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Edited Transcript of WJA.TO earnings conference call or presentation 2-May-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 WestJet Airlines Ltd Earnings Call

CALGARY May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of WestJet Airlines Ltd earnings conference call or presentation Tuesday, May 2, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregg Saretsky

WestJet Airlines Ltd. - CEO, President and Non-Independent Director

* Hugh Harley

* Robert Cummings

WestJet Airlines Ltd. - Executive Vice-President

* Sarah Walker

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Conference Call Participants

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* Ben Cherniavsky

Raymond James Ltd., Research Division - MD of Industrial Research

* Cameron Doerksen

National Bank Financial, Inc., Research Division - Analyst

* Christopher Allan Murray

AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research and Senior Analyst

* David Tyerman

Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research

* Douglas Taylor

Canaccord Genuity Limited, Research Division - Director

* Fadi Chamoun

BMO Capital Markets Equity Research - MD and Analyst

* Helane Renee Becker

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Hunter Kent Keay

Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace and Defense

* Kevin Chiang

CIBC World Markets Inc., Research Division - Analyst

* Konark Gupta

Macquarie Research - Analyst

* Tim James

TD Securities Equity Research - Research Analyst

* Turan Quettawala

Scotiabank Global Banking and Markets, Research Division - Analyst

* Walter Noel Spracklin

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to WestJet 2017 First Quarter Conference Call and Webcast. (Operator Instructions) As a reminder, this conference call is being broadcast live on the Internet and is being recorded.

Your speakers today are Mr. Gregg Saretsky, President and Chief Executive Officer; Ms. Sarah Walker, Vice President Controller; Mr. Bob Cummings, Executive Vice President, Commercial; Mr. Cam Kenyon, Executive Vice President, Operations.

I would now like to turn the conference over to Mr. Hugh Harley, Director of Investor Relations. Please go ahead.

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Hugh Harley, [2]

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Thank you, Gitika, and good morning, everyone. Welcome to WestJet's 2017 First Quarter Results Conference Call.

As an outline of today's call, first, I would like to mention that Harry Taylor will unfortunately not be on the call, as he is attending to a personal family matter.

As such, Gregg and Sarah Walker, our VP, Vice President Controller will provide some opening remarks, which will be approximately 10 to 12 minutes. Following this, we will take questions from analysts and then we will conclude the call with questions from the media.

I would like to remind everyone that we are holding our Annual General Meeting today at 10 a.m. Calgary time. As such, when we are at the question-and-answer portion of the call, I would like to request that you limit yourself to one question and one follow-up. That should allow us to get to as many questioners as possible in the hour we have allotted for this call.

Before turning the call over to Gregg, I would like to read the customary cautionary language. We caution you that today's conference call will contain forward-looking statements about WestJet's future and operational performance, including statements with respect to our outlook for the 2017 second quarter and 2017 full year. This information is based on certain assumptions and reflect WestJet's expectations as of today's date, and accordingly, are subject to change after such date.

Forward looking information is subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations. These risks and uncertainties are discussed in documents WestJet files from time to time with securities regulatory authorities. Except as may be required by Canadian securities law, we do not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Furthermore, certain non-GAAP measures and additional GAAP measures may be discussed or referred to on today's conference call. Please refer to the section entitled Reconciliation of Non-GAAP and Additional GAAP Measures in WestJet's MD&A of financial results for the 3 months ended March 31, 2017 for further information.

Now, I'll pass the call over to Gregg.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [3]

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Thank you. Good morning, everyone, and thank you for joining us.

Today we announced our 48th second quarter of profitability, reporting first quarter net earnings of $48.3 million, or earnings per diluted share of $0.41.

In the quarter, we flew a record number of guests, reported strong top line revenue growth of 8%, and for the first time in 8 quarters, we reported positive RASM growth of 2.3% year-over-year.

Despite a more positive revenue environment, our return on invested capital declined to 10% for the 12 months ending March 31, 2017. This is below our targeted long-term return on invested capital of 13% to 16% over the cycle. We are absolutely committed to returning to our targeted range by growing revenues and reducing costs to increase earnings.

Specifically, in the first quarter of 2017, we began a seat reconfiguration program for our Boeing 737-700 and Boeing 737-800 fleet, which will increase capacity by 4 seats and 6 seats, respectively, on each of these aircraft types. We expect to complete the reconfiguration of the Boeing 737 fleet by June 2017 and the 737-800 fleet before the end of 2018.

The high-density Boeing 737-800, which will be part of our planned ULCC, will also contribute nicely to reduced unit costs in 2018. The new ULCC will provide Canadians with no frills, lower-cost level travel options while broadening our growth opportunities and opening new market segments.

We're also looking forward to the arrival of our first Boeing 737 MAX 8 aircraft, which is scheduled for delivery in the third quarter of this year, with initial revenue service anticipated before the end of the year. The MAX introduces the latest fuel-efficient technology, making it approximately 14% more fuel efficient than our current Boeing 737 NGs. We will have a total of 4 MAX aircraft in revenue service by late Q4 and another 7 coming in 2018.

Today, we also announced a definitive purchase agreement for up to 20 state-of-the-art Boeing 787-9 aircraft. This agreement includes commitments for 10 firm Boeing 787-9 deliveries between the first quarter of 2019 and the fourth quarter of 2021, with options for an additional 10 aircraft to be delivered between 2020 and 2024. As part of this agreement, WestJet is converting 15 MAX aircraft that were to be delivered between 2019 and 2021 to options available now between 2022 and 2024. We expect to fund the Boeing 787 deliveries from cash from operations and anticipate no additional net debt.

This order represents an exciting new chapter in WestJet's history. It will diversify our network, will de-risk our dependence on the Alberta and Canadian point of sales, and will provide a great new plank of revenue growth, as we take WestJet's caring and low-fare brand to the world.

Turning to revenue. I'd like to highlight the very positive trends we see in terms of growth of our reward program, managed corporate business revenues and the number of guests who hold our WestJet RBC MasterCard. Specifically in terms of first quarter year-over-year growth, our total of rewards members were up approximately 16%, our managed corporate business revenues were up almost 7% and our RBC WestJet credit cardholders were up 35%.

In the first quarter, our premium economy or Plus revenue was up almost 30% year-over-year and well ahead of the 18% increase we experienced in 2016. As I've said before, this penetration into the business traveler segment and the growth of our rewards membership base creates a great foundation for future revenue growth from both ticket sales and ancillary revenues.

Turning now to our outlook. In terms of the second quarter of 2017, we expect systemwide capacity growth of 6% to 6.5% year-over-year, with domestic capacity to grow between 12.5% and 13%. In terms of the full year 2017, we anticipate systemwide capacity growth between 3.5% and 5.5% year-over-year, with domestic capacity growth between 7.5% and 8.5%. The majority of the domestic capacity growth in 2017 is attributable to a combination of new WestJet Encore flying, and our expanding charter business. Excluding these 2 lines of business, system capacity as measured like same-store sales, is up a modest 2.5%, while domestic is up approximately 4% in 2017.

