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Executives

Hugh Harley – Director, IR

Gregg Saretsky – President and CEO

Vito Culmone – EVP, Finance and CFO

Bob Cummings – EVP, Sales, Marketing, and Guest Experience

Ferio Pugliese – EVP; President, WestJet Encore

Analysts

Kevin Chiang – CIBC

Turan Quettawala – Scotia Capital

David Newman – Cormark Securities

Hunter Keay – Wolfe Research

Cameron Doerksen – National Bank

Unidentified Corporate Participant

Helane Becker – Cowen and Company

Ben Cherniavsky – Raymond James

Walter Spracklin – RBC Capital Markets

Glenn Engel – Bank of America Merrill Lynch

Chris Murray – AltaCorp Capital Inc.

Tim James – TD Securities

David Tyerman – Canaccord Genuity

WestJet Airlines (OTC:WJAVF) Q4 2013 Earnings Call February 4, 2014 10:00 AM ET

Operator

Good morning ladies and gentlemen thank you for standing-by. Welcome to WestJet’s 2013 Fourth Quarter and Full Year Conference Call and Webcast. As a reminder all participants are in listen-only mode to prevent any background noise. After the speakers’ remarks there will be an opportunity to ask questions. (Operators Instructions). As a reminder this conference call is being broadcast live on the Internet and is being recorded.

Your conference speakers today are Mr. Gregg Saretsky, President and Chief Executive Officer; Mr. Vito Culmone, Executive Vice President of Finance and Chief Financial Officer; Mr. Bob Cummings, Executive Vice President of Sales, Marketing, and Guest Experience and Mr. Ferio Pugliese, Executive Vice President of WestJet and President of WestJet Encore.

I will now turn the conference over to Mr. Hugh Harley, Director of Investor Relations.

Hugh Harley

Thank you Satchi and good morning, everyone. Welcome to WestJet’s 2013 fourth quarter and year-end financial results conference call.

I would like to provide you with an outline of today’s call. Gregg and Vito 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. When we are at the Q&A portion of the call I would like to request that you limit yourself to two questions. That should allow us to get to as many questioners as possible.

Before turning the call over to Gregg, I would like read the customary cautionary language. Please note certain statements made by WestJet in this call may contain forward-looking information. There are risks that actual results will differ materially from these contemplated by these forward-looking statements. For additional information on such risks please consult our filings with security regulatory authorities. These are publicly available on SEDAR and can be found in the media and Investor Relations section of our website, westjet.com.

These forward-looking statements represent WestJet’s expectation as of today’s date February 4, 2014 and accordingly are subject to change after such date. WestJet does not undertake to update correct or revise any forward-looking information as a result of any new information, future events or otherwise except as required by law.

Now I’ll pass the call over to Gregg.

Gregg Saretsky

Thank you and good morning everybody. Thank you for joining us. We had a great year in 2013 with record earnings of $2.03 per share, up 14% year-over-year. We achieved our 35th consecutive quarter of profitability and for the sixth consecutive quarter surpassed our return on invested capital target of 12% by achieving 13.9% for the year.

These great results were driven by WestJeters’ ongoing focus on taking care of our guests and their business as we introduced several key initiatives in the year including the launch of WestJet Encore, which continues to grow and perform well as we expand eastward, the market launch of our fare bundles and plus products, having reached the $100 million cost savings target under our business transformation initiative by the end of this year one year ahead of our original goal, the ongoing expansion of our network, including our first ever trans-Atlantic destination Dublin, Ireland and last but not least our strong financial and operational results led to a record profit share and owners’ performance of work payout exclusive of dividends for our employees.

On February 28th at our 18th birthday party WestJeters will receive the last of their 2013 bonus resulting in a total payout of approximately 11% of annual salaries and benefits or roughly six weeks’ pay per employee. Well done WestJeters.

We’re very pleased with the successful launch of WestJet Encore in June 2013. Encore has allowed us to bring our friendly and caring service to new Canadian communities and to create new connections between existing WestJet markets, bring additional feet into our network and increase our schedule efficiency. WestJet Encore now has eight Bombardier Q400 aircraft deployed with 60 daily departures serving 15 new and existing WestJet destinations and with firm commitments to purchase 12 additional Q400s through 2015. We continue to hold auctions for an additional 25 Q400s between 2015 and 2018.

The introductions of our fare bundle and plus products has gone well and our guests have being taking advantage of the increased comfort, convenience and flexibility options, we’ve provided to them. In fact we continue to expect to be in the high end of our previously disclosed range of $50 million to $80 million in incremental annualized revenue.

In terms of our company-wide business transformation initiative, we’ve identified and put into action measures that will enable us to achieve our $100 million target in future cost savings by the end of 2014, a full year ahead of our original goal of 2015. As part of this initiative in October 2013 we began operating under the one-in-50 flight attendant ratio. We anticipate this change will provide us with future cost savings as we grow into the surplus of flight attendants we’re carrying as a result of our commitment to no involuntary lay-offs.

