded version of the program for our managers and frontline leaders.
In early 2010, we launched our first-ever leadership course catalogue “Latitudes 2010,” which will provide the company with a comprehensive overview of the core development courses available to all WestJetters. Latitudes 2010 continues the evolution of learning at WestJet.
In order to maintain a high level of guest service, we only add people to our team who will enhance the guest experience by being positive, passionate, friendly, fun and innovative about the quality of service they provide. Our recruitment team, in conjunction with many area specialists and managers throughout our Company, helped maintain our team in 2009. As of December 31, 2009, we employed 7,641 people, or approximately 6,291 full-time equivalent employees.
Additionally, in 2009, our pilots signed a mutually beneficial four-year agreement, allowing us to maintain our low-cost structure through greater productivity of our pilot group.
Pro-Active Communication Team
We are a rarity in the airline industry in that our employees are not unionized. To help ensure effective communication between management and non-management employees, the Pro-Active Communication Team ("PACT") was formed in 1999 by non-management employees with the support and encouragement of management. Since then, PACT has acted as the recognized employee organization throughout our Company, representing the interests of all non-management positions. PACT represents its membership by taking a pro-active approach to resolving issues and addressing the needs of WestJetters balanced with fostering our culture and vision. PACT is comprised of a number of subgroups to better represent the diverse groups within the Company. These objectives are enhanced through the use of interest based collaboration with our management teams. As a reflection of our commitment to creating a world-class employee experience for all of our WestJetters, since 1999, a PACT representative, nominated by members of PACT, has been proposed by management to our shareholders to sit on the Board of Directors of our Company. This ensures WestJetters' interests are considered in Board decisions.
WestJet Airlines Ltd. 2009 Annual Information Form - 29 -
Compensation
In order to attract and retain the right people, we designed a unique compensation philosophy that allows WestJetters to align their personal success with that of our Company and shareholders. In addition to a base salary, our compensation is enhanced through profit sharing incentives and an Employee Share Purchase Plan (“ESPP”) that allows our people to share in our profitability and to accumulate an equity stake in our Company and thereby benefit from increases in our share value.
By being able to share in our success, employees are motivated to improve our overall performance and are truly engaged in the business. During periods of successful corporate performance, WestJetters benefit through profit sharing and potential stock appreciation; however, during periods of lower corporate performance, compensation plans automatically yield a lower overall compensation and a lower fixed cost to our Company.
As the airline industry is highly susceptible to the state of the economy, including high fuel prices and competitive pressures, this compensation structure has provided us with a competitive advantage, especially during difficult times. Traditionally, it is in difficult times that airlines have been hampered by restrictive higher fixed-cost labour agreements. It is in these same times that our compensation plans provide a natural incentive to WestJetters to work to ensure that the challenging environment is overcome. We believe that this philosophy, which is unique in the Canadian airline industry, has been a significant contributor to our success to date. As of March 15, 2010, our labour relations are stable, and we do not anticipate this to change in the foreseeable future.
Base salaries
Base salaries for our people, other than pilots, are reviewed annually to align with external market salaries and are further reviewed through internal job evaluations. Employees are also eligible for annual merit increases based on performance.
Employee share purchase plan (“ESPP”)
We believe that having employees as shareholders is fundamental to our success and growth, and therefore we provide our people with an opportunity to acquire an ownership interest in WestJet. All employees, including executive management, are encouraged to contribute a portion of their salary, to a maximum of 20 per cent, to the ESPP. For every dollar an employee contributes to the ESPP, we match with one dollar. The combined funds are then used to buy Voting Shares on the open market during each calendar month. Under the terms of the ESPP, we have the option to acquire Voting Shares on behalf of employees through open market purchases or to issue shares from treasury at the current market price, which is determined based on the volume-weighted average trading price of the Common Shares for the five trading days preceding the issuance. In 2009, we elected to issue 977,459 shares from treasury at a total market value of $11.1 million for a portion of our matching contribution, for which no cash was exchanged.
Employees who have not exceeded their maximum 20 per cent contribution level may use their profit share payments to top-up their ESPP contributions and we will match this “top-up” amount. Shares under the ESPP vest to the employee after one year. The ESPP has been very successful in encouraging employees to become shareholders and promoting the principle that the employees’ best interests are compatible with the best interests of the shareholders. As at December 31, 2009, approximately 84 per cent of our active WestJetters participate in the ESPP, on average contributing 15 per cent of their pre-tax salary towards the purchase of shares.
WestJet Airlines Ltd. 2009 Annual Information Form - 30 -
Employee profit share plan
Another means for employees to participate in corporate performance is through profit sharing. All employees, including executives, are eligible for the employee profit share plan. The program is designed to reward employees at a level which is directly proportional to the profit margin we generate. Profit share is paid based on a percentage, ranging between 10 per cent and 20 per cent, of our pre-tax income. This approach creates a culture of ownership and encourages all employees to focus on our bottom line. All amounts paid for profit share are subject to prior approval by the Board of Directors.
Stock option plan
We have a stock option plan, whereby as at December 31, 2009, up to a maximum of 12,228,611 Voting Shares were available for issuance to officers and certain employees subject to the following limitations:
(i) the number of Voting Shares reserved for issuance to any one optionee will not exceed five per cent of the issued and outstanding Voting Shares at any time;
(ii) the number of Voting Shares reserved for issuance to insiders shall not exceed 10 per cent of the issued and outstanding Voting Shares; and (iii) the number of Voting Shares issuable under the stock option plans, which may be issued within a one-year period, shall not exceed 10 per cent of the issued and outstanding Voting Shares at any time.
Stock options are granted at a price that equals the weighted average five day trading price of our Voting Shares, have a term of four or five years and vest on either the first, second or third anniversary from the date of grant.
During 2004, in order to minimize the level of dilution resulting from stock options, we introduced a cashless settlement alternative. Under the terms of our stock option plan, option holders can either (i) elect to receive shares by delivering cash to the Company in the amount of the options, or (ii) elect a cashless settlement alternative, whereby they can choose to receive a number of shares equivalent to the market value of the options over the exercise price.
As at December 31, 2009, 10,550,153 options or 84 per cent of total options exercised since the introduction of the cashless settlement have been on a cashless basis with 2,567,199 Voting Shares being issued. The chart below lists, on a fiscal-year basis, the number of stock options exercised on a cash and cashless- settlement basis with the corresponding number of Voting Shares issued over the last six years:
Stock Options Exercised Voting Shares Issued Cash Cashless Cash Cashless Conversion Basis Basis Total Basis Basis Total Rate 2004 1,509,367 449,635 1,959,002 1,509,367 102,354 1,611,721 82.3% 2005 354,702 3,151,923 3,506,625 354,702 979,089 1,333,791 38.0% 2006 - 433,129 433,129 - 73,589 73,589 17.0% 2007 136,630 4,139,944 4,276,574 136,630 1,049,752 1,186,382 27.7% 2008 14,364 1,998,926 2,013,290 14,364 332,730 347,094 17.2% 2009 - 376,596 376,596 - 29,685 29,685 7.9% Total 2,015,063 10,550,153 12,565,216 2,015,063 2,567,199 4,582,262 36.5%
WestJet Airlines Ltd. 2009 Annual Information Form - 31 -
Executive Share Unit Plan (“ESU”)
We have an equity-based ESU plan, whereby as at December 31, 2009, up to a maximum of 509,841 restricted share units (“RSU”) and performance share units (“PSU”) combined may be issued to our senior executive officers. The fair market value of the RSUs and PSUs at the time of grant is equal to the weighted average trading price of our Voting Shares for the five trading days immediately preceding the grant date. RSUs Each RSU entitles the senior executive officer to receive payment upon vesting in the form of Voting Shares. The RSUs time vest at the end of a three-year period, with compensation expense being recognized in net earnings on a straight-line basis over the vesting period. A total of 105,491 RSUs were granted under this plan during 2009 with 17,211 RSUs being exercised. As at December 31, 2009, 143,461 RSUs are outstanding.
PSUs
Each PSU entitles the senior executive officer to receive payment upon vesting in the form of Voting Shares. PSUs time vest at the end of a three-year term and incorporate performance criteria based on achieving the compounded average diluted earnings per share growth rate targets established at the time of grant. A total of 140,650 PSUs were granted under this plan during 2009 with 22,948 PSUs being exercised. As at December 31, 2009, 191,276 PSUs are outstanding.
2007 RSU
We have a cash-settled RSU plan, whereby RSUs may be issued to our executive officers as part of their total compensation. Each RSU entitles a participant to receive cash equal to the market value of the equivalent number of our Voting Shares. No WestJet shares will be issued under this plan. As at December 31, 2009, 61,682 RSUs were outstanding, all of which vested and were paid out in January 2010.
Deferred Share Unit (“DSU”)
We have a cash-settled DSU plan as an alternative form of compensation for independent Board of Directors. Each DSU entitles a participant to receive cash equal to the market value of the equivalent number of our Voting Shares. The number of DSUs granted is determined based on the closing price of our Common Shares on the trading day immediately prior to the date of grant. As at December 31, 2009, 40,423 DSUs were vested and outstanding. DSUs are redeemable upon the Director’s retirement from the Board.
Safety
We are committed to providing the highest level of safety in all operations. With a growing network and expanding fleet, safety remains the foremost core value within our culture.
Our safety programs meet or exceed the high standards required by Transport Canada. In 2009, we completed implementation of a Safety Management System (“SMS”) under new Transport Canada regulations to enhance our safety performance. An SMS is an organized set of programs, principles, processes and procedures to manage operational risks. Our SMS integrates human, technical and financial
WestJet Airlines Ltd. 2009 Annual Information Form - 32 -
resources to achieve an exceptional level of safety through a focus on proactive risk management and quality management processes.
Proactive risk identification and control is a cornerstone of our SMS. Once a hazard is identified it receives a risk classification that drives the follow-up actions and timelines. Common safety processes have been implemented across our company to ensure a consistent framework for operational risk management. Employees are engaged in the SMS and are encouraged to report hazards to ensure that new operational risks are identified as soon as possible and controlled before they can cause an incident.
Other elements of our SMS include safety training for all WestJetters, regular analysis of safety data, operational and system quality assurance, safety planning and safety performance reviews. Each operational department is required to establish annual safety goals, specify safety performance indicators and measure their safety performance in an annual report. These annual safety reports, as well as monthly safety updates, are provided to our Executive Safety Management Committee, which is chaired by our Chief Executive Officer.
We have also invested in the latest aircraft equipment that increases safety, systems reliability and aircraft efficiency. The Boeing NG 737 aircraft, with its industry-leading technology, is the ideal aircraft for our operations. In addition to the economic and environmental benefits of operating the aircraft, there are many safety enhancements that it provides with its high level of technology.
One feature of the NG 737 aircraft that we have implemented to enhance safety is its Required Navigational Performance (“RNP”) capability. RNP combines the virtues of global positioning systems and automated flight management to allow the aircraft to follow complex lateral and vertical approach paths to any runway. Using RNP, a commercial jetliner can safely navigate through a tight corridor in the sky during takeoff or landing in extreme weather conditions, flying safely around obstacles such as mountains and hills. To date, we have introduced over 80 RNP procedures into airports across Canada.