For the first quarter of 2017, we expect -- I'm sorry, for the second quarter of 2017, we expect strong traffic and revenue growth to continue and anticipate positive RASM growth of up 2.5% to up 4.5% year-over-year. While it's early days, forward bookings for the third quarter are trending ahead nicely for the quarter, and we anticipate a further sequential improvement in unit revenue performance as we move from the second quarter to the third quarter.

We believe our 2017 plan will position us well for sustainable profitability as we run the business to achieve our long-term financial, operational and guest satisfaction targets. I want to thank our over 12,000 WestJetters for their continued dedication to safely providing our growing number of guests, with WestJet's award-winning brand of friendly, caring service during a rather difficult operational first quarter.

And with that, I'd like to turn the call over to Sarah.

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Sarah Walker, [4]

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Thank you, Gregg. Good morning, everyone, and thanks again for joining us today.

As Gregg noted, we achieved our 48th consecutive profitable quarter, reporting net earnings of $48.3 million or $0.41 per fully diluted share for the first quarter. We welcomed a record 5.7 million guests on board our aircraft in the 3 months ended March 31, 2017. Our traffic increased by 6.8%, as we increased system capacity by 5.5% compared to the same period in 2016.

We reported first quarter total revenue growth of 8% year-over-year. The first quarter had a load factor of 83%, up 0.9 percentage points from 2016. This increase in load factor, combined with a 1.2% increase in our yield, resulted in an overall RASM increase of 2.3% year-over-year. We continue to be pleased with the growth in our ancillary revenues. In the first quarter, ancillary revenue increased by 8.4% year-over-year to $103.4 million, amounting to an all-time high of $19 per guest. These increases were mainly attributable to pre-reserved seating fees and checked bag fees.

Turning to expenses. Our total CASM for the first quarter was up 7.8% year-over-year, while CASM, excluding fuel and employee profit share, was up 4.2% year-over-year at $0.1027. This increase in CASM, excluding fuel and profit share, was driven largely by increases in maintenance, depreciation and amortization expense and other operating expenses.

Our CASM, excluding fuel and profit share, increase of 4.2% was outside of previously disclosed guidance of up 1.5% to 2%, primarily as a result of the year-over-year impact of a noncash cumulative catch up adjustment to our maintenance provision of $18.5 million combined with $7 million of expenses relating to irregular operations or IROP. These IROPs were due to severe weather experienced in the first quarter, which led to flight delays and cancellations. We experienced a record total of 29 IROP days in the first quarter of 2017. That is more IROP day occurrences than we had in the first quarter of 2015 and the first quarter of 2016 combined, and approximately 2x the average of what we had experienced in the first quarters over the past 4 years.

In terms of the cumulative catch up entry of $18.5 million to adjust our maintenance provision, this relates to changes in our assumptions of the projected timing, cost and scope of maintenance activities related to our leased aircraft. Our provision is calculated based on the best information available to us and is an estimate of the cost and timing of future maintenance activities.

Fuel remains a significant cost at about 23% of our operating cost in the first quarter, with fuel cost per liter increasing by 36.2% year-over-year to $0.64. Average jet fuel prices were USD 62 per barrel compared to USD 44 per barrel in the first quarter of 2016, an increase of approximately 41%.

Our balance sheet remains strong. We ended the first quarter of 2017 with a cash, cash equivalents and marketable securities balance of $1.6 billion, representing 37.4% of our trailing 12 months revenue.

In the quarter, we took delivery of 2 Bombardier Q400 aircraft, and subsequent to the quarter, we extended the leases on 3 Boeing 737 aircraft and plan to return the remaining lease that expires later this year.

Our credit and liquidity metrics remained strong. As of March 31, 2017, our adjusted debt-to-equity ratio was 1.60, down from 1.63 at the end of 2016. And our adjusted net debt was $1.8 billion, essentially flat from December 31, 2016.

Our trailing 12-month EBITDAR was $940 million, resulting in an adjusted net debt-to-EBITDAR ratio of 1.91, down from 1.93 at December 31, 2016, still well below the internal guideline of an adjusted net debt-to-EBITDAR measure of no more than 2.5.

We are pleased to announce that our 2017 second quarter dividend will be $0.14 per common voting and variable voting share, to be paid out on June 30, 2017. Our current dividend plus our annual payout ratio at approximately 26% based on trailing 12 months adjusted net earnings per fully diluted share of $2.15.

In closing, I would like to cover some remaining outlook items before handing the call back over to Gregg.

For the second quarter of 2017, we expect CASM, excluding fuel and employee profit share, to be up 1.0% to 1.5% year-over-year. In terms of the full year 2017, we continue to expect CASM, excluding fuel and profit share, to be up 2.5% to 3.5% year-over-year, reflective of the significant growth in Q400 operations, which have higher unit costs.

I also would like to reference our costs were still much lower than our main competitor, and that keeping our cost as low as possible continues to be our priority. For the second quarter of 2017, we expect fuel cost to range between $0.65 and $0.67 per liter, representing a year-over-year increase of approximately 23% to 26%.

For the full year 2017, we now expect capital expenditures to be approximately $1 billion, with spending related primarily to aircraft deliveries, deposits on future aircraft, overhauls on owned engines and the continued installation of our in-flight entertainment system. This compares with our previous full year 2017 guidance of approximately $900 million to $920 million, with the difference driven primarily by the signing and deposits related to the Boeing 787-9 Dreamliner purchase agreement.

For the second quarter of 2017, we expect our capital expenditures to be between $380 million and $400 million. The second quarter and full year 2017 expected CASM, excluding fuel and employee profit share and capital expenditures, are based on an average forecast foreign exchange rate of approximately CAD 1.35 to USD 1.

We continue to be very proud of the following: our investment-grade business model; our strong balance sheet and liquidity; our young fleet with average age of 7.4 years; the continued successful expansion of WestJet Encore; and our award-winning culture and unique brand of friendly, caring service.

As Gregg has mentioned, we are looking to improve our ROIC performance. Clearly, the prolonged economic downturn in Alberta has impacted us significantly. Not withstanding that, higher fuel and the increased wide-body transcon capacity being put into the domestic market, we are working hard to get us back to where we should be in terms of our ROIC.

In closing, I also want to thank all of WestJetters for their commitment, focus on safety and the caring and friendly service they provide our guests each and every day, especially given the challenging winter weather conditions experienced in the quarter.

With that, I'll hand it back to Gregg.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [5]

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Thank you, Sarah.

Gitika, I guess, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from Kevin Chiang with CIBC.