In addition, the new staffing ratio will allow us the ability to compete on an equal footing with other North American and International airlines and enable us to continue to offer affordable fares to our guests.

In 2013, we made several moves to improve our long-term fleet efficiency including the seat reconfiguration in the first quarter, the announcement of the sale of 10 of our oldest 737-700 aircrafts to Southwest Airlines and the purchase of 10 new 737-800 aircraft late this year and early next year. And our September 2013 agreement with Boeing to purchase 65 737 Max aircrafts all of which provide increased fuel efficiency and enhanced amenities to increase the comfort available to our guests, while helping to maintain our low cost operating model and provide our guest with an enhanced in-flight experience.

We will continue to actively identify and implement new cost savings initiatives and remain committed to working in collaboration with all WestJeters to set our company up for ongoing low cost operations for years to come. Over the course of 2013 we continue to see success with our strategy of growing our airline partnerships, which included evolving our interline agreements to co-chairs with Air France and China Southern Airlines and adding five additional interline agreements.

Revenue from our interline and co-chair partnerships increased 26% in the fourth quarter and 65% in the full year 2013 year-over-year and our network including our 33 airline partnerships provides our guests with access to over 140 destinations directly on WestJet.

In terms of our rewards program, we were honored that the WestJet RBC World Elite MasterCard was ranked Canada’s Best Travel Rewards Card for 2013 according to MoneySense Magazine in September and ranked number one amongst travel reward cards in Canada’s top travel reward credit card category by Rewards Canada in November.

Today, we’re pleased to announce a 20% increase to our quarterly dividend from $0.10 to $0.12 our fourth increase since we declared our first dividend of $0.05 in 2010. This puts our payout ratio at 24% based on 2013 earnings per share of $2.03 and our dividend yield at 1.9%. We believe our focus on returning value to our shareholders through our dividend and normal course issuer bid programs as well as our ongoing commitment to achieving a sustainable return on invested capital of 12% continues to demonstrate our confidence in the robustness of our business model supported by WestJeters ongoing hard work and the growing loyalty of our guests.

I’d like to take this opportunity to welcome our new Executive Vice President of Operations, Fred Cleveland to WestJet. Fred joins us from American Eagle Airlines, where he was Chief Operating Officer and Senior Vice President of Technical Operations. His extensive airline industry experience and impressive background will be a strong asset for WestJet as we expand our network, grow our fleet and focus on the safe, efficient and on-time operation of our business.

I want to extend my thanks also to the nearly 10,000 WestJeters, whose ongoing hard work and commitment makes a difference every day as we deliver our brand of caring service and provide a remarkable experience to our guests. Nowhere was this more evident than during the winter storms in Eastern Canada in January where our team did us proud. Thank you WestJeters. I am very proud of the entire WestJet team and our ability to provide value to everyone in WestJet’s world.

And with that, I’d like to turn the call over to Vito.

Vito Culmone

Thank you, Gregg and good morning everyone. We had a very solid fourth quarter and it helped us bring home record 2013 earnings. As Gregg highlighted, we reported our 35th consecutive quarter of profitability with revenue of $926.4 million, an increase of 7.6% and net earnings of $67.8 million or $0.52 per diluted share up 13% year-over-year.

Our traffic in the fourth quarter increased by 6.1% as we increased system capacity by 8.3%. In the fourth quarter of 2013 we welcomed over 4.5 million guests on border aircraft an increase of 5.6% while our load factor in the fourth quarter was 80.3%. For the fourth quarter we were pleased to see improved yield 1.4% higher year-over-year, which was slightly offset by the year-over-year decline in our load factor.

Our fourth quarter per unit revenue was slightly down by 0.6% year-over-year continuing the improving trend from our unit revenue changes realized in previous quarters in 2013. We’re pleased with the continued increases we’re seeing in our ancillary revenues as a result of several initiatives, we introduced in 2013 primarily the introduction of fare bundles and the launch of our plus product.

In the fourth quarter, our ancillary revenue increased by approximately 33% to $46 million and by 26.4% to $10.09 on a per guest basis. Our fare bundles product offers our guest increased comfort, convenience and flexibility options and allows for them to pay for the amenities they want with the product fully rolled out we’re very pleased with the results we’ve seen.

In terms of costs, our total CASM for the fourth quarter was 0.9% lower year-over-year. While our average fuel costs per liter increased by 1.1% our fuel cost on an ASM basis declined 2.2% for the same period, reflecting the impact of our improved fuel consumption relative to ASM growth.