Through the integrated safety programs that comprise our SMS, technological developments and advanced training for pilots, inflight crew, maintenance and flight support staff, we maintain the highest level of safety in our operations. Our systems provide a robust framework for safety management; however, it is WestJetters’ commitment to our core safety values that maintains our excellent safety performance.
Flight Simulators
Fleet commonality is important when considering flight training. All 737 aircraft types can be trained on the same NG 737 simulator. As we hire new pilots and continuously train our current pilots, the need for proper in-house training facilities became increasingly important. With three in-house flight simulators, we avoid the high cost of sending pilots to external training facilities, while managing the process of training our pilots internally to ensure the highest standards of safety are maintained.
Maintenance
Our aircraft maintenance program is approved by Transport Canada and places emphasis on both safety and aircraft reliability. Our program meets all requirements of the Boeing Maintenance Planning Document along with any of Transport Canada’s additional requirements. The program completes all of the required maintenance checks within the prescribed timeframe and provides a given schedule which is beneficial for long-term fleet planning.
WestJet Airlines Ltd. 2009 Annual Information Form - 33 -
We maintain the highest standards of safety and have an in-house reliability program which monitors aircraft, engine and component performance. In addition, we obtain in-service information directly from Boeing for our aircraft, CFM International for our engines and other original equipment manufacturers allowing us to continuously enhance the maintenance program.
We generally carry out our own line maintenance activities across the system. When external agencies do carry out maintenance on our aircraft, we maintain quality oversight and ensure that they are approved by Transport Canada. Our heavy maintenance activities are carried out by external contractors at their facilities.
Maintenance costs on new aircraft are lower in part due to them being under warranty for several years. As of December 31, 2009, 35 of our 86 aircraft or 40.7 per cent were still under warranty.
Our expertise in operating and maintaining NG 737s coupled with the cost savings associated with operating a fleet of newer aircraft provide us with one of the most cost-effective and safety-conscious maintenance programs in the industry.
Along with the maintenance program we have an inventory control system intended to reduce the time that an aircraft may be out of service for maintenance and parts replacement. An inventory of both rotable and consumable spares, including engines and auxiliary power units at strategic locations across the route network ensures quick availability and replacement of parts. Inventory levels at each location are based on prior history of demand and forecasted future placement requirements
Social Policy
We provide a friendly, safe, equitable and rewarding work environment for our WestJetters. We attract and retain outstanding professionals, provide them with continuous learning, encourage performance excellence, achieve diversity and develop leaders at all levels.
As a fundamental principle of employment, and in recognition of the Canadian Human Rights Act , we recognize that all persons are equal in dignity and human rights without regard to race, religion, colour, sex, sexual orientation, marital or family status, disability, age, convictions for which a pardon has been granted or national or ethnic origin. We are committed to the objectives of the Employment Equity Act and report annually to the government authorities on the representation of those designated groups within our Company. We are continually exploring new ways to enhance our diversity hiring initiatives.
Environment
We recognize the impact that air travel can have on the environment. Despite the fact that air travel only represents a very small portion of the total greenhouse gas (“GHG”) emissions in Canada, we believe it is important to proactively seek out new processes and technologies that minimize our impact on the environment.
As well as adhering to all of the local, national and international standards, we strive to use and develop technologies that are environmentally sound. We were the first airline in North America to implement Blended Winglet Technology on its 700- and 800-series aircraft. This technology provides environmental benefits through improved fuel efficiency, reduced noise and reduced GHG emissions.
To date, environmental laws and regulations have not had a material adverse effect on our business or our financial condition; however, changes in such government laws and regulations are ongoing and may
WestJet Airlines Ltd. 2009 Annual Information Form - 34 -
make environmental compliance increasingly expensive. We are not able to predict future costs which may be incurred in order to comply with future environmental regulations.
We have also created a new board committee, the SH&E committee to provide further governance around environmental issues.
Three-year History
2007
2007 was highlighted by significant growth with revenues surpassing $2 billion as we increased our fleet of 737s by seven aircraft to 70 as of December 31, 2007. We generated a pre-tax margin of 11.1 per cent, one of the best in the North American airline industry. Our success was fueled by a buoyant Canadian economy; WestJetters’ continued friendly, helpful and committed focus to provide an exceptional guest experience; our continued industry-leading on-time performance and several strategic initiatives to manage our capacity growth.
With consumer demand for WestJet continuing to grow, we signed an agreement with the Boeing Company for the purchase of 20 Boeing NG 737 aircraft scheduled for delivery in 2012 and 2013, to satisfy the demands of our growth. In addition, during 2007, we signed three letters of intent to lease an additional 11 aircraft to be delivered between 2008 and 2011.
In 2007, we added scheduled service to Mexico, Jamaica and Dominican Republic, offering our guests across Canada a total of 19 sun destinations to travel to in the winter. These destinations further enriched WestJet Vacations’ already strong package offerings providing more choices for our guests while allowing us to expand our successful seasonal capacity deployment strategy.
During 2007, we came to an agreement with the vendor of the aiRes reservation system to discontinue the aiRes contract and, as a result, recognized an impairment loss of $31.9 million.
In 2007, there was turbulence in the Canadian competitive landscape with Harmony Airways ending all scheduled flights as of April 9, 2007.
In the latter half of 2007, the price of crude oil increased rapidly, straining North American airlines’ balance sheets. For us, this rapid increase was partially offset by the strengthening Canadian dollar.
We received the award for Canada's Most Admired Corporate Culture for the third year in a row, reflecting the continued passion and efforts of WestJetters.
2008
2008 was a challenging year for the airline industry, marked by economic uncertainty , volatility in the price of jet fuel and turmoil in the financial and credit markets. While 2008 was challenging for us, we generated a pre-tax margin of 10.0 per cent, among the best in the North American airline industry.
While most airlines reduced capacity in 2008, we added six new aircraft, growing our fleet to 76, increasing capacity by 17.8 per cent while growing revenue 19.9 per cent to over $2.5 billion.
In 2008, we continued to expand upon our successful seasonal capacity deployment strategy; increased service to Mexico, Jamaica, Dominican Republic and Hawaii; and added popular sun destinations such as
WestJet Airlines Ltd. 2009 Annual Information Form - 35 -
Puerto Vallarta, Cancun and St. Lucia to offer our guests increased choices to travel south in the winter. These destinations further bolstered WestJet Vacations’ offerings of customized air and hotel packages for our guests.
One of the most challenging aspects of 2008 was the significant volatility in crude oil and jet fuel prices. During the second quarter of 2008, we introduced a fuel surcharge to partially offset the effect of unprecedented fuel prices. As the price of fuel subsided in the third quarter, we subsequently eliminated the fuel surcharge. During the third quarter we began a more extensive fuel hedging program under a revised policy as approved by our Board of Directors.
On December 19, 2008, we signed an agreement with Sabre to provide us with a license to access and use its reservation system SabreSonic®.
In 2008, we entered a code-share agreement with Southwest Airlines. This code-share agreement is an important step in the ability to offer our guests more destinations in the United States conveniently and cost effectively.
In 2008, we were one of 10 companies presented with Canada's 10 Most Admired Corporate Cultures award reflecting the continued engagement, hard work and commitment of our dedicated WestJetters. This award is the successor of the Most Admired Corporate Culture award that we were awarded in 2005, 2006 and 2007.
The year ended with the most severe and widespread winter weather across Canada in nearly 40 years. The weather hit during the busy holiday travel season, causing numerous airport closures and record numbers of flight delays and cancellations. As a result, we spent an additional $3.2 million on hotel rooms, meal vouchers, ground transportation, chartered aircraft and de-icing costs during the fourth quarter of 2008 as compared to the same period of 2007.
2009
Continuing the trend from the last quarter of 2008, 2009 was a very challenging year for the airline industry given the deep economic recession, impact of the H1N1 pandemic, a major security breach on Christmas Day in the U.S. and the resulting dampening of demand for air travel continuing into 2010. Despite the numerous challenges we faced in 2009, we recorded an earnings before tax margin of six per cent, which was among the best in the North American airline industry.
In response to another challenging year, most airlines focused on reducing capacity and costs, while managing cash. Taking a different tack from others, 2009 was an opportunity to continue expanding our network to set us up for future growth. We increased our fleet size to 86 aircraft from 76 aircraft at the end of 2008 and increased our 2009 capacity by 2.6 per cent. Throughout the year, we added 15 new bases: Yellowknife, Sydney, San Diego, San Francisco, Miami, Atlantic City, Cozumel, Lihue, St. Maarten, Varadero, Freeport, Ixtapa, Cayo Coco, Providenciales and Holguin.
During 2009, our fares were under continued pressure from the weak economic environment, as aggressive discounts were used in order to stimulate traffic. The result was a reduction in our annual revenue of 10.5 per cent to $2.28 billion.
Another major milestone achieved this year, from both a long-term cost-control perspective as well as a cultural perspective, was the consolidation of offices into our new centralized Campus. The move was completed by April 24, 2009, and celebrated with the official grand opening ceremony on May 4, 2009.
WestJet Airlines Ltd. 2009 Annual Information Form - 36 -
On September 30, 2009, we closed a prospectus financing pursuant to which we issued and sold an aggregate of 15,398,500 Common Voting Shares and Variable Voting Shares at a price of $11.20 per share for aggregate proceeds of approximately $172 million. The proceeds of the financing were intended to be used for capital expenditures, working capital and to maintain our capital position and flexibility for financing future growth opportunities.
On October 17, 2009, we transitioned to SabreSonic®. This platform is expected to support our continued growth and provide our guests with multiple new products and services to enhance our guest experience. The implementation of SabreSonic® provides us with the technical capabilities to partner with other airlines. In 2009 we signed and implemented an inbound interline agreement with Air France and KLM.
In 2009, we were inducted into Waterstone Human Captial’s Corporate Culture Hall of Fame after being presented with Canada’s 10 Most Admired Corporate Culture awards for four-consecutive years. In addition, we were named one of Canada’s Top 50 Employers by Hewitt Associates.
For 2010, our business plans are focused around leveraging the capabilities we implemented during 2009. This includes the launch of our Frequent Guest and credit card programs, additional airline partnerships and potentially new fare offerings. All of these items will utilize the additional functionality available through our reservation system implementation.
CAPITAL STRUCTURE
Constraints
Under Canadian law, non-Canadian ownership and control of airline voting shares is limited to 25 per cent of outstanding shares. To reduce inconveniences in buying and selling WestJet Common Shares and to ensure our continuous compliance with the requirement to qualify as Canadian, we introduced a Variable Voting Share structure into our capital structure, which was approved by shareholders at a special meeting held on August 30, 2005.
Common Voting Shares may only be owned and controlled by Canadians. Any Common Voting Share owned or controlled by a person who is not a Canadian is, or must be, converted to a Variable Voting Share. Variable Voting Shares may only be owned or controlled by non-Canadians. Therefore, any Voting Share owned or controlled by a person who is not Canadian is, or must be, converted to a Variable Voting Share.