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Kevin Chiang, CIBC World Markets Inc., Research Division - Analyst [2]

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Maybe first, I'll just dig into the ROIC comment. Obviously, you are focused to get back up to 13%. Just wondering how I should think about the buckets that get you there. It seems like you have a good visibility on the long-term invested capital you need to put into business given your fleet announcement. So when I think of the ULCC growth plans, the wide-body plans and your legacy operations and maybe, Encore, how do I think about the individual ROIC there? Should I think about, for example, ROIC within the wide-body being above-average to kind of lift the group rate up? Just wanted to figure out the buckets that get to 13% here?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [3]

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Thanks, Kevin. Good morning. I'll start and maybe invite Sarah to chime in as well. Our ROIC is a function of 2 things, our ability to generate more revenues from the existing assets, and secondly, the opportunity to take cost out. So I'll talk first about revenues. As I mentioned in my prepared remarks, we're seeing great success in penetration into the business traveler segment. This is a line of business that has not been historically a major part of WestJet's revenue source, over the first 20 years of our history. So we're getting good traction among the managed corporate business travel. I think everybody has become more price-sensitive, even in the business segments. And WestJet's brand of core value is really attracting those travelers who are now a little bit more price-sensitive. The plans to expand our Plus product to launch an enhancement of service within the cabin, to continue to grow the revenues that come from our airline partners and from our affinity card with RBC WestJet Mastercard, those all contributed. The core of our businesses are 737 operation and so a return to the 13% to 16% is going to be very much dependent on the core of our business, the 737 operations generating more returns. And so that kind of gets me to the cost. And we have a number of initiatives in the hopper to reduce costs. I think the biggest here would be the reconfiguration of our fleet by adding another row of seats to our 700 and 800s. That's going to take cost out, because we're dividing our total cost by those additional seats. In addition, we have a number of IT technology initiatives in the Hopper that will drive more self-service, eliminate calls to our call center, and provide our guests with the opportunity to serve themselves through digital means that will make a number of our existing services more cost-effective. So it's really a cost and revenue focus in combination.

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Kevin Chiang, CIBC World Markets Inc., Research Division - Analyst [4]

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That's helpful. Just -- are you willing to provide any details on some of the unit cost savings from the seat densification? Or should we just think of -- look at your fleet plan add the 4 to 6 seats and assume that level of CASM saving?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [5]

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It's pretty linear. That would be a safe bet.

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Kevin Chiang, CIBC World Markets Inc., Research Division - Analyst [6]

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Okay. And just my second follow-up question here. I did notice in your MD&A, in your salaries and benefit section, you mentioned that there's been a decrease in participation in your, I guess, your employee plan, your share plan there. I'm just wondering what your thoughts are? I know you've had a little bit of a battle with the unions. I know you pride yourself on WestJetters being owners of the company. I'm just wondering if you think this foretells maybe some of the labor tension you have within your organization? If there's any comments there that would be helpful?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [7]

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Yes, no, not at all. I think what it tells us is that we have being growing very rapidly. So we have a lot of employees entering our system at more junior levels. And so their rates appear lower than those who are more tenured. And we have more rapid growth at the bottom of the pay scale than the top of the pay scale. We've seen over history that contributions tend to be lower among those with lower incomes. And I would expect that, that will rise over time.

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Operator [8]

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The next question is from Hunter Keay with Wolfe Research.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace and Defense [9]

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So what does the CapEx profile look like through 2020? And when you say you're going to fund the 787 acquisitions from cash flow, seems like that would be a little bit difficult unless you're getting a really big discount off list price for that plane. So, is there no caveat to that comment that's required about creative financing? You just literally expect to fund all the CapEx through cash from operations? I guess, that's two questions, sorry.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [10]

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Yes, no, that's what I said in my prepared remarks. I mean, obviously, that's a function of how we expect the business to perform and what we expect the underpinnings of the economic environment to be. But absent a dramatic decline in GDP and other global recession, we do expect to be able to fund this acquisition from operations. And remember that we've essentially canceled 15 MAX deliveries in the same window, which takes a significant amount of CapEx out and that creates the money that we'll use to fund the acquisition of 10 787s.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace and Defense [11]

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Okay. And do you care to comment on sort of like is a $1 billion baseline CapEx annually a fair way to think about it annually through the end of the decade?

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Sarah Walker, [12]

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Yes, sorry, it's Sarah here. And we -- we don't really provide capital guidance outside of just the upcoming year, so...

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [13]

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But I wouldn't expect it to be going at this same run rate.

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Hunter Kent Keay, Wolfe Research, LLC - MD and Senior Analyst of Airlines, Aerospace and Defense [14]

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Okay. And then, as I think about the long-haul strategy and well, actually, let's talk about the ULCCs for a second. The ULCC strategy, honestly the more I think about it, the more I'm kind of struggling with it. And I know, you put a quote intentionally from Clive in the release about disrupting the market, but how do you ensure that you don't really disrupt yourself by cannibalizing your own yields here, saying nothing about the other costs that obviously come with an airline within an airline. How are you going to manage that yield risk?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [15]

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Hunter, it's Bob Cummings here. First of all, the airline within an airline, we are looking at this as more of a separate vehicle than integrated at this particular point. We're not going to give exact details on this call, but the network planning will be coordinated with respect to the cannibalization question and concern that you have. When we looked at all of the segments that a ULCC could and will serve, the cross-border leakage, defensively and offensively, and looked at setting up this vehicle and what it would look like, and how we would set it up, design it and then potentially, advantageously plug into some components of current WestJet, the more it made sense to us over time. And as the competitive landscape has evolved and emerged and looking at it going forward, this made complete sense to us. We've been innovative and disruptive in the past. And when we looked at this space in the range of a 737, when we do announce all of the details of what the final design looks like, what the network looks like, this will certainly be accretive to WestJet's earnings and enabling us to grow in other parts of the business.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [16]

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Hunter, I might just add to that. We have said we're going to defend our low-fare franchise in Canada. We do already have a low-fare competitor in NewLeaf, and we have adjusted our capacity to ensure that we have seats at the right price to compete with those low fares in all of the market segments. Introducing an aircraft that is denser in configuration with a service that is more aligned with the services that ULCCs are providing, means that our CASM will approach something closer to $0.06 to $0.065 from the $0.10 that we're operating at today. So it creates a much stronger platform to compete in that space and to bring additional low fares to communities and we've seen over our 21-year history, how much that stimulates demand. And how we avoid cannibalization, for the most part is avoiding competing head-to-head our 2 brands.

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Operator [17]

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The next question is from Konark Gupta with Macquarie.

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Konark Gupta, Macquarie Research - Analyst [18]

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Just wanted to clarify first on the maintenance provision adjustment, Sarah. So you did not appear to have any insight into this maintenance provision when you guided to the first quarter CASM in February. And what would be the maintenance provision adjustment be like in the next few quarters?

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Sarah Walker, [19]

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Yes. We did factor in a portion into the guidance, but it really was the work that we were doing throughout the first quarter that led it to be higher than what we had anticipated. And I guess, I'll just say with the maintenance provision, it is an accounting estimate of where we're trying to end up at the end of a lease return to a lessor to settle their obligations, whether it's through maintenance work or payments. So it's a very highly, sensitive model, and just some quick insight that with the 82 engines that are in there alone, if you just make a small change of $100,000 to your assumptions, you've got an $8.2 million change.

