Consolidated Financial Statements of - WestJetbit.ly/2ankQ8G

2016 Second Quarter Report

Management’s Discussion and Analysis

Management’s Discussion and Analysis of Financial Condition and Operating Results For the three and six months ended June 30, 2016 and 2015

WestJet Airlines Ltd. Second Quarter 2016 MD&A July 25, 2016

Contents About WestJet ............................................................. 2

Fleet ......................................................................... 24

Financial and operational highlights ............................... 3

Off-balance sheet arrangements and related party transactions ............................................................... 25

Overview ..................................................................... 4 Outlook ....................................................................... 7 Discussion of operations ............................................... 8 Summary of quarterly results ...................................... 17 Guest experience ....................................................... 18 Liquidity and capital resources .................................... 18

Share capital.............................................................. 26 Accounting ................................................................ 27 Controls and procedures ............................................. 28 Forward-looking information ....................................... 29 Definition of key operating indicators ........................... 30 Non-GAAP and additional GAAP measures .................... 31

Advisories The following Management’s Discussion and Analysis of Financial Condition and Operating Results (MD&A), dated July 25, 2016, should be read in conjunction with the cautionary statement regarding forward-looking information below, as well as WestJet’s unaudited condensed consolidated interim financial statements and notes thereto for the three and six months ended June 30, 2016 and 2015, and audited consolidated financial statements and notes thereto, for the years ended December 31, 2015 and 2014. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). All amounts in the following MD&A are in Canadian dollars unless otherwise stated. References to “WestJet,” “the Corporation,” “the Company”, “we,” “us” or “our” mean WestJet Airlines Ltd. and its consolidated subsidiaries and structured entities, unless the context otherwise requires. Additional information relating to WestJet, including periodic quarterly and annual reports and Annual Information Forms (AIF), filed with Canadian securities regulatory authorities, is available on SEDAR at sedar.com and our website at westjet.com. Cautionary statement regarding forward-looking information This MD&A contains “forward-looking information” as defined under applicable Canadian securities legislation. This forward-looking information typically contains the words “anticipate,” “believe,” “estimate,” “intend,” “expect,” “may,” “will,” “should,” “potential,” “plan,” “project” or other similar terms. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information. 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 its nature, forward-looking information is subject to numerous risks and uncertainties including, but not limited to, the impact of general economic conditions, changing domestic and international airline industry conditions, volatility of fuel prices, terrorism, pandemics, currency fluctuations, interest rates, competition from other airline industry participants (including new entrants, capacity fluctuations and changes to the pricing environment), labour matters, government regulations, stock market volatility, the ability to access sufficient capital from internal and external sources, and additional risk factors discussed in other documents we file from time to time with securities regulatory authorities, which are available on SEDAR at sedar.com or, upon request, without charge from us. The disclosure found under the heading “Outlook” in this MD&A, including the guidance summary for the three months ended September 30, 2016 and the year ended December 31, 2016 may contain forward-looking information that constitutes a financial outlook. The forwardlooking information, including any financial outlook, contained in this MD&A, is provided to assist investors in understanding our assessment of WestJet’s future plans, operations and expected results. The forward-looking information, including without limitation, the disclosure found under the heading “Outlook”, contained in this MD&A may not be appropriate for other purposes and is expressly qualified by this cautionary statement. Please refer to page 29 of this MD&A for further information on our forward-looking information including assumptions and estimates used in its development. Our assumptions and estimates relating to the forward-looking information referred to above are updated in conjunction with filing our quarterly and annual MD&A and, except as required by law, we do not undertake to update any other forwardlooking information. Non-GAAP and additional GAAP measures Certain measures in this MD&A do not have any standardized meaning as prescribed by Generally Accepted Accounting Principles (GAAP) and, therefore, are considered non-GAAP measures. These measures are provided to enhance the reader’s overall understanding of our financial performance or current financial condition. These measures also provide investors and management with an alternative method for assessing our operating results in a manner that is focused on the performance of our ongoing operations and provide a more consistent basis for comparison between periods. These measures are not in accordance with, or an alternative to, GAAP and do not have standardized meanings. Therefore, they may not be comparable to similar measures presented by other entities. Please refer to page 32 of this MD&A for a reconciliation of non-GAAP measures, including cost per available seat mile (CASM), excluding fuel and employee profit share; return on invested capital (ROIC); free cash flow; diluted free cash flow per share; diluted operating cash flow per share; and earnings before income tax (EBT) margin, and for a reconciliation of additional GAAP measures, including adjusted debt-to-equity; adjusted net debt to earnings before interest, taxes, depreciation and aircraft rent (EBITDAR); and the cash to trailing twelve months revenue ratio. Definitions Various terms used throughout this MD&A are defined at page 30 under the title Definition of key operating indicators.

WestJet Second Quarter 2016 │ 1

About WestJet WestJet is a Canadian airline based in Calgary, Alberta. Through scheduled flights across a growing network, WestJet also operates WestJet Vacations, which provides air, hotel, car and excursion packages, and WestJet Encore, a regional airline which operates a fleet of turboprop aircraft in a network of destinations in Canada and the United States. As of June 30, 2016, our airline offered scheduled service to 101 destinations in North America, Central America, the Caribbean and Europe with a fleet of 114 Boeing 737 Next Generation (Boeing 737 NG) aircraft, 30 Bombardier Q400 (Q400) aircraft and four Boeing 767 300ERW (Boeing 767) aircraft. When including our airline partners, we serve over 160 destinations. We plan to continue adding new destinations and additional frequencies to our existing markets through the growth of our regional Bombardier Q400 fleet, our narrow-body Boeing 737 NG fleet and our wide-body Boeing 767 aircraft. WestJet’s mission is to enrich the lives of everyone in WestJet’s world by providing safe, friendly and affordable air travel. We strive to be one of the top five airlines in the world. We believe that focusing on metrics such as on-time performance, safety, profitability, guest satisfaction and employee engagement will lead us toward this goal. Guiding us every day towards accomplishing our mission and vision are our core values: •

commitment to safety;

•

positive and passionate in everything we do;

•

appreciative of our people and guests;

•

fun, friendly and caring;

•

aligning the interests of WestJetters with the interests of the Company; and

•

honest, open and keeping our commitments.

WestJet’s focus on our people has always been fundamental to the success of our airline. In an industry that has become largely commoditized, we recognize that WestJetters are an essential part of our business and that their commitment to caring for our guests supports our profitable results. Our goal remains to attract, train, motivate, develop and retain the right people. Our commitment to our people allows us to take care of WestJetters, who in turn take care of our guests. When this occurs, we will build on our success and take care of our business which in turn allows us to take care of our people, and so on, as depicted in the graphic below. Our caring culture is essential to our continuous growth and is one of the key elements that provide us with the capability to execute on our strategies.


Financial and operational highlights The financial and operational highlights for WestJet for the second quarter and first six months of 2016 are as follows: Three months ended June 30 ($ in thousands, unless otherwise noted)

2015

Change

2015

Change

949,313

941,998

0.8%

1,980,758

2,025,495

(2.2%)

Operating expenses

887,887

841,610

5.5%

1,796,060

1,727,947

3.9%

61,426

100,388

(38.8%)

184,698

297,548

(37.9%)

6.5%

10.7%

(4.2 pts.)

9.3%

14.7%

(5.4 pts.)

51,723

88,886

(41.8%)

175,909

281,335

(37.5%)

Operating margin (per cent)

Earnings before income taxes (EBT) EBT margin (per cent)(i) Net earnings

5.4%

9.4%

(4.0 pts.)

8.9%

13.9%

(5.0 pts.)

36,654

61,554

(40.5%)

124,299

202,291

(38.6%)

0.30

0.49

(38.8%)

1.02

1.60

(36.3%)

Earnings per share: Basic Diluted ROIC (per cent)(i)

0.30

0.49

(38.8%)

1.02

1.58

(35.4%)

11.4%

15.3%(ii)

(3.9 pts.)

11.4%

15.3%(ii)

(3.9 pts.)

Three months ended June 30

Operational highlights

2016

Revenue Earnings from operations

Financial highlights

2016

Six months ended June 30

2016

2015

ASMs

7,115,577,504

6,654,631,242

RPMs

5,748,772,711

5,199,326,504

Load factor

80.8%

78.1%

Yield (cents)

16.51

RASM (cents) CASM (cents) CASM, excluding fuel and employee profit share (cents)(i) Fuel consumption (litres) Fuel costs per litre (cents) Segment guests Average stage length (miles) Departures Utilization (hours) Full-time equivalent employees at period end Fleet size at period end (i) (ii)


Change

2016

2015

Change

6.9%

14,409,981,621

13,473,244,403

7.0%

10.6%

11,737,161,091

10,765,276,153

9.0%

2.7 pts.

81.5%

79.9%

1.6 pts.

18.12

(8.9%)

16.88

18.82

(10.3%)

13.34

14.16

(5.8%)

13.75

15.03

(8.5%)

12.48

12.65

(1.3%)

12.46

12.83

(2.9%)

9.93

9.28

7.0%

9.89

9.23

7.2%

342,458,639

310,947,207

10.1%

694,852,212

634,070,433

9.6%

53

69

(23.2%)

50

67

(25.4%)

5,301,338

4,956,488

7.0%

10,626,444

9,871,067

7.7%

906

908

(0.2%)

922

939

(1.8%)

55,666

51,702

7.7%

111,109

100,771

10.3%

10.9

11.5

(5.2%)

11.2

11.8

(5.1%)

9,556

8,967

6.6%

9,556

8,967

6.6%

148

129

14.7%

148

129

14.7%

Please refer to page 32 of this MD&A for a reconciliation of non-GAAP measures and additional GAAP measures. These amounts represent ROIC as at December 31, 2015, based on our trailing twelve months’ earnings before tax, excluding special items, finance costs and implied interest on our off-balance-sheet aircraft leases. Please refer to page 32 of this MD&A for a reconciliation of non-GAAP measures and additional GAAP measures.


Overview Our 2016 second quarter financial results represent our 45th consecutive quarter of reported profitability with net earnings of $36.7 million and diluted earnings per share of $0.30. Total revenue increased by 0.8 per cent year over year, driven primarily by the increase in ancillary revenue. We also saw an improved load factor in the current quarter, driven by traffic growth, however, our overall guest revenue decreased as a result of continued downward pressure on our fares as a result of the severe economic downturn in the energy sector. During the quarter, our operating margin was 6.5 per cent. We returned approximately $69.8 million to our shareholders through our dividend and normal course issuer bid in the second quarter of 2016. Since these programs began in 2010, we have returned over eight hundred million dollars to our shareholders. Our 12-month ROIC of 11.4 per cent at June 30, 2016 represents a decrease of 3.9 percentage points compared to our 2015 full-year ROIC of 15.3 per cent but aligns with our expectations in achieving a long term ROIC within the targeted range of 13.0 and 16.0 per cent. Second quarter overview •

Earned total revenue of $949.3 million, an increase of 0.8 per cent from $942.0 million in the second quarter of 2015.

•

Increased capacity, measured in available seat miles (ASMs), by 6.9 per cent over the second quarter of 2015.

•

Increased traffic, measured in revenue passenger miles (RPMs), by 10.6 per cent over the second quarter of 2015.

•

Realized yield of 16.51 cents, down 8.9 per cent over the second quarter of 2015.

•

Realized RASM of 13.34 cents, down 5.8 per cent from 14.16 cents in the second quarter of 2015.

•

Realized CASM of 12.48 cents, down 1.3 per cent from 12.65 cents in the second quarter of 2015.

•

Realized CASM, excluding fuel and employee profit share, of 9.93 cents, up 7.0 per cent from 9.28 cents in the second quarter of 2015.

•

Recorded an operating margin of 6.5 per cent, down 4.2 percentage points from 10.7 per cent in the second quarter of 2015.

•

Recorded an earnings before tax (EBT) margin of 5.4 per cent, down 4.0 percentage points from 9.4 per cent in the second quarter of 2015.

•

Reported net earnings of $36.7 million, a decrease of 40.5 per cent from $61.6 million in the second quarter of 2015.

•

Reported diluted earnings per share of $0.30, a decrease of 38.8 per cent from $0.49 per share in the second quarter of 2015.

Please refer to page 32 of this MD&A for a reconciliation of non-GAAP measures and additional GAAP measures.


WestJetters WestJetters are an essential part of our business. Their commitment to creating a positive, safe and caring experience for our guests supports our profitable results. During the second quarter of 2016, WestJet flew 5.3 million guests, a second quarter record, an increase of 7.0 per cent over the comparable period of the prior year. In May 2016, WestJetters came together to support the residents of Fort McMurray, Alberta during the wildfire evacuations. WestJet’s ability to help evacuate the people of Fort McMurray was a direct result of WestJetters being available to assist at a moment’s notice. These actions are a testament of the care and commitment delivered each and every day by nearly 12,000 WestJetters. During the second quarter of 2016, we also celebrated two operational milestones: WestJet Encore celebrated three years of successful operations and WestJet Vacations celebrated its 10th year. Since its launch in 2013, WestJet Encore has been embraced by more than 30 Canadian communities seeking improved connectivity, lower fares and competitive air service and it remains committed to evolving its network offering and guest experience. In addition, WestJet Vacations has provided guests with affordable, reliable and flexible vacation packages and as a result has experienced unprecedented growth over the last 10 years. We look forward to the continued success of both WestJet Encore and WestJet Vacations for many years to come and we recognize that our WestJetters have been and will continue to be a key part of that success. Subsequent to quarter end, on July 4, 2016, Alberta Venture magazine named our President and Chief Executive Officer, Gregg Saretsky, one of Alberta’s 50 Most Influential People for 2016. This is a well-deserved recognition for Gregg, one that reflects the many contributions he has made to both the success of Alberta and WestJet. Guest experience and service enhancements We are committed to exploring and implementing initiatives that will improve both our onboard guest experience and the ease with which our guests do business with us. In 2015, we began installing and activating WestJet Connect, our new inflight entertainment system, on a number of our Boeing 737 and 767 aircraft. As of the date of this MD&A, we have installed and activated WestJet Connect systems on 61 of our Boeing 737s and all of our Boeing 767s. We expect installations to be completed on the majority of our Boeing 737 fleet by the end of 2016. On May 24, 2016, we announced a reciprocal frequent flyer agreement with Qantas Airways. This agreement allows members of both airlines’ respective frequent flyer programs to earn their choice of either WestJet dollars or Qantas Points when travelling on flights of either airline. This expands on the existing code-share relationship between Qantas and WestJet announced in 2014. We believe this is a significant improvement to our rewards program as it expands our program to global travel which will bring opportunities and benefits to our WestJet Rewards members. On May 26, 2016 we announced that eligible guests departing from U.S. airports will now be able to receive the TSA PreCheck designation using web, mobile and kiosk check-in. Prior to this, only eligible guests who received their boarding passes at WestJet counters could take advantage of the program, which offers a less-intrusive search when departing from U.S. airports. We anticipate that this service enhancement will make the security experience much more efficient, especially for those guests travelling for business and our WestJet Rewards members. This development is part of our overall strategy to make it easy for our guests to do business with us and add value to our guests’ experience with WestJet. Network expansion and fleet During the quarter, we continued to execute on our strategy to grow our airline through new and increased service across our scheduled network. In June 2016, we announced direct, non-stop flights on our existing routes between Edmonton, Alberta and Hamilton, Ontario and between Winnipeg, Manitoba and Kelowna, British Columbia, to coincide with the busy summer flying season. We also became the only Canadian airline to serve Halifax, Nova Scotia non-stop from Vancouver, British Columbia and Winnipeg, Manitoba. These additional routes shift capacity from Alberta, which continues to experience economic weakness, to Eastern Canada. Both of these seasonal, direct flights have been timed to connect conveniently with WestJet’s extensive domestic network. The flexibility in our fleet plan allows us to assess our scheduled network to look for extra flying opportunities to continually meet the needs of both our business and leisure guests by providing them with convenience and connectivity options. We remain focused on developing our relationships with our airline partners, as establishing strong airline partnerships continues to be a key strategy of ours. As discussed above under the heading Guest experience and service enhancements, in the second quarter of 2016, we expanded our existing code-share relationship with Qantas Airways to include a new reciprocal WestJet Second Quarter 2016 │ 5

frequent flyer agreement. As of the date of this MD&A, we have a total of 46 airline partnership agreements that enable our guests to access over 160 destinations through WestJet. In the second quarter of 2016 we added three new Q400 aircraft and a fourth Boeing 767 series aircraft to our fleet; in addition we returned one leased Boeing 737-700 NG series aircraft. Our fleet is comprised of 30 Q400 aircraft, 114 Boeing 737 NG aircraft and four Boeing 767 aircraft at June 30, 2016. Subsequent to quarter end, on July 15, 2016, we returned our second leased Boeing 737-700 NG series aircraft. As our fleet, including our future deliveries of Boeing 737 MAX aircraft, continues to expand, we expect to establish additional profitable routes in Canada, the U.S. and internationally. Our evolving aircraft mix allows us to provide increased route frequency, increased non-stop routes and improved scheduling times and connectivity to our guests. Corporate commitment In the second quarter of 2016 we continued to be proactive in our approach to managing our business to ensure our continued profitability and we continued to focus on two broad strategies that include seeking out opportunities to increase revenue and emphasizing our focus on cost reduction. As previously disclosed, our revenue opportunities include being flexible with our fleet and network scheduling to match market demand, continuing to build our relationships with our airline partners and a greatly expanded charter program which we expect to commence in the fourth quarter of 2016. We are also undertaking a number of cost reduction initiatives including optimizing our fleet maintenance plan based on global fleet best practices, reviewing fleet densification opportunities, renegotiating contracts with various vendors and reducing non-essential costs, among others. On May 2, 2016, Moody’s Investor Service assigned us our second investment-grade credit rating which provided us the opportunity to access cost-effective financing. On June 16, 2016 we successfully completed an offering of US$400.0 million 3.50 per cent Senior Unsecured Notes resulting in WestJet becoming the first North American investment-grade airline to issue unsecured debt in an initial public offering in the past decade.