The holders of Variable Voting Shares and Common Voting Shares vote together at any meeting of shareholders and no separate meeting is held for these classes of shares, unless it is to address a matter specific to a class.
We have adopted certain by-laws and procedures to address monitoring and enforcement of ownership requirements established by the CTA and our Articles. In particular, our shareholders approved By-Law No. 2005-1 which sets out general powers of the Board of Directors to enact procedures regarding the issuance, transfer and holding of voting shares, power to require declarations regarding ownership status of persons holding voting shares and various enforcement provisions regarding Canadian ownership. In addition, we have adopted certain monitoring procedures to ensure compliance with our Articles and by- laws and the maintenance of ownership levels required under the CTA. These procedures establish that our transfer agent will make periodic inquiries of intermediaries holding voting shares for non-registered holders to ensure compliance with share holding ownership requirements.
WestJet Airlines Ltd. 2009 Annual Information Form - 37 -
When used in describing our share capital, "Canadian" has the meaning presently defined in subsection 55(1) of the CTA, being a Canadian citizen or a permanent resident within the meaning of subsection 2(1) of the Immigration and Refugee Protection Act (Canada), a government in Canada or an agent of such a government or a corporation or other entity that is incorporated or formed under the laws of Canada or a province, that is controlled in fact by Canadians and of which at least 75 per cent, or such lesser percentage as the Governor in Council may by regulation specify, of the voting interests are owned and controlled by Canadians.
Proposed Change to Restriction on Foreign Ownership
On March 12, 2009, Bill C-10, the Budget Implementation Act 2009 was assented to by the Canadian Parliament. This Act contains amendments to the CTA, however, at the date hereof these amendments have not been proclaimed into force. When in force, these amendments will replace the current definition of “Canadian” within the CTA that prescribes a 25 per cent limit on the voting interests owned and controlled by non-Canadians and will instead provide the Governor in Council with the authority to implement new regulations to the CTA specifying the limit on the voting interests owned and controlled by non-Canadians, subject to a limit of 49 per cent on the voting interests owned and controlled by all non-Canadians, or a limit of 49 per cent on the voting interests owned and controlled by any specified class of non-Canadians prescribed in such regulations. These amendments to the CTA will come into force on a date to be fixed by order of the Governor in Council made on the recommendation of the Minister of Transport (federal). On October 8, 2009, the Canadian Transportation Agency commenced a consultation process with stakeholders, including us, regarding the implementation of these new regulations, which will be implemented in conjunction with the coming into force of the amendments to the CTA described above. We are unable to predict the form such regulations will take, the timing for their enactment, or the potential effect on us or our capital structure.
General
Our capital structure consists of an unlimited number of Common Voting Shares; an unlimited number of Variable Voting Shares; an unlimited number of Non-Voting Shares, issuable in series (the "Non-Voting Shares"); an unlimited number of First Preferred Shares, issuable in series (the "First Preferred Shares"); an unlimited number of Second Preferred Shares, issuable in series (the "Second Preferred Shares"); and an unlimited number of Third Preferred Shares, issuable in series (the "Third Preferred Shares") (the First Preferred Shares, Second Preferred Shares and Third Preferred Shares are collectively referred to as the "Preferred Shares").
As at March 15, 2010, 144,849,144 Voting Shares are issued and outstanding, consisting of 138,848,959 Common Voting Shares as fully paid and non-assessable, and 6,000,185 Variable Voting Shares as fully paid and non-assessable. No Non-Voting Shares or Preferred Shares have been issued. There are no current plans to issue Non-Voting Shares or any class or series of Preferred Shares.
Common Voting Shares
Exercise of Voting Rights
The holders of Common Voting Shares will be entitled to receive notice of and to attend and vote at all meetings of our shareholders, except those at which holders of a specific class are entitled to vote separately as a class under the ABCA . Each Common Voting Share shall confer the right to one vote at all shareholder meetings.
WestJet Airlines Ltd. 2009 Annual Information Form - 38 -
Dividends
Subject to the rights, privileges, restrictions and conditions attached to any class of WestJet shares ranking prior to the Common Voting Shares, holders of Common Voting Shares are entitled to receive any dividends declared by our directors at the times and for the amounts that the Board of Directors may, from time to time, determine. The Common Voting Shares, Variable Voting Shares and Non-Voting Shares shall rank equally as to dividends on a share-for-share basis. All dividends declared shall be declared in equal or equivalent amounts per share on all Common Voting Shares, Variable Voting Shares and Non-Voting Shares then outstanding, without preference or distinction.
Rights in the Case of Liquidation, Winding-Up or Dissolution
Subject to the rights, privileges, restrictions and conditions attached to any class of shares ranking prior to the Common Voting Shares, in the case of liquidation, dissolution or winding-up of our Company, the holders of Common Voting Shares, Variable Voting Shares and Non-Voting Shares shall be entitled to receive our remaining property and shall be entitled to share equally, share for share, in all distributions of such assets.
Conversion
Subject to the foreign ownership restrictions in the CTA , each issued and outstanding Common Voting Share shall be converted into one Variable Voting Share, automatically and without any further act of WestJet or the holder, if such Common Voting Share is or becomes owned or controlled by a person who is not a Canadian.
In the event that an offer is made to purchase Variable Voting Shares and the offer is one which is required, pursuant to applicable securities legislation or the rules of a stock exchange on which the Variable Voting Shares are then listed, to be made to all or substantially all the holders of Variable Voting Shares, each Common Voting Share shall become convertible at the option of the holder into one Variable Voting Share at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Common Voting Shares for the purpose of depositing the resulting Variable Voting Shares pursuant to the offer and for no other reason, including notably with respect to voting rights attached thereto, which are deemed to remain subject to the provisions concerning the voting rights for Common Voting Shares notwithstanding their conversion. Our transfer agent shall deposit the resulting Variable Voting Shares on behalf of the holder.
Should the Variable Voting Shares issued upon conversion and tendered in response to the offer be withdrawn by the holder or not taken up by the offeror, or should the offer be abandoned or withdrawn, the Variable Voting Shares resulting from the conversion shall be automatically reconverted, without further intervention on the part of WestJet or on the part of the holder, to Common Voting Shares.
The Common Voting Shares may not be converted into Variable Voting Shares, or vice-versa, other than in accordance with the conversion procedure set out in our Articles of Amendment.
Constraints on Share Ownership
The Common Voting Shares may only be beneficially owned and controlled by Canadians.
WestJet Airlines Ltd. 2009 Annual Information Form - 39 -
Variable Voting Shares
Exercise of Voting Rights
Each Variable Voting Share entitles the holder to receive notice of, to attend and vote at all meetings of our shareholders, except those at which the holders of a specific class are entitled to vote separately as a class under the ABCA .
Variable Voting Shares will carry one vote per share held, except where (i) the number of outstanding Variable Voting Shares exceeds 25 per cent of the total number of all issued and outstanding Variable Voting Shares and Common Voting Shares (or any greater percentage the Governor in Council may specify pursuant to the CTA), or (ii) the total number of votes cast by or on behalf of the holders of Variable Voting Shares at any meeting on any matter on which a vote is to be taken exceeds 25 per cent (or any greater percentage that the Governor in Council may specify pursuant to the CTA ) of the total number of votes that may be cast at such meeting.
Under the circumstances described above, the Variable Voting Shares as a class cannot carry more than 25 per cent (or any greater percentage that the Governor in Council may specify pursuant to the CTA ) of the total voting rights attached to the aggregate number of our issued and outstanding Variable Voting Shares and Common Voting Shares. Under the circumstances described above, the Variable Voting Shares as a class cannot, for a given shareholders' meeting, carry more than 25 per cent (or any greater percentage that the Governor in Council may specify pursuant to the CTA ) of the total number of votes that may be cast at the meeting. If either of the above noted thresholds is surpassed at any time, the vote attached to each Variable Voting Share will decrease prorata automatically without further act or formality to ensure that the applicable threshold is not exceeded.
Dividends
Subject to the rights, privileges, restrictions and conditions attached to any other class of our shares ranking prior to the Variable Voting Shares, the holders of Variable Voting Shares are entitled to receive any dividends that are declared by our directors at the times and for the amounts that our Board of Directors may, from time to time, determine. The Variable Voting Shares shall rank equally with the Common Voting Shares and the Non-Voting Shares as to dividends on a share-for-share basis. All dividends shall be declared in equal or equivalent amounts per share on all Variable Voting Shares, Common Voting Shares and Non-Voting Shares then outstanding, without preference or distinction.
Rights in the Case of Liquidation, Winding-Up or Dissolution
Subject to the rights, privileges, restrictions and conditions attached to the other classes of our shares ranking prior to the Variable Voting Shares, in the case of liquidation, dissolution or winding-up of WestJet, the holders of Variable Voting Shares, Common Voting Shares and Non-Voting Shares shall be entitled to receive our remaining property and shall be entitled to share equally, share for share, in all distributions of such assets.
Conversion
Each issued and outstanding Variable Voting Share shall be automatically converted into one Common Voting Share, without any further intervention on the part of WestJet or the holder, if (i) the Variable Voting Share is or becomes beneficially owned and controlled by a Canadian; or if (ii) the provisions
WestJet Airlines Ltd. 2009 Annual Information Form - 40 -
contained in the CTA relating to foreign ownership restrictions are repealed and not replaced with other similar provisions in applicable legislation.
In the event that an offer is made to purchase Common Voting Shares and the offer is one which is required, pursuant to applicable securities legislation or the rules of a stock exchange on which the Common Voting Shares are then listed, to be made to all or substantially all the holders of Common Voting Shares in a given province of Canada to which these requirements apply, each Variable Voting Share shall become convertible at the option of the holder into one Common Voting Share at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Variable Voting Shares for the purpose of depositing the resulting Common Voting Shares pursuant to the offer, and for no other reason, including notably with respect to voting rights attached thereto, which are deemed to remain subject to the provisions concerning voting rights for Variable Voting Shares notwithstanding their conversion. Our transfer agent shall deposit the resulting Common Voting Shares on behalf of the holder.
Should the Common Voting Shares issued upon conversion and tendered in response to the offer be withdrawn by the holder or not taken up by the offeror, or should the offer be abandoned or withdrawn, the Common Voting Shares resulting from the conversion shall be automatically reconverted, without further intervention on the part of WestJet or on the part of the holder, into Variable Voting Shares.
Variable Voting Shares may not be converted into Common Voting Shares, and vice-versa, other than in accordance with the conversion procedure set out in our Articles of Amendment.
Constraints on Share Ownership
Variable Voting Shares may only be beneficially owned or controlled by non-Canadians.
Non-Voting Shares
The Non-Voting Shares may be issued, from time to time in one or more series, each series consisting of such number of Non-Voting Shares as determined by our Board of Directors who may also fix the designations, rights, privileges, restrictions and conditions attaching to the shares of each series of Non- Voting Shares. There are no Non-Voting Shares issued and outstanding.
Dividends
The Non-Voting Shares, the Common Voting Shares and the Variable Voting Shares shall rank equally as to dividends on a share for share basis.