So I think, after the work that we've done, we are in a good position that, going forward, that any changes in estimates you'll see will likely just be to some discount rate changes or maybe some shop plan changes as we start to approach return. And then, your rate is really just looking at what the additions are going forward.

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Konark Gupta, Macquarie Research - Analyst [20]

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Okay. And Gregg, question on the international wide-body expansion. So these 787s are coming in from 2019, and obviously, you're taking out 737 MAX during the time frame, so it's a decent CapEx offset, I believe. But what happens to the 767 fleet before and after 787? Do you intend to keep these 767s until you get 787s and then spin them off, or you want to continue with 767 ones?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [21]

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No, I think the beauty of our plan is we have the luxury of making that decision when we get there. We had -- when we inducted the 767 into our fleet, we sort of saw them as having a 5-year useful life. So you might conclude from that, that they'd be more likely to depart the fleet than stay. But they'll be fully depreciated assets, and they might still have a home, and we'll make that decision as the 787s start to arrive. But we're trying to forecast where we think fuel is in 2019 and 787 is 20% more fuel efficient than the 767. And so, I think it's just great that we have the flexibility to keep them or let them go.

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Konark Gupta, Macquarie Research - Analyst [22]

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Okay. And these 787s are being financed?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [23]

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No, we expect them to be paid for from cash from operations.

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Operator [24]

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The next question is from Walter Spracklin with RBC.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [25]

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So I wanted to go back to kind of overall strategy questions here. Each of my questions will be on ULCC and then the 787 wide-body strategy. So starting with the ULCC, Gregg, can you -- you started -- this airline started as kind of -- as a low-cost carrier and to go with and from what I understand, you're going to go no frills and add an extra row. I'm struggling to see the real big difference in why you would create a whole new airline configured around kind of fairly minor changes to configuration as well as how you'll be presenting the -- presenting the fares, unless it is to start a new certificate and hire all new pilots, and therefore, rebase your salaries and how that might be a challenge with any unionization efforts that occur? Just curious your thoughts there.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [26]

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Yes. So, let me correct some of your assumptions. We're talking about 189 seats on these aircraft, which is several extra rows, not just one. The one extra row is going on our existing fleet at WestJet. We view this new ULCC as being completely separately branded. It won't have WestJet's name on it. It will be separately named, and we might invite our employees to help us pick that name. It will look different, the uniforms of the people in the operation will be different. It will have significantly lower costs on every line of that business. And I guess, I'd ask you to think about easyJet or Ryanair and what their product offering looks like. That's what this will be. So, there'll be more opportunity to drive ancillary charges, because the focus on ULCC is just have a absolutely rock-bottom entry fare. And then you pay as you consume for all of the other products and services. We have a lot of frills sitting on WestJet. We have a Plus cabin; we have WiFi connectivity; free in-flight entertainment; we provide snacks and beverages for free; we allow people to carry on bags for free. And if you look at what the ULCCs do, none of that is included. So that's how we think about this line of business. And it'll be significantly lower cost, and it'll be different than WestJet in 1996. WestJet in 1996 was a low-cost carrier. This will be an ultra low-cost carrier. And the world has really evolved to a place, since 1996, where these ULCCs do exist. In the States, they are approximately 4% or 5% of the system capacity, and there is -- there may be an opportunity for something of that nature in Canada. So that's how we see that one. And we have a 21-year history of working collaboratively with our WestJetters, and we'll be able to do that with this ULCC and I expect that our people will be excited about the growth opportunities that this provides, upgrades to captains from First Officer positions and opportunity for people in WestJet Encore who fly turboprops to go over and fly jets. So it's an exciting opportunity, and it's one that will allow us to defend, more vigorously, that ultra low-cost carrier space. And the only other thing I would say is, we think about this business, the airline business in Canada as really having 3 segments. There is a segment that is ultra low-cost, the one I just described. There is a segment in the middle, which is a value player, and that's WestJet. Our fares are still lower today, and our costs are lower than our primary domestic competitor and we're offering a high-value product. But it has more frills than a ULCC. And then at the high end of the spectrum is a product that is more tailored to, I'll call it, the luxury segment, that is looking for something like a lie-flat bed when they're flying long haul international, and that's likely what the product on the 787 will afford us. And so, we'll have 3 very distinct products that will address those 3 segments from thrift to luxury, and all with an appropriate cost structure to match with the revenues we expect these segments to drive. And that in combination gets us to the 13% to 16% ROIC.

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [27]

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I'll just chime in, it's Bob. The 174 to 189 seats by itself is over a 10% ex-fuel CASM savings. And then as Gregg mentioned, as you work through other parts of the business model and you look at the market you're trying to serve with respect to low fares and the competitive set, the announcement that we made to have a distinct approach into this market definitely makes sense for us. And we've looked around the world with respect to what has happened with unbundling the product and offering as low a fare as possible and driving that ancillary line. And the market around the world, this has been a lucrative one with respect to the earnings that these vehicles and these companies have generated and we expect to do the same in Canada.

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Walter Noel Spracklin, RBC Capital Markets, LLC, Research Division - Analyst [28]

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Okay. The second question then is on your wide-body expansion. I know when you expanded in Canada, you were going into monopoly served markets, where pricing was high and you had a low-cost model, which made that expansion very successful. As you roll out your 787, these will not be monopoly served markets and your low-cost approach will be less significant, given you are now operating multiple aircraft in your fleet and fuel is a much bigger portion of the cost structure. So I'm curious to understand, based on that, what your strategy will be as you expand globally? Will you be targeting primarily leisure markets and, therefore, going with a single-class cabin configuration? Or with the cost of the 787 and the need to get adequate returns, are you going in to do a class cabin? Again, a low-price strategy going into these markets will be very difficult given the lack of that cost differential and the fact that it's no longer a monopoly. So I'm trying to understand what your strategy will be with the new wide-bodies that you've announced here today?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [29]

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Yes, I think the strategy really is to be the value player in that long-haul space much as classic WestJet is within domestic Canada. Still have a cost advantage over our primary competitors. We have a history of being a disruptor. I believe we'll be a disruptor in this space, much as we have with our services started last year to London, Gatwick, which has gone exceedingly well from a customer attraction. These are mature markets, as you said, Walter, but we're still finding a significant amount of stimulation in them. And we look around the world and you look at AirAsia X or Norwegian, which both fly wide-bodies in a low-cost model, we aren't -- we won't be a single class. We are not today. Our 767s have 2 classes. We have a premium economy and an economy and on stage lengths that start to get longer than 10 hours, which we expect the 787 to fly. We will have an appropriately-sized business class cabin with a few more frills that will disrupt how people think about business class travel. So it's the same WestJet model that has been so successful in domestic North America service that we're going to bring to long haul, and we've had a glimpse into our ability to do that in the right way through our 767 operation.