Our CASM excluding fuel and employee profit share for the fourth quarter was down 0.3% year-over-year and $0.0929 cents the decrease in CASM excluding fuel and employee profit share relates primarily to lower in-flight aircraft leasing airport operations, flight operations and navigational expenses on a unit basis, partially offset by increases in maintenance, sales and distribution, depreciation and amortization and marketing G&A.

The recent major storms that affected our major domestic airports had a result impact on our revenue and expenses – had a resulting, excuse me, impact on our revenue and expenses in December and January. We estimate the winter storm’s net impact on our margins was approximately $6 million to $7 million including increased operational costs, displaced revenue and costs avoided with less than half of this impact occurring in December.

In terms of our full year 2013 results, we had net earnings of $268.7 million, a 10.9% increase year-over-year and record earnings per diluted share of $2.03. Our revenue was 6.9% higher at nearly $3.7 billion driven mainly by the additional seat capacity in our network and increased traffic despite a slight year-over-year decline in yield and load factor.

Fuel continued to be the largest portion of our costs at approximately 32% of total operating expenses for the full year 2013. On a per ASM basis fuel costs were $0.0434 in 2013, a 3.6% decrease compared with 2012 driven by the reduction in fuel costs per liter and our improved fuel consumption relative to ASM growth.

I am pleased to report that our ongoing focus on managing our controllable cost resulted in our full year CASM excluding fuel and profit share coming in 0.7% lower year-over-year better than our previously provided guidance of down approximately 0.5%. This year-over-year reduction was a result of hard work and reducing expenses throughout our business.

In 2013, the average exchange rate was C$1.03 to US$1 compared with the rate at par in 2012, which was a headwind that contributed to additional costs excluding fuel and profit share of approximately $12 million. Overall we’re pleased with our performance in terms of lower unit costs in 2013 considering the start-up of Encore and our lower average day flight.

We continue to take advantage of our strong balance sheet. In the full year 2013 we invested $715 million in net aircraft additions compared with $269 million in 2012, relating primarily to the delivery of five Boeing 737-800, eight Bombardier Q400 aircrafts, future aircraft deposits for the 10 Boeing 737 NG aircraft that will replace the 10 737-700 aircraft we will be selling to Southwest Airlines this and next year, and for 65 of Boeing’s new 737 Max aircraft, as well as cost incurred for owned aircraft engine overhauls and additional rotable parts and spare engine acquisitions. As at the end of 2013 our deposits on future aircraft balance is at $418 million.

Our operating cash flow in 2013 was $608 million compared with $723 million in 2012. This decline is mainly attributable to cash taxes paid in 2013 at the amount of $148 million. During 2013, we repaid a $179 million of our long-term debt, we repurchased shares for $112 million and paid out $52 million in dividends. We also had a cash inflow of $318 million related to the financing of five Boeing 737-800 and eight Q400 aircrafts delivered in 2013.

We ended 2013 with a cash and cash equivalent balance of $1.26 billion which represents 34% of our trailing 12 months revenue. Our adjusted net debt at the end of Q4 was $940 million which is 6.7% higher than that at the end of Q3, 2013 attributable to an increase in adjusted debt by virtue of $141 million of additional financing we put in place in the fourth quarter partially offset by a slight increase in cash and cash equivalents. We’re pleased with the continued strength in our liquidity and leverage positions, which provide us with significant flexibility as we move ahead with our growth plans.

In terms of our adjusted debt to equity ratio as of December 31, 2013 it was 1.38 unchanged from the ratio at the end of 2012 as our increase in adjusted debt from additional aircraft financing in 2013 was offset by our increase in adjusted equity in 2013 due to higher net earnings.

Our EBITDAR grew by $38 million to $773 million in the full year of 2013 and based on the trailing 12 months our adjusted net debt-to-EBITDAR ratio was 1.22, an increase over the ratio of 0.86 at the end of 2012 and still remaining at industry leading levels. Our dividend and normal course issuer bid programs, which we first introduced in November of 2010 have allowed us to return over $400 million combined to shareholders.

Our current NCIB expires on February 18 2014 and thus far, we’ve repurchased and cancelled 4.7 million shares representing 71% of the NCIB. 1.9 million shares remain available for repurchase. We’re nearing the completion of our third consecutive NCIB and in total we’ve purchased and cancelled 13% of our outstanding shares. We currently have approximately 128.6 million voting shares issued and outstanding as of January 31, 2013. As Gregg noted we continue to believe that our strategic NCIB and dividend programs are effective ways to manage our capital and to return value to our shareholders.

In terms of Boeing aircraft financing in the third quarter of 2013 we finalized some agreements a guarantee commitment with the Exim Bank for $190.5 million and entered into a loan agreement with the Canadian Chartered bank to finance the five Boeing 737-800 aircraft deliveries in that year. During 2013 we fully drew down on the guarantee commitment with Exim and the Canadian Chartered bank loan for the five 737-800 aircraft delivered in 2013. We have fixed the rate of interest for the five delivered aircraft using interest rate swaps and the term loans are secured by the five delivered aircrafts.