Outlook For the third quarter of 2016, we expect system-wide capacity to be up between 9.0 and 10.0 per cent year over year, primarily as a result of our new wide-body service to London Gatwick, and our domestic capacity to be flat to up 1.0 per cent year over year. In terms of the full-year 2016, we continue to anticipate system-wide capacity growth between 7.0 and 9.0 per cent year over year, and domestic capacity growth between 1.5 and 2.5 per cent year over year. For the third quarter of 2016, we anticipate revenue growth, continued strong traffic growth and year over year declines in RASM of 1.0 to 3.0 per cent, an improvement from our second quarter year over year RASM decline. We expect CASM, excluding fuel and employee profit share for the third quarter of 2016 to be up 1.0 to 1.5 per cent year over year. For the full-year 2016, we now expect CASM, excluding fuel and employee profit share, to be up 2.5 to 3.5 per cent year over year. This compares with our previous full-year 2016 guidance of up 0.5 to 2.5 per cent year over year, with the difference primarily driven by higher guest experience costs related to London Gatwick irregular operations and timing of wide-body maintenance expenses which have been pulled forward into the fourth quarter of 2016, partially offset by an improved forecasted Canadian dollar to US dollar foreign exchange rate. For the third quarter of 2016, we expect fuel costs to range between 56 and 58 cents per litre, which represents a year-overyear decrease of approximately 8 to 11 per cent. The third quarter 2016 expected fuel costs are based on current forecasted jet fuel prices of US $56 per barrel and an average forecasted foreign exchange rate of approximately 1.30 Canadian dollars to one US dollar. For the full-year 2016, we forecast capital expenditures between $900 million and $920 million, with spending related primarily to aircraft deliveries, deposits on future aircraft, overhauls on owned engines and the installation of a new inflight entertainment system on certain aircraft. For the third quarter of 2016, we expect our capital expenditures to be between $130 million and $140 million. The third quarter expected CASM, excluding fuel and employee profit share and capital expenditures are based on an average forecasted foreign exchange rate of approximately 1.30 Canadian dollars to one US dollar. The full-year 2016 expected CASM, excluding fuel and employee profit share and capital expenditures are based on an average forecasted foreign exchange rate of approximately 1.32 Canadian dollars to one US dollar.

Guidance summary

Guidance summary(i)

RASM Fuel cost per litre

Three months ended September 30, 2016 Down 1.0% to 3.0%

Year ended December 31, 2016

56 to 58 cents

CASM, excluding fuel and profit share

Up 1.0% to 1.5%

Up 2.5% to 3.5%

System capacity

Up 9.0% to 10.0%

Up 7.0% to 9.0%

Flat to up 1.0%

Up 1.5% to 2.5%

Domestic capacity Effective tax rate Capital expenditures

28% to 30% $130 to $140 million

$900 to $920 million

(i) The percentage changes noted are based on a year over year comparison


Discussion of operations Capacity For the three and six months ended June 30, 2016, our overall capacity increased by 6.9 per cent and 7.0 per cent, respectively, over the same periods in 2015. This increase was primarily from the addition of four Boeing 767s to our fleet (please refer to the Fleet section of this MD&A on page 24). The following tables depict our capacity allocation between our domestic, transborder and international markets for the three and six months ended June 30, 2016: 2016 ASMs Domestic Transborder and international Total

Domestic Transborder and international Total

3,805,699,112 3,309,878,392 7,115,577,504

Three months ended June 30 2015 % of total ASMs % of total 53.5% 46.5% 100.0%

3,874,562,185 2,780,069,057 6,654,631,242

58.2% 41.8% 100.0%

Six months ended June 30 2016 2015 ASMs % of total ASMs % of total 6,809,962,175 47.3% 6,637,374,731 49.3% 7,600,019,446 14,409,981,621

52.7% 100.0%

6,835,869,672 13,473,244,403

50.7% 100.0%

Change ASMs (1.8%) 19.1% 6.9%

Change ASMs 2.6% 11.2% 7.0%

For the three and six months ended June 30, 2016, our domestic to transborder and international capacity mix shifted as we experienced a capacity increase in our transborder and international markets and a decrease in domestic capacity compared to the same period of 2015. The majority of the transborder and international capacity growth in the second quarter of 2016, was driven by our new London Gatwick routes, which began in May 2016, serviced by our Boeing 767 aircraft. Our domestic capacity decreased as a result of redeployed Q400 aircraft in Eastern Canadian markets which were previously serviced by Boeing 737 aircraft, this allowed for a more robust schedule and the removal of unnecessary capacity from off-peak flight times. During the six months ended June 30, 2016, both our domestic and transborder and international capacity increased compared to the same period of 2015, driven by increased frequencies and new destinations serviced by our growing WestJet Encore fleet and an increase in service to transborder and international markets serviced by the new and redeployed Boeing 737s and Boeing 767s. In the second quarter of 2016, our domestic traffic, measured in RPMs, increased by 2.7 per cent year over year as compared to the 1.8 per cent decrease in domestic capacity. For the six months ended June 30, 2016, domestic traffic, measured in RPMs, increased 4.9 per cent year over year compared to the 2.6 per cent increase in domestic capacity. The increase in RPMs was higher than the increase in capacity as a result of the redeployment of capacity from Western to Eastern Canada in response to the economic downturn in the energy sector, thereby improving our load factors. In addition, there was an increase in connecting traffic, both domestically and to transborder and international markets, including London Gatwick, all of which contributed to the increase in RPMs compared to capacity growth in the three and six months ended June 30, 2016. With regard to our transborder and international markets, RPMs increased by 20.8 per cent over the second quarter of 2015 while capacity increased 19.1 per cent. For the six months ended June 30, 2016, RPMs increased 12.8 per cent compared to an 11.2 per cent increase in capacity. The increase of transborder and international RPMs in the second quarter of 2016 is primarily driven by the new international service to London Gatwick which commenced in May 2016. These flights generated significant capacity as well as operated at higher than average load factors. As such, we saw transborder and international RPM growth outpace the capacity growth for both the three and six months ended June 30, 2016.


Revenue ($ in thousands) Guest Other Total revenue Load factor Yield (cents) RASM (cents)

Three months ended June 30 2016 2015 Change 814,402 828,909 (1.8%) 134,911 113,089 19.3% 949,313 941,998 0.8% 80.8% 78.1% 2.7 pts. 16.51 18.12 (8.9%) 13.34 14.16 (5.8%)

Six months ended June 30 2016 2015 Change 1,700,622 1,785,855 (4.8%) 280,136 239,640 16.9% 1,980,758 2,025,495 (2.2%) 81.5% 79.9% 1.6 pts. 16.88 18.82 (10.3%) 13.75 15.03 (8.5%)

During the second quarter of 2016, total revenue increased by 0.8 per cent to $949.3 million compared to $942.0 million in the same quarter of 2015. On a per ASM basis, for the three months ended June 30, 2016 revenue decreased by 5.8 per cent to 13.34 cents from 14.16 cents in the same quarter of 2015. The overall increase in total revenue was driven by an increase in ancillary revenue included in other revenue, partially offset by lower guest revenue resulting from a decrease in yield. The downward pressure on our fares continues to be a result of the economic downturn in the energy sector, however we saw an improved load factor from traffic growth across our network compared to the same period of 2015. For the six months ended June 30, 2016 total revenue decreased by 2.2 per cent to $1,980.8 million compared to $2,025.5 million in the same period of 2015. Revenue on a per ASM basis decreased by 8.5 per cent to 13.75 from 15.03 cents in the same period of the prior year. These decreases are due to a decline in yield offset by an increase in ancillary revenue.

Other revenue Included in other revenue are amounts related to ancillary revenue, WestJet Vacations’ non-air revenue and our cargo and charter operations. During the three and six months ended June 30, 2016, other revenue increased by 19.3 and 16.9 per cent to $134.9 million and $280.1 million from $113.1 million and $239.6 million in the same periods of the prior year. This increase was driven mainly by an increase in ancillary revenue. Ancillary revenue, which includes product and service fees, our WestJet RBC® MasterCard± program revenue and onboard sales, provides an opportunity to maximize our profits through the sale of higher-margin goods and services while enhancing our overall guest experience by providing guests with additional products and services to meet their needs. The following table presents ancillary revenue and ancillary revenue per guest for the three and six months ended June 30, 2016:

Ancillary revenue ($ in thousands) Ancillary revenue per guest

Three months ended June 30 2016 2015 Change 95,220 82,899 14.9% 18.18 16.74 8.6%

Six months ended June 30 2016 2015 Change 190,630 165,894 14.9% 18.11 16.83 7.6%

For the three and six months ended June 30, 2016, ancillary revenue was $95.2 million and $190.6 million, an increase of 14.9 per cent each from $82.9 million and $165.9 million, respectively, in the same periods of the prior year. On a per guest basis, ancillary fees for the quarter and year to date increased by 8.6 and 7.6 per cent to $18.18 and $18.11 per guest, from $16.74 and $16.83 per guest, respectively, for 2015. These increases are mainly attributable to the increase in our first bag fee which was driven by higher guest bookings and the addition of a first bag fee on our international flights in the first quarter of 2016. In addition, the increases in the upgrade fee for our enhanced Plus product (first launched in the second half of 2015) and the continued interest in and success of our WestJet RBC® MasterCard± program, also had a favourable impact on our ancillary revenue. WestJet Vacations continues to generate revenue which supports WestJet’s overall network. The land component, which includes hotels, attractions and car rentals, is reported on the condensed consolidated statement of earnings at the net amount received. In the first half of 2016, WestJet Vacations’ non-air revenue component increased due to increased demand for our vacation packages which had a positive impact on our margins. Partially offsetting this increase to our margins was the weaker Canadian dollar experienced throughout the first half of 2016 compared to the same period in the prior year. The majority of the land components are paid in US dollars, which is netted against the gross revenue collected in Canadian dollars.


Expenses

Aircraft fuel Salaries and benefits Rates and fees Depreciation and amortization Sales and marketing Maintenance Aircraft leasing Other Employee profit share Total operating expenses Total, excluding fuel and profit share

Expense ($ in thousands) Three months ended June 30 2016 2015 Change 182,583 214,948 (15.1%) 218,250 202,513 7.8% 152,470 138,516 10.1% 86,821 62,766 38.3% 84,118 50,345 44,973 69,519 (1,192) 887,887 706,496

74,376 37,009 43,981 58,142 9,359 841,610 617,303

13.1% 36.0% 2.3% 19.6% (112.7%) 5.5% 14.4%

CASM (cents) Three months ended June 30 2016 2015 Change 2.57 3.23 (20.4%) 3.07 3.04 1.0% 2.14 2.08 2.9% 1.22 0.94 29.8% 1.18 0.71 0.63 0.98 (0.02) 12.48 9.93

1.12 0.56 0.66 0.87 0.14 12.65 9.28

5.4% 26.8% (4.5%) 12.6% (114.3%) (1.3%) 7.0%

During the three months ended June 30, 2016, operating expenses increased by 5.5 per cent to $887.9 million as compared to $841.6 million in the same period in 2015. This increase was primarily driven by depreciation and amortization expense, maintenance expense and other expenses, partially offset by decreases in aircraft fuel expense and employee profit share expense. On an ASM basis, operating expenses decreased by 1.3 per cent to 12.48 cents from 12.65 cents in the same period in 2015 driven by our ASM growth of 6.9 per cent.

Aircraft fuel Salaries and benefits Rates and fees Depreciation and amortization Sales and marketing Maintenance Aircraft leasing Other Employee profit share Total operating expenses Total, excluding fuel and profit share

Expense ($ in thousands) Six months ended June 30 2016 2015 Change 348,998 425,393 (18.0%) 440,573 405,594 8.6% 306,214 272,706 12.3% 168,590 119,945 40.6% 173,195 103,283 91,280 142,617 21,310 1,796,060 1,425,752

157,099 72,486 91,636 123,966 59,122 1,727,947 1,243,432

10.2% 42.5% (0.4%) 15.0% (64.0%) 3.9% 14.7%

CASM (cents) Six months ended June 30 2016 2015 Change 2.42 3.16 (23.4%) 3.06 3.01 1.7% 2.13 2.02 5.4% 1.17 0.89 31.5% 1.20 0.72 0.63 0.99 0.15 12.46 9.89

1.17 0.54 0.68 0.92 0.44 12.83 9.23

2.6% 33.3% (7.4%) 7.6% (65.9%) (2.9%) 7.2%

During the six months ended June 30, 2016, operating expenses increased by 3.9 per cent to $1,796.1 million as compared to $1,727.9 million in the same period in 2015, primarily driven by the year-over-year increase in rates and fees expense, depreciation and amortization expense and maintenance expense, partially offset by a decrease in aircraft fuel expense and employee profit share expense. On an ASM basis, operating expenses for the six months ended June 30, 2016 decreased by 2.9 per cent to 12.46 cents from 12.83 cents in the same period in 2015 driven by our ASM growth of 7.0 per cent.


Aircraft fuel Three months ended June 30 2016 2015 Change Aircraft fuel expense ($ in thousands) Aircraft fuel expense as a percent of operating expenses Fuel consumption (litres) Fuel cost per litre (cents) Average market price for jet fuel in US dollars (per barrel) Average market price for jet fuel in Canadian dollars (per barrel)

Six months ended June 30 2016 2015 Change

182,583

214,948

(15.1%)

348,998

425,393

(18.0%)

21%

26%

(5.0 pts.)

19%

25%

(6.0 pts.)

342,458,639 53

310,947,207 69

10.1% (23.2%)

694,852,212 50

634,070,433 67

9.6% (25.4%)

57

76

(25.0%)

49

74

(33.8%)

73

94

(22.3%)

65

91

(28.6%)

Fuel remains a significant cost representing 21 per cent and 19 per cent of total operating expenses for the three and six months ended June 30, 2016 (three and six months ended June 30, 2015 – 26 and 25 per cent, respectively). For the three and six months ended June 30, 2016, aircraft fuel expense decreased by 15.1 per cent and 18.0 per cent to $182.6 million and $349.0 million from $214.9 million and $425.4 million, respectively, primarily due to the 23.2 per cent and 25.4 per cent year-over-year decrease in our fuel cost per litre. Fuel costs per ASM for the three and six months ended June 30, 2016, were 2.57 cents and 2.42 cents, compared to 3.23 cents and 3.16 cents in the same periods of 2015, a decrease of 20.4 per cent and 23.4 per cent year over year. This decrease was driven by the overall decrease in the Canadian market price of jet fuel. Our fuel costs per litre for the three and six months ended June 30, 2016 decreased by 23.2 per cent and 25.4 per cent to 53 cents and 50 cents per litre. On average, the market price for jet fuel was US $57 per barrel in the second quarter of 2016 versus US $76 per barrel in the second quarter of 2015, a decrease of approximately 25.0 per cent. The benefit from the lower market price of US-dollar jet fuel on a year-over-year basis was partially offset by the weaker Canadian dollar as the average market price for jet fuel in Canadian dollars decreased by only 22.3 per cent to $73 per barrel from $94 per barrel in the second quarter of 2015. Similarly, on average, the market price for jet fuel was US $49 per barrel for the six months ended June 30, 2016 versus US $74 per barrel in the same period of the prior year, a decrease of approximately 33.8 per cent while jet fuel in Canadian dollars decreased by only 28.6 per cent to $65 per barrel from $91 per barrel in the second quarter of 2015. For 2016, we estimate our sensitivity of fuel costs to changes in crude oil to be approximately USD $8.8 million annually for every one US-dollar change per barrel of West Texas Intermediate (WTI) crude oil. Additionally, we estimate our sensitivity to changes in fuel pricing to be approximately $14.0 million for every one-cent change per litre of fuel. We estimate that every one-cent change in the value of the Canadian dollar versus the US dollar will have an approximate impact of $5.2 million on fuel costs. As at June 30, 2016, we have no fuel derivative contracts outstanding. We will continue to monitor and adjust to movements in fuel prices and may re-visit our hedging strategy as changing markets and competitive conditions warrant.


Salaries and benefits Our compensation philosophy is designed to align corporate and personal success. We have created a compensation program whereby a portion of our expenses are variable and are tied to our financial results. Our compensation strategy encourages employees to become owners in WestJet, which creates a personal vested interest in our financial results and operational accomplishments. ($ in thousands) Salaries and benefits plans Employee share purchase plan Share-based payment plans Total salaries and benefits Full-time equivalent employees (FTE)

Three months ended June 30 2016 2015 Change

Six months ended June 30 2016 2015 Change

188,062 23,230 6,958 218,250 9,556

383,567 45,636 11,370 440,573 9,556

175,735 21,528 5,250 202,513 8,967

7.0% 7.9% 32.5% 7.8% 6.6%

354,670 42,173 8,751 405,594 8,967

8.1% 8.2% 29.9% 8.6% 6.6%

Salaries and benefits plans Salaries and benefits are determined via a framework of job levels based on internal assessments and external market data. During the three and six months ended June 30, 2016, salaries and benefits increased by 7.0 per cent and 8.1 per cent, respectively to $188.1 million and $383.6 million, from $175.7 million and $354.7 million in the same periods of 2015. These increases were primarily due to the 6.6 per cent increase in our total number of full-time equivalent employees to 9,556 employees at June 30, 2016 (June 30, 2015 – 8,967 employees) and the impact of our market and merit increases.