Rights in the Case of Liquidation, Winding-Up or Dissolution
Subject to the rights, privileges, restrictions and conditions attaching to any other class of our shares ranking prior to the Non-Voting Shares, in the case of liquidation, dissolution or winding-up of our Company or other distribution of our assets among our shareholders for the purpose of winding-up its affairs, the holders of Non-Voting Shares, Common Voting Shares and Variable Voting Shares shall be entitled to receive the remaining property of our Company and shall be entitled to share equally, share for share, in all distributions of such assets.
WestJet Airlines Ltd. 2009 Annual Information Form - 41 -
Constraints on Share Ownership
Except as provided in the ABCA , the holders of Non-Voting Shares are not entitled to vote.
Conversion
Except as described below, the Non-Voting Shares shall not have any conversion rights attached thereto.
In the event that an offer is made to purchase Common Voting Shares or Variable Voting Shares, as the case may be, and the offer is one which is required, pursuant to applicable securities legislation or the rules of a stock exchange on which the Common Voting Shares or Variable Voting Shares, as the case may be, are then listed, to be made to all or substantially all the holders of Common Voting Shares or Variable Voting Shares, as the case may be, in a province of Canada to which the requirement applies, each Non-Voting Share shall become convertible at the option of the holder into one Common Voting Share or Variable Voting Share, as the case may be, at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Non-Voting Shares for the purpose of depositing the resulting Common Voting Shares or Variable Voting Shares, as the case may be, pursuant to the offer, and for no other reason, including notably with respect to voting rights attached thereto, notwithstanding their conversion. The transfer agent shall deposit the resulting Common Voting Shares or Variable Voting Shares, as the case may be, on behalf of the holder.
If (i) Common Voting Shares or Variable Voting Shares, as the case may be, resulting from the conversion and deposited pursuant to the offer are withdrawn by the holder or are not taken up by the offeror; or (ii) the offer is abandoned or withdrawn by the offeror or the offer otherwise expires without such Common Voting Shares or Variable Voting Shares, as the case may be, being taken up and paid for, the Common Voting Shares or Variable Voting Shares, as the case may be, resulting from the conversion will be re-converted into Non-Voting Shares and a share certificate representing the Non-Voting Shares will be sent to the holder by the transfer agent. Common Voting Shares or Variable Voting Shares, as the case may be, resulting from the conversion and taken up and paid for by the offeror shall be re-converted into Non-Voting Shares at the time the offeror is required under the applicable securities legislation to take up and pay for such shares.
In the event that the offeror takes up and pays for the Common Voting Shares or Variable Voting Shares, as the case may be, resulting from conversion, the transfer agent of WestJet shall deliver to the holders thereof the consideration paid for such shares by the offeror.
There will be no right to convert the Non-Voting Shares into Common Voting Shares or Variable Voting Shares, as the case may be, in the following cases: a. the offer to purchase Common Voting Shares or Variable Voting Shares, as the case may be, is not required under applicable securities legislation or the rules of a stock exchange on which the Common Voting Shares or Variable Voting Shares, as the case may be, are then listed to be made to all or substantially all holders of Common Voting Shares or Variable Voting Shares, as the case may be, who are in a province of Canada to which the legislation applies, that is, the offer is an "exempt take over bid" within the meaning of the foregoing securities legislation; or b. an offer to purchase Non-Voting Shares is made concurrently with the offer to purchase Common Voting Shares or Variable Voting Shares, as the case may be, and the two offers are identical in respect of price per share, percentage of outstanding shares for which the offer is made, and in all
WestJet Airlines Ltd. 2009 Annual Information Form - 42 -
other material respects, including in respect of the conditions attaching thereto. The offer to purchase the Non-Voting Shares must be unconditional, subject to the exception that the offer for the Non- Voting Shares may contain a condition to the effect that the offeror not be required to take up and pay for Non-Voting Shares tendered in response to the offer if no shares are purchased pursuant to the contemporaneous offer for the Common Voting Shares or the Variable Voting Shares, as the case may be.
The conversion of Non-Voting Shares to Common Voting Shares or Variable Voting Shares, as the case may be, as contemplated above is subject to certain procedures and formalities, which are more fully described in WestJet’s Management Information Circular dated July 29, 2005 on SEDAR at www.sedar.com.
Preferred Shares
Issuable in Classes and Series
We may issue Preferred Shares from time to time in any class and in any series as the Board of Directors may determine. The Board of Directors may also fix the designations, rights, privileges and conditions attaching to the Preferred Shares of each class and series. The holders of Preferred Shares are not entitled to vote, except as provided for in the ABCA .
Priority
The Preferred Shares of each class and each series shall, with respect to the payment of dividends and distribution of assets in the event of liquidation, dissolution or winding-up of our Company, whether voluntary or involuntary, or any other distribution of our assets among our shareholders for the purpose of winding-up our affairs, rank on a parity with the Preferred Shares of every other series in its class and shall be entitled to preference over the Voting Shares, the Non-Voting Shares and any other shares of any other class ranking junior to such class of Preferred Shares. The First Preferred Shares rank in priority to the Second Preferred Shares and the Third Preferred Shares, and the Second Preferred Shares rank in priority to the Third Preferred Shares.
Potential Constraints under the ABCA
Our Articles of Amendment provide that in the event any Canadian federal or provincial legislation applicable to WestJet is prescribed which implements additional constraints on the Voting Shares, in addition to those described herein, the Articles of Amendment and the provisions applicable to the Voting Shares set forth therein shall be read as if they included such additional constraints that assist WestJet to qualify under such prescribed law to receive licenses, permits, grants, payments or other benefits by reason of attaining or maintaining a specified level of Canadian ownership and control shall be the level of Canadian ownership and control designated by such prescribed law of Canada or a province. The implementation of any such Canadian federal or provincial legislation may have an affect on the voting rights or ownership restrictions applicable to the Voting Shares, and in particular may have an adverse effect on holders of Variable Voting Shares.
DIVIDEND POLICY
No dividends have been paid or declared on any of our shares since the date of incorporation. This policy is based on operational results, financial policy and financing requirements for future growth and is continuously reviewed.
WestJet Airlines Ltd. 2009 Annual Information Form - 43 -
MARKET FOR SECURITIES
Our Common Voting Shares and the Variable Voting Shares are traded on the Toronto Stock Exchange under the symbols "WJA" and "WJA.A," respectively. The following table lists the high and low market prices and trading volume of our Common Voting Shares and Variable Voting Shares for the periods indicated .
Common Voting Shares Variable Voting Shares WJA WJA.A High Low High Low Period Volume Volume ($) ($) ($) ($) 2010 January 13.77 12.20 9,215,634 13.51 12.21 107,627 February 14.15 12.87 5,975,010 14.11 13.07 149,862
2009 January 14.95 12.67 14,426,206 14.93 11.81 448,442 February 14.00 10.60 10,719,752 13.98 10.12 177,785 March 12.59 10.04 9,513,681 12.50 9.71 160,751 April 12.96 11.56 8,510,734 12.79 11.42 384,005 May 13.65 11.59 10,514,554 13.46 11.16 284,221 June 12.07 9.70 13,392,055 12.17 9.13 170,062 July 10.81 9.63 11,464,024 10.67 9.81 91,769 August 12.50 10.30 13,751,458 12.46 10.31 170,125 September 12.18 10.89 18,026,460 13.63 10.61 325,245 October 11.72 10.75 11,941,344 11.56 10.77 180,151 November 12.10 10.93 9,639,071 12.00 11.29 32,978 December 12.68 11.54 9,634,496 12.73 11.54 228,056
WestJet Airlines Ltd. 2009 Annual Information Form - 44 -
DIRECTORS AND EXECUTIVE OFFICERS
The following information relating to the current directors is based partly on our records and partly on information received from each director, and sets forth the name, municipality of residence, and age of each director, his principal occupation, all other positions and offices with us held by him, including committee memberships, the year in which he was first elected a Director and certain additional background information. All directors will retire at our May annual general meeting and will be subject to re-election. Equity ownership information in the following table is provided as at March 15, 2010, unless otherwise stated.
Directors
Mr. Beddoe, 63, is Chairman of WestJet, President of The CLIVE J. BEDDOE Hanover Group of Companies and a Director of Alberta Calgary, Alberta, Canada Investment Management Corp. Mr. Beddoe, a successful Chairman entrepreneur, brings to WestJet a strong background in financial Director since Jun. 21, planning and strategic management. Mr. Beddoe is a private pilot 1995 and has been licensed to fly numerous types of aircraft. It was through this keen interest in aircraft that he became involved with Non-Independent the formation of WestJet. Mr. Beddoe served as President of Director WestJet until September 2006 and the CEO of WestJet until September 2007. On February 10, 2009, Mr. Beddoe relinquished Equity Ownership: his role as Executive Chairman of WestJet in favor of acting solely
Common Voting Shares as Chairman of the Board. Areas of Expertise: 4,314,849 Airline industry Options Management 154,231 (at Dec. 31, 2009)
Mr. Bolton, 71, is a Chartered Accountant and Fellow of the Alberta HUGH BOLTON Institute of Chartered Accountants, and the former Chairman, CEO Edmonton, Alberta, and partner in Coopers & Lybrand Canada, Chartered Accountants. Canada Mr. Bolton is currently the non-executive Chair of the Board of Director since Aug. 2, Directors of EPCOR Utilities Inc. and Matrikon Inc. He is also a 2005 board member of the Canadian National Railway Company, Teck Resources Limited, TD Bank Financial Group and Capital Power Independent Director Corporation. Mr. Bolton received his Bachelor of Arts in Economics from the University of Alberta. In 2006, he was made a fellow of the Institute of Corporate Directors (Canada). Equity Ownership:
Common Voting Shares Areas of Expertise: 5,000 Accounting DSUs Corporate finance 10,544 Corporate governance
WestJet Airlines Ltd. 2009 Annual Information Form - 45 -
RON A. BRENNEMAN Mr. Brenneman, 63, is the former President and Chief Executive Calgary, Alberta, Canada Officer of Petro-Canada. Prior to joining Petro-Canada in 2000, he Director since Sept. 8, spent more than 30 years with Imperial Oil Ltd. and its parent 2009 company Exxon Corporation. Until February 15, 2010, he served as the Executive Vice-Chairman of Suncor Energy Inc. Mr. Independent Director Brenneman also serves on the Boards of the Bank of Nova Scotia and BCE Inc. Mr. Brenneman holds a B.Sc. (in chemical engineering) from the University of Toronto and a M.Sc. (in Equity Ownership: control systems) from the University of Manchester. Common Voting Shares 10,000
Areas of Expertise: Retail business Management International Business
SEAN M. DURFY Mr. Durfy, 43, is the President and Chief Executive Officer of the Calgary, Alberta, Canada Corporation. He has been with WestJet since 2004, when he Director since Nov. 7, joined the airline as Executive Vice-President, Sales and 2007 Marketing. Sean was appointed President in September 2006 and assumed the additional role of CEO in September 2007. Before Non-Independent joining WestJet, Mr. Durfy served as President and Chief Director Operating Officer of ENMAX Energy Corporation (The City of Calgary's electrical utility company), and as an Officer of Equity Ownership: ENMAX Corporation, from April 1999 until December 2004. Mr.