As of the end of 2013 there was no remaining commitment with Exim Bank and no undrawn loan amounts from the Canadian Chartered Bank. Under the loan agreement with Export Development Canada we signed last year for Q400 financing we have $689 million undrawn under the $820 million loan agreement as of the end of the calendar year 2013.

To close out my remarks, I would like to move on to a few remaining outlook items including foreign exchange rates before handing the call back over to Gregg. We expect our revenue growth and strong traffic results to continue in the first quarter and we anticipate our RASM will be flat to up slightly when compared with the record breaking first quarter of 2013. Contributing to this improving trend are the impact of our fare bundles product and the further roll out of WestJet Encore.

With respect to our 2014 system wide capacity outlook we continue with the guidance we’ve previously provided of between 4% and 6% growth. The flexibility we’ve built into our fleet plan through lease renewal options and the optimized deployment of our Boeing 737 and Bombardier Q400s fleets allow us to align our capacity growth with market conditions.

For the first quarter of 2014 we anticipate system wide capacity growth between 7.5% and 8.5%. In terms of domestic capacity growth we expect it to be between 5% and 6% for the full 2014 and between 9% and 10% in the first quarter of 2014.

In regards to the recent decline in the exchange rate between the Canadian and the US dollar we have been monitoring this closely. In terms of sensitivity for every $0.01 change in the value of Canadian versus the US dollar this will have an approximate impact of $13 million on our annual un-hedged operating costs, approximately 11 million of which relates to our fuel expenses.

Our business model is robust and the movement in this exchange rate does not impact our long-term strategic perspective of where we’re headed. While we’re prepared to use yield to offset the resulting cost pressures and protect our margins going forward we’re committed to transparency in our advertising price. To that end we’ve avoided the surcharges other airlines have added in favor of fare increases where what you see is what you pay. We continue to focus on protecting our overall cost structure which has been one of the main pillars of our airline from day one.

In 2014, we expect to take delivery of seven Boeing 737-800 aircrafts, we have extended one of the three leases previously scheduled to be returned in 2014 and expect to extend the other two. Previously, we had expected to return two of these leased aircrafts this year but have since negotiated favorable lease renewal rates and plan to utilize these aircrafts as spares during the retrofit of the new in-flight entertainment and connectivity system, which we expect to undertake later this year and through 2017.

We are also selling five of our oldest 737-700 aircraft in the fourth quarter of 2014 to Southwest Airlines as we had previously announced in May of 2013, which will result in us ending 2014 with two additional Boeing 737 aircraft compared with the end of 2013. In addition, we will be taking delivery of eight new Bombardier Q400s aircraft this year and we will end 2014 with a total of 16 Bombardier Q400s.

Our projected jet fuel cost for the fourth quarter is between $0.95 and $0.97 per liter, representing a 2% to 4% increase year-over-year based on current forecasted jet fuel prices of US$125 per barrel at an average foreign exchange rate of approximately 1.11 Canadian dollars to 1 US dollar.

Turning to our non-fuel cost, with the decline of the exchange rate to approximately 1.11 Canadian dollars to 1 US dollar as well as accelerated expenses arising from the decision to advance the timing of particular engine overhaul and repairs in anticipation of one of our suppliers providing notice recommending earlier replacement of certain parts we now expect our full year 2014 CASM, excluding fuel and employee profit share to be up 1.5% to 2.5% year-over-year as compared to our previous guidance of flat to up 1%.

For the first quarter of 2014 we expect our CASM, ex-fuel and employee profit share to be up 3.5% to 4.5% year-over-year primarily driven by the weakening of the Canadian dollar versus the U.S. dollar, accelerated depreciation expense from the decision to advance the timing of certain engine overhauls and repairs with a greater proportion starting in the first quarter of 2014 and as previously noted the impact of challenging winter weather on our operations.

In terms of capital expenditures we are now forecasting for the full year 2014 approximately $610 million to $630 million with spending related primarily to aircraft deliveries, deposits on future aircraft and engine overhauls. This is slightly higher than our previously provided guidance with the difference driven by the weakening of the Canadian dollar to U.S. dollar exchange rate and the accelerated capital cost arising from the decision to advance the timing of certain engine overhauls. For the first quarter of 2014 we’re forecasting capital expenditures to range between $140 and $150 million.

In closing, I also want to thank WestJeters for their tremendous ongoing efforts and as a team we look forward to continuing our commitment, taking of our guest and each other and welcome more guests on to WestJet’s network.

With that I will hand it back to you Gregg.

Gregg Saretsky

Thank you, Vito and Satchi we’re now ready for the Q&A.