Em ployee share purchase plan (ESPP) The ESPP encourages employees to become owners of WestJet shares and provides employees with the opportunity to significantly enhance their earnings. Under the terms of the ESPP, WestJetters may, dependent on their employment agreement, contribute up to a maximum of between 10 per cent and 20 per cent of their gross salary to acquire voting shares of WestJet at the current fair market value. The contributions are matched by WestJet and are required to be held within the ESPP for a period of one year. At June 30, 2016, approximately 83.9 per cent (June 30, 2015 - 85.0 per cent) of our eligible active employees participated in the ESPP, contributing an average of 13.8 per cent (June 30, 2015 - 14.2 per cent) of their gross salaries. Under the terms of the ESPP, we acquire voting shares on behalf of employees through open market purchases. For the three and six months ended June 30, 2016, our matching expense was $23.2 million and $45.6 million, a 7.9 per cent and 8.2 per cent increase, respectively, from $21.5 million and $42.2 million in the same periods of 2015, driven largely by the increased number of eligible employees compared to the prior year as well as the overall increase in salaries, as discussed above under the heading Salaries and benefits plans.

Share-based paym ent plans We have three equity-settled share-based payment plans whereby either stock options, restricted share units (RSUs) or performance share units (PSUs) may be awarded to pilots, senior executives and certain non-executive employees. Our equity-settled share-based payments are measured at the fair value of the instrument granted and recognized as compensation expense with a corresponding increase in equity reserves on a straight-line basis over the related service period based on the number of awards expected to vest. For the three months ended June 30, 2016, share-based payment expense totaled $7.0 million, representing an increase of 32.5 per cent over the $5.3 million recognized in the same period in the prior year. This primarily relates to an increase in the number of eligible executives receiving share-based rewards in the second quarter of 2016 as compared to the second quarter of 2015 as a result of vacancies in 2015 along with an overall general increase in eligible management and pilot participants. For the six months ended June 30, 2016, share-based payment expense was $11.4 million, representing an increase of 29.9 per cent from $8.8 million recognized in the same period in the prior year. This increase relates to an increased number of eligible executives receiving grants in the first half of 2016 versus the first half of 2015.


Rates and fees Rates and fees expense consists primarily of airport landing and terminal fees, ground handling fees and navigational charges.

Rate and fees expense ($ in thousands) Departures

Three months ended June 30 2016 2015 Change 152,470 138,516 10.1% 55,666 51,702 7.7%

Rate and fees expense ($ in thousands) Departures

Six months ended June 30 2016 2015 Change 306,214 272,706 12.3% 111,109 100,771 10.3%

For the three and six months ended June 30, 2016, our rates and fees expense was $152.5 million and $306.2 million, a $14.0 million and $33.5 million or 10.1 and 12.3 per cent increase, respectively, from $138.5 million and $272.7 million in the comparable periods in 2015. Rates and fees expense per ASM is 2.14 cents and 2.13 cents for the three and six months ended June 30, 2016, an increase of 2.9 and 5.4 per cent from 2.08 cents and 2.02 cents in the same periods of 2015. Compared to the first half of 2015, we experienced increased airport related costs including terminal and landing fees and ground handling fees as a result of increased departures out of many of our airport bases, due to the overall expansion of our network and in particular the growth of WestJet Encore. This increase is also driven by the impact of the devaluation of the Canadian dollar as certain airport rates and fees are denominated in US dollars.

Depreciation and am ortization Depreciation and amortization expense for the three and six months ended June 30, 2016 was $86.8 million and $168.6 million, a $24.1 million and $48.6 million or 38.3 and 40.6 per cent increase, respectively, from $62.8 million and $119.9 million in the comparable periods of 2015. Depreciation and amortization expense per ASM was 1.22 cents in the second quarter of 2016 and 1.17 cents in the first half of 2016, representing an increase of 29.8 and 31.5 per cent, respectively, from 0.94 and 0.89 cents in the same periods of the prior year. These year-over-year increases were mainly driven by the overall growth in our fleet, the changing fleet mix and the impact of the devaluation of the Canadian dollar as certain aircraft purchases are denominated in US dollars.


M aintenance Maintenance expense is comprised of technical maintenance which represents costs incurred for maintenance on our aircraft fleet, and a maintenance provision which represents our estimate of future obligations to meet the lease return conditions specified in our lease agreements. Expense ($ in thousands) CASM (cents) Three months ended June 30 2016 2015 Change 2016 2015 Change Technical maintenance Maintenance provision Total maintenance

Technical maintenance Maintenance provision Total maintenance

31,062 19,283 50,345

23,035 13,974 37,009

34.8% 38.0% 36.0%

0.44 0.27 0.71

0.35 0.21 0.56

25.7% 28.6% 26.8%

Expense ($ in thousands) CASM (cents) Six months ended June 30 2016 2015 Change 2016 2015 Change 62,391 42,894 45.5% 0.44 0.32 37.5% 40,892 29,592 38.2% 0.28 0.22 27.3% 103,283 72,486 42.5% 0.72 0.54 33.3%

For the three and six months ended June 30, 2016, our maintenance expense was $50.3 million and $103.3 million, a $13.3 million and $30.8 million or 36.0 and 42.5 per cent increase, respectively, from $37.0 million and $72.5 million for the same periods in 2015. Maintenance expense per ASM was 0.71 cents and 0.72 cents for the three and six months ended June 30, 2016, an increase of 26.8 per cent and 33.3 per cent, respectively, from 0.56 cents and 0.54 cents in the same periods of 2015. Technical maintenance expense for the three and six months ended June 30, 2016 was $31.1 million and $62.4 million, which represents an $8.0 million and $19.5 million or 34.8 and 45.5 per cent increase, respectively, from $23.0 million and $42.9 million in the same periods of 2015. Our technical maintenance cost per ASM was 0.44 cents for both the three and six months ended 2016, representing an increase of 25.7 and 37.5 per cent from 0.35 cents and 0.32 cents, respectively, in the same periods of the prior year. These year-over-year increases were mainly attributable to our diversified, aging and growing fleet where we have performed more maintenance events compared to the prior year, the impact of the devaluation of the Canadian dollar compared to the same period in the prior year as most of our maintenance costs are denominated in US dollars and a lower comparable period which included a reserve write-up of $2.3 million due to lease extensions in the second quarter of 2015. Maintenance provision expense for the three and six months ended June 30, 2016 was $19.3 million and $40.9 million, which represents a $5.3 million and $11.3 million or 38.0 and 38.2 per cent increase, respectively, from $14.0 million and $29.6 million in the same periods of 2015. Our maintenance provision cost per ASM was 0.27 cents and 0.28 cents for the three and six months ended 2016, representing an increase of 28.6 and 27.3 per cent from 0.21 cents and 0.22 cents, respectively, in the same periods of the prior year. The increase was primarily driven by changes in the estimated timing and scope of maintenance activities for our leased aircraft and a change in the discount rate. Our provision is calculated based on the best information available to us and includes estimates of the cost and timing of future maintenance activities on leased aircraft, as well as discount rates.


Other operating expenses The following table provides a breakdown of the more significant items included in other operating expenses: Expense ($ in thousands)

Travel and training Technical support General and administrative Remaining other operating expenses Total other operating expenses

2016 24,947 10,168 22,357 12,047 69,519

Expense ($ in thousands)

Travel and training Technical support General and administrative Remaining other operating expenses Total other operating expenses

2016 50,142 21,783 42,725 27,967 142,617

CASM (cents)

Three months ended June 30 2015 Change 2016 2015 23,270 7.2% 0.35 0.35 10,380 (2.0%) 0.14 0.16 17,395 28.5% 0.31 0.26 7,097 69.7% 0.18 0.10 58,142 19.6% 0.98 0.87

Change 0.0% (12.5%) 19.2% 80.0% 12.6%

CASM (cents)

Six months ended June 30 2015 Change 2016 45,816 9.4% 0.35 21,334 2.1% 0.15 32,964 29.6% 0.30 23,852 17.3% 0.19 123,966 15.0% 0.99

2015 0.34 0.16 0.24 0.18 0.92

Change 2.9% (6.3%) 25.0% 5.6% 7.6%

For the second quarter of 2016, our other operating expense was $69.5 million, an $11.4 million or 19.6 per cent increase from $58.1 million for the same period in 2015. Other operating expense per ASM was 0.98 cents for the three months ended June 30, 2016, an increase of 12.6 per cent from 0.87 cents in the same period of 2015. For the six months ended June 30, 2016, our other operating expense was $142.6 million or 15.0 per cent increase from $124.0 million. On a per ASM basis, other operating expenses increased by 7.6 per cent to 0.99 cents from 0.92 cents in the first half of 2015.These increases were driven by increases in general and administrative expense and the remaining other expenses. For the second quarter of 2016, our general and administrative expense was $22.4 million, a $5.0 million or 28.5 per cent increase from $17.4 million for the same period in 2015. General and administrative expense per ASM was 0.31 cents for the three months ended June 30, 2016, an increase of 19.2 per cent from 0.26 cents in the same period of 2015. These increases were primarily driven by higher consulting costs relating to certain ongoing operational initiatives as well as consulting costs incurred in relation to third party professional services. For the second quarter of 2016, the remaining other operating expenses were $12.0 million, a $4.9M million or 69.7 per cent increase from $7.1 million for the same period in 2015. The remaining other operating expenses per ASM were 0.17 cents for the three months ended June 30, 2016, an increase of 70.0 per cent from 0.10 cents in the same period of 2015. These increases were primarily driven by irregular Boeing 767 operations mainly attributable to flight delays and estimated regulated guest compensation on our London Gatwick routes.

Em ployee profit share All employees are eligible to participate in the employee profit sharing plan. As the profit share system is a variable cost, employees receive larger awards when we are more profitable. Conversely, the amount distributed to employees is reduced in less profitable periods. Our profit share expense for the three months ended June 30, 2016, resulted in a credit of $1.2 million, representing a decrease of over one hundred per cent from $9.4 million in the same period of the prior year. Profit share is estimated based on a year to date eligible earnings margin of not less than 10 per cent therefore due to the lower year to date eligible earnings margin ended June 30, 2016 compared to the higher year-to-date eligible earnings margin in the first quarter, the second quarter expense resulted in a credit. Our profit share expense for the six months ended June 30, 2016, was $21.3 million, representing a decrease of 64.0 per cent from $59.1 million in the same period of the prior year. This year-over-year decrease is directly attributable to lower earnings eligible for profit share in the first half of 2016 versus the prior year.


Foreign exchange The gain or loss on foreign exchange included in our condensed consolidated statement of earnings is mainly attributable to the effect of the changes in the value of our US-dollar-denominated net monetary assets and liabilities. Monetary assets consist mainly of US-dollar cash and cash equivalents, security deposits on various leased aircraft, and maintenance reserves paid to lessors, offset by monetary liabilities of US-dollar accounts payable and accrued liabilities and maintenance provisions. As part of our Foreign Currency Risk Management Policy we hold US-dollar-denominated cash and short-term investments and enter into US-dollar foreign exchange forward contracts to protect our balance sheet, operating margins and cash flows. At June 30, 2016, US-dollar-denominated net monetary assets totaled approximately US $26.5 million compared to net monetary liabilities of US $24.0 million at December 31, 2015. The increase in US-dollar-denominated net monetary assets compared to 2015 year end is largely due to an increase in US-dollar cash during the second quarter. We reported a foreign exchange gain of $1.6 million and $6.3 million for the three and six months ended June 30, 2016 on the revaluation of our US-dollar-denominated monetary assets and liabilities. We periodically use financial derivatives to manage our exposure to foreign exchange risk. At June 30, 2016, to fix the exchange rate on a portion of our US-dollar-denominated hotel costs and aircraft lease payments, we have foreign exchange forward contracts for an average of US $11.5 million per month for the period of July 2016 to June 2017, for a total of US $137.9 million, at a weighted average contract price of 1.3247 Canadian dollars to one US dollar. Additionally, we entered into a fixed US dollar to fixed Canadian dollar uncollateralized cross currency swap agreement to mitigate our exposure to fluctuations in the Canadian US-dollar exchange rate on interest payments on the US-Dollar Notes, which are denominated in USD (please refer to the section called Financing found on page 21 of this MD&A). We have designated certain contracts under our foreign exchange hedging program for cash flow hedge accounting, while other contracts do not qualify for hedge accounting. Under cash flow hedge accounting, the effective portion of the change in the fair value of the hedging instrument is recognized in hedge reserves, while any ineffective portion is recorded directly to net earnings as a non-operating gain or loss. Upon maturity of the derivative instrument, the effective gains and losses previously recognized in hedge reserves are recorded in net earnings as a component of the expenditure to which they relate. Those contracts not designated under cash flow hedge accounting have the change in fair value recorded directly in net earnings as a non-operating gain or loss. At June 30, 2016, no portion of the forward contracts designated under cash flow hedge accounting was considered ineffective. The following table presents the financial impact and statement presentation of our foreign exchange derivatives on the condensed consolidated statement of financial position at June 30, 2016 and December 31, 2015 and on the condensed consolidated statement of earnings for the three and six months ended June 30, 2016 and 2015. ($ in thousands)

Statement presentation

Statement of Financial Position: Fair value Fair value Unrealized gain (loss)

Prepaid expenses, deposits and other Accounts payable and accrued liabilities Hedge reserves (before tax)

($ in thousands) Statement of Earnings: Realized gain Realized gain (loss) Realized gain (loss)

Statement presentation Aircraft leasing Other revenue Gain on derivatives

June 30 2016

December 31 2015

180 (4,708) (4,528)

17,409 (51) 15,770

Three months ended June 30 2016 2015 502 (961) (612)

4,942 -


($ in thousands) Statement of Earnings: Realized gain Realized gain (loss) Realized gain

Six months ended June 30 2016 2015

Statement presentation Aircraft leasing Other revenue Gain on derivatives

4,457 (500) 106

9,665 -

The fair value of the foreign exchange forward contracts presented on the condensed consolidated statement of financial position is measured based on the difference between the contracted rate and the current forward price obtained from the counterparty, which can be observed and corroborated in the marketplace. For 2016, we estimate that every one-cent change in the value of the Canadian dollar versus the US dollar will have an approximate impact of $8.6 million on our annual unhedged operating costs (approximately $5.2 million for fuel and $3.4 million related to other US-dollar-denominated operating expenses). We also have a significant amount of our future purchase obligations, including certain aircraft, exposed to foreign exchange risk. At June 30, 2016, we estimate every one-cent change in the value of the Canadian dollar versus the US dollar would have an approximate impact of $34.0 million on our future US-dollar-denominated purchase obligations. Income taxes Our effective consolidated income tax rate for both the three and six months ended June 30, 2016 was 29 per cent, as compared to 31 per cent and 28 per cent respectively, for the comparative periods in 2015. These year-over-year variances are due to the general corporate income tax rate increase in Alberta for 2015, which occurred in July 2015, requiring a prospective application starting in the second quarter of 2015. For 2016, we anticipate that our annual effective consolidated income tax rate will remain in the range of 28 to 30 per cent.

Summary of quarterly results

($ in thousands, except per share data) Total revenue Net earnings Basic earnings per share Diluted earnings per share

($ in thousands, except per share data) Total revenue Net earnings Basic earnings per share Diluted earnings per share

Jun. 30 2016 949,313 36,654 0.30 0.30

Jun. 30 2015 941,998 61,554 0.49 0.49

Three months ended Mar. 31 Dec. 31 2016 2015 1,031,444 958,715 87,644 63,436 0.71 0.51 0.71

Sept. 30 2015 1,045,055 101,803 0.82

0.51

0.82

Three months ended Mar. 31 Dec. 31 2015 2014 1,083,497 994,394

Sept. 30 2014 1,009,728

140,737 1.11 1.09

90,713 0.71 0.70

52,191 0.41 0.40

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. Compared to our strong results in the first nine months of 2015, we experienced a notable decrease to total revenue, net earnings and earnings per share in the most recent three quarters. These results were impacted by the economic weakness in Alberta and the Prairie Provinces which resulted in much softer demand in Western Canada and downward pressure on fares. WestJet Second Quarter 2016 │ 17

Guest experience At WestJet, we are focused on meeting the needs of our guests while maintaining the highest safety standards. We are committed to delivering a positive guest experience at every stage of our service, from the time the flight is booked to its completion. Key performance indicators On-time performance, indicating the percentage of flights that arrive within 15 minutes of their scheduled time, is a key factor in measuring our guest experience. The completion rate indicator represents the percentage of flights completed of the flights originally scheduled. Our bag ratio represents the number of delayed, lost, damaged or pilfered baggage claims made per 1,000 guests.

On-time performance Completion rate(i) Bag ratio (i)

Three months ended June 30 2016 2015 Change 88.1% 91.3% (3.2 pts.) 99.0% 99.2% (0.2 pts.) 3.53 3.24 (9.0%)

Six months ended June 30 2016 2015 Change 85.6% 98.6% 3.76

84.8% 98.5% 3.85

0.8 pts. 0.1 pts. 2.3%

Our completion rate for the three and six months ended June 30, 2016 excludes the impact related to the wild fires that occurred in Fort McMurray, Alberta in the second quarter of 2016. This situation led to the closure of the Fort McMurray airport to scheduled flights from early May 2016 to early June 2016, during which time we did not operate our scheduled flights out of Fort McMurray. Had we included those scheduled flights our completion rate would have been 97.8% and 98.0%, respectively, for the three months and six months ended June 30, 2016.