Common Voting Shares Durfy's business background also includes commodity 31,669 management, product development, operations and marketing and Areas of Expertise: Options sales at TransAlta Corporation and Honeywell Ltd. Mr. Durfy Airline industry 295,742 (at Dec. 31, received his Bachelor of Commerce from Dalhousie University in Marketing 2009) Halifax, Nova Scotia. Retail business PSUs On March 15, 2010, WestJet and Mr. Durfy announced that Mr. Management 83,336 Durfy was resigning as President and CEO and a director of RSUs 111,113 WestJet, under mutually agreeable terms, effective April 1, 2010.
Mr. Godfrey, 46, is the co-founder and Chief Executive Officer of BRETT GODFREY Virgin Blue Airlines, a publicly-listed airline in Australia. Mr. Clayfield, Queensland, Godfrey brings valuable experience in the airline industry to Australia WestJet. Mr. Godfrey has worked for various Virgin Group Director since Aug. 22, airlines, starting in the early 1990s with Virgin Atlantic as Finance 2006 Manager. In 1997, he was appointed CFO of Virgin Express, a low-fare publicly-listed airline based in Belgium, before launching Independent Director Virgin Blue in 2000. Mr. Godfrey is also a board member of Green Cross Australia, a not-for-profit organization and holds a business degree from Victoria University in Melbourne, Australia. Equity Ownership: He is a Chartered Accountant. Variable Voting Shares Areas of Expertise: 13,700 Airline industry Accounting Management
WestJet Airlines Ltd. 2009 Annual Information Form - 46 -
DONALD A. HOUGAN Mr. Hougan, 57, joined WestJet in 1999, and is currently based in Calgary, Alberta, Canada Calgary as one of WestJet's pilots. He is a member of WestJet's Director since May 15, Pro-Active Communication Team (“PACT”), as well as the PACT 2007 Representative on WestJet's Board of Directors.
Non-Independent Director
Equity Ownership: Common Voting Shares 17,542 Options Areas of Expertise: 16,207 (at Dec. 31, Airline industry 2009)
Mr. Allan Jackson, 69, is currently the President and Chief ALLAN W. JACKSON Executive Officer of Arci Ltd., a private real estate investment Calgary, Alberta, Canada company, and President and Chief Executive Officer of Jackson Lead Director Enterprises Inc., a private holding and consulting company. Mr. Director since July 30, Jackson serves as Chair of the Board of Directors for Canadian 2003 Western Bank, and previously as a director of Princeton Developments Ltd., a private real estate development and Independent Director management company. Mr. Jackson received his Bachelor of Arts (Honours) in Business Administration from the University of Western Ontario. Equity Ownership: Common Voting Shares Areas of Expertise: 21,000 Corporate governance DSUs Banking 12,544 Real estate
Mr. Barry Jackson, 57, is the retired Chair of Resolute Energy Inc. S. BARRY JACKSON Calgary, Alberta, Canada and Deer Creek Energy Limited. He was formerly President, CEO Director since Feb. 24, and a director of Crestar Energy Inc. He has worked in the oil and 2009 gas industry since 1974 and held senior executive positions with Northstar Energy Corporation and Crestar. Mr. Jackson has a Independent Director Bachelor of Science degree in Engineering from the University of Calgary and is a member of the Association of Professional Engineers, Geologists and Geophysicists of Alberta. He has served Equity Ownership: on the boards of several public companies and on the audit DSUs committees of some of those boards. Mr. Jackson is Chair of 3,261 TransCanada Corporation and TransCanada PipeLines Limited and a director of Laricina Energy Ltd. and Nexen Inc. Areas of Expertise: Compensation Management Oil & gas Corporate governance
WestJet Airlines Ltd. 2009 Annual Information Form - 47 -
Mr. Matthews, 73, has been involved in all aspects of investment WILMOT L. banking by serving in various positions with Nesbitt Burns Inc. MATTHEWS and its predecessor companies from 1964 until his retirement in Toronto, Ontario, Canada September, 1996, most recently as Vice Chairman and Director. Director since Sep. 17, Mr. Matthews is currently President of Marjad Inc., a private 1996 investment company. He is Chairman of Resin Systems Inc. and also serves on the Board of Directors of several private companies Independent Director and clubs. Mr. Matthews received his Bachelor of Arts in Math, Physics and Chemistry from the University of Toronto and his Master of Science in Economics from the London School of Equity Ownership: Economics in London, England, and is a Chartered Accountant. Common Voting Shares Areas of Expertise: 3,406,371 Investments DSUs Accounting 9,772 Corporate finance Corporate governance
Mr. Pollock, 63, is the President and Chief Executive Officer of L.M. (LARRY) both the Canadian Western Bank and Canadian Western Trust. He POLLOCK is also a Director of Canadian Direct Insurance (a subsidiary of Edmonton, Alberta, CWB), EPCOR, Canadian Helicopters Income Trust, and the Canada Edmonton Eskimos of the Canadian Football League, and is a Director since Sep. 16, member of the Executive Council of the Canadian Bankers' 1999 Association. Mr. Pollock graduated from the Saskatchewan Institute of Applied Arts & Sciences in Business Administration. Independent Director
Equity Ownership: Areas of Expertise: Common Voting Shares Banking 11,975 Accounting Management
Mr. Scace, 71, is a former partner and Chairman of McCarthy ARTHUR R.A. SCACE, Tétrault LLP, Barristers and Solicitors in Toronto. He is also Past C.M., Q.C. Chairman of the Bank of Nova Scotia. Mr Scace received his Toronto, Ontario, Canada Bachelor of Arts from the University of Toronto and Oxford Director since June 3, University, his Master of Arts from Harvard University and his 2005 Bachelor of Laws from Osgoode Hall. He was called to the bar in Ontario in 1967. Independent Director
Equity Ownership: Common Voting Shares Areas of Expertise: 15,000 Law DSUs Corporate governance 4,302
WestJet Airlines Ltd. 2009 Annual Information Form - 48 -
Executive Officers (as at March 15, 2010)
Name, City, Province and Position or Office with Principal Occupation During Years of Airline Country of Residence WestJet Past Five (5) Years Experience
Sean Durfy President and Chief President of WestJet since September Calgary, Alberta Executive Officer 2006 and Chief Executive Officer of Canada WestJet since September 2007; prior thereto, Executive Vice-President, Sales, 6 Marketing and Airports of WestJet since December 2004; prior thereto, President, ENMAX Energy Corporation.
Vito Culmone Executive Vice- Executive Vice-President, Finance and Calgary, Alberta President, Finance and Chief Financial Officer of WestJet since Canada Chief Financial Officer March 2007; prior thereto, Vice-President, Commercial Finance of Molson Canada; 3 prior thereto, Vice-President, Corporate Finance of Molson Inc; prior thereto, Vice President, Finance and Chief Financial Officer of Molson USA, LLC.
Bob Cummings Executive Vice- Executive Vice-President, Marketing & Calgary, Alberta President, Marketing & Sales, WestJet, since November 1, 2009, Canada Sales prior thereto, Executive Vice-President, Guest Experience and Marketing, WestJet 5 since September 2006; prior thereto, Vice- President, Marketing, WestJet since March 2005; prior thereto, Vice-President, Marketing, ENMAX Energy Corporation
Dr. Hugh Dunleavy Executive Vice- Executive Vice-President, Strategy & Calgary, Alberta President, Strategy & Planning, WestJet, since November 1, Canada Planning 2009, prior thereto, Executive Vice- President, Commercial Distribution, WestJet since September 2006; prior 30 thereto, Vice-President, Revenue, WestJet since January 2005; prior thereto, Vice- President, Sales and Support, Lufthansa Systems since January 2003; prior thereto, Senior Director, Commercial, Air Canada
Ferio Pugliese Executive Vice- Executive Vice-President, People and Calgary, Alberta President, People and Culture, WestJet since June 2007; prior 3 Canada Culture thereto, Vice President, Human Resources at Catalyst Paper Corporation
Gregg Saretsky Executive Vice- Executive Vice-President, Operations, Calgary, Alberta President, Operations WestJet since October 7, 2009, prior Canada thereto, Vice-President, WestJet Vacations, since June 1, 2009, prior thereto EVP Flight Operations & 24 Marketing, Alaska Airlines from February 2007 to December 2008, and prior thereto EVP Marketing & Planning, Alaska Airlines
WestJet Airlines Ltd. 2009 Annual Information Form - 49 -
Over the past couple of years, the board of directors had been working on the development of a succession plan as part of its normal course of business. During this process, Sean Durfy and the board agreed that given Mr. Durfy’s personal situation the search for a suitable successor should be accelerated.
After much discussion and upon the identification of a successor, the board accepted Sean Durfy’s resignation on mutually agreed upon terms. On March 15, 2010, WestJet announced that Sean Durfy was stepping down as President and CEO and a director of WestJet effective April 1, 2010.
WestJet further announced that Gregg Saretsky, currently WestJet’s Executive Vice-President, Operations, will be taking over the role of President and CEO of WestJet effective April 1, 2010. An executive search to fill the Executive Vice-President, Operations role vacated by Gregg Saretsky is underway.
Directors and executive officers of WestJet, as a group, own, directly or indirectly, or exercise control or direction over, 7.9 million (approximately 5.5 per cent) of our Voting Shares at March 15, 2010. Information as to securities beneficially owned or over which control or direction is exercised, not being within our knowledge, has been supplied by the respective individuals.
Conflicts of Interest
We have debt financing and investments in short-term deposits with a financial institution that is related through two common directors, one of whom is also the president of the financial institution. As at December 31, 2009, total long-term debt includes an amount of $6.4 million (2008 – $7.3 million) due to the financial institution. Included in cash and cash equivalents as at December 31, 2009 are short-term investments of $143.3 million (2008 – $96.5 million) owing from the financial institution. In 2008, we signed a three-year revolving operating line of credit agreement with a banking syndicate, of which one of the members is the related-party financial institution. These transactions occurred in the normal course of operations on terms consistent with those offered to arm’s length parties and are measured at the exchange amount.
There are potential conflicts of interest to which some of the directors and officers of our Company will be subject. In connection with our operations, some of the directors and officers are engaged in or associated with and will continue to be engaged in or associated with service and supply businesses whose services and products may be utilized by us from time to time. At present, these relationships are immaterial. Conflicts, if any, will be subject to the procedures and remedies as provided for under the ABCA , subject to internal review by the Audit Committee.
Cease-trade, Bankruptcy, Penalties or Sanctions
To the knowledge of our executive officers and Directors, none of our Directors is, or has been in the last ten years, a director, chief executive officer or chief financial officer of any company that: (a) was subject to an order that was issued while that person was acting in that capacity; or (b) was subject to an order that was issued after the Director ceased to be a director, chief executive officer or chief financial officers and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.