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [30]

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It's Bob here. What I'll add is our franchise at this point too with the network in Canada and the feed and how we have evolved our channel capabilities and demand channels, learned from sixth freedom and have set up numerous channels with a reward program and all our partners in Canada and airline partners around the world, as well as our reward program. We are in a good position at this particular point to go in to the wide-body market in a bigger way and capitalize on our franchise in Canada and our growing capabilities all the way around.

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Operator [31]

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The next question is from Fadi Chamoun with BMO Capital Markets.

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Fadi Chamoun, BMO Capital Markets Equity Research - MD and Analyst [32]

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I want to circle back on what you just indicated, Bob, as of my first question is, sort of the kind of feedback from the domestic network that you would expect as a result of this international expansion?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [33]

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The kind of which, sorry?

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Fadi Chamoun, BMO Capital Markets Equity Research - MD and Analyst [34]

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So do you think that this widebody strategy will help create a lot of accretion in your domestic network as a result of the feed through? And if there is anything any kind of specific numbers you can share on that would be great.

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [35]

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Yes, I'll start and then I'll let Gregg chime in if he has anything to add. Our network plan that we built over a number of years, first of all, we brought in Encore and that's been accretive. And we've always thought that widebody was a big prize for us and to work towards a bigger play there. And that it all works together with respect to widebody in and out of Canada, and the size of the market and where we're headed with respect to building stronger networks and stronger feed networks and the widebody will definitely be accretive into and out of Canada. Some of the capacity that you're seeing now besides what we're building with respect to widebody, and Gregg mentioned, Encore and what we're doing into the business market and the charter market, it all works together. And to build a stronger Canadian franchise, and it'll both, feed the widebody franchise and as well, the widebody franchise will definitely be accretive into Canada and using our network to take guests coming into major cities in Canada and taking them onto secondary centers.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [36]

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The only thing I would add, Fadi, is we have a couple of domestic competitors that fly international. Their international operations will be higher CASM than we forecast our 787 operation will be. And then there are a variety of foreign flag carriers serving Canada with significantly higher CASM. And so, it's a big market. The addressable market size in Canada is $28 billion, about $11 billion or $12 billion of that is in international long-haul. And I think, we're going to have a great mousetrap here, that will undoubtedly force a new equilibrium. So, if you've got the right cost structure, and you can ensure that your product can be appropriately priced given that cost structure, we've said for a long time at WestJet, the he with the lowest cost wins. And we think, this is a space that we can certainly win in

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Fadi Chamoun, BMO Capital Markets Equity Research - MD and Analyst [37]

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Okay. My second question sort of along the same lines, is just to confirm, you're indicating that the 787 will likely fly in 3 configuration sort of business class, lie-flat seats, and ultimately, premium economy and economy. And secondly, if you can confirm if that's the case, then can you talk a little bit about where exactly the cost advantage of WestJet will come from versus the incumbent carriers? And if you have sort of any indication about what kind of cost advantage you anticipate to have versus these incumbent carriers, 5%, 10%?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [38]

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Yes, we don't provide segmented results. And so, I'm not going to do that here today other than to say, we expect that this aircraft, even with -- it's a safe assumption to make that there will be 3 levels of service on board the aircraft. But that, what we won't disclose today is how big each of those cabins would be other than to say, we expect to have a density advantage. And then as Bob said, there are 20-plus widebodies flown currently by a Canadian operator without a domestic network. We'll have a feed advantage. We'll be relying on sixth freedom traffic flows, and we have our own large domestic network with Encore to feed these widebody aircraft. So it's an advantage that comes not only from cost, which is largely a density play, but then also from a feed advantage that others don't have.

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Operator [39]

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The next question is from Helane Becker with Cowen and Company.

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Helane Renee Becker, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [40]

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Just a couple of questions. One is, are you going to use older 737s or -- for the ULCC, or will there be another aircraft order coming?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [41]

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No, we have, as Sarah said in her opening remarks, the average age of our fleet is only 7.4 years. So we have a lot of fairly young 737s, that have been planned to be lease returned over the next couple of years, as our MAX aircraft arrive. And I think what we'll do now is in addition to slowing down the arrival of the MAXs that was announced in tandem with the widebody, we will, as the MAX -- as that few MAXs that do come into the fleet arrive, we will take 737-800s from our existing fleet and move them to the ULCC. So no incremental 737 order.

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Helane Renee Becker, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [42]

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So there will be 2 retrofit projects, right? The one you're finishing up now and then a second one to increase the number of seats again?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [43]

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That's correct.

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Helane Renee Becker, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [44]

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Okay. And then, can you say what the timing on the second retro is, because the first one ends by year-end 2018. I thought you said in your opening remarks. So then as MAXs come in '19, we'll start to see these go through a second project?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [45]

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Yes. So we have a number of aircraft that are scheduled to be lease returned and we're in a variety of discussions with lessors around keeping those aircraft. And those aircraft would be reconfigured, as they're moved into our ULCC. So that work will happen between Q3 this year and let's say, Q3 next year. So that work will actually be accomplished in advance of the 737-800 fleet generally. But remember, we have 115 737s in WestJet, that all are going through reconfiguration. And we're talking about 10 being reconfigured for the purposes of going into the ULCC.

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Helane Renee Becker, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [46]

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Okay. So that was one question, just in like 7 parts. And then my other question is with respect to the widebody, as you think about international expansion, are there bilateral agreement issues that you're going to have to deal with to be able to serve markets? Or do you have open skies with most countries that you're thinking about growing into? How should we think about your opportunities there?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [47]

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It's a bit of both. The EU has an open skies agreement with Canada. So all of that is open to us.

China, we have a fairly expansive agreement between Canada and China. WestJet is not yet a designated carrier in the Chinese space. We expect that, that might be a good opportunity for our 787s and so we're going to be having to apply for designation under a number of bilaterals for countries where we don't have existing open skies agreements. But we don't anticipate that to be in any way limiting.

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Helane Renee Becker, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [48]

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Okay. And then my final question is with respect to the share repurchase program, are you going to suspend that given the increase in CapEx? Or will that and the dividend commitment still continue?

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Sarah Walker, [49]

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Hi. It's Sarah. Right now, we still have about 193,000 shares under the current bid that's expiring later this month. And if we decided to go forward and do another bid, we'll make that announcement at that time.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [50]

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I think, Helane, as you know, these are all subject to direction from the Board. Our dividend will continue. We're not planning on reducing that. And the Board through discussion with management will decide if and when we want to increase the dividend or issue a new NCIB.

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Operator [51]

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The next question is from Cameron Doerksen with National Bank.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [52]

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Just first question on the RASM trends. I mean you're probably getting a lift year-over-year on the flights to London just because you have fewer, I guess, heavily discounted initial fares into the market. But I'm wondering if you can just maybe talk about what you're seeing on the -- on RASM on those international routes? But also, how it's looking domestically as you look ahead to Q2 and Q3?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [53]

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It's Bob here. Overall, I would characterize demand as healthy, and we're quite happy with what we see with demand when we put all that -- the capacity on various routes and regions against that. So overall, a good demand environment. With respect to some specifics, yes, we're into a 2nd-year and there's all the learnings that go with that with respect to the 767 operation and what we've done commercially with respect to our pricing and all of our channel activity there. So you're right in terms of pointing to what we're seeing on the forward-looking trends and the numbers associated with that to London.