During the three months ended June 30, 2016, our on-time performance decreased by 3.2 percentage points, compared to the same period of 2015. This decrease is primarily from an increase in general departure delay occurrences due to more weather-related events as compared to the same period in the prior year. Our on-time performance for the six months ended June 30, 2016, was relatively flat year over year and our overall on-time performance placed us as the number one performing North American airline for June 2016. Our completion rate for the three and six months ended June 30, 2016 was flat compared to the same period in 2015, which is a testament to our ability to complete our originally scheduled flights and ensure guests reach their final destination. Our baggage ratio deterioration in the second quarter of 2016 was impacted by the situation in Fort McMurray. Specifically, we saw an increase in the number of bags moving throughout our network as we made the decision to significantly relax baggage limits and fees at this location. Overall our results across all three performance indicators for the first half of 2016 compared to the same period in 2015, are driven by our continued internal focus on improving our on-time performance. We strive to consistently and safely perform on time.

Liquidity and capital resources Liquidity The airline industry is highly sensitive to unpredictable circumstances and, as such, maintaining a strong financial position is imperative to an airline’s success. Our consistent and strong financial results enable us to maintain a healthy balance sheet. We completed the second quarter of 2016 with a cash and cash equivalents balance of $1,698.2 million, compared to $1,183.8 million at December 31, 2015. The increase in our cash position was a result of funds received from our nonrevolving credit facility in January 2016 and our US-dollar bond issuance in June 2016 (please refer to the section called Financing found on page 21 of this MD&A). These cash inflows were partially offset by capital expenditures for aircraft acquisitions and other equipment, the cost of shares repurchased pursuant to our normal course issuer bid as well as our quarterly dividend payment and debt repayments. Part of our cash and cash equivalents balance relates to cash collected with respect to advance ticket sales, for which the balance at June 30, 2016, was $695.8 million, an increase of 12.2 per cent from $620.2 million at December 31, 2015. We have cash and cash equivalents on hand to have sufficient liquidity to meet our liabilities, when due, under both normal and


stressed conditions. At June 30, 2016, we had cash on hand of 2.44 (December 31, 2015 – 1.91) times our advance ticket sales balance. We monitor capital and liquidity using a number of measures, including the following ratios:

Cash to trailing 12 months revenue (TTM)(i)(ii) Adjusted debt-to-equity ratio(i) Adjusted net debt to EBITDAR(i) (i) (ii)

June 30 2016 42.6% 1.67 1.72

December 31 2015 29.4% 1.27 1.29

Change 13.2 pts. 31.5% 33.3%

Please refer to page 32 of this MD&A for a reconciliation of non-GAAP and additional GAAP measures. In addition to our cash and cash equivalents, as of June 30, 2016, we have available our entire $300.0 million revolving credit facility that expires in June 2019 (please refer to the section Financing found on page 21 of this MD&A). Available funds from the credit facility have not been included in this ratio.

As of June 30, 2016, our cash to TTM revenue ratio increased by 13.2 percentage points to 42.6 per cent from 29.4 per cent at December 31, 2015. This exceeds our internal guideline of approximately 30% and is the result of an increase in cash and cash equivalents due to additional borrowings from the non-revolving, unsecured credit facility in January 2016 and the USdollar bond issuance in June 2016. In addition to our cash and cash equivalents, as of June 30, 2016, we have available $300.0 million as the undrawn portion of our revolving credit facility (please refer to the section called Financing found on page 21 of this MD&A). Our adjusted debt-to-equity ratio of 1.67, and our adjusted net debt to EBITDAR ratio of 1.72 at June 30, 2016, increased from 1.27 and 1.29, respectively, at December 31, 2015. These ratios are well below our internal guideline of no more than 2.5 with the increases due to increased debt levels associated the additional borrowings as noted above. Our current ratio, defined as current assets over current liabilities, was 1.30 at June 30, 2016 as compared to 0.97 at December 31, 2015, an increase of 34 per cent due mostly to an increase in our cash and cash equivalents as well as decreases in our accounts payable and accrued liabilities.

Select cash flow inform ation ($ in thousands) Cash provided by operating activities Less: Cash used by investing activities Cash provided (used) by financing activities Cash flow from operating, investing and financing activities Effect of foreign exchange on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period

($ in thousands) Cash provided by operating activities Less: Cash used by investing activities Cash provided (used) by financing activities Cash flow from operating, investing and financing activities Effect of foreign exchange on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period

Three months ended June 30 2016 2015 Change 144,674 130,134 14,540 (300,355) 443,297 287,616 3,722

(166,725) (41,711) (78,302) 2,515

(133,630) 485,008 365,918 1,207

291,338 1,406,910 1,698,248

(75,787) 1,405,339 1,329,552

367,125 1,571 368,696

Six months ended June 30 2016 2015 Change 366,770 387,937 (21,167) (534,060) 693,805 526,515 (12,064) 514,451

(339,277) (98,559) (49,899) 21,380 (28,519)

(194,783) 792,364 576,414 (33,444) 542,970

1,183,797 1,698,248

1,358,071 1,329,552

(174,274) 368,696


Operating cash flow s For the quarter ended June 30, 2016, our cash flow from operations increased 11.2 per cent to $144.7 million compared to $130.1 million in the same quarter of the prior year. Similarly, on a per share basis (diluted), for the quarter ended June 30, 2016, our cash flow from operations increased 15.5 per cent to $1.19 per share compared to $1.03 per share in the same period of the prior year (please refer to page 32 of this MD&A for a reconciliation of non-GAAP and additional GAAP measures). This year-over-year increase was mainly a result of higher contributions from working capital. For the six months ended June 30, 2016, cash from operations decreased 5.5 per cent to $366.8 million compared to $387.9 million in the same period of 2015. This year-over-year decrease is predominantly due to lower earnings and contributions from working capital. On a per share basis, for the six months ended June 30, 2016, our cash from operations decreased 1.32 per cent to $3.00 per share compared to $3.04 per share in the same period of the prior year. This year-over-year decrease is predominantly due to lower earnings. At June 30, 2016, restricted cash consisted of $30.5 million (December 31, 2015 – $53.6 million) for cash held in trust by WestJet Vacations; $13.6 million (December 31, 2015 – $13.4 million) for security on letters of guarantee; and, in accordance with U.S. regulatory requirements, $1.4 million (December 31, 2015 – $1.6 million) for cash not yet remitted for passenger facility charges.

I nvesting cash flow s For the three and six months ended June 30, 2016, cash flow used for investing activities totaled $300.4 million and $534.1 million, respectively as compared to $166.7 million and $339.3 million in the same period of the prior year. The year-over-year increase in cash outflows is the result of increased capital spending in the current period, lower contributions from working capital, as well as the impact of cash proceeds received on the delivery of the final two aircraft sold to Southwest in the prior year comparative period. The majority of our investing activities during the second quarter of 2016 related to the delivery of three Q400 aircraft, one Boeing 767, additional deposits for future Boeing MAXs, Boeing 737 NGs and Q400 aircraft, overhauls of owned engines, as well as installation of our new inflight entertainment system and slim-line seats with power.

Financing cash flow s For the quarter ended June 30, 2016, our financing cash inflows totaled $443.3 million as compared to cash outflows of $41.7 million in the same period of the prior year. Our financing activities in the second quarter of 2016 consisted mainly of cash inflows of $562.1 million related to the proceeds from the June 2016 US-dollar bond issuance and financing of three Q400 aircraft (please refer to the Financing section below for further information), offset by cash outflows related to long-term debt repayments of $43.5 million, dividends paid of $16.8 million, cash interest paid of $8.4 million and shares repurchased pursuant to our normal course issuer bid of $53.0 million. For the six months ended June 30, 2016, financing inflows totaled $693.8 million compared to outflows of $98.6 million in the same period of 2015. For the six months ended June 30, 2016, our financing inflows were the result of $914.8 of borrowings from the non-revolving, unsecured credit facility and the June 2016 US-dollar bond issuance offset by $85.1 million in repayments of long term debt, dividends paid of $33.9 million, $66.9 million for shares repurchased under our normal course issuer bids, and cash interest paid of $24.7 million.

Free cash flow Free cash flow is a non-GAAP measure that represents the cash that a company is able to generate after meeting its requirements to maintain or expand its asset base. It is a calculation of operating cash flow, less the amount of cash used in investing activities related to property and equipment. Our free cash flow for the three and six months ended June 30, 2016, was a negative $155.7 million and negative $167.3 million, respectively, compared to a negative $63.6 million and positive $50.1 million in the same periods of the prior year. On a per share basis (diluted), this equated to negative $1.28 per share and negative $1.37 per share for the three and six months ended June 30, 2016, compared to negative $0.56 per share and positive $0.39 per share in the same period of the prior year. The decline for the three months ended June 30, 2016 compared to the same period of the prior year was due to an increase in our capital expenditures for aircraft additions and other equipment, while the decline in the six months ended June 30, 2016 was due to increased capital expenditures compounded by a decrease in earnings compared to the same period of the prior year. Please refer to page 32 of this MD&A for a reconciliation of non-GAAP and additional GAAP measures. WestJet Second Quarter 2016 │ 20

Financing We have grown through acquisitions of Boeing 737 NG, Boeing 767 and Bombardier Q400 aircraft. During the second quarter of 2016, three Q400 aircraft deliveries were financed by individual secured term loans with Export Development Canada (EDC) for approximately 80 per cent of the purchase price of the aircraft. We also took delivery of one Boeing 767 aircraft in the second quarter of 2016, funded with cash. At June 30, 2016, we had secured loans financing 37 Boeing 737 NG aircraft and 30 Q400 aircraft with a remaining debt balance of $802.1 million, net of transaction costs. This debt is financed in Canadian dollars and has no financial covenants associated with it. Including our Senior Unsecured Notes, our new US-Dollar Notes (described below) and our unsecured, non-revolving credit facility, described below, our total outstanding debt balance at June 30, 2016 is $2,011.1 million, net of transaction costs. We currently have an $820 million guaranteed loan agreement with EDC pursuant to which EDC will make available to WestJet Encore financing support for the purchase of Bombardier Q400s. We are charged a non-refundable commitment fee of 0.2 per cent per annum on the undisbursed portion of the commitment. Under the terms of the agreement, availability of any undrawn amount will expire at the end of 2018. The expected amount available for each aircraft is up to 80 per cent of the net price with a term to maturity of up to 12 years, payable in quarterly installments. At June 30, 2016, we have $318.3 million undrawn under the loan agreement. At June 30, 2016, we have not drawn on our revolving credit facility and therefore the undisbursed portion of the credit facility was $300 million. We pay a standby fee for the undisbursed portion of the credit facility. Our revolving credit facility contains two financial covenants: (i) minimum pooled asset coverage ratio of 1.5 to 1, and (ii) minimum fixed charge coverage ratio of 1.25 to 1. At June 30, 2016, the Corporation was in compliance with both ratios. On January 5, 2016, we entered into an unsecured, non-revolving $300 million 4-year term credit facility with a syndicate of banks. The credit facility is available for general corporate purposes, including the funding of future aircraft acquisitions. On January 7, 2016, we drew the full $300 million available under the credit facility for aircraft purchases and general corporate purposes using Canadian dollar bankers’ acceptances, which remained outstanding as at June 30, 2016. Interest is calculated by reference to the applicable base rate plus an applicable pricing margin based on our corporate debt credit ratings. The credit facility contains two financial covenants: (i) minimum pooled asset coverage ratio of 1.5 to 1, and (ii) minimum fixed charge coverage ratio of 1.25 to 1. At June 30, 2016, the Corporation was in compliance with both ratios. On June 16, 2016, we successfully completed a private placement of US$400.0 million 3.50 per cent Senior Unsecured Notes (the US-Dollar Notes). The US-Dollar Notes bear interest of 3.50 per cent per year with semi-annual interest payments on June 16 and December 16 of each year commencing on December 16, 2016 and will mature on June 16, 2021. These USDollar Notes rank senior in right of payment to all future subordinated debt, rank equally in right of payment with all our other existing and future unsecured unsubordinated debt, but are effectively subordinate to all of our existing and future secured debt to the extent of the value of the assets securing such debt. There are no financial covenant requirements associated with the US-Dollar Notes. The net proceeds from the sale of these US-Dollar Notes will be used for general corporate purposes, including the funding of future aircraft purchases. Concurrently with the issuance of the US-Dollar Notes, the Corporation entered into fixed US dollar to fixed Canadian dollar uncollateralized cross currency swap agreements (the cross-currency swaps) to mitigate our exposure to future cash flow fluctuations in the Canadian US dollar exchange rate attributable to the notional and interest portions of the US-Dollar Notes. The US$400.0 million notional at 3.50 per cent interest per annum was exchanged for $511 million Canadian dollars at a 3.56 per cent weighted average interest per annum through the cross-currency swaps. The cross-currency swap terms are from June 16, 2016 to June 16, 2021, which matches the 5-year maturity of the US-Dollar Notes. We designated the cross-currency swap contracts as effective cash flow hedges for accounting purposes. At June 30, 2016, no portion of the cross-currency swap agreements designated as cash flow hedges were considered ineffective.


The following table presents the financial impact and statement presentation of the cross-currency swap agreement on the condensed consolidated statement of financial position at June 30, 2016 and December 31, 2015. There was no impact to the condensed consolidated statement of earnings for the three and six months ended June 30, 2016 and 2015.

($ in thousands) Statement presentation Statement of Financial Position: Fair value

Prepaid expenses, deposits and other

Fair value Fair value Fair value Unrealized loss

Other Assets Accounts payable and accrued liabilities Other liabilities Hedge reserves (before tax impact)

June 30 2016

December 31 2015 -

23 4,274 (80) (343) (1,225)

At June 30, 2016, we have not made any commitments for future aircraft financing, except our loan agreement with EDC described above. Our credit ratings, discussed below, are an important factor that is expected to provide WestJet with a range of public and private debt financing options in the future. We continue to evaluate the optimum balance and sources of financing available to us based on our internal requirements and capital structure as well as the external environment for aircraft financing.

I nterest During the three and six months ended June 30, 2016, we incurred $14.7 million and $28.9 million in interest (three and six months ended June 30, 2015 - $13.1 million and $26.4 million) on our long-term debt. During the first six months of 2016 $12.1 million of interest was capitalized (June 30, 2015 – $nil) as it related to deposits paid for Boeing and Bombardier aircraft. Of this amount, $8.2 million relates to prior periods. In the second quarter of 2016, $2.4 million of interest was capitalized (June 30, 2015 - $nil). To mitigate the earnings impact of changing interest rates on our variable rate loans, we have entered into interest rate swap agreements to fix the interest rates over the term of these loans. Upon proper qualification, we designated the interest rate swap contracts as effective cash flow hedges for accounting purposes. At June 30, 2016, no portion of the interest rate swap agreements designated as cash flow hedges was considered ineffective. The following table presents the financial impact and statement presentation of the interest rate swap agreements on the condensed consolidated statement of financial position at June 30, 2016 and December 31, 2015 and on the condensed consolidated statement of earnings for the three and six months ended June 30, 2016 and 2015.

($ in thousands) Statement presentation Statement of Financial Position: Fair value Fair value Unrealized loss

Accounts payable and accrued liabilities Other liabilities Hedge reserves (before tax impact)

June 30 2016

December 31 2015

3,900 12,101 16,001

4,475 8,489 12,964

Three months ended June 30 ($ in thousands) Statement of Earnings: Realized (loss) gain


($ in thousands) Statement of Earnings: Realized (loss) gain


Finance costs

Finance costs

2016

2015 (988)

(746)

Six months ended June 30 2016 2015 (2,034)

(1,503)


The fair value of the interest rate swap agreements is measured based on the difference between the fixed swap rate and the forward curve for the applicable floating interest rates obtained from the counterparty, which can be observed and corroborated in the marketplace.

Credit ratings Both our ‘BBB-‘ long-term corporate credit rating with a stable outlook from Standard & Poor’s Rating Services, originally received in the first quarter of 2014, and our ‘Baa2’ senior unsecured notes rating with a stable outlook from Moody’s Investor Service, received on May 2, 2016, remain in good standing. Credit ratings are intended to provide investors with an external measure of our overall creditworthiness. Credit ratings are not recommendations to buy, sell or hold our securities and do not address the market price or suitability of a specific security for a particular investor. Both of our corporate credit ratings are considered investment grade. There is no assurance that our ratings will remain in effect for any given period of time or that our ratings will not be revised or withdrawn entirely by the credit rating agencies in the future if, in their judgment, circumstances so warrant. Contractual obligations and commitments At June 30, 2016, our contractual obligations and commitments are indicated in the following table. In the table, all US-dollar amounts have been converted at the period-end foreign exchange rate and presented in Canadian dollars. ($ in thousands) Long-term debt repayments(i) Leases and commitments(ii) Purchase obligations(iii) Total contractual obligations (i) (ii) (iii)

2,303,271 850,084 4,603,117

Within 1 year 209,431 242,706 583,565

7,756,472

1,035,702

Total

1 - 3 years

3 - 5 years

Over 5 years

382,077 339,457 1,409,314

1,353,786 186,653 718,015

357,977 81,268 1,892,223

2,130,848

2,258,454

2,331,468

Includes contractual principal and interest payments on long-term debt. Relates to leases and commitments for aircraft, land, buildings, equipment, computer hardware, software licenses and inflight entertainment. Relates to obligations for our confirmed purchased aircraft deliveries for Boeing 737 NGs, Boeing 737 MAXs, Bombardier Q400s and spare engines.

Our future US-dollar-denominated purchase commitments, including certain aircraft, are exposed to foreign exchange risk (please refer to the heading called Foreign exchange found on page 16 of this MD&A). We plan to meet our contractual obligations and commitments through our current cash and cash equivalents balance combined with cash flows from operations and future sources of financing. We continuously monitor the capital markets and assess financing alternatives available to us for our future aircraft deliveries. At this time, we are not aware of, nor do we reasonably expect, adverse changes to our future ability to access similar or other generally available sources of liquidity. Contingencies 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.