Other than as disclosed below, to the knowledge of our Executive Officers and Directors, none of our Directors is, or has been in the last ten years, a director or executive officer of any company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was
WestJet Airlines Ltd. 2009 Annual Information Form - 50 -
subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets. In addition, none of such persons has become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangements or compromises with creditors, or had a receiver manager or trustee appointed to hold his assets.
Mr. Beddoe served as a director of Darian Resources Ltd. (“Darian”), a private company, until his resignation in October 2009. Subsequent to Mr. Beddoe’s resignation, on February 12, 2010, Darian obtained an order under the Companies’ Creditors Arrangement Act (“CCAA”). The CCAA proceedings are currently pending and the outcome of the proceedings unknown at this time.
Committees of the Board
As at March 15, 2010, the Board of Directors has established four standing committees: an Audit Committee, a Compensation Committee, a Corporate Governance Committee (“CGN”), and a Safety, Health and Environment Committee (“SH&E”) established in 2010. Each committee reports to the Board with their recommendations for final approval.
COMMITTEE MEMBERS as at March 15, 2010 Audit Compensation CGN SH&E Non-Independent Beddoe (1) Durfy (2) Hougan (3) Independent Bolton Chair Brenneman Godfrey Allan Jackson Chair Barry Jackson Chair Matthews Chair Pollock Scace Notes: (1) As Chairman, Mr. Beddoe attends all committee meetings in an ex officio capacity. (2) As CEO, Mr. Durfy attends all committee meetings. Mr. Durfy will resign from the board effective April 1, 2010. (3) As the PACT representative, Mr. Hougan does not attend committee meetings.
Audit Committee Disclosure
The Audit Committee has a Charter, which addresses the purpose, composition, meeting requirements, responsibilities and duties (documents and reports review, auditors’ independence, financial reporting process, process improvement and ethical and legal compliance matters) of the committee. The Audit Committee will review the adequacy of the Charter at least every two years and propose to the Board any necessary changes from time to time. The Charter of the Audit Committee is attached to this Annual Information Form as Appendix “A.”
Composition of the Audit Committee
The members of the Audit Committee are Mr. Hugh Bolton, Mr. Allan Jackson, Mr. Wilmot Matthews, Mr. Larry Pollock and Mr. Arthur Scace. The Audit Committee met five times during 2009.
WestJet Airlines Ltd. 2009 Annual Information Form - 51 -
The members of the Audit Committee are independent (in accordance with Multilateral Instrument 52-110) and are financially literate. The Committee meets at least quarterly. The purpose of the quarterly meetings is to review and subsequently recommend, to the full Board, the Audit Committee's approval of financial statements, to discuss the analysis of financial information provided by management, to review accounting policies and estimates, and to monitor actual financial performance from planned performance.
Relevant Education and Experience
Mr. Hugh Bolton, the Chairman of the Committee, is a Chartered Accountant and Fellow of the Alberta Institute of Chartered Accountants, and the former Chairman, CEO and partner in Coopers & Lybrand Canada, Chartered Accountants. He has an undergraduate degree in economics from the University of Alberta. Mr. Bolton is currently the non-executive Chair of the Board of EPCOR Utilities Inc. and of Matrikon Inc. He is also a board member of Canadian National Railway Company, Teck Resources Limited, TD Bank Financial Group and Capital Power Corporation.
Mr. Allan Jackson is currently the President and Chief Executive Officer of Arci Ltd., a private real estate investment company, and President Mr. Jackson serves as the Chair of Canadian Western Bank, and previously served as director of Princeton Developments Ltd., a private real estate development and management company, where he served on the Audit Committee. Mr. Jackson received his Bachelor of Arts (Honours) in Business Administration from the University of Western Ontario.
Mr. Wilmot Matthews is a Chartered Accountant who was also a Vice-Chairman of Nesbitt Burns Inc. before his retirement in 1996. He has served on numerous audit committees in addition to that of our Company, including as Chairman of the audit committee of Renaissance Energy Ltd. and for numerous years as a member of the audit committee of Burns Fry Ltd. He is also a former member of the audit committee of Husky Energy Ltd.
Mr. Larry Pollock, presently the President and Chief Executive Officer of a Canadian Schedule 1 Bank, has been in the financial services industry since 1968. He has extensive experience as an analyst and commercial loan underwriter and presently serves on the audit committee of the Canadian Helicopters Income Fund. He has also served on the audit committees of Epcor Utilities Inc., and Allianz Insurance and Trafalgar Insurance of Canada, subsidiaries of Allianz of Germany.
Mr. Arthur Scace is presently the Chair of Garbell Holdings Limited. He has served as the Chair of the The Bank of Nova Scotia, and on the boards of numerous other public companies, including The Canada Life Assurance Company, Gerdau Ameristeel and various companies within The Brompton Group of Companies. He is a former partner and Chairman of McCarthy Tetrault LLP , Barristers and Solicitors in Toronto. He has B.A.s from the University of Toronto and Oxford University; an M.A. from Harvard University, an LL.B. from Osgoode Hall, and Honorary Doctorates from The Law Society of Upper Canada, York University, the University of Trinity College and the University of Toronto.
Pre-Approval of Policies and Procedures
In accordance with its Charter, the Audit Committee reviews and approves interim consolidated financial statements, approves the scope and timing of the annual audit by our independent external auditors and reviews and recommends to the Board the approval of the annual audited consolidated financial statements. The Committee also reviews and assesses with the independent external auditors the Corporation's internal financial control systems and corporate approval procedures. The Audit Committee meets at least four times each year, which meetings include discussions with the auditors in the absence of
WestJet Airlines Ltd. 2009 Annual Information Form - 52 -
management. The Audit Committee is currently composed of five independent Directors. Audit fees and fees paid to the audit firm for non-audit services are reviewed by the committee quarterly. Non-audit services to be provided to us by our auditors in excess of 25 per cent of our annual audit fee must be pre-approved by the Audit Committee.
Independent Auditor Service Fees
The Audit Committee annually reviews the appointment of our external auditors and makes recommendations to the Board regarding our auditors’ appointment and remuneration. The Audit Committee meets quarterly with the external auditors, including a private session without management present. The Committee receives reports, reviews audit findings, approves audit plans and is appraised of future reporting developments from our external auditors. KPMG LLP serves as our independent auditors. In aggregate, fees paid, and payable, to KPMG LLP for the years ended December 31, 2009 and 2008 respectively, are detailed below.
Year ended Year ended December 31, 2009 December 31, 2008 Audit fees $748,000 $ 661,000 Audit-related fees 166,251 60,008 Tax fees 45,861 72,162 All other fees - - $960,112 $ 793,170
Audit Fees
Audit fees were paid for professional services rendered in connection with the audit of our annual consolidated financial statements, review of our consolidated interim financial statements, involvement with the 2009 equity offering and various other discussions.
Audit-related Fees
Audit related fees were paid for professional services rendered in relation to passenger facility charge audits and our International Financial Reporting Standards conversion project.
Tax Fees
Tax fees were paid for general tax consultations relating to Canadian taxes and various taxes in the U.S. and international jurisdictions.
MATERIAL CONTRACTS
We did not enter into any material contracts within the most recently completed financial year, or before the most recently completed financial year which are material and are still in effect, other than those contracts entered in the ordinary course of business.
LEGAL PROCEEDINGS
We are party to legal proceedings and claims that arise during the ordinary course of business. It is the opinion of management that the ultimate outcome of these and any outstanding matters will not have a material effect upon our financial position, results of operations or cash flows.
WestJet Airlines Ltd. 2009 Annual Information Form - 53 -
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
There were no material interests, direct or indirect, of our directors and senior officers, nor of any nominees for director or any shareholder who beneficially owns more than 10 per cent of our shares, or any known associate or affiliate of such persons in any transaction since the commencement of our last completed financial year, or in any proposed transaction which has materially affected or would materially affect us or any of our subsidiaries.
INTERESTS OF EXPERTS
No person or corporation is named as having prepared or certified a statement, report or valuation described or included in a filing, or referred to in a filing, made under National Instrument 51-102 by our Company during, or relating to, our most recently completed financial year, and whose profession or business gives authority to the statement, report or valuation made by the person or corporation, other than KPMG LLP, our auditors. KPMG LLP has advised our Audit Committee that they are independent with respect to WestJet in accordance with the auditor's rules of professional conduct of the Institute of Chartered Accountants of Alberta.
RISKS AND UNCERTAINTIES
The airline industry has inherent risk associated with it to which we are subject, including, but not necessarily limited to, the risk factors listed below. Management performs a risk assessment on a continual basis to ensure that significant risks related to our airline have been reviewed and assessed.
Any major safety incident involving our aircraft or similar aircraft of other airlines could materially and adversely affect our service, reputation and profitability.
A major safety incident involving our aircraft during operations could cause substantial repair or replacement costs to the damaged aircraft, a disruption in service, significant claims relating to injured guests and others, and a negative impact on our reputation for safety, all of which may adversely affect our ability to attract and retain guests. We have an Emergency Response Plan (ERP) in the event of an incident occurring.
An air carrier’s liability is limited by applicable conventions, including the Montreal and Warsaw Conventions. Any changes to these or other conventions or treaties could increase our potential liabilities to guests.
We carry insurance with comparable coverage to other scheduled airlines operating in the North American market. While we believe our insurance is adequate, there can be no assurance that such coverage will fully protect us against all losses that we might sustain, which could have a material adverse effect on our results of operations. There is no assurance that we will be able to obtain insurance on the same terms as we have in the past.
There is a risk that the Government of Canada may not continue to provide indemnity for third party war risk coverage, which it currently provides to certain scheduled carriers, including WestJet. In the event that the Government of Canada does not continue to provide such coverage, such coverage may or may not be available to us in the commercial markets, and the costs and impact of such costs are, as yet, undetermined.
The London aviation insurance market has announced its intention to introduce a new standard war and terrorism exclusion clause to apply to aircraft hull, spares, guest and third party liability policies that will
WestJet Airlines Ltd. 2009 Annual Information Form - 54 -
exclude claims caused by the hostile use of a dirty bomb, electromagnetic pulse device or biochemical materials. Any such changes could increase our potential exposure.
We are dependent on the price and availability of jet fuel. Continued periods of high fuel costs, volatility of fuel prices and/or significant disruptions in the supply of fuel could adversely affect our results of operations.
Fuel price volatility continues to represent a significant risk, as the cost of fuel has been at historically elevated levels throughout the past few years, and is largely unpredictable. Fuel prices are impacted by a host of factors outside our control, such as significant weather events, geopolitical tensions, refinery capacity and global demand and supply. A small change in the price of fuel can significantly affect profitability. Our ability to react to fuel price volatility may be delayed and affected by factors outside our control.
Although fuel prices were lower overall during 2009 as compared to 2008, prices remained higher than long-term historical averages. Our fuel costs constitute our largest single expense category, representing approximately 28 per cent of operating costs in 2009 and approximately 36 per cent in 2008. Therefore, the price of fuel has impacted, and could continue to impact, the timing and nature of our growth initiatives.