And then overall, Gregg mentioned, between Plus and Corporate-Managed Travel, if you combine those 2 for Q1, so that's over 15% incremental revenue year-over-year. So those investments are definitely paying off, and we're seeing those going forward and we expect those to continue.

Alberta, the economy is projecting over a 2% GDP growth this year, and we're seeing demand probably pretty -- or demand pretty commensurate with that level of growth but we're not seeing a huge recovery. But we're -- we've at least hit the bottom here in Alberta. And all the efforts we've made or are making to the diversify, we're seeing those come in at quite a healthy level as well. So all things considered, that gives you a little bit of a picture.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [54]

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Okay. And maybe my second question is a sort of bigger picture question, it's regards to execution risk. And you've got -- you're continuing to grow your existing business, but now you've got 2 pretty major strategic initiatives underway at the same time. So I'm wondering if you are comfortable with the resources, especially on the human resources side of things to successfully execute on both of these things at the same time? And what do you see as sort of the biggest risk in the next 12 months with getting both these initiatives off the ground?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [55]

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Yes, that's a fair question, Cam. What I would say is that we know the 737 well. And these are aircrafts that are coming from WestJet and moving over to our ULCC. So the execution risk there is negligible. We grew WestJet Encore from a dream to by the end of this year, we're going to have 43 aircrafts flying in that Q400 fleet. So in 3 years, from zero to 43, gives me a lot of confidence that we can go from zero to 10 on a fleet that we already know and with far less execution risk.

And then the 787, we've got 2 years to prepare for that, that's a 2019 initiative. And so, they are decoupled from each other. And I think, all of that should give everybody a level of comfort that this is doable. Certainly, that's how we feel.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [56]

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Do you think you have to, I guess, beef up your management team somewhat to execute on these things?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [57]

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Yes. We've announced a couple of changes already. We've announced that Bob Cummings is going to go and start up our ULCC and we're freeing up him from the WestJet operation and we've announced his backfill, Ed Sims will be joining us. Ed has international experience from Air New Zealand. He led the international division of that airline. And so he brings a lot of widebody long-haul product sales distribution experience. And we are looking forward to leveraging all of his strengths and knowledge in that space.

And then, Bob will be assembling a small team of folks to help him stand up at the ULCC. Not any different than the team of folks we put together to start up WestJet Encore. So I think, we have the playbook, and we're moving nicely forward with that. And on the IT side, as you know, we've been missing a CIO for almost a full year. Craig Maccubbin has joined us from Southwest Airlines. I think, if you know what Southwest has been up to on the technology side over the last several years moving into a new GDS, it's a heart and lung transport. Craig was very instrumental into that. He has a lot of knowledge in the space and will bring a lot of strength in building the IT systems to support all of what's going on here

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [58]

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It's Bob here. We've inducted a number of new or different aircraft here over the last 4 or 5 years and had to deal with a busy lease return schedule. So the competencies of the organization and the capabilities are, we're very confident that we'll do a good job over the next 1 year, 1.5 year here.

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Operator [59]

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The next question is from Turan Quettawala with Scotiabank.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Analyst [60]

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I guess, first one on the ULCC. I was just wondering, you've obviously talked about 10 planes initially here. How do you think about the size of that business in 2 to 3 years? Maybe does it depend on how much the new competition grows? Or is there an independent growth plan here?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [61]

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I'll start, then I'll let Gregg chime in if he wishes. Right now, we're just heavily focused on head down on an initial network, and what that looks like. And then we'll get into the market and just feel our way from there. We did size the market initially. And as I said, it's distinct enough to announce the approach that we announced. And we'll now just get into the market, and we'll feel our way from there with respect to how this grows and how this fits into the overall portfolio.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [62]

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Yes, Turan, I would, it's a question we get asked a lot, how big could this be, and honestly, a bit difficult for us to say. We know that 10 to start is probably a good size. We do have a history. When we announced an order book for 45 Q400s, I think some analysts questioned whether or not in a matured market there was room for 45 more turboprops in this country. I think we've proven that. We've seen the stimulation that comes from the low fares and dramatic growth. The ULCC is going to be purposed at the very low end of the market serving leisure markets only. We don't expect that you'll see these aircraft flying in in markets where you have a nice business mix. We think classic WestJet is perfectly capable to do that.

And so, the overlap will be minimized between the 2 brands, and we think there's lots of room in Canadian domestic leisure markets and Southern leisure markets. So besides, I don't think I'll comment on that. We'll let our results determine how big it gets.

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [63]

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Turan, I mentioned this earlier, but the leakage across the border of traffic into Bellingham and Buffalo is something we've looked at for years. And definitely, as we're putting this together and thinking about it, we have a circle around that opportunity as well.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [64]

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It's 5.5 million Canadians that travel across the border to start their journey and are accessing ULCC capacity from border airports. And so, as Bob said, there is a good target there, and we know that there's 5.5 million Canadians that would rather start from home. So that's where this will be targeted.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Analyst [65]

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Fair enough. And I guess, you don't the pilot agreement yet on this, right?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [66]

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Well, I think the answer to that is it depends because we have already agreed with our WestJet Pilot Association that these planes will be flown by pilots on the WestJet Pilot Department list. So we won't be hiring off the street, except, if we don't get enough interest by WestJet pilots to go and fly these jets. And I expect that we'll have lots of interest from WestJet Encore. The opportunity to move from Q400s to jets is a natural career progression. And there is -- there would be pay raises there. So we don't expect that's going to be a problem. But until we open up the bid and see just how all that moves, we won't know.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Analyst [67]

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And I guess, for my second question maybe I could ask you to comment on ROIC. It's been below the range here for some time. I guess, do think that the ROIC can come back to your long-term guided range here before the 787s start coming in? Or do you think it'll have to be sort of after?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [68]

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I think we should expect ROIC to continue to improve from where we are today. What I can tell you is that the revenue for air travel from the province of Alberta over the last 2 years has shrunk by $1 billion. As an airline with 40% of our capacity to, from or within Alberta, there is absolutely no way to avoid the hit that comes from a market that shrinks by $1 billion, when you're so heavily over indexed. I think the market should be excited about the opportunity that the widebody provides, because it will diversify revenues. And we've seen our domestic competitor speak regularly on their ability to be less impacted by what's gone on in Alberta. So we are, to some degree, dependent on Alberta coming back. But we're moving assets away from Alberta and certainly the widebody into markets where we think there are opportunities to drive the 13% to 16%. The exact timing for that, I don't have a good line of sight. But I expect that it will continue to improve before the first widebody arrives.