Question-and-Answer Session

Operator

Thank you. Ladies & gentlemen we will now begin the analyst question and answer session. (Operator Instructions). Our first question is from Kevin Chiang of CIBC. Please go ahead.

Kevin Chiang – CIBC

Hi, congratulations on a strong end to the year. Maybe just a house-keeping question first. Of the 100 million cost savings you were recognizing a year earlier is that a run rate that we’ll see by the end of 2014 or will you fully realize that in 2014?

Vito Culmone

Expectation is that we’ll fully realize that in 2014 Kevin.

Kevin Chiang – CIBC

Okay I just wanted to confirm that. And just secondly just looking at your CASM, your revised CASM guidance up 1.5% to 2.5% versus what you had before. When I just look at things simplistically, it looks like it’s few dollars down, roughly $0.07 on average year-over-year assuming it holds at these levels, that’s about a call it a 100 million cost creep based on your FX sensitivity but you are recognizing this 100 million in savings.

So I am just trying to get a sense when you see the revised CASM guidance moving higher how much of that is due to currency versus some of these cost you are bringing forward here related to some of those engine overhaul work you mentioned in your prepared remarks?

Vito Culmone

Approximately $20 million is related to the foreign exchange.

Kevin Chiang – CIBC

Perfect. That’s it from me. Thank you.

Operator

The next question is from Turan Quettawala of Scotia Capital. Please go ahead.

Turan Quettawala – Scotia Capital

Yes good morning everyone. I guess maybe first off Vito you know talked about lease renewals a little bit. You have quite a few more coming up in the next 12 months here. I am just wondering with the Max now getting closer can you talk a little bit about what the rates are looking at looking like right now on the lease renewals and do you think you could get further discounts as you go forward here?

Vito Culmone

Yeah the overall environment on lease renewals is actually favorable particularly as it relates to 700 series aircraft and that’s what you are seeing reflected in our decision to renew the three renewals that were coming due in 2014. So you are absolutely right as we look forward we have a significant amount of lease renewals through the 2015 to 2018 period and we’ll be obviously trying to leverage the market conditions in regards to potential lease renewals as we move forward.

The capacity discipline and obviously return on investment capitals are primary focus. We’ll balance that with the incoming 737 aircrafts.

Turan Quettawala – Scotia Capital

Fair enough. I guess net-net Vito do you think you could sort of offset the whole impact on the dollar here?

Vito Culmone

You know that we forward hedge our lease expenses on a rolling 12 month basis. So as it relates to 2014 the aircraft lease expenses which will aggregate to about $180 million. We have got that locked in at about $1.4 so we protected some of the downside on the foreign exchange as it relates to the aircraft lease expenses in 2014. I think with some of the reductions you are seeing in rates that’s more than enough to offset FX going forward but again you know obviously these will be older aircraft as we renew them and there’s lots of other things to consider in that equation.

Turan Quettawala – Scotia Capital

Great. If I may ask just one more on the plus seating here. How is it going on that? Are all of sort of initial tiding pains over? You know what are the loads looking like on those seats and how much is the take up on booking versus on check-in? Thank you.

Gregg Saretsky

Plus has ramped up nicely since we got our commercial launch in August and month over month we are seeing the paid load factor increase and it’s increased on both sides the upgrade within 24 hours as well as the paid load factor with respect to the fare classes where a guest books in advance, where the guest books in advance we did have some light fares or some upper end fares that needed to work their way through the system on peak lives to take full advantage of the plus product. That essentially happened through the Christmas season.

So now we’re pretty clear with respect to the upside of plus when you combine the upgrade as well as booking in advance and that we just did our first round of research and the satisfaction value levels we’re very happy with and we project good things with great set we’re at the upper end of the guidance that we have given and the run rate looks pretty favorable and as importantly that the guest feedback is favorable as well.

Turan Quettawala – Scotia Capital

Great, thank you very much.

Operator

The next question is from David Newman with Cormark Securities. Please go ahead.

David Newman – Cormark Securities

Hi, good morning gentlemen.

Gregg Saretsky

Good morning, David.

David Newman – Cormark Securities

Just on ancillary over $10 a guest now and it sounds like you have got connectivity in the [Caribbean] coming up later on this year any other levers you can employ you know currency doesn’t seem like you are going to bite on a currency surcharge but just a Wi-Fi I think that’s a source of revenue, serves the border end and then of course the controversial one is the baggage fee. Any thoughts on where you stand on ancillary just for the year on those various items?

Gregg Saretsky

Yeah, that’s obviously a line item we’re watching closely in light up what’s happening with FX. It’s the place where we expect to be able to generate some incremental revenue. We haven’t made a decision on our first bag fee. You know we continue to look at that.