In the event of a fuel supply shortage or significantly higher fuel prices, a curtailment of scheduled service could result. A significant increase in the price of aircraft fuel could result in a disproportionately higher increase in our average total costs in comparison to our competitors, if they are using more effective hedging programs.
Worldwide economic conditions may adversely affect our business, operating results and financial condition. A weak economy could decrease our bookings. A reduction in discretionary spending could decrease amounts our guests are willing to pay.
The airline industry is particularly sensitive to changes in economic conditions, which affect guest travel patterns and related revenues. For example, the recent unfavourable worldwide economic conditions have reduced spending for both leisure and business travel. As such, a weak economy could reduce our bookings, and a reduction in discretionary spending could also decrease amounts our guests are willing to pay. Unfavourable economic conditions can also impact the ability of airlines to raise fares to help offset increased fuel, labour and other costs. These factors could adversely affect our revenues and results of operations.
Our failure to achieve our growth strategy could have a material adverse effect on our financial condition and results of operations.
Our growth strategy involves increasing the number of markets served and increasing the frequency of flights to the markets we already serve. During the initial phases of implementing service in a new market, we are more vulnerable to the effects of fare discounting in that market by competitors already operating in that market or by new entrants. There can be no assurance that we will be able to identify and successfully establish new markets.
The airline industry is intensely competitive. Reduced market growth rates can create heightened competitive pressures, impacting the ability to increase fares and increasing competition for market share.
WestJet Airlines Ltd. 2009 Annual Information Form - 55 -
The airline industry is highly competitive and particularly susceptible to price discounting, because airlines incur only nominal costs to provide services to guests occupying otherwise unsold seats. We primarily compete with a small number of Canadian airlines in our domestic market, and one Canadian airline plus numerous U.S. carriers in the transborder and international markets. We face significant competition from other airlines that are serving most of our existing and potential markets. Other airlines regularly meet or price their fares below our fares, potentially preventing us from attaining a share of the guest traffic necessary to maintain profitable operations. Our ability to meet price competition depends on our ability to operate at costs lower than that of our competitors or potential competitors over the medium to long term.
In addition, consumers are able to more effectively shop for travel services through Internet websites and, particularly, wholesale travel sellers to more effectively compare pricing information. The growth and competitiveness of Internet distribution channels have pushed air carriers to more aggressively price their products. This, in turn, reduces yield and may have an impact on our revenue and profitability, as more and more consumers utilize this distribution network.
With the aggressive and competitive nature of our industry, we turn inwards to realize cost efficiencies and competitive advantages. Conventional airline profits are sensitive to the general level of economic activity, taxes, interest rates, demographic changes, price levels, special circumstances or events occurring in the locations served, and to external factors such as foreign exchange rates and international political events. Notwithstanding our variable profit share plan, a portion of an airline's costs, such as labour, aircraft ownership and facilities charges, cannot be easily adjusted in the short term to respond to market changes.
The failure of critical systems on which we rely could harm our business.
We depend on automated systems to operate our business and support our initiatives, including our computerized airline reservation systems, telecommunication systems, aircraft maintenance system and website. Our website and reservation systems must be able to accommodate a high volume of traffic and deliver important and accurate flight information. Any disruption in these systems could result in the loss of important data, reallocation of personnel, failure to meet critical deadlines and increased expenses, and could generally harm our business.
During 2009, we replaced or enhanced several key technology systems. On October 17, 2009, we implemented a new reservation system that is hosted by Sabre. Because Sabre hosts the reservation system on our behalf, we will be dependent on Sabre for processing information critical to our business. In conjunction with the migration to our new system, a new revenue accounting system was also implemented during 2009. Additionally, we implemented a new reservation system on September 13, 2009, Softvoyage, for our WestJet Vacations business. The revenue accounting and Softvoyage systems are also hosted solutions. As such, we are reliant on third party performance for timely and effective completion of many of our technology initiatives.
Integration of complex systems and technology presents significant challenges in terms of costs, human resources and development of effective internal controls. In the ordinary course of business, our systems will require modifications and refinements to address our growth and business requirements. We could be adversely affected if we are unable to modify our systems as necessary.
As a company that processes, transmits and stores credit card data, we are subject to compliance with certain requirements established by credit card companies. Non-compliance with these requirements, whether through system breaches or limitations, may result in substantial fines and/or temporary or
WestJet Airlines Ltd. 2009 Annual Information Form - 56 -
permanent exclusion from one or more credit card acceptance programs. The inability to process one or more credit card brands could have a material impact on our guest bookings, revenue and profitability.
Government intervention, regulations, rulings or decisions rendered that impose additional requirements and restrictions on operations could increase operating costs or disrupt our operations.
The airline industry is subject to extensive laws relating to, among other things, airline safety and security, provision of services, competition, environment and labour concerns. Government entities such as Transport Canada, the Competition Bureau, the Canadian Transportation Agency, and other domestic or foreign government entities may implement new laws or regulatory schemes, or render decisions, rulings or changes in policy that could have a material adverse effect on the airline industry in general by significantly increasing the cost of airline operations, imposing additional requirements on operations, or reducing the demand for air travel.
Laws relating to data collection on guests and employees for security purposes and counterbalancing privacy legislation have increased costs of operations. Any material changes that add additional requirements to collecting, processing and filing data with, or otherwise reporting data to, government agencies may materially impact our business as to time and costs and, therefore, our operating results.
The increase in security measures and clearance times required for guest travel, as we experienced in 2009, could have a material adverse effect on guest demand and the number of guests we carry. A reduction in guest numbers could have a negative impact on our revenues and results of operations.
We are dependent on single aircraft and engine suppliers. Any interruption in the provision of goods and services from these suppliers, or other significant third party suppliers, as well as mechanical or regulatory issues associated with their equipment could have a material adverse effect on our business, operating results and financial condition.
We secure goods and services from a number of third party suppliers. Any significant interruption in the provision of goods and services from such suppliers, some of which would be beyond our control, could have a material adverse effect on our business, operating results and financial condition.
We are dependent on Boeing as our sole supplier for aircraft and many of our aircraft parts. If we were unable to acquire additional aircraft from Boeing, or Boeing were unable or unwilling to provide adequate support for its products, our operations would be materially adversely affected. If Boeing was unable to adhere to its contractual obligations in meeting scheduled delivery dates for our owned and leased aircraft, we would be required to find another supplier for aircraft to fulfill our growth plans. Acquiring aircraft from another supplier would require significant transition costs, and, additionally, aircraft may not be available at similar prices or received during the same scheduled delivery dates, which could adversely affect our business, operating results and financial condition. In addition, we would be materially adversely affected in the event of a mechanical or regulatory issue associated with the Boeing Next- Generation 737 aircraft type, including negative perceptions from the travelling community.
We are also dependent on General Electric as a sole supplier for aircraft engines and would, therefore, be materially adversely affected in the event of a mechanical or regulatory issue associated with our engines.
Inability to retain key personnel could harm our business.
WestJet Airlines Ltd. 2009 Annual Information Form - 57 -
Our success will depend, in part, on the retention of members of our management and key personnel. If any of these individuals become unable to continue in their present role, we may have difficulty replacing these individuals, which could adversely affect us.
Our business is labour-intensive and requires large numbers of pilots, flight attendants, mechanics and other personnel. Our growth and general turnover requires us to locate, hire, train and retain a significant number of new employees each year. There can be no assurance that we will be able to locate, hire, train and retain the qualified employees that we need to meet our growth plans or replace departing employees. If we are unable to hire and retain qualified employees at a reasonable cost, our business, operating results and financial condition could be adversely affected.
Our financial results are affected by foreign exchange and interest rate fluctuations.
We are exposed to foreign exchange risks arising from fluctuations in exchange rates on our US-dollar- denominated net monetary assets and our operating expenditures, mainly aircraft fuel, aircraft leasing expense, certain maintenance costs and a portion of airport operations costs. Since our revenues are received primarily in Canadian dollars, we are exposed to fluctuations in the US-dollar exchange rate with respect to these payment obligations.
We are exposed to fluctuations in the US-dollar exchange rate relating to the purchases of the remaining 38 737 aircraft. Historically the purchase of our aircraft is financed by funds drawn in Canadian dollars; however, the aircraft are paid for in US funds at the date of each aircraft delivery. As a result, we are exposed to foreign currency fluctuations prior to each delivery date. In July 2008, we took delivery of the final aircraft under our previous facility with Ex-Im Bank, which was subsequently closed. We have yet to pursue financing agreements for our remaining 38 aircraft, as our next purchased aircraft delivery is not expected until January 2011. There is no guarantee we will be able to secure similar financing arrangements for the remaining 38 purchased aircraft to be delivered in 2011 to 2016.
We are also exposed to general market fluctuations of interest rates, as we have future aircraft purchase commitments that will be financed at prevailing market rates.
Terrorist attacks or military involvement in unstable regions may harm the airline industry.
After the terrorist attacks of September 11, 2001, the airline industry experienced a substantial decline in guest traffic and revenue, and increased security and insurance costs. In late 2009, certain incidents again heightened the concern regarding terrorist attacks. The heightened concern over potential terrorist attacks could cause a further decrease in guest traffic and yields, and increase security measures and related costs for the airline industry generally. Additional terrorist attacks would likely have a further significant negative impact on our business and the airline industry. Should such an attack occur in Canada, the adverse impact could be very significant.
Our operations are affected by a number of external factors that are beyond our control such as weather conditions, and special circumstances or events occurring in the locations we serve.
Delays or cancellations caused by weather conditions and work stoppages or strikes by airport workers, baggage handlers, air traffic controllers and other workers not employed by us could have a material adverse impact on our financial condition and operating results. Delays contribute to increased costs and decreased aircraft utilization, which negatively affect profitability.
WestJet Airlines Ltd. 2009 Annual Information Form - 58 -
Our business is dependent on its ability to operate without interruption at a number of key airports, including Toronto Pearson International Airport and Calgary International Airport. An interruption or stoppage in service at a key airport could have a material adverse impact on our business, results from operations and financial condition.
A localized epidemic or a global pandemic may adversely affect our business.
A widespread outbreak of H1N1, or other widespread illness, could affect our ability to continue full operations and could materially adversely affect demand for air travel. We cannot predict the likelihood of such a public health emergency or the effect that it may have on our business or the market price of our securities. However, any significant reduction in guest traffic on our network could have a material adverse effect on our business, results from operations and financial condition.
Governmental fee increases discourage air travel.
Increases in air navigation fees in Canada could have a negative impact on our business and our financial results.
All commercial service airports in Canada are regulated by the federal government. Airport authorities continue to implement or increase various user fees that impact travel costs for guests, including landing fees for airlines and airport improvement fees. Airport authorities generally have the unilateral discretion to implement and adjust such fees. The combined increased fees, and increases in rents under various lease agreements between airport authorities and the Government of Canada, which in many instances are passed on to air carriers and air travellers, may negatively impact travel, in particular, discretionary travel.
Our maintenance costs will increase as our fleet ages.