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Operator [69]

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The next question is from Doug Taylor with Canaccord Genuity.

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Douglas Taylor, Canaccord Genuity Limited, Research Division - Director [70]

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Can you talk about what other infrastructure investments beyond the aircraft are going to be required that you're thinking about in advance of the 787 launch, lounges, any changes to the loyalty program, anything like that or infrastructure?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [71]

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It's Bob here. And we have our product plan and overall infrastructure planned. As we're broadening our strategic approach here, we have really have laid the tracks to continue to evolve our reward program, and the upper tiers of our reward program with respect to what the needs are of a frequent traveler, the corporate traveler, the global traveler, and where we may go with airline partners. So with respect to lounges and how they evolve and evolve in our major cities, we definitely are looking hard at plans there and how they'll fit into our future. We need it to get to the right size before we got to a tipping point. And as I said, our airline partnership strategy factors into that. And then, as we look through our entire product plan and our service capabilities, Craig coming on board in terms of making it easy to do business with us through a mobile device, and being able to self-serve end-to-end, that's definitely a vision of ours and we have a road map to achieve that and that will definitely help with all segments of travelers. So our underlying infrastructure plan, product and service plan to service the widebody end of the market, and then do what we need to do across the other segments, we're tracking along nicely and we have the scale now to continue to make those investments.

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Douglas Taylor, Canaccord Genuity Limited, Research Division - Director [72]

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Okay. Second question for me. Can you talk a little bit about the decision of push out the MAX Aircraft as part of the 787 transaction? Obviously, very different markets targeted by those 2 different aircraft. I mean, was there something specific about the shift in the demand profile or is it the ULCC decision that you think caused you to make that decision?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [73]

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No, Doug, I think it's just being good stewards of our capital, and we committed long ago, that we're not going to allow our net debt-to-EBITDA ratio to get above 2.5. We are managing this business conservatively. We have a young fleet of NGEs, average age 7 -- just over 7 years. So we saw an opportunity to keep some of those NGEs longer and preserve the capital to invest instead of into MAX aircraft to invest into the widebody. And eventually, once it's a bit of a -- the pipeline swallowing the pig. Once that capital outlay for the widebodies is behind us we can go back and revisit what more we want to do on the narrow-body.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research and Senior Analyst [74]

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Just returning to the ULCC and thinking about the market. I think Bob, you talked a little about the fact that there seems to be a pool of passengers who do travel over the border to do leisure. I guess, the question is, where are the passengers going to come from in your mind on the ULCC? Is this something that there's another pool out there that you may be able to attack or is it something that's going to have to be a purely stimulation-type of model in order to get the passengers on board?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [75]

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Well, the -- if you look at the models around the world, the unbundling of all the features beyond the seat, the flexibility, convenience, all the comfort features, what you do with your reward program, merchandising, you can really strip down a product. And then the ancillaries with respect to -- if you look around the world, there are carriers if you convert it to Canadian dollars, hitting the CAD 70, mid-CAD 70 mark with respect to ancillary. So the total revenue price when you look at the product and then a low fare associated with that, you can stimulate a lot of traffic or a lot of additional trips. So that -- the definite stimulation part of this and what that looks like and how we're thinking about that, there is a substantive opportunity there. And we've seen it with respect to people crossing the border, and how, we've analyzed that. And then our franchise with respect to how we're evolving it as a value player and how those 2 fit together, the timing was right for us to do this defensively as well.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research and Senior Analyst [76]

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Okay. Now you've mentioned, do you guys actually have a target for ancillary per guest at this particular point going in?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [77]

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We're just formulating the specifics around that. So stay tuned.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research and Senior Analyst [78]

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Okay, great. And then, I guess my next question just, and it's something that Gregg had mentioned earlier, that was I think kind of important, with 40% of your traffic in, through and around Alberta. What are seeing in terms of booking curves and demand profile all throughout the chain, both in leisure? And are you seeing any sort of a recovery at this point? I know that some other industries are starting to see some, call it, green shoots, if you will, out West. But I'm just wondering what you guys are starting to see right now?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [79]

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It's -- I don't want to get too bullish. It's looking better, but it's not a fast recovery. So we're hesitant to call it a recovery. We feel much better than we did, say 3 quarters ago, and we do have some trends that are in the up direction, but it's too early to say we're in recovery mode.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [80]

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Chris, I think as you know, airlines are usually the first to feel the recession and the last to recover because so much of our travel is discretionary. And until unemployment starts to decline and people get jobs and they're feeling confident about their incomes, they're still holding back on their spend. So I think there are lots of signs the economy in Alberta is improving, but our share of that improvement will trail by probably 1 quarter or 2. But we're optimistic that we've least felt the bottom and we're starting to see business travel to improve first .

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research and Senior Analyst [81]

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Okay, great. And leisure trends are still a little slow is what you're saying?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [82]

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Yes, I think if you compare it to the amount of capacity in the market, I think that's a fair characterization.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [83]

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I guess add to some of the questions about the ULCC. Hoping to get a little more clarification on what this might look like, although I realize you guys don't want to show your complete hand at this point. But is this going to be a ground up separate entity where you're hiring a separate management team, you're going with a completely different network plan, network planners? I mean, for example, where would you go to buy ticket for this airline? Would it be on WestJet's website? Or are you going to get a whole separate booking engine? I'm trying to envision what this would -- like where some of the cost advantages would be relative to what you've got now and what kind of infrastructure you might leverage like you did with Encore?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [84]

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Ben, it's Bob, and you're not going to get a really satisfactory direct answer. But let me put some color around our thinking.

First and foremost, the principles around this are low cost, simplicity, unbundling and the low-fare market. And then when you look at all of the business and operating model characteristics from pure play, ULCCs around the world, that's how they achieve it is with a singular focus on those principles and objectives. So having said that, I'll say, we've started there and then there is the context of how we scale this up, and where we do look at WestJet and where there is some coordination or plugging into with some WestJet assets in the mix. So it is a stay tuned, but I will say, with respect to the brand and the expectations in the market, the plan is to keep it away from WestJet.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [85]

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I would add, Ben is, think of this more like a legion's model and less like rouge. So we're not anticipating that there will be any connection to WestJet. This will be stand-alone. You'll go to a different place to buy your tickets. The airplanes and the uniforms will look different. It's a brand-new line of business, that will serve well our guests at the bottom-end of the market without creating negative halo onto WestJet. And the other thing is, I've said before that we believe that there is a small market here. Canada is not very densely populated and there are long distances. And so I don't expect this to get to the point where it's getting anywhere close to the size of WestJet. It's going to be a small airline with the purpose of serving a small segment of the market.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [86]

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But I can't imagine there are too many city pairs where you would put this capacity without overlapping where WestJet already serves. So let's just hypothetically say, you put this Vancouver to Hawaii, which would be a classic leisure market. How do you not cannibalize what you're doing on your own service, unless you were to displace the capacity that WestJet is currently providing on that route, in which case, there'd be all kinds of questions about connectivity in your network, because you say it won't touch WestJet. So how does someone get from Prince George to Hawaii through Vancouver, if you're not connecting? And if you are going to be allowed that service how does it not cannibalize your existing capacity?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [87]