One of the pacing items for us in terms of being able to make a decision for the first bag fee is technological readiness and there is a bunch of work that needs to be done by our multi host to put us in a position to one day make that decision.

The other thing I would say is the fees, the changed fees, the pre reserve seating fees by onboard all heart related elements of our ancillary revenue provide opportunities to us in 2014 to take some increases there. So we do expect to continue to grow that line and use it as an offset to some of the headwind we’re experiencing on FX.

David Newman – Cormark Securities

Okay just for clarification Gregg is it you said Saber and are the systems ready or how long would it take to kind of get that in a mode that you can actually do something on the baggage side?

Gregg Saretsky

I wish I could give you a good date on that. The systems are not ready. We have been in conversation with Saber for months, waiting for them to provide us with an estimate of the work that needs to be done and then there’s work that needs to be done on all of the systems that hook up to Saber that our guest would use to pay such fees, our kiosk for example at the airport, our Internet booking engine which is actually provided by Datalex in Ireland.

So there is a lot of infrastructure on the technology side that needs to come together. So don’t have a date for when that will be available for us to make one informed decision on whether or not we want to pull the trigger on first bag fees.

David Newman – Cormark Securities

Okay and I think Vito you mentioned I think in your prepared remarks you are looking at connectivity in the cabin for Wi-Fi Gregg is that something that you anticipate just like Q3-Q4 this year that you might have the solution on that front?

Gregg Saretsky

Yeah. Maybe I’ll let – do you want to put that to Bob.

Bob Cummings

Gregg, did mention that we expect to deploy that by the end of the year and that would be a measured roll out. We have some dark aircrafts it would start with those. So we’d roll out with x amount of aircraft through the end of the year and when we do announce we’ll go through the business model with respect to what’s paid and what’s free and what that looks like. But that won’t ramp up immediately to be material one at the revenue front.

Gregg Saretsky

Yeah. David, we will be in a position to make an announcement on our choice at in-flight entertainment and connectivity provider by the end of February. So we want to bring that information to WestJeters first and there is a lot of detail we want to work together with our team on before we go public on that announcement but suffice us to say, that the lead time between supplementary type certification and installation aircraft will probably lead to no revenues from connectivity in 2014.

David Newman – Cormark Securities

I am sorry say that again the last piece Gregg sorry…

Gregg Saretsky

Zero revenue in 2014 from connectivity.

David Newman – Cormark Securities

Got it. Okay. And what do you think the potential could be?

Gregg Saretsky

You know I think I would look at what the U.S. carriers are generating from their connectivity and I think an assumption along those lines would be good for WestJet.

David Newman – Cormark Securities

Okay. And last one for me, on the FX are you assuming Vito, 1.11 for the entire year on your CASM assumption as well?

Vito Culmone

That’s correct.

David Newman – Cormark Securities

Very good. Thank you.

Operator

The next question is from Hunter Keay of Wolfe Research. Please go ahead.

Hunter Keay – Wolfe Research

Hi. Thank you. A little bit on this IT, are you saying this is 100% of the reason why bag fees are not in place or is there a strategic component of this that you’re struggling with as well because also on the IT are you guys comfortable to say, because I thought over three years and Datalex, last April I thought that Datalex was the last pacing item from an IT perspective because don’t you guys already charge for bag fees now for the third bag, I just can’t understand why there will be that much difference to charge for the first.

So I guess it’s a two part question, what else needs to be done on the IT side, I thought Datalex was everything and again is it entirely the 100% IT the reason why they are not in place today?

Gregg Saretsky

Yeah. So it’s a good question Hunter, obviously the strategic decision to move forward with the bag fee has not been made. If and when we make a decision to move forward we want to have all the technology in the place. So the pacing item is to get the company in a position to be able to make that decision. So yes, we have Datalex as our Internet booking engine and yes, we are on savor as a multi host.

But as you know, a lot of carriers that have implemented first bag fees exempt a certain groups of customers. So in our case we want to exempt if we go down this path, people that are in our top tier of our frequent flyer program or people that maybe hold our credit card or people that would have bought plus fare. So these categories of guests and the technology today doesn’t allow us to exempt anybody.

So we do charge for a second bag but it’s an all or nothing, everybody all pays or nobody pays. So in our case everybody is paying. As we move to first bag we want to make a differentiation there based on our pursuit of the business traveler segment.

Bob Cummings

If I can just add a little bit it’s Bob, some of what we’re doing at the reward program now have evolved and now the dots connector of our consideration are potentially connected.

Hunter Keay – Wolfe Research

I am sorry Bob, I had trouble in hearing you, can you repeat that? I missed that.

Bob Cummings

It’s Bob.

Hunter Keay – Wolfe Research

Oh, sorry, Bob. Yeah, thanks.