The average age of our fleet as at December 31, 2009, was 4.4 years. These aircraft require less maintenance now than they will in the future. We have incurred lower maintenance expenses on these aircraft because most of the parts on these aircraft are under multi-year warranties. Our maintenance costs will increase as our fleet ages and warranties expire. At December 31, 2009, 51 owned aircraft have come off warranty, with an additional 12 coming off warranty in 2010.
A significant change in our unique corporate culture or guest experience could have adverse operational and financial consequences.
Our strong corporate culture is one of our fundamental competitive advantages. We strive to maintain an innovative culture where all employees are committed to, and passionately pursue, our values, mission and vision. We also foster a unique culture of caring and compassion for our guests and fellow employees that sets us apart from our competitors. The failure to maintain our unique corporate culture or guest experience could adversely affect our business and financial results.
We have significant financial obligations and will incur significantly more fixed obligations, which could harm our ability to meet our growth strategy.
Our debt and other fixed obligations could impact our ability to obtain additional financing to support capital expansion plans and working capital on suitable terms. Our ability to make scheduled payments on our debt and other fixed obligations will depend on our future operating performance and cash flow. The failure to generate sufficient operating cash flow to meet our fixed obligations could harm our business.
WestJet Airlines Ltd. 2009 Annual Information Form - 59 -
A limited number of our current financing agreements require us to comply with specific financial covenants. There is no assurance that we can comply with these covenants in the future. These covenants may limit our ability to finance future operations or capital needs. If we were to default on these covenants and were unsuccessful in obtaining a waiver of the default, a portion of amounts owing under the defaulted agreement may require reclassification on our balance sheet. In this event, we would require sufficient cash to meet the repayment obligation per the agreement or require additional debt or equity financing, which may not be available. If unable to repay the debt, we would be required to liquidate certain assets in order to obtain the necessary funds or be subject to the risk of having our aircraft repossessed, which could adversely impact our business.
PRIVACY
We are subject to privacy laws regarding the collection, use, disclosure and protection of personal information, including passenger and employee personal information, including Canada's federal private sector privacy legislation, the Personal Information Protection and Electronic Documents Act (“PIPEDA”), which governs the collection, use and disclosure of personal information in the course of commercial activities by a federally regulated business. We have taken steps to develop and maintain a privacy policy and related practices which are designed to meet or exceed the requirements of applicable privacy legislation, primarily focused on PIPEDA, but considering other laws as well. We believe that our privacy policy and practices comply with applicable laws.
TRANSFER AGENT AND REGISTRAR
CIBC Mellon Trust Company, at its principal offices in Calgary, Alberta and Toronto, Ontario, is transfer agent and registrar for our Common Voting Shares and Variable Voting Shares.
ADDITIONAL INFORMATION
Additional information relating to us may be found on SEDAR at www.sedar.com. As well, additional information including restrictions on voting securities, executive remuneration and indebtedness, principal holders of securities of WestJet, securities authorized for issuance under equity compensation plans and interests of insiders in material transactions, as applicable, is contained in our information circular with respect to the annual meeting of shareholders to be held on May 4, 2010. Additional financial information and discussion of the affairs of WestJet is provided in the financial statements and management's discussion and analysis for the fiscal period ended December 31, 2009, being the most recently completed annual fiscal period of WestJet, which are included in our annual report for the period ended December 31, 2009, which information is incorporated herein by reference. A copy of such documents may be obtained upon request from the Secretary of WestJet.
We will also provide to any person upon request to the Secretary of WestJet, 22 Aerial Place N.E., Calgary, AB T2E 3J1 one copy of:
(I) Our Annual Information Form, together with one copy of any document, or the pertinent pages of any document, incorporated by reference in the Annual Information Form;
(II) Our comparative financial statements for our most recently completed financial year together with the accompanying report of the auditors and one copy of any of our interim financial statements subsequent to the financial statements for our most recently completed financial year;
(III) Our information circular in respect to our most recent annual meeting;
WestJet Airlines Ltd. 2009 Annual Information Form - 60 -
®Registered trademarks of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of Canada. ±MasterCard and World MasterCard are registered trademarks and PayPass and Tap & Go are trademarks of MasterCard International Incorporated. TM WestJet Frequent Guest Program, WestJet Credit Card Program and WestJet dollars are trademarks for WestJet Airlines Ltd.
WestJet Airlines Ltd. 2009 Annual Information Form - 61 -
Appendix ‘A’
WESTJET AIRLINES LTD,
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER
I. PURPOSE
The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing: the financial reports and other financial information provided by the Corporation to any governmental body or the public; the Corporation’s systems of internal controls regarding finance, accounting, legal compliance that management and the Board have established; and the Corporation’s auditing, accounting and financial reporting processes. Consistent with this function, the Audit Committee should encourage continuous improvement of, and should foster adherence to, the Corporation’s policies, procedures and practices at all levels. The Audit Committee’s primary duties and responsibilities are to:
(a) Serve as an independent and objective party to monitor the Corporation’s financial reporting process and internal controls over financial reporting.
(b) Review and appraise the audit efforts of the Corporation’s independent auditors and internal auditing department.
(c) Provide an open avenue of communication among the independent auditors, financial and senior management, the internal auditing department, and the Board of Directors.
(d) Report regularly to the Board of Directors on significant results of the foregoing activities.
The Audit Committee will primarily fulfill these responsibilities by carrying out the activities enumerated in Section IV of this Charter.
II. COMPOSITION
The Audit Committee shall be comprised of three or more Directors as determined by the Board, each of whom shall be independent Directors, and free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent and objective judgment as a member of the Committee. All members of the Committee shall have a working familiarity with basic finance and accounting practices, and at least one member of the Committee shall have accounting or related financial management expertise. Committee members may enhance their familiarity with finance and accounting by participating in educational programs conducted by the Corporation or an outside consultant. The members of the Committee shall be elected by the Board at the annual organizational meeting of the Board or until their successors shall be duly elected and qualified. Unless a Chair is elected by the full Board, the members of the Committee may designate a Chair by majority vote of the full Committee membership.
WestJet Airlines Ltd. 2009 Annual Information Form - i -
Appendix ‘A’
WESTJET AIRLINES LTD,
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER
III. MEETINGS
The Committee shall meet at least four times annually, or more frequently as circumstances dictate. In addition, the Committee should meet with the independent auditors and management quarterly to review the Corporation’s financials consistent with IV. 2 below.
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
Documents/ Reports Review
1. Review this Charter at least once every two (2) years and present for approval any changes to the Board.
2. Review with management and the independent auditors the Annual and Quarterly Financial Statements and notes thereto and present to the Board for approval and public release.
3. Review with management the Annual and Quarterly Management's Discussion and Analysis of financial results and operations and present to the Board for approval and public release.
4. Review with management the quarterly financial results press release and present to the Board for approval and public release.
5. Review with management the quarterly and annual President’s Message and present to the Board for approval and public release.
6. Review regular internal reports to management prepared by the internal auditing department and management’s response. Ensure executive summary of internal audit reports are provided to Board.
7. Review significant audit findings during the year, including the status of previous audit recommendations for both internal and external audits.
8. Review regular summary reports of directors and officers expense account claims at least annually. Establish and review approval policies for expense reports and as required request audits of expense claims and policies for expense approval and reimbursements. The Chairman of the Audit Committee or of the Compensation Committee to approve expense reports of the CEO; and the CEO to approve those of the directors and officers.
WestJet Airlines Ltd. 2009 Annual Information Form - ii -
Appendix ‘A’
WESTJET AIRLINES LTD,
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER
Independent Auditors
9. Recommend to the Board of Directors the selection of the independent auditors, considering independence and effectiveness and approve the fees and other compensation including fees for non-audit services to be paid to the independent auditors.
10. The Audit Committee will formally pre-approve any fees for non-audit services which are cumulatively and annually in excess of 25 per cent of the audit fee.
11. On at least an annual basis, the Committee should review and discuss with the auditors all significant relationships the auditors have with the Corporation to determine the auditors’ independence and the objectivity.
12. Annually review the performance of the independent auditors and approve any proposed discharge of the independent auditors when circumstances warrant.
13. Regularly consult with the independent auditors without the presence of management, about internal controls and the fullness, accuracy and quality of the organization’s financial statements and the appropriateness of the accounting principles used. Consider the ability and strength of accounting and internal control systems, the effectiveness of the audit and the competence of finance personnel.
14. Review and approve, in consultation with the finance management and the Director, Audit and Advisory Services, the audit scope and plan of the internal audit department.
15. Review and approve, in consultation with finance management and the independent auditors, the audit scope and plan of the independent auditors.
16. Review and approve the Corporation’s hiring policies regarding employees and former employees of the present and former external auditors of the Corporation.
Management’s Use of Accounting Firms other than the Independent Auditors
17. Management will inform the Chairman of the Audit Committee of non-audit services greater than $100,000 performed by any Accounting Firm other than the Independent Auditors.
Financial Reporting Processes
18. In consultation with the independent auditors and the internal auditors, review the integrity of the organization’s financial reporting processes, both internal and external.
19. Consider the independent auditors' judgments about the quality, consistency and appropriateness of the Corporation’s accounting principles as applied in its financial reporting and the company's financial reporting and accounting estimates.
WestJet Airlines Ltd. 2009 Annual Information Form - iii -
Appendix ‘A’
WESTJET AIRLINES LTD,
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER
20. Consider and recommend to the Board, if appropriate, major changes to the Corporation’s auditing and accounting principles, policies and practices as recommended by the independent auditors, management, or the internal auditing department. In particular, the Audit Committee will consider and recommend to the Board, management’s significant accounting policy choice recommendations with respect to the conversion from Canadian GAAP to IFRS.
Process Improvement
21. Following completion of the annual audit, review separately with, the independent auditors and internal auditors any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information.
22. Review any significant disagreements among management and the independent auditors in connection with the preparation of the financial statements and report to the Board of Directors any significant unresolved disagreements.
23. Review with the independent auditors, the internal auditors and management the extent to which changes to or improvements in accounting principles and practices, previously approved by the Audit Committee have been implemented.
24. Conduct and authorize investigations into any matters within the Committee’s scope of responsibilities.
25. Ensure that adequate policies and procedures are in place to identify, mitigate, monitor and report all significant business risks on an ongoing, proactive basis.
26. Review the appointment, performance, and replacement of the Director, Audit and Advisory Services
27. On at least an annual basis, review with the Company’s counsel, any legal matters that could have a significant impact on the organization’s financial statements, the company’s compliance with applicable laws and regulations, and inquiries received from regulators or government agencies.
28. Perform any other activities consistent with this Charter, the Corporation’s by-laws and governing law, as the Committee or the Board deems necessary or appropriate.
27. Set, approve and review at least every two years, the internal audit department’s charter.
WestJet Airlines Ltd. 2009 Annual Information Form - iv -
Appendix ‘A’
WESTJET AIRLINES LTD,
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER
V. AUTHORITY
The audit committee will have the authority to:
(a) Engage independent counsel and other advisors as necessary
(b) Set and pay the compensation for any advisors employed
(c) Communicate directly with the internal and external auditors
WestJet Airlines Ltd. 2009 Annual Information Form - v -