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Ben, we know the market well, and all the network flows where Canadians are going and coming into Canada, accessing where we're going to take share off others and we mentioned the leakage across the border. We have a pretty good idea on how this will be very accretive to WestJet with respect to where we want to put our capacity. And then I've mentioned a couple of times that defensively with respect to our franchise going forward and our corporate health, this serves a purpose as well.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [88]

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So would you see it overlapping with your existing network?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [89]

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No, I'll tell you, Ben. When we started the service to London and Gatwick, we saw surprisingly a segment of business had found it's way onto EasyJet. These are people that are smart enough to do the math to know that they can buy a point-to-point ticket on us and a point-to-point ticket on EasyJet to get to anywhere in the Mediterranean at lower cost than the legacy carriers provide through connecting hubs in Europe. So somebody going from Prince George to a point somewhere else in our network flown by the ULCC, I would imagine we would do the same thing. They buy a ticket on WestJet to get to the point where the ULCC departs from, and they would buy a separate ticket on the ULCC. It is a bit the way of the world in ULCC space. And might there be some markets where they will overlap? Possibly. I mean if you look at what's going on in Australia, you have Jetstar that overlaps with Qantas in certain markets, and they've figured out how to make that accretive to earnings and to total revenues. And so, it may or may not overlap, and we're not particularly fussed about that as long as we get the segments separate enough to make sure that this is accretive and not cannibalizing.

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [90]

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We'd say, we've spent a lot of time segmenting the market.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD of Industrial Research [91]

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Just a quick housekeeping second question. The IROPs that you reported, were they mainly related to the Gatwick service, because there were a lot of delays over the Atlantic this -- in the first quarter as well from what I was able to track?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [92]

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No, our operational reliability on Gatwick is tracking very close to our 737s. We actually had a very good first quarter on the 767. It's all weather related and then construction at Toronto Pearson, we've got a runway being shortened there for some resurfacing work that has caused a lot of havoc, and that will continue until May 19. So as Sarah said, we've got 2x the average of the last 4 years in terms of disrupted flights. And more disruptions in Q1 than the last 2 years combined. So it is a -- it's a 2 to 3 standard deviation departure from what you'd normally expect for Q1.

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Tim James, TD Securities Equity Research - Research Analyst [93]

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Just want to follow-up on the return on capital question here. You've mentioned that I believe you feel the ULCC will be accretive to earnings. Do you expect the launch of the ULCC in 2018 or are you going to bring the 787 operations into this in 2019 will be temporarily dilutive to your return on invested capital? And I don't mean, will it cause it to decline relative to the prior year. I mean could it be lower as a result of those initiatives, relative to what it would be in the absence of those initiatives?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [94]

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We don't think so. That's not how we thought about or planned for it. But all new operations, we saw that in year 1 on the 767, we saw that in year 1 on the Q400, that there is a cycle that is generally 12 months that these new operations go through to achieve maturity -- and so, we have these starting at different times, the ULCC, I would say, for all intents and purposes is going to be a Q1, 2018. There maybe a plane flying before year end, but it's largely a Q1, 2018. And that capacity will be trickled in through the year. It won't be 10 in January, 10 aircrafts but will be trickled in. And it's going to be a -- it's small. On a base of 115 737s, having 10 of them in the ULCC, not all 10 starting in January will have a very small impact on ROIC in 2018. And then similarly in 2019, when we get all of -- into Skyline, which has published those 3 787s flying in 2019. One is delivered toward the end of the year, and we're going to be careful. I think somebody asked a question earlier about, are these going to replace 767s? And we know that the opportunity, for example, on London with 787s, this plane looks better from an economic standpoint than 767s on Gatwick. And so that might be a good place to start to ensure that ROIC is accretive right from year 1.

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Tim James, TD Securities Equity Research - Research Analyst [95]

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Okay. And then just returning on the reason for the change in the MAX deliveries, the 15 aircraft. Am I correct in assuming from your answer then that you'll be keeping some of the existing NGEs in service longer than contemplated under the previous plan?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [96]

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Yes, that's a good assumption.

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David Tyerman, Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research [97]

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My first question is on the 2017 CASM ex guidance. So if my math's right, you had unusuals of about 1% increase in CASM ex, yet you didn't change your guidance. I was just wondering why that was?

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [98]

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But for your question, David, does that infer reducing CASM through the rest of the year, since the year hasn't changed and the first quarter was above, the answer is, yes.

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David Tyerman, Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research [99]

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Where would it come from then? That's a pretty big change.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [100]

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We've got a lot of projects underway. I've talked to a few of them. We get some benefit from seat densification. There is some benefit there from length of haul and there's a bunch of things that are going on. And there's a strong cost discipline across the organization. I mean, we are cost champions, and I think, the organization is stepping up to help look for opportunities to save costs on every line.

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David Tyerman, Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research [101]

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Okay. And my other question was on the widebody. So, Gregg, if I understood your question, or your answer to one of the questions correctly, it sounds like the main advantage versus Air Canada is seat densification. And I guess, against transit, you also get the feed advantage. But that doesn't -- the seat densification doesn't sound like a very sustainable advantage. AC can easily match you if they need to, so where is your cost advantage?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [102]

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It's Bob here. We've analyzed the market very carefully and the various shares going into and out of Canada and Air Canada has it's share. And then if you look at what our fair share would be, with our brand, our point-of-sale advantages and where we are with some of the gaps that you're noting on the plus delta side, we feel very good about growing into this business and doing that with very healthy margins and it being accretive to ROIC. So with respect of where we have advantages and the cost advantages and the sustainability versus whether there is other gaps and where those gaps are closing. And then all the other ASMs that make up that $11 billion market into and out of Canada, and the advantages we have, I'll say from Canadians, and what our natural point-of-sale or share should be, we've analyzed a very healthy future for this line of business.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [103]

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Dave, what I'd suggest you might do is, it's pretty easy to find seasonal, or year around deployment for 10 aircraft. Much more difficult from a seasonal Canadian market to do that with 100 widebodies. If you look at our competitor's widebody deployments, it goes from very high utilization in the summer to very low utilization in the winter and that drives a ton of CASM. We will get the advantage, not only from densification, but how we will deploy the aircraft, the fleet and the utilization that we get across 12 months, not just from 6.

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David Tyerman, Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research [104]

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So your suggestion that really it's the scale that's the really driver here or a key driver here that you have so few, 10 especially that you should be able to deploy in the fine markets for them all year around where it's a lot harder for Canada to do that. Is that the idea?

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Robert Cummings, WestJet Airlines Ltd. - Executive Vice-President [105]

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You've got it.

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Gregg Saretsky, WestJet Airlines Ltd. - CEO, President and Non-Independent Director [106]

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You got it. Take a look at the P&L.