Bob Cummings

Yeah, what I said was the evolution of our reward program and particularly the upper end of that and how that evolves and the timing on that and how that potentially connects the dots with what you’re talking about is a consideration as well.

Hunter Keay – Wolfe Research

So it sounds like this is many quarters away, it sounds like there are a lot of things that need to be done, is that fair?

Gregg Saretsky

I don’t know we have an assessment of the timing on that Hunter to be honest, because we’re still waiting on our technology suppliers to give us dates. I don’t know if this is the major undertaking for them or an easy thing to deliver.

Hunter Keay – Wolfe Research

Okay. A real quick on cash you guys were talking for about having 30% of cash built in revenues in the balance sheet which I think we could make an argument that that’s too high already but if we take your balance sheet down to that level it’s about $150 million of excess cash you’re holding on, which would exhaust about 90% of the NCIB next year.

So just using your existing cash balance alone and some presumably better operating cash flow as well, is there any reason, why I should not assume you’re going to well exceed the 71% in the NCIB that you did last year through the next one?

Gregg Saretsky

Well, we haven’t made a decision on next one yet Hunter – we haven’t – we’ve got a couple of weeks left on this current NCIB. So as you described you’re absolutely right we’re 71% through this current NCIB and as soon as obviously we get into an open window post this call we’ll have a couple of more weeks through the termination of the existing month through February 18 and we expect to be in the market buying shares through that period.

Hunter Keay – Wolfe Research

Okay. Thank you.

Operator

Next question is from Cameron Doerksen of National Bank Financial. Please go ahead.

Cameron Doerksen – National Bank

Yeah, thanks. I guess my question is on the competitive environment. I mean it does look like we’ve got a fairly rational domestic market for 2014 you’re adding 5% to 6% capacity there is a lot of capacity growth from other players. So I guess there might be concern is on the sun destination market, we’ve said, the announces by yourselves and from Air Canada some sizeable capacity increases to places like Vegas and Caribbean. I am just wondering if you think that there is going to be an up demand in 2014 to fill all of those seats especially to the sun destination specifically.

Bob Cummings

Hi, it’s Bob and if you look at our regional breakout between what we call international sun destinations, Caribbean and Mexico, trans-border and domestic talking specifically about Mexico, Caribbean and Vegas and some of those types of destinations in the US., we’re actually tracking quite well with respect to year-over-year numbers. So we see healthy demand, healthy yields and that environment continues to attract I will say, attract more capacity but so far with respect to moving things around and more feet from Encore and how we’re constructing our network and building our overall capabilities and fundamental so far it looks pretty good.

Vito Culmone

So Cam one thing I would add is, we’ve seen since 1996 when WestJet started, that bringing low fares to market has big impact on elasticity of demand. Half of our growth in 2014 comes from WestJet Encore. WestJet Encore is liberating these monopoly markets from the very high fares that they have been subjected to by the monopoly provider of capacity and with fares coming down we’re seeing growth rates of 30% and 40% from the airport to encore serving.

So we’re creating new demand, much has always been in our history and I don’t expect that to be any different as we continue to roll WestJet Encore across the rest of the country. So yes, we do expect there to be significant demand and that our capacity will be well built by that elasticity of demand.

Cameron Doerksen – National Bank

Okay. Good, just second question I am wondering if you can give the – and you may have already given this but the aircraft deliveries by quarter for 2014?

Gregg Saretsky

Go ahead, Candace.

Unidentified Corporate Participant

Okay. Sorry, we’ve got two aircraft delivering in June this year.

Gregg Saretsky

These are 737s?

Unidentified Corporate Participant

Yeah, 737s and then 800s, two are coming in September, two in October and one in December. So those are aircraft deliveries and then we’ve got five aircrafts leaving the fleet. Those are the oldest 700 that you had spoken to earlier that are going to Southwest and the timing of those are one is leaving in September, one in October, two in November and one in December.

Cameron Doerksen – National Bank

So those are the Boeings how about the Bombardiers?

Gregg Saretsky

I have that here I can give you the Bombardier deliveries. We have a delivery here in February and then we’ve got April, May, June, July, October, November and December brings us to 16 aircraft at the end of the year.

Cameron Doerksen – National Bank

Okay. That’s great that’s all I have. Thanks very much.

Gregg Saretsky

Thanks Cam.

Operator

The next question is from Helane Becker of Cowen and Company. Please go ahead.

Helane Becker – Cowen and Company

Thanks operator and hi guys. I just have a question on your decision on your financing decisions on the aircraft side. Since you have maintenance reserves and you have to pay maintenance to source does that in any way change the way you might think about financing aircrafts going forward especially given your strong balance sheet, I would think that you wouldn’t necessarily have to pay those reserves?