Fleet During the second quarter of 2016, we took delivery of three Q400 aircraft and one Boeing 767 aircraft, and returned one leased Boeing 737-700 NG series aircraft to end the quarter with a registered fleet of 148 aircraft with an average age of 7.1 years. Subsequent to June 30, 2016, on July 15, 2016, we returned our second leased Boeing 737-700 NG series aircraft. On June 1, 2016, we converted the last nine of our original 25 purchase options for Q400 aircraft. These aircraft are scheduled for delivery between April 2017 and June 2018. The conversion of these options aligns with our strategy to have measured and profitable growth of our regional airline. As we continue to increase the proportion of Q400s in our fleet, our combined average stage length, calculated using a departures based methodology in line with industry standards, will be disproportionately impacted until such time that the aircraft mix in our fleet is stable. Our Q400s are used for short-haul flying which results in an increase in the number of departures compared to our Boeing 737 NG aircraft. For the three and six months ended June 30, 2016, our combined average stage length of 906 and 922 miles decreased by 0.2 per cent and 1.8 per cent, respectively, compared to the combined average stage length of 908 miles and 939 miles for the same periods in 2015. On a fleet basis, for the three and six months ended June 30, 2016, our Bombardier Q400 average stage length decreased by 0.6 per cent and increased by 1.3 per cent, respectively, and our Boeing NG 737 stage length increased by 5.7 per cent and 3.5 per cent, respectively. The combination of our firm commitments and our lease renewal options help us to optimize the size and age of our fleet. This provides us with the flexibility within our firm commitments to end 2027 with a fleet size between 190 and 233 aircraft, depending on future decisions to renew leases. The following table illustrates our Boeing 737, Boeing 767 and Bombardier Q400 fleet as at June 30, 2016 and December 31, 2015 as well as our firm commitments through to 2027. Total Dec. Jun. 31, 30, 2015 2016 Narrow body aircraft Boeing 737-600 NG Boeing 737-700 NG(i) Boeing 737-800 NG(ii) Boeing 737 MAX 7(iii)(iv) Boeing 737 MAX 8(iii)(iv) Wide body aircraft Boeing 767-300 ERW Regional aircraft Bombardier Q400 NextGen Fleet before lease expiries Lease expiries Fleet after lease expiries (i) (ii) (iii) (iv) (v)

Future Deliveries

Total

Q3-Q4 2016

2017

2018

201920

202123

202427

Total

2027

13

13

―

―

―

―

―

―

―

13

59 42 ― ―

58 43 ― ―

― 3 ― ―

― 2 ― 4

― ― ― 7

― ― 6 12

― ― 4 11

― ― 15 6

― 5 25 40

58 48 25 40

2

4

―

―

―

―

―

―

―

4

24

30

4

7

4

―

―

―

15

45

140

148

7

13

11

18

15

21

85

233

(6)

(8)

(13)

(14)

―

(43)

(43)

7

3

5

1

21

42

190

―

―

140

148

(2)

(v)

5

At June 30, 2016, of the 58 Boeing 737-700NG series aircraft in our fleet, 29 are leased (Dec. 31, 2015 – 30) and 29 are owned (Dec. 31, 2015 – 29). At June 30, 2016, of the 43 Boeing 737-800NG series aircraft in our fleet, 14 are leased (Dec. 31, 2015 – 14) and 29 are owned (Dec. 31, 2015 – 28). We have options to purchase an additional 10 Boeing 737 MAX aircraft between the years 2020 and 2021. WestJet’s Boeing 737 MAX 7 and MAX 8 aircraft orders can each be substituted for the other model of aircraft, or for Boeing 737 MAX 9 aircraft. Subsequent to quarter end, on July 15, 2016 we returned one additional leased Boeing 737-700 NG series aircraft, not reflected in this table.


Off balance sheet arrangements and related-party transactions Aircraft operating leases We currently have 43 Boeing 737 aircraft under operating leases. Future cash flow commitments in connection with these aircraft totaled US $397.3 million at June 30, 2016 (December 31, 2015 – US $466.6 million) which we expect to fund through cash from operations. Although the current obligations related to our aircraft operating lease agreements are not recognized on our condensed consolidated statement of financial position, we include an amount equal to 7.5 times our annual aircraft leasing expense in assessing our overall leverage through our adjusted debt-to-equity and adjusted net debt to EBITDAR ratios discussed previously. Fuel and de-icing facility corporations We are a contracted party to 15 fuel facility arrangements and two de-icing facility arrangement whereby we participate under contract in fuel facility corporations and de-icing facility corporations, along with other airlines, to obtain fuel services and deicing services at major Canadian and U.S. airports. The fuel facility and de-icing facility corporations operate on a costrecovery basis. The purpose of these corporations is to own and finance the systems that distribute fuel and de-icing fluid, respectively, 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 the debt service requirements, of the fuel and de-icing facility corporations are shared pro rata among the contracting airlines. The 15 fuel facility corporations and the two de-icing facilities are not consolidated within our accounts. In the remote event that all other contracting airlines withdraw from the arrangements and we remained as sole member, we would be responsible for the costs of the fuel facility corporations and de-icing facility corporations, including debt service requirements. At May 31, 2016, the fuel facility corporations and the de-icing facility corporations have combined total assets of approximately $672.7 million and liabilities of approximately $645.6 million. Related-party transactions At June 30, 2016, we had no transactions with related parties as defined in International Accounting Standard (IAS) 24 – Related Party Disclosures, except those pertaining to transactions with key management personnel in the ordinary course of their employment or directorship agreements.


Share capital Outstanding share data Our issued and outstanding voting shares, along with voting shares potentially issuable, are as follows: Common voting shares Variable voting shares Total voting shares issued and outstanding Stock options RSUs – Key employee and pilot plan RSUs – Executive share unit plan PSUs – Executive share unit plan Total voting shares potentially issuable Total outstanding and potentially issuable voting shares

June 30, 2016 97,355,676 22,515,749 119,871,425 9,017,291 246,030 263,456 439,395 9,966,172 129,837,597

Quarterly dividend Our dividend is reviewed on a quarterly basis in light of our financial position, financing policies, cash flow requirements and other factors deemed relevant. On July 25, 2016, the Board of Directors declared our 2016 third quarter dividend of $0.14 per common voting share and variable voting share payable on September 30, 2016 to shareholders of record on September 14, 2016. This remains consistent with the $0.14 per share declared and paid during our second quarter of 2016. We believe this demonstrates our confidence in delivering continued profitable results and is consistent with our objective of creating and returning value to our shareholders. Normal course issuer bid On May 12, 2016, our 2015 normal course issuer bid (2015 bid) expired, under which the Corporation purchased and cancelled 5,348,121 common voting shares and variable voting shares (the Shares) of the 6,000,000 Shares it was authorized to repurchase. During the three and six months ended June 30, 2016, under the 2015 bid we repurchased and cancelled 1,348,121 and 2,148,121 Shares respectively, equal to 22.5 and 35.8 per cent of the maximum number of shares we are authorized to repurchase, for total consideration of $28.1 million and $42.1 million, respectively. These Shares were purchased on the open market through the facilities of the Toronto Stock Exchange (TSX) at the prevailing market price at the time of the transaction. At the same time as the expiry of the 2015 bid, the Corporation filed a notice with the TSX to make a normal course issuer bid to purchase outstanding Shares on the open market. As approved by the TSX on May 16, 2016, the Corporation is authorized to purchase up to 4,000,000 Shares (representing approximately 3.3 per cent of the Corporation’s issued and outstanding Shares as of April 30, 2016) during the period from May 18, 2016 to May 17, 2017, or until such time as the bid is completed or terminated at the Corporation’s option (2016 bid). Any shares purchased under the 2016 bid will be purchased on the open market through the facilities of the TSX at the prevailing market price at the time of the transaction. Shares acquired under this bid will be cancelled. During the second quarter of 2016, under the 2016 bid we repurchased and cancelled 1,110,440 Shares equal to 27.8 per cent of the maximum number of Shares we are authorized to repurchase, for total consideration of $24.9 million. These Shares were purchased on the open market through the facilities of the TSX at the prevailing market price at the time of the transaction. As of the date of this MD&A, there are 2,889,560 Shares remaining for purchase under the 2016 bid. A shareholder of WestJet may obtain a copy of the notice filed with the TSX in relation to the 2016 bid, free of charge, by contacting the Corporate Secretary of WestJet at 22 Aerial Place N.E., Calgary, Alberta T2E 3J1 (telephone: (403) 444-2600) or by emailing [email protected].


Accounting Critical accounting judgments and estimates Critical accounting judgments and estimates used in preparing our unaudited condensed consolidated interim financial statements are described in WestJet’s 2015 annual MD&A and annual consolidated financial statements for the year ended December 31, 2015. The preparation of consolidated financial statements in conformity with GAAP requires management to make both judgments and estimates that could materially affect the amounts recognized in the financial statements. By their nature, judgments and estimates may change in light of new facts and circumstances in the internal and external environment. There have been no material changes to our critical accounting estimates and judgments during the three and six months ended June 30, 2016. Future accounting pronouncements The International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC) have issued the following standards that have not been applied in preparing our condensed consolidated interim financial statements and notes thereto, for the three and six months ended June 30, 2016 as their effective dates fall within annual periods beginning subsequent to the current reporting period. Proposed standard

Description

Previous standard

Effective date

IFRS 15 – Revenue from Contracts with Customers

A new standard on revenue recognition that contains a single model that applies to contracts with customers and two approaches to recognizing revenue; at a point in time or over time.

IAS 11 - Construction contracts; IAS 18 – Revenue; IFRIC 13 - Customer Loyalty Programmes; IFRIC 15 Agreements for the Construction of Real Estate; IFRIC 18 - Transfers of Assets from Customers; SIC-31 Revenue - Barter Transactions Involving Advertising Services

Effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted.

IFRS 9 – Financial Instruments

A single financial instrument accounting standard addressing: classification and measurement (Phase 1), impairment (Phase II) and hedge accounting (Phase III).

IAS 39; IAS 32; IFRS 7 – Financial Instruments: Recognition and Measurement; Presentation; Disclosures


IFRS 16 Leases

A new standard on lease accounting addressing the principles to apply to report useful information about the amount, timing and uncertainty of cash flows arising from a lease. All lease commitments will be recognized as a liability.

IAS 17 - Leases


Management is currently in the process of formalizing our transition plan regarding these new accounting standards including our approach to defining the impact, if any, on reporting processes, information systems, business processes and external disclosures. We anticipate completing our scoping in the fourth quarter of 2016. We do not anticipate early adoption of these standards.


Controls and procedures Disclosure controls and procedures (DC&P) DC&P are designed to provide reasonable assurance that all relevant information is gathered and reported to management, including the chief executive officer (CEO) and the chief financial officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of our DC&P was conducted, as at June 30, 2016, by management under the supervision of the CEO and the CFO. Based on this evaluation, the CEO and the CFO have concluded that, as at June 30, 2016, our DC&P, as defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), was effective. Internal control over financial reporting (ICFR) ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Management is responsible for establishing and maintaining adequate ICFR. Our ICFR includes policies and procedures that pertain to the maintenance of records that provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; and are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our condensed consolidated interim financial statements. Because of its inherent limitations, ICFR can provide only reasonable assurance and may not prevent or detect misstatements. Furthermore, projections of an evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Management, under the supervision of the CEO and the CFO, has evaluated our ICFR using the framework and criteria established in the 2013 Internal Controls – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, the CEO and the CFO have concluded that as at June 30, 2016, ICFR (as defined in NI 52-109) were effective. There were no changes in our ICFR during the interim period ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our ICFR.


Forward-looking information This MD&A offers our assessment of WestJet’s future plans, operations and outlook and contains “forward-looking information” as defined under applicable Canadian securities legislation, including without limitation: Forward looking statement

Key assumptions

Heading

Our plan to continue adding new markets and additional frequencies to our existing markets through the growth of our fleet. We expect to complete the installation of the new inflight entertainment system on the majority of our Boeing 737 fleet by the end of 2016. We believe that the reciprocal frequent flyer agreement with Qantas Airways will significantly improve our rewards program and will bring opportunities and benefits to our WestJet Reward members. Our expectation that the TSA PreCheck service enhancement will make the security experience more efficient for our business and frequent flyer guests. The flexibility in our fleet plan will allow us to adjust our schedules to better meet the needs of our guests. Our expectation that as our fleet continues to expand we will establish additional profitable routes in Canada, the U.S. and internationally.

Boeing and Bombardier will meet our aircraft delivery schedules and there will be availability at certain airports. Our current installation schedule will not be impacted by unexpected aircraft scheduling, or supplier delays. Our agreement with Qantas Airways remains in good standing.

About WestJet

2

Guest experience and service enhancements Guest experience and service enhancements

5

The program being successfully carried out.

Guest experience and service enhancements

5

There will be availability at certain airports and we have the ability to accommodate the shifting operations. Boeing and Bombardier will be able to meet our aircraft delivery commitments. Our ability and systems to assess route profitability will continue. Boeing and Bombardier will be able to meet our aircraft delivery commitments. Forecasted jet fuel prices of US $56 per barrel for the third quarter of 2016. Average foreign exchange rate of approximately 1.30 Canadian dollars to one US dollar for the third quarter of 2016 and approximately 1.32 for the full-year 2016. No significant changes to current tax legislation. Boeing and Bombardier will meet our aircraft delivery schedules. Based on our current network planning and schedules. Based on our current risk management policies.

Guest experience and service enhancements Network expansion and fleet

5

Fleet

24

Outlook

7

Income taxes

17

Aircraft fuel

11

Forecasted jet fuel prices of US $56 per barrel for the third quarter of 2016. Average foreign exchange rate of approximately 1.30 Canadian dollars to one US dollar.

Aircraft fuel

11

We expect our aircraft to be delivered as per our fleet delivery schedule. Our anticipated outlook and guidance for the third quarter of 2016 and full year 2016, where provided, for traffic, system-wide and domestic capacity, year over year change in RASM, year over year change in CASM, excluding fuel and profit share, fuel costs, capital expenditures and our expected effective tax rate.

We will continue to monitor and adjust to movements in fuel prices and may re-visit our hedging strategy as changing markets and competitive conditions warrant. Our estimate of our sensitivity of fuel costs to changes in crude oil and jet fuel and sensitivity to fuel costs to the change in the value of the Canadian dollar versus of the US dollar.

Page

5

5


Our estimate of our sensitivity in our annual unhedged operating costs and our future USdenominated purchase obligations to the change in the value of the Canadian dollar versus the US dollar. We expect to receive financing from EDC for up to 80 per cent of the net price for each Bombardier Q400 aircraft Our expectation that our credit rating will provide us with a range of public and private debt financing options in the future. Our plan to meet contractual obligations and commitments through our current cash and cash equivalents balance combined with future cash flows from operations sources of aircraft financing and our expectation that there will not be adverse changes to our future ability to access liquidity. We expect that the future outcome of our current legal proceedings and claims will not have a material effect upon our financial position, results of operations or cash flows. We do not anticipate early adoption of the new financial instrument standards, referred to under the heading.

Average foreign exchange rate of approximately 1.30 Canadian dollars to one US dollar.

Foreign exchange

16

Our current EDC agreement will remain in good standing.

Financing

21

We will maintain our investment grade corporate debt credit ratings.

Financing

21

We will maintain our investment grade corporate debt credit ratings.

Contractual obligations and commitments

23

Off balance sheet arrangements

25

Based on our current legal counsel assessment.

Contingencies

23

Based on preliminary review of the standards.

Future accounting pronouncements

27

Definition of key operating indicators Our key operating indicators are airline industry metrics, which are useful in assessing the operating performance of an airline. Available seat miles (ASM): A measure of total guest capacity, calculated by multiplying the number of seats available for guest use in an aircraft by stage length. Average stage length: The average distance of a non-stop flight leg between take-off and landing as defined by International Air Transport Association (IATA) guidelines. Cost per available seat mile (CASM): Operating expenses divided by available seat miles. Departures: One flight, counted by the aircraft leaving the ground and landing. Load factor: A measure of total capacity utilization, calculated by dividing revenue passenger miles by total available seat miles. Revenue passenger miles (RPM): A measure of guest traffic, calculated by multiplying the number of segment guests by stage length. Revenue per available seat mile (RASM): Total revenue divided by available seat miles. Segment guest: Any person who has been booked to occupy a seat on a flight leg and is not a member of the crew assigned to the flight. Utilization: Operating hours per day per operating aircraft. Yield (revenue per revenue passenger mile): A measure of unit revenue, calculated as the gross revenue generated per revenue passenger mile.


Non-GAAP and additional GAAP measures The following non-GAAP and additional GAAP measures are used to monitor our financial performance: Adjusted debt: The sum of long-term debt and off-balance-sheet aircraft operating leases. Our practice, consistent with common airline industry practice, is to multiply the trailing 12 months of aircraft leasing expense by 7.5 to derive a present value debt equivalent. This measure is used in the calculation of adjusted debt-to-equity and adjusted net debt to EBITDAR, as defined below. Adjusted equity: The sum of share capital, equity reserves and retained earnings, excluding hedge reserves. This measure is used in the calculation of adjusted debt-to-equity. Adjusted net debt: Adjusted debt less cash and cash equivalents. This measure is used in the calculation of adjusted net debt to EBITDAR, as defined below. EBITDAR: Earnings before net finance costs, taxes, depreciation, amortization, aircraft rent and other items, such as asset impairments, gains and losses on derivatives, and foreign exchange gains or losses. Trailing 12 months EBITDAR is a measure commonly used in the airline industry to evaluate results by excluding differences in the method by which an airline finances its aircraft. Cash to trailing 12 months of revenue: Cash as a percentage of the trailing twelve months’ revenue is a measure commonly used in the airline industry to compare liquidity positions. CASM, excluding fuel and employee profit share: We exclude the effects of aircraft fuel expense and employee profit share expense to assess the operating performance of our business. Fuel expense is excluded from our operating results because fuel prices are affected by a host of factors outside our control, such as significant weather events, geopolitical tensions, refinery capacity, and global demand and supply. Excluding this expense allows us to analyze our operating results on a comparable basis. Employee profit share expense is excluded from our operating results because of its variable nature dependent on earnings and excluding this expense allows for greater comparability. Return on invested capital: ROIC is a measure commonly used to assess the efficiency with which a company allocates its capital to generate returns. Return is calculated based on our trailing twelve months’ earnings before tax, excluding special items, finance costs and implied interest on our off-balance-sheet aircraft leases. Invested capital includes average long-term debt, average finance lease obligations, average shareholders’ equity and off-balance-sheet aircraft operating leases. Free cash flow: Operating cash flow less capital expenditures. This measure is used to calculate the amount of cash available that can be used to pursue other opportunities after maintaining and expanding the asset base. Diluted free cash flow per share: Free cash flow divided by the diluted weighted average number of shares outstanding. Diluted operating cash flow per share: Cash flow from operations divided by diluted weighted average shares outstanding.


Reconciliation of non-GAAP and additional GAAP measures The following provides a reconciliation of non-GAAP and additional GAAP measures to the nearest measure under GAAP for items presented throughout this MD&A.

CASM , excluding fuel and em ployee profit share ($ in thousands) Operating expenses Aircraft fuel expense Employee profit share expense Operating expenses, excluding fuel and employee profit share ASMs CASM, excluding fuel and profit share (cents)


Three months ended June 30 2016 2015 Change 887,887 841,610 46,277 (182,583) (214,948) 32,365

2016 1,796,060 (348,998)

2015 1,727,947 (425,393)

Change 68,113 76,395

1,192

(9,359)

10,550

(21,310)

(59,122)

37,812

706,496

617,303

89,192

1,425,752

1,243,432

182,320

7,115,577,504

6,654,631,242

6.9%

14,409,981,621

13,473,244,403

7.0%

9.93

9.28

7.0%

9.89

9.23

7.2%

Adjusted debt-to-equity ($ in thousands) Long-term debt(i) Off-balance-sheet aircraft leases(ii) Adjusted debt Total shareholders’ equity Add: Hedge reserves Adjusted equity Adjusted debt-to-equity

June 30 2016 2,011,149 1,302,998 3,314,147 1,970,813 15,757 1,986,570 1.67

December 31 2015 1,174,833 1,305,668 2,480,501 1,959,993 (1,903) 1,958,090 1.27

Change 836,316 (2,670) 833,646 10,820 17,660 28,480 31.5%

(i) At June 30, 2016, long-term debt includes the current portion of long-term debt of $140,558 (December 31, 2015 – $141,572) and long-term debt of $1,870,591 (December 31, 2015 – $1,033,261). (ii) Off-balance-sheet aircraft leases are calculated by multiplying the trailing 12 months of aircraft leasing expense by 7.5. At June 30, 2016, the trailing 12 months of aircraft leasing expenses totaled $173,733 (December 31, 2015 – $174,089).

Adjusted net debt to EBI TDAR ($ in thousands) Adjusted debt Less: Cash and cash equivalents Adjusted net debt Net earnings Add: Net finance costs(i) Taxes Depreciation and amortization Aircraft leasing Other(ii) EBITDAR Adjusted net debt to EBITDAR(iii)

June 30 2016 3,314,147 (1,698,248) 1,615,899 289,537

December 31 2015 2,480,501 (1,183,797) 1,296,704 367,530

29,869 125,294 313,566 173,733

38,136 152,728 264,921 174,089

(8,267) (27,434) 48,645 (356)

5,078 937,077 1.72

9,499 1,006,903 1.29

(4,421) (69,826) 33.3%

Change 833,646 (514,451) 319,195 (77,993)

(i) At June 30, 2016, net finance costs includes the trailing 12 months of finance income of $14,352 (December 31, 2015 – $15,529) and the trailing 12 months of finance cost of $44,221 (December 31, 2015 – $53,665). (ii) At June 30, 2016, other includes the trailing 12 months foreign exchange loss of $4,344 (December 31, 2015 – loss of $10,326). (iii) At June 30, 2016 and December 31, 2015, the Corporation met its internal guideline of an adjusted net debt to EBITDAR and an adjusted net debt to adjusted EBITDAR measure of less than 2.50.


Free cash flow ($ in thousands, except per share data) Cash flow from operating activities Aircraft additions Other property and equipment and intangible additions Free cash flow Weighted average number of shares outstanding - diluted Diluted free cash flow per share

($ in thousands, except per share data) Cash flow from operating activities Adjusted for: Aircraft additions Other property and equipment and intangible additions Free cash flow Weighted average number of shares outstanding - diluted Diluted free cash flow per share

2016

Three months ended June 30 2015 Change

144,674

130,134

14,540

(281,474) (18,882) (155,682) 121,545,896 (1.28)

(156,861) (9,865) (63,592) 126,787,833 (0.50)

(124,613) (9,017) (119,090) (5,241,937) (156.0%)

Six months ended June 30 2015 Change 366,770 387,937 (21,167)

2016

(492,007) (42,053) (167,290) 122,236,795 (1.37)

(312,444) (25,393) 50,100 127,689,059 0.39

(179,563) (16,660) (217,390) (5,452,264) (251.3%)

Operating cash flow per share Three months ended June 30 ($ in thousands, except per share data) Cash flow from operating activities Weighted average number of shares outstanding - diluted Diluted operating cash flow per share

2016 144,674 121,545,896 1.19

($ in thousands, except per share data) Cash flow from operating activities Weighted average number of shares outstanding - diluted Diluted operating cash flow per share

Six months ended June 30 2016 2015 Change 366,770 387,937 (21,167) 122,236,795 127,689,059 (5,452,264) 3.00 3.04 (1.32%)

Cash to trailing 12 m onths revenue ($ in thousands) Cash and cash equivalents Trailing 12 months revenue Cash to trailing 12 months revenue (i)

June 30 2016 1,698,248 3,984,527 42.6%

2015 130,134 126,787,833 1.03

December 31 2015 1,183,797 4,029,265 29.4%

Change 14,540 (5,241,937) 15.5%

Change 514,451 (44,738) 13.2 pts.

(i) At June 30, 2016 and December 31, 2015, the Corporation met its internal guideline of cash to trailing 12 months revenue of approximately 30 per cent.


Return on invested capital ($ in thousands) Earnings before income taxes (trailing twelve months) Add: Finance costs Implicit interest in operating leases(i) Return Invested capital: Average long-term debt(ii) Average shareholders' equity Off-balance-sheet aircraft leases(iii) Invested capital Return on invested capital

June 30 2016 414,831

December 31 2015 520,258

44,221 91,210 550,262

53,665 91,397 665,320

(9,444) (187) (115,058)

1,617,149 1,919,542 1,302,998 4,839,689 11.4%

1,181,748 1,868,748 1,305,668 4,356,164 15.3%

435,401 50,794 (2,670) 483,525 (3.9 pts.)

Change (105,427)

(i) Interest implicit in operating leases is equal to 7.0 per cent of 7.5 times the trailing 12 months of aircraft lease expense. 7.0 per cent is a proxy and does not necessarily represent actual for any given period. (ii) Average long-term debt includes the current portion and long-term portion. (iii) Off-balance-sheet aircraft leases are calculated by multiplying the trailing 12 months of aircraft leasing expense by 7.5. At June 30, 2016, the trailing 12 months of aircraft leasing expenses totaled $173,733 (December 31, 2015 – $174,089).


Financial Statements and Notes

Condensed Consolidated Interim Financial Statements and Notes For the three and six months ended June 30, 2016 and 2015

WestJet Airlines Ltd. Second Quarter 2016 Financial Statements and Notes July 25, 2016

Condensed Consolidated Statement of Earnings For the three and six months ended June 30 (Stated in thousands of Canadian dollars, except per share amounts) (Unaudited)

Note

Revenue: Guest Other Operating expenses: Salaries and benefits Aircraft fuel Rates and fees Sales and marketing Depreciation and amortization Maintenance Aircraft leasing Other Employee profit share Earnings from operations Non-operating income (expense): Finance income Finance cost Gain (loss) on foreign exchange Gain (loss) on disposal of property and equipment Loss on derivatives

11

Earnings before income tax Income tax expense (recovery): Current Deferred Net earnings Earnings per share: Basic Diluted

10 10

Three months ended June 30 2016 2015


814,402 134,911 949,313

828,909 113,089 941,998

1,700,622 280,136 1,980,758

1,785,855 239,640 2,025,495

218,250 182,583 152,470 84,118 86,821 50,345 44,973 69,519 (1,192) 887,887 61,426

202,513 214,948 138,516 74,376 62,766 37,009 43,981 58,142 9,359 841,610 100,388

440,573 348,998 306,214 173,195 168,590 103,283 91,280 142,617 21,310 1,796,060 184,698

405,594 425,393 272,706 157,099 119,945 72,486 91,636 123,966 59,122 1,727,947 297,548

3,547 (12,793) 1,574 (1,782) (249) (9,703) 51,723

4,251 (13,477) 940 (3,216) (11,502) 88,886

7,294 (17,955) 6,295 (2,862) (1,561) (8,789) 175,909

8,470 (27,398) 313 2,402 (16,213) 281,335

14,945 124 15,069 36,654

26,845 487 27,332 61,554

54,430 (2,820) 51,610 124,299

66,421 12,623 79,044 202,291

0.30 0.30

0.49 0.49

1.02 1.02

1.60 1.58

The accompanying notes are an integral part of the condensed consolidated interim financial statements.


Condensed Consolidated Statement of Financial Position (Stated in thousands of Canadian dollars) (Unaudited)

Note

Assets Current assets: Cash and cash equivalents Restricted cash Accounts receivable Prepaid expenses, deposits and other Inventory Non-current assets: Property and equipment Intangible assets Other assets Total assets Liabilities and shareholders’ equity Current liabilities: Accounts payable and accrued liabilities Advance ticket sales Deferred rewards program Non-refundable guest credits Current portion of maintenance provisions Current portion of long-term debt Non-current liabilities: Maintenance provisions Long-term debt Other liabilities Deferred income tax Total liabilities Shareholders’ equity: Share capital Equity reserves Hedge reserves Retained earnings Total shareholders’ equity Commitments Total liabilities and shareholders’ equity

3 4

5

6 7

6 7

8

June 30 2016

December 31 2015

1,698,248 45,507 113,642 91,553 32,684 1,981,634

1,183,797 68,573 82,136 131,747 36,018 1,502,271

3,808,352 61,840 81,301 5,933,127

3,473,262 63,549 89,942 5,129,024

420,750 695,799 132,812 42,157 91,083 140,558 1,523,159

545,438 620,216 117,959 40,921 85,819 141,572 1,551,925

234,480 1,870,591 16,580 317,504 3,962,314

243,214 1,033,261 13,603 327,028 3,169,031

567,979 87,265 (15,757) 1,331,326 1,970,813

582,796 82,713 1,903 1,292,581 1,959,993

5,933,127

5,129,024

13



Condensed Consolidated Statement of Cash Flows For the three and six months ended June 30 (Stated in thousands of Canadian dollars) (Unaudited)

Note

Operating activities: Net earnings Items not involving cash: Depreciation and amortization Change in maintenance provisions Amortization of transaction costs Amortization of hedge settlements Loss on derivatives (Gain) loss on disposal of property and equipment Share-based payment expense Deferred income tax expense (recovery) Unrealized foreign exchange gain Change in non-cash working capital Change in restricted cash Change in other assets Change in other liabilities Purchase of shares pursuant to compensation plans Maintenance provision settlements

Three months ended June 30 2016 2015


36,654

61,554

124,299

202,291

86,821 19,760 929 247 249 1,782 6,958 124 (5,276) 9,302 17,215 (321) (258) (6,237) (23,275) 144,674

62,766 14,300 1,091 350 3,216 5,250 487 (4,417) (12,874) 11,487 3,313 469 (5,109) (11,749) 130,134

168,590 42,085 2,162 567 1,561 2,862 11,370 (2,820) (6,183) 23,409 23,066 6,799 (977) (6,383) (23,637) 366,770

119,945 30,545 2,311 700 (2,402) 8,750 12,623 (11,769) 50,945 15,532 (5,892) 283 (13,071) (22,854) 387,937

(256,701) (130) (19,260) (24,264) (300,355)

(234,708) 35,217 (16,226) 48,992 (166,725)

(468,247) 73 (36,659) (29,227) (534,060)

(444,163) 82,651 (31,873) 54,108 (339,277)

562,096 (43,492) (52,968) (16,782) 40 (8,361) 2,764 443,297

51,546 (43,011) (27,601) (17,535) 36 (8,490) 3,344 (41,711)

914,791 (85,104) (66,933) (33,914) 40 (24,715) (10,360) 693,805

117,870 (85,497) (71,906) (35,207) 36 (23,829) (26) (98,559)

287,616

(78,302)

526,515

(49,899)

3,722 291,338

2,515 (75,787)

(12,064) 514,451

21,380 (28,519)

Cash and cash equivalents, beginning of period

1,406,910

1,405,339

1,183,797

1,358,071

Cash and cash equivalents, end of period Supplemental disclosure of operating cash flows Cash interest received Cash taxes paid, net

1,698,248

1,329,552

1,698,248

1,329,552

3,520 (29,533)

4,511 (30,032)

7,099 (74,472)

9,153 (61,304)

8

Investing activities: Aircraft additions Aircraft disposals Other property and equipment and intangible additions Change in non-cash working capital

Financing activities: Increase in long-term debt Repayment of long-term debt Shares repurchased Dividends paid Issuance of shares pursuant to compensation plans Cash interest paid Change in non-cash working capital

Cash flow from operating, investing and financing activities Effect of foreign exchange on cash and cash equivalents Net change in cash and cash equivalents

8 9

The accompanying notes are an integral part of the condensed consolidated interim financial statements. WestJet Second Quarter 2016 │ 38

Condensed Consolidated Statement of Changes in Equity For the six months ended June 30 (Stated in thousands of Canadian dollars) (Unaudited) Note

Share capital: Balance, beginning of period Issuance of shares pursuant to compensation plans Shares repurchased

Equity reserves: Balance, beginning of period Share-based payment expense Issuance of shares pursuant to compensation plans

8 8 8

8

Hedge reserves: Balance, beginning of period Other comprehensive income

Retained earnings: Balance, beginning of period Dividends declared Shares repurchased Purchase of shares pursuant to compensation plans Net earnings

Total shareholders’ equity

9 8

2016

2015

582,796 629 (15,446) 567,979

603,287 1,131 (11,919) 592,499

82,713 11,370 (6,818) 87,265

75,094 8,750 (8,270) 75,574

1,903 (17,660) (15,757)

(3,179) (124) (3,303)

1,292,581 (33,914) (51,487) (153) 124,299 1,331,326

1,102,300 (35,207) (59,987) (5,896) 202,291 1,203,501

1,970,813

1,868,271



Condensed Consolidated Statement of Comprehensive Income For the three and six months ended June 30 (Stated in thousands of Canadian dollars) (Unaudited) Three months ended June 30 2016 2015 Net earnings Items to be reclassified to net earnings: Other comprehensive income, net of tax: Amortization of hedge settlements to aircraft leasing Net unrealized gain (loss) on foreign exchange derivatives(i) Reclassification of net realized gain on foreign exchange derivatives(ii) Net unrealized gain (loss) on interest rate derivatives(iii) Reclassification of net realized loss on interest rate derivatives(iv) Net unrealized gain (loss) on cross-currency swap derivatives(v) Total comprehensive income (i)

Net of income taxes of $401 and $3,934 (2015 – $455 and $(3,080)).

(ii)

Net of income taxes of $310 and $1,497 (2015 – $1,301 and $2,553).

(iii)

Net of income taxes of $285 and $1,368 (2015 – $(415) and $1,257).

(iv)

Net of income taxes of $(266) and $(547) (2015 – $(197) and $(394)).

(v)

Net of income taxes of $450 and $450 (2015 – $nil and $nil)


36,654

61,554

124,299

202,291

247 (1,090) (849) (776) 722 (1,225) (2,971)

350 (1,575) (3,640) 1,491 550 (2,824)

567 (10,708) (4,079) (3,702) 1,487 (1,225) (17,660)

700 8,439 (7,132) (3,240) 1,109 (124)

33,683

58,730

106,639

202,167



Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2016 and 2015 (Stated in thousands of Canadian dollars, except percentage, ratio, share and per share amounts) (Unaudited) 1.

Statement of significant accounting policies The condensed consolidated interim financial statements of WestJet Airlines Ltd. (the Corporation) for the three and six months ended June 30, 2016 and 2015, were authorized for issue by the Board of Directors on July 25, 2016. The Corporation is a public company incorporated and domiciled in Canada. The Corporation provides airline service and travel packages. The Corporation’s shares are publicly traded on the Toronto Stock Exchange (TSX) under the symbol WJA. The principal business address is 22 Aerial Place N.E., Calgary, Alberta, T2E 3J1 and the registered office is Suite 2400, 525 - 8 Avenue S.W., Calgary, Alberta, T2P 1G1.