Vito Culmone

Yeah. Helane hi, it’s Vito. We effectively don’t actually pay reserves on the majority of our leased aircraft. There is only 10 aircrafts the original G-cast leases dating back to, gosh, I am going to go back a few years where obviously our financial position was very different than where we are today as far as the size and scale. So your question is a good one and in fact we with the exception of those 10 aircraft do not pay any reserves.

Helane Becker – Cowen and Company

Okay. So the five that are going to Southwest are they included in these 10 or when will these 10 come off lease sale on like that?

Vito Culmone

Yeah, there are five that we’re selling to Southwest Air they are owned aircraft, so we are selling 10 aircraft to Southwest, 10 of our owned aircraft to southwest, five in Q4 of 2014 and five in Q1 of 2015. And we are replacing those 10 aircrafts with new deliveries from Boeing and those new deliveries are going to be 800 aircrafts 800 series.

Helane Becker – Cowen and Company

Right okay.

Vito Culmone

Those aircraft don’t have anything to do with our leasing formula.

Helane Becker – Cowen and Company

Okay. And then just I think last year when or the year before when slots and gate scheme available you guys were a bidder in La Guardia have you thought of the ones that are available this year and what’s your position on those?

Gregg Saretsky

Yeah this is Gregg we have expressed this strong interest in slots at Washington International Airport but have been precluded from participating in that auction to-date. I think the U.S. authorities have decided that those slots are going to U.S. carriers and all but a couple of them have been handed out to two carriers, as you know Jeff Boone, Southwest.

Helane Becker – Cowen and Company

Okay.

Gregg Saretsky

So we’re still waiting here if there will be a process where the few remaining and whether not will be invited to play in that.

Helane Becker – Cowen and Company

Okay. And then on the Dublin service have you opened reservation yet and how is that going?

Gregg Saretsky

We have the advance bookings are strong. We haven’t yet opened point of sales Europe so we’re drafting right now Canada point of sales with the process of entering the bank’s settlement plans in Ireland, the UK, Germany and France that should be accomplished within the next month. And opening up inventory in the European GDS will also – same time.

So currently we’re a little bit hamstrung, we are only having Canada point of sale open but Canadians are showing up in very large numbers and advanced bookings are tracking well ahead of our expectations.

Helane Becker – Cowen and Company

Great thank you very much. Have a nice day.

Operator

Next question is from Ben Cherniavsky of Raymond James. Please go head.

Ben Cherniavsky – Raymond James

Good morning guys.

Gregg Saretsky

Good morning.

Ben Cherniavsky – Raymond James

Gregg just on the ROIC you remember while when you few years ago first put your target out of 12% I think there was a fair amount skepticism basically from the point that you are starting at that point that you would be able to reach that level and you’ve done a very good job getting there.

Have you guys considered raising that number because while 12% is a lot better than where you were, it’s below still below what most carriers with carriers you guys wanted to be compared to are generating or targeting on ROIC like Southwest use 15% target, EasyJet’s above that. So you have you thought about raining that metric at this point?

Gregg Saretsky

Yeah in our North American competitive set there is only one airline you called it out at Southwest that has set of target that’s above our, they are targeting 15. So we’re ahead of or swimming with the rest of the pack and one of the few airlines that’s been able to achieve that. Remember target was set with reference to our weighted average cost of capital and so 12% we’re exceeding our cost of capital by nice margin. And we also set that 12% target we wanted it to be sustainable across the cycle.

So I don’t know if what we’re seeing now the headwind on the Canadian dollar that means that the Canadian economy speed up it slows down. So we’re not ready yet to change the target. We still need to see how we perform across the cycle but should give everybody that’s listening confidence that we’re looking at that and we’re thinking about achieving that ROIC even in down part of the cycle, so no change yet.

Ben Cherniavsky – Raymond James

Okay. And on the Transatlantic route have you got any carriers in mind where you might be able to add some interlining or code sharing either into Dublin or in other market that you might be looking at over there to enhance the network of that service?

Gregg Saretsky

Well certainly our code share partners Air France, KLM and British Airways all have operations at Dublin to their hubs. And we have been in conversation with and certainly we have into line already with those three airlines over Dublin.

For us importantly we are really looking to be a pace setter with respect to low cost travel to Europe generally and Dublin’s as you know is the home to Europe’s frankly the world’s largest low cost carrier Ryan Air. And we won’t enter into a codeshare with them but people can buy a ticket at their website and can buy the ticket from WestJet and get end-to-end travel to 100 points beyond Dublin at very low cost.

So if you’re looking for a low cost way to 100 points in Europe it’s going to go through Dublin on WestJet and connect to it one of the low cost carriers operating at Dublin.

Ben Cherniavsky – Raymond James

Right. Okay, great. Thanks very much.

Operator

Your next question is from Walter Spracklin of RBC. Please go head.

Walter Spracklin – RBC Capital Markets