(a) Basis of presentation These condensed consolidated interim financial statements and the notes thereto have been prepared in accordance with IAS 34 – Interim Financial Reporting. They do not include all of the information required for full annual financial statements and should be read in conjunction with the 2015 consolidated annual financial statements. There have been no changes to the Corporation’s significant accounting policies from those disclosed in the 2015 consolidated annual financial statements. (b) Seasonality The airline industry is sensitive to general economic conditions and the seasonal nature of air travel. The Corporation experiences increased domestic travel in the summer months and more demand for transborder and international travel over the winter months, thus reducing the effects of seasonality on net earnings.



Capital management The Corporation’s policy is to maintain a strong capital base in order to maintain investor, creditor and market confidence and to sustain the future development of the airline. The Corporation manages its capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to manage the capital structure, the Corporation may, from time to time, purchase shares for cancellation pursuant to normal course issuer bids, issue new shares, pay dividends and adjust current and projected debt levels. In the management of capital, the Corporation includes shareholders’ equity (excluding hedge reserves), long-term debt, cash and cash equivalents and the Corporation’s off-balance-sheet obligations related to its aircraft operating leases, all of which are presented in detail below. The Corporation monitors its capital structure on a number of bases, including cash to trailing 12 months revenue, adjusted debt-to-equity and adjusted net debt to earnings before net finance cost, taxes, depreciation and amortization and aircraft leasing (EBITDAR). EBITDAR is a non-GAAP financial measure commonly used in the airline industry to evaluate results by excluding differences in tax jurisdictions and in the method an airline finances its aircraft. In addition, the Corporation will adjust EBITDAR for non-operating gains and losses on derivatives and foreign exchange and impairment losses. The calculation of EBITDAR is a measure that does not have a standardized meaning prescribed under IFRS and therefore may not be comparable to similar measures presented by other issuers. The Corporation adjusts debt to include its off-balance-sheet aircraft operating leases. To derive a present-value debt equivalent, common industry practice is to multiply the trailing 12 months of aircraft leasing expense by a multiplier. The Corporation uses a multiplier of 7.5. The Corporation defines adjusted net debt as adjusted debt less cash and cash equivalents. The Corporation defines equity as total shareholders’ equity, excluding hedge reserves.

Cash to trailing 12 months revenue Cash and cash equivalents Trailing 12 months revenue Cash to trailing 12 months revenue(v) Adjusted debt-to-equity Long-term debt(i) Off-balance-sheet aircraft leases(ii) Adjusted debt Total shareholders’ equity Add: Hedge reserves Adjusted equity Adjusted debt-to-equity(v) Adjusted net debt to EBITDAR Adjusted debt (as above) Less: Cash and cash equivalents Adjusted net debt Net earnings Add: Net finance cost(iii) Taxes Depreciation and amortization Aircraft leasing Other(iv) Trailing 12 months EBITDAR Adjusted net debt to EBITDAR(v)

June 30 2016

December 31 2015

Change

1,698,248 3,984,527 42.6%

1,183,797 4,029,265 29.4%

514,451 (44,738) 13.2 pts

2,011,149 1,302,998 3,314,147 1,970,813 15,757 1,986,570 1.67

1,174,833 1,305,668 2,480,501 1,959,993 (1,903) 1,958,090 1.27

836,316 (2,670) 833,646 10,820 17,660 28,480 31.5%

3,314,147 (1,698,248) 1,615,899 289,537

2,480,501 (1,183,797) 1,296,704 367,530

833,646 (514,451) 319,195 (77,993)

29,869 125,294 313,566 173,733 5,078 937,077 1.72

38,136 152,728 264,921 174,089 9,499 1,006,903 1.29

(8,267) (27,434) 48,645 (356) (4,421) (69,826) 33.3%

(i)

At June 30, 2016, long-term debt includes the current portion of long-term debt of $140,558 (December 31, 2015 – $141,572) and long-term debt of $1,870,591 (December 31, 2015 – $1,033,261).

(ii)

Off-balance-sheet aircraft leases is calculated by multiplying the trailing 12 months of aircraft leasing expense by 7.5. At June 30, 2016, the trailing 12 months of aircraft leasing costs totaled $173,733 (December 31, 2015 – $174,089).

(iii)

At June 30, 2016, net finance cost includes the trailing 12 months of finance income of $14,352 (December 31, 2015 – $15,529) and the trailing 12 months of finance cost of $44,221 (December 31, 2015 – $53,665).

(iv)

At June 30, 2016, other includes the trailing 12 months foreign exchange loss of $4,344 (December 31, 2015 – loss of $10,326) and trailing 12 months non-operating loss on derivatives of $734 (December 31, 2015 – gain of $827).

(v)

The Corporation has internal guidelines for cash to trailing 12 months revenue of approximately 30%, an adjusted debt-to-equity measure of no more than 2.5 and an adjusted net debt to EBITDAR measure of no more than 2.5. The Corporation’s internal guidelines are not related to any covenants. WestJet Second Quarter 2016 │ 42


Cash and cash equivalents June 30 2016 482,009 1,216,239 1,698,248

Bank balances(i) Short-term investments(i) (i)

4.

Included in these balances, at June 30, 2016, the Corporation has US-dollar cash and cash equivalents totaling US $221,139 (December 31, 2015 – US $170,216).

Restricted cash June 30 2016 Cash held in trust for WestJet Vacations Inc. Security on facilities for letters of guarantee Passenger facility charges

5.

December 31 2015 340,504 843,293 1,183,797

30,467 13,609 1,431 45,507

December 31 2015 53,572 13,366 1,635 68,573

Property and equipment

Aircraft(i) Ground property and equipment Spare engines and rotables Deposits on aircraft Buildings Leasehold improvements Assets under development

Aircraft(i) Ground property and equipment Spare engines and rotables Deposits on aircraft Buildings Leasehold improvements Assets under development (i)

January 1 2016 2,741,974 72,176 167,446 319,019 106,364 10,374 55,909 3,473,262

Net Additions 80,990 9,770 12,907 356,664 (64) 2,583 32,928 495,778

Depreciation (139,315) (8,798) (9,259) (1,766) (1,550) (160,688)

Transfers 244,406 (143) 5,494 (201,997) 135 (47,895) -

June 30 2016 2,928,055 73,005 176,588 473,686 104,534 11,542 40,942 3,808,352

January 1 2015 1,933,286 60,152 144,035 509,684 109,434 10,460 26,143 2,793,194

Net additions 190,963 20,283 38,421 554,482 89 2,378 126,080 932,696

Depreciation (216,287) (15,186) (15,221) (3,511) (2,423) (252,628)

Transfers 834,012 6,927 211 (745,147) 352 (41) (96,314) -

December 31 2015 2,741,974 72,176 167,446 319,019 106,364 10,374 55,909 3,473,262

Aircraft includes (a) aircraft (b) engine, airframe and landing gear core components (c) engine, airframe and landing gear overhaul components, and (d) inflight entertainment systems. For the three and six months ended June 30, 2016, total aircraft depreciation expense for overhaul components was $28,610 and $54,259 (June 30, 2015 – $23,264 and $43,060).



Property and equipment (continued) June 30, 2016 Aircraft Ground property and equipment Spare engines and rotables Deposits on aircraft Buildings Leasehold improvements Assets under development

December 31, 2015 Aircraft Ground property and equipment Spare engines and rotables Deposits on aircraft Buildings Leasehold improvements Assets under development

Cost 4,166,626 192,965 258,732 473,686 136,718 24,822 40,942 5,294,491

Cost 3,912,617 183,828 240,893 319,019 136,783 22,104 55,909 4,871,153

Accumulated depreciation (1,238,571) (119,960) (82,144) (32,184) (13,280) (1,486,139) Accumulated depreciation (1,170,643) (111,652) (73,447) (30,419) (11,730) (1,397,891)

Net book value 2,928,055 73,005 176,588 473,686 104,534 11,542 40,942 3,808,352

Net book value 2,741,974 72,176 167,446 319,019 106,364 10,374 55,909 3,473,262

The net book value of the property and equipment pledged as collateral for the Corporation’s long-term debt was $1,527,229 at June 30, 2016 (December 31, 2015 – $1,574,433). 6.

Maintenance provisions and reserves The Corporation’s operating aircraft lease agreements require leased aircraft to be returned to the lessor in a specified operating condition. The maintenance provision liability represents the present value of the expected future cost. A maintenance expense is recognized over the term of the provision based on aircraft usage and the passage of time, while the unwinding of the present value discount is recognized as a finance cost. The majority of the Corporation’s maintenance provision liabilities are recognized and settled in US dollars. Where applicable, all amounts have been converted to Canadian dollars at the period end foreign exchange rate.

Opening balance Additions Change in estimate(i) Foreign exchange Accretion(ii) Settled Ending balance Current portion Long-term portion

June 30 2016 329,033 37,143 3,749 (21,918) 1,193 (23,637) 325,563 (91,083) 234,480

December 31 2015 246,579 59,061 3,677 46,667 1,667 (28,618) 329,033 (85,819) 243,214

(i)

Reflects changes to the timing and scope of maintenance activities and the discount rate used to present value the liability.

(ii)

At June 30, 2016, the Corporation’s aircraft lease maintenance provisions are discounted using a weighted average risk-free rate of approximately 0.5% (December 31, 2015 – 1.0%) to reflect the weighted average remaining term of approximately 23 months (December 31, 2015 – 27 months) until cash outflow.



Maintenance provisions and reserves (continued) A certain number of operating aircraft leases also require the Corporation to pay a maintenance reserve to the lessor. Maintenance reserves are either refunded when qualifying maintenance is performed or offset against end of lease obligations for returning leased aircraft in a specified operating condition. Where the amount of maintenance reserves paid exceeds the estimated amount recoverable from the lessor, the non-recoverable amount is recorded as maintenance expense in the period it is incurred. Non-recoverable amounts previously recorded as maintenance expense may be recovered based on changes to expected overhaul costs and recoverable amounts over the term of the lease. The Corporation’s maintenance reserves are recognized and settled in US dollars. All amounts have been converted to Canadian dollars at the period end foreign exchange rate. At June 30, 2016, the current portion of maintenance reserves included in prepaid expenses, deposits and other is $18,154 (December 31, 2015 – $15,190) and the long-term portion of maintenance reserves included in other assets is $15,785 (December 31, 2015 – $19,261).

7.

Long-term debt

Term loans – purchased aircraft(i) Term loans – purchased aircraft(ii) Term loans – purchased aircraft(iii) Senior unsecured notes(iv) Non-revolving facility(v) USD senior unsecured notes(vi) Ending balance Current portion Long-term portion

June 30 2016 168,365 187,799 445,946 398,179 299,034 511,826 2,011,149 (140,558) 1,870,591

December 31 2015 220,458 198,041 358,415 397,919 1,174,833 (141,572) 1,033,261

(i)

30 individual term loans, amortized over a 12-year term, repayable in quarterly principal instalments totaling $22,058, at an effective weighted average fixed rate of 5.94%, maturing between 2016 and 2020. These facilities are guaranteed by the Export-Import Bank of the United States (Ex-Im Bank) and secured by 30 Boeing 737 Next Generation aircraft. There are no financial convenants related to these term loans.

(ii)

7 individual term loans, amortized over a 12-year term, repayable in quarterly principal instalments totaling $5,576, in addition to a floating rate of interest at the three month Canadian Dealer Offered Rate plus a basis point spread, with an effective weighted average floating interest rate of 2.49% at June 30, 2016, maturing between 2024 and 2025. The Corporation has fixed the rate of interest on these 7 term loans at a weighted-average rate of 3.20% using interest rate swaps. These facilities are guaranteed by Ex-Im Bank and secured by 7 Boeing 737 Next Generation aircraft. There are no financial convenants related to these term loans.

(iii)

30 individual term loans, amortized over a 12-year term, repayable in quarterly principal instalments totaling $9,256, at an effective weighted average fixed rate of 3.20%, maturing between 2025 and 2028. Each term loan is secured by one Q400 aircraft. There are no financial convenants related to these term loans.

(iv)

3.287% senior unsecured notes with semi-annual interest payments and a fixed effective interest rate of 3.31% at June 30, 2016, with principal due upon maturity in July 2019. The notes rank equally in right of payment with all other existing and future unsubordinated debt of the Corporation, but are effectively subordinate to all of the Corporation’s existing and future secured debt to the extent of the value of the assets securing such debt. There are no financial covenants related to these senior unsecured notes.

(v)

Non-revolving, unsecured term loan repayable in quarterly principal instalments of $3,750 beginning on March 31, 2017, increasing annually, with an effective interest rate of 2.51% using an interest rate swap, maturing in 2020. The credit facility contains two financial covenants: (i) minimum pooled asset coverage ratio of 1.5 to 1, and (ii) minimum fixed charge coverage ratio of 1.25 to 1 measurable on a quarterly basis. At June 30, 2016 the Corporation has met both covenants.

(vi)

Senior unsecured notes denominated in US Dollars with semi-annual interest payments and a fixed effective rate of 3.59% at June 30, 2016, with principal due upon maturity in June 2021. The notes rank equally in right of payment with all other existing and future unsubordinated debt of the Corporation, but are effectively subordinate to all of the Corporation’s existing and future secured debt to the extent of the value of the assets securing such debt. There are no financial covenants related to these senior unsecured notes.

Future scheduled principal and interest repayments of long-term debt at June 30, 2016 are as follows: Within 1 year 1 – 3 years 3 – 5 years Over 5 years

209,431 382,077 1,353,786 357,977 2,303,271 WestJet Second Quarter 2016 │ 45


Long-term debt (continued) The Corporation has an $820,000 loan agreement with Export Development Canada for the future purchase of Bombardier Q400 NextGen aircraft. The Corporation is charged a non-refundable commitment fee of 0.2 per cent per annum on the undisbursed portion of the loan. The undisbursed portion of the loan at June 30, 2016, is $318,294 (December 31, 2015 – $421,975). Availability of any undrawn amount expires on December 31, 2018. The expected amount available for each aircraft is up to 80 per cent of the net price with a term to maturity of up to 12 years, repayable in quarterly instalments, including interest at a floating or fixed rate, determined at the inception of the loan. The Corporation has an unsecured, revolving syndicated credit facility of $300,000 available for general corporate purposes, including the funding of future aircraft acquisitions, maturing in June 2019 with an option to extend the three year term on an annual basis. Funds from the revolving credit facility can be drawn through various debt instruments and interest is calculated by reference to the applicable base rate plus an applicable pricing margin based on the Corporation’s debt rating. The Corporation also pays a standby fee for the undisbursed portion of the revolving credit facility. At June 30, 2016, the Corporation has $nil (December 31, 2015 – $nil) drawn on the facility. The credit facility contains two financial covenants: (i) minimum pooled asset coverage ratio of 1.5 to 1, and (ii) minimum fixed charge coverage ratio of 1.25 to 1. At June 30, 2016 the Corporation has met both covenants. On January 5, 2016, the Corporation entered into an unsecured, non-revolving $300,000 4-year term credit facility with a syndicate of banks. The credit facility is available for general corporate purposes, including the funding of future aircraft acquisitions. On January 7, 2016, the Corporation received the $300,000 from the credit facility using Canadian dollar bankers’ acceptances. The Corporation has fixed the interest rate over the 4-year term of the facility at 2.757% using an interest rate swap. Interest is calculated by reference to the applicable base rate plus an applicable pricing margin based on the Corporation’s debt rating. On June 16, 2016, the Corporation successfully completed a private placement offering for USD $400,000 3.50% senior unsecured notes maturing on June 16, 2021. The Corporation has fixed the foreign exchange rate over the 5-year term using a cross currency swap, refer to Note 12 for additional disclosure. The Corporation will use the proceeds from the sale for general corporate purposes, including the funding of future aircraft acquisitions.

8. Share capital (a) Issued and outstanding June 30 2016 Number Amount Common and variable voting shares: Balance, beginning of period Issuance of shares pursuant to compensation plans Shares repurchased Balance, end of period

123,086,477 43,509 (3,258,561) 119,871,425

582,796 629 (15,446) 567,979

December 31 2015 Number Amount 127,690,868 115,299 (4,719,690) 123,086,477

603,287 1,833 (22,324) 582,796

At June 30, 2016, the number of common voting shares outstanding was 97,355,676 (December 31, 2015 – 109,089,643) and the number of variable voting shares was 22,515,749 (December 31, 2015 – 13,996,834).

Under a normal course issuer bid, the Corporation was authorized to purchase up to 6,000,000 outstanding common and variable voting shares during the period May 13, 2015 to May 12, 2016 (the 2015 bid), or until such time as the bid was completed or terminated at the Corporation’s option . Any shares purchased under this bid were purchased on the open market at the prevailing market price at the time of the transaction. Common and variable voting shares acquired under this bid were cancelled. The bid expired on May 12, 2016, with the Corporation purchasing and cancelling 5,348,121 of the 6,000,000 shares it was authorized.


Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2016 and 2015 (Stated in thousands of Canadian dollars, except percentage, ratio, share and per share amounts) (Unaudited) 8. Share capital (continued) (a) Issued and outstanding (continued) On May 16, 2016, the Corporation filed a notice with the TSX to make a normal course issuer bid to purchase outstanding shares on the open market. As approved by the TSX, the Corporation is authorized to purchase up to 4,000,000 common voting shares and variable voting shares (representing approximately 3.3 per cent of the Corporation’s issued and outstanding shares as of April 30, 2016) during the period May 18, 2016 to May 17, 2017 (the 2016 bid), or until such time as the bid is completed or terminated at the Corporation’s option. Any shares purchased under this bid are purchased on the open market through the facilities of the TSX at the prevailing market price at the time of the transaction. Common voting shares and variable voting shares acquired under this bid will be cancelled. During the six months ended June 30, 2016, the Corporation purchased and cancelled 2,148,121 shares under the 2015 bid and 1,110,440 under the 2016 bid for a total of 3,258,561 shares (year ended December 31, 2015 – 4,719,690) for total consideration of $66,933 (year ended December 31, 2015 – $123,813). The average book value of the shares repurchased was $4.74 per share (year ended December 31, 2015 – $4.73) and was charged to share capital. The excess of the market price over the average book value, including transaction costs, was $51,487 (year ended December 31, 2015 – $101,489) and was charged to retained earnings. (b) Stock option plan The fair value of options granted and the assumptions used in their determination are as follows:

Weighted average fair value per option Weighted average risk-free interest rate Weighted average expected volatility Expected life of options (years) Weighted average dividend yield

Three months ended June 30 2016 2015 3.58 4.85 0.6% 0.9% 27.9% 26.7% 3.7 3.7 1.9% 1.7%

Six months ended June 30 2016 2015 3.58 4.85 0.6% 0.9% 27.9% 26.7% 3.7 3.7 1.9% 1.7%

Changes in the number of options, with their weighted average exercise prices, are summarized below: 2016

Stock options outstanding, beginning of period Granted Exercised Forfeited Expired Stock options outstanding, end of period Exercisable, end of period

Number of options 5,675,047 3,506,668 (122,011) (11,968) (30,445) 9,017,291 4,799,921

2016

Stock options outstanding, beginning of period Granted Exercised Forfeited Expired Stock options outstanding, end of period Exercisable, end of period

Number of options 5,706,547 3,523,980 (150,535) (32,256) (30,445) 9,017,291 4,799,921

Three months ended June 30 Weighted exercise price $24.42 $20.07 $14.91 $22.72 $23.09 $22.86 $24.48

2015 Number of Weighted options exercise price 3,627,417 22.38 2,269,595 26.92 (176,536) 19.01 (60,651) 23.30 (4,981) 24.57 5,654,844 24.30 2,897,159 22.29

Six months ended June 30 Weighted exercise price $24.40 $20.05 $14.88 $24.65 $23.09 $22.86 $24.48

2015 Number of Weighted options exercise price 3,738,714 22.33 2,270,887 26.92 (247,151) 18.98 (102,625) 23.46 (4,981) 24.57 5,654,844 24.30 2,897,159 22.29 WestJet Second Quarter 2016 │ 47

Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2016 and 2015 (Stated in thousands of Canadian dollars, except percentage, ratio, share and per share amounts) (Unaudited) 8. Share capital (continued) (b) Stock option plan (continued) Under the terms of the Corporation's stock option plan, with the approval of the Corporation, option holders can either (i) elect to receive shares by delivering cash to the Corporation in the amount of the exercise price of the options, or (ii) choose a cashless settlement alternative, whereby they can elect to receive a number of shares equivalent to the market value of the options over the exercise price. For the three and six months ended June 30, 2016, option holders exercised 119,279 and 147,803 options (three and six months ended June 30, 2015 – 174,101 and 244,716 options) on a cashless basis and received 34,445 and 40,777 shares (three and six months ended June 30, 2015 – 51,448 and 80,058 shares). For the three and six months ended June 30, 2016, 2,732 options were exercised on a cash basis (three and six months ended June 30, 2015 – 2,435 options). (c) Key employee plan Changes in the number of units, with their weighted average fair value, are summarized below: Three months ended June 30 2016 Number of units 277,360 102,571 1,615 (135,516) 246,030

Units outstanding, beginning of period Granted Units, in lieu of dividends Settled Forfeited Units outstanding, end of period

Weighted fair value $23.81 $20.08 $21.19 $23.14 $22.61

2015 Number of Weighted fair units value 377,009 21.13 80,995 26.91 1,511 26.60 (170,833) 19.49 (315) 23.98 288,367 23.73

Six months ended June 30 2016 Number of units 278,140 110,821 3,557 (144,222) (2,266) 246,030

Units outstanding, beginning of period Granted Units, in lieu of dividends Settled Forfeited Units outstanding, end of period

Weighted fair value $24.09 $19.78 $20.46 $23.22 $24.07 $22.61

2015 Number of Weighted fair units value 391,030 20.99 81,247 26.92 3,269 28.36 (186,864) 19.46 (315) 23.98 288,367 23.73

(d) Executive share unit plan Changes in the number of units, with their weighted average fair value, are summarized below: Three months ended June 30 2016 RSUs Number Weighted of units fair value Units outstanding, beginning of period Granted Units granted in lieu of dividends Settled Forfeited Units outstanding, end of period

PSUs Number Weighted of units fair value

2015 RSUs PSUs Number Weighted Number Weighted of units fair value of units fair value

224,291 98,681

$24.01 $20.33

305,023 196,107

$24.77 $20.08

107,043 44,398

23.24 26.90

217,527 110,573

23.52 26.89

1,805 (61,321) -

$21.19 $22.39 -

2,884 (64,619) -

$21.19 $22.10 -

629 (5,978) (21,313)

26.60 22.68 23.06

1,402 (11,869) (44,377)

26.60 22.89 23.24

263,456

$22.99

439,395

$23.04

124,779

24.62

273,256

24.97


Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2016 and 2015 (Stated in thousands of Canadian dollars, except percentage, ratio, share and per share amounts) (Unaudited) 8. Share capital (continued) (d) Executive share unit plan (continued) Six months ended June 30 2016 RSUs Number Weighted of units fair value Units outstanding, beginning of period Granted Units granted in lieu of dividends Settled Forfeited Units outstanding, end of period

PSUs Number Weighted of units fair value

2015 RSUs PSUs Number Weighted Number Weighted of units fair value of units fair value

222,720 98,681

$24.04 $20.33

302,887 196,107

$24.79 $20.08

179,890 44,398

19.85 26.90

321,620 110,573

20.88 26.89

3,376 (61,321) -

$20.57 $22.39 -

5,020 (64,619) -

$20.62 $22.10 -

1,107 (72,796) (27,820)

28.02 14.80 23.28

2,391 (102,129) (59,199)

27.96 15.13 23.41

263,456

$22.99

439,395

$23.04

124,779

24.62

273,256

24.97

(e) Share-based payment expense The following table summarizes share-based payment expense for the Corporation’s equity-based plans: Three months ended June 30 2016

9.

Stock option plan Key employee plan

4,322 1,148

Executive share unit plan

1,488

Total share-based payment expense

6,958


2015

2016

3,569 984

2015

7,202 1,585

5,734 1,500

697

2,583

1,516

5,250

11,370

8,750

Dividends On May 2, 2016 the Board of Directors declared our 2016 second quarter dividend of $0.14 per common and variable voting share. For the three and six months ended June 30, 2016, the Corporation paid dividends totaling $16,782 and $33,914 (three and six months ended June 30, 2015 – $17,535 and $35,207).

10. Earnings per share The following reflects the share data used in the computation of basic and diluted earnings per share:

Weighted average number of shares outstanding – basic Effect of dilution Weighted average number of shares outstanding – diluted

Three months ended June 30 2016 2015 121,122,176 125,883,282 423,720 904,551 121,545,896 126,787,833

Six months ended June 30 2016 2015 121,957,549 126,494,420 279,246 1,194,639 122,236,795 127,689,059

For the three and six months ended June 30, 2016, 7,425,770 and 8,831,125 employee stock options (three and six months ended June 30, 2015 – 1,535,902 and 316,939 options) and nil and 139,699 restricted share units (three and six months ended June 30, 2015 – nil and nil) were not included in the calculation of dilutive potential shares as the result would have been antidilutive.


Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2016 and 2015 (Stated in thousands of Canadian dollars, except percentage, ratio, share and per share amounts) (Unaudited) 11. Finance cost Three months ended June 30 2016 2015 14,740 13,149 (2,424) 477 328 12,793 13,477

Interest on long-term debt Capitalized interest(i) Accretion on maintenance provisions (i)

Six months ended June 30 2016 2015 28,904 26,445 (12,142) 1,193 953 17,955 27,398

Relates to interest capitalized on deposits paid for Boeing and Bombardier aircraft yet to be delivered using a weighted average interest rate of 3.09%. Of the total amount capitalized for the six months ended June 30, 2016, $8,197 relates to prior periods.

12. Financial instruments and risk management (a) Fair value of financial assets and financial liabilities The Corporation’s financial assets and liabilities consist primarily of cash and cash equivalents, restricted cash, accounts receivable, derivatives, other interest bearing deposits, accounts payable and accrued liabilities and long-term debt. The following tables set out the Corporation’s classification and carrying amount, together with the fair value, for each type of financial asset and financial liability at June 30, 2016 and December 31, 2015:

June 30, 2016 Asset (liability): Cash and cash equivalents(i) Accounts receivable Foreign exchange derivatives(ii) Interest rate derivatives(iii) Other deposits(iv) Accounts payable and accrued liabilities(v) Long-term debt(vi) Cross-currency swap derivatives(vii)

Fair value Through profit or loss Derivatives

Amortized cost Loans and Other financial receivables liabilities

Carrying amount

Total

Fair value

1,743,755 – – – 20,272

– – (4,528) (16,001) –

– 113,642 – – –

– – – – –

1,743,755 113,642 (4,528) (16,001) 20,272

1,743,755 113,642 (4,528) (16,001) 20,272

– –

– –

– –

(412,062) (2,011,149)

(412,062) (2,011,149)

(412,062) (2,004,415)

– 1,764,027

3,874 (16,655)

– 113,642

– (2,423,211)

3,874 (562,197)

3,874 (555,463)


Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2016 and 2015 (Stated in thousands of Canadian dollars, except percentage, ratio, share and per share amounts) (Unaudited) 12. Financial instruments and risk management (continued) (a) Fair value of financial assets and financial liabilities (continued)

December 31, 2015 Asset (liability): Cash and cash equivalents(i) Accounts receivable Foreign exchange derivatives(ii) Interest rate derivatives(iii) Other deposits(iv) Accounts payable and accrued liabilities(v) Long-term debt(vi)

Fair value Through profit or loss Derivatives

Amortized cost Loans and Other financial receivables liabilities

Carrying amount

Total

Fair value

1,252,370 – – – 26,675

– – 17,358 (12,964) –

– 82,136 – – –

– – – – –

1,252,370 82,136 17,358 (12,964) 26,675

1,252,370 82,136 17,358 (12,964) 26,675

– – 1,279,045

– – 4,394

– – 82,136

(540,912) (1,174,833) (1,715,745)

(540,912) (1,174,833) (350,170)

(540,912) (1,124,849) (300,186)

(i)

Includes restricted cash of $45,507 (December 31, 2015 – $68,573).

(ii)

Includes $180 (December 31, 2015 – $17,409) classified in prepaid expenses, deposits and other, and $4,708 (December 31, 2015 – $51) classified in accounts payable and accrued liabilities.

(iii)

Includes $3,900 (December 31, 2015 – $4,475) classified in accounts payable and accrued liabilities and $12,101 classified in other long-term liabilities (December 31, 2015 – $8,489).

(iv)

Includes $20,272 (December 31, 2015 – $21,275) classified in prepaid expenses, deposits and other, and $nil (December 31, 2015 – $5,400) classified in other long-term assets.

(v)

Excludes foreign exchange derivative liabilities of $4,708 (December 31, 2015 – $51), interest rate derivative liabilities of $3,900 (December 31, 2015 – $4,475), and cross-currency swap derivative liabilities of $80 (December 31, 2015 – $nil).

(vi)

Includes current portion of long-term debt of $140,558 (December 31, 2015 – $141,572) and long-term debt of $1,870,591 (December 31, 2015 – $1,033,261).

(vii) Includes $23 (December 31, 2015 - $nil) classified in prepaid expenses, deposits and other, $4,274 (December 31, 2015 - $nil) classified in other longterm assets, $80 (December 31, 2015 - $nil) classified in accounts payable and accrued liabilities and $343 (December 31, 2015 - $nil) classified in other long-term liabilities.


Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2016 and 2015 (Stated in thousands of Canadian dollars, except percentage, ratio, share and per share amounts) (Unaudited) 12. Financial instruments and risk management (continued) (a) Fair value of financial assets and financial liabilities (continued) The following items shown in the condensed consolidated statement of financial position at June 30, 2016 and December 31, 2015, are measured at fair value on a recurring basis and classified using level 1 or level 2 inputs. Level 1 inputs are defined as quoted prices in active markets while level 2 is defined as significant other observable inputs. There are no financial assets or liabilities classified as level 3 (significant unobservable inputs) in the fair value hierarchy. June 30, 2016 Asset (liability): Cash and cash equivalents Foreign exchange derivatives Interest rate derivatives Other deposits Cross-currency swap derivatives

Level 1 1,743,755 − − 20,272 1,764,027

December 31, 2015 Asset (liability): Cash and cash equivalents Foreign exchange derivatives Interest rate derivatives Other deposits

Level 1 1,252,370 − − 26,675 1,279,045

Level 2 − (4,528) (16,001) − 3,874 (16,655) Level 2 − 17,358 (12,964) − 4,394

Total 1,743,755 (4,528) (16,001) 20,272 3,874 1,747,372 Total 1,252,370 17,358 (12,964) 26,675 1,283,439

During the three and six months ended June 30, 2016 and the year ended December 31, 2015, there were no transfers between level 1, level 2 and level 3 financial assets and liabilities measured at fair value. Cash and cash equivalents: Classified as level 1, these consist of bank balances and short-term investments, primarily highly liquid instruments, with terms up to 31 days. Interest income is recorded in the condensed consolidated statement of earnings as finance income. Foreign exchange derivatives: Classified as level 2, these consist of foreign exchange forward contracts where the fair value of the forward contracts is measured based on the difference between the contracted rate and the current forward price. At June 30, 2016, the weighted average contracted rate on the forward contracts was 1.3247 (December 31, 2015 – 1.3069) Canadian dollars to one US dollar, and the weighted average forward rate used in determining the fair value was 1.2919 (December 31, 2015 – 1.3830) Canadian dollars to one US dollar. Interest rate derivatives: Classified as level 2, these consist of interest rate swap contracts that exchange a floating rate of interest with a fixed rate of interest. The fair value of the interest rate swaps is determined by measuring the difference between the fixed contracted rate and the forward curve for the applicable floating interest rates. At June 30, 2016, the Corporation’s swap contracts have a weighted average fixed interest rate of 1.84% (December 31, 2015 – 1.69%). The June 30, 2016 weighted average floating forward interest rate was 0.92% (December 31, 2015 – 1.14%). Cross-currency swap derivatives: Consist of fixed US dollar to fixed Canadian dollar uncollateralized cross-currency swap agreements to mitigate exposure to fluctuations in future cash flows that are attributable to foreign currency risk resulting from the issuance of US denominated long-term debt. The USD $400,000 notional at 3.50% interest per annum was exchanged for CAD $511,110 at a 3.56% weighted average interest per annum through the terms of the Swaps, which match the 5-year maturity of the USD senior unsecured notes. Upon proper qualification, these swaps have been designated as effective cash flow hedges. At June 30, 2016, no portion of the cross-currency swap agreements designated as cash flow hedges was considered ineffective. The fair value of the cross-currency swap contract was determined by discounting the difference between the contracted prices and market based yield curves. These are classified as level 2. Other deposits: Consist of security deposits related to aircraft financing and airport operations deposits that earn a floating market rate of interest and are classified as level 1.


Notes to the Condensed Consolidated Interim Financial Statements For the three and six months ended June 30, 2016 and 2015 (Stated in thousands of Canadian dollars, except percentage, ratio, share and per share amounts) (Unaudited) 12. Financial instruments and risk management (continued) (a) Fair value of financial assets and financial liabilities (continued) Accounts receivable and accounts payable and accrued liabilities: The Corporation designates accounts receivable and accounts payable and accrued liabilities as loans and receivables and other financial liabilities, respectively. These items are initially recorded at fair value and subsequently measured at amortized cost. Due to their short-term nature, the carrying value of accounts receivable and accounts payable and accrued liabilities approximate their fair value. Long-term debt: The fair value of the Corporation’s long-term debt is determined by discounting the future contractual cash flows of principal and interest under the current financing arrangements using the Corporation’s June 30, 2016 implied Corporate BBB- rate of 3.11% (December 31, 2015 – 3.95%) for a 5.69 year term (December 31, 2015 – 6.44 year term), equal to the weighted average remaining term of the Corporation’s long-term debt at June 30, 2016. 13. Commitments (a) Purchased aircraft and spare engines At June 30, 2016, the Corporation is committed to purchase five 737 Next Generation aircraft for delivery between 2016 and 2017 and 65 737 MAX aircraft for delivery between 2017 and 2027. The Corporation is also committed to purchase 15 Q400 NextGen aircraft for delivery between 2016 and 2018 and a total of 10 Boeing and Bombardier spare engines for delivery between 2016 and 2026. The remaining estimated deposits and delivery payments for the 85 aircraft and 10 spare engines are presented in the table below. Where applicable, US dollar commitments are translated at the period end foreign exchange rate. Within 1 year 1 – 3 years 3 – 5 years Over 5 years

583,565 1,409,314 718,015 1,892,223 4,603,117

(b) Leases and contractual commitments The Corporation has entered into leases and other contractual commitments for aircraft, land, buildings, equipment, computer hardware, software licenses and inflight entertainment. At June 30, 2016, the future payments under these commitments are presented in the table below. Where applicable, US dollar commitments are translated at the period end foreign exchange rate. Within 1 year 1 – 3 years 3 – 5 years Over 5 years

242,706 339,457 186,653 81,268 850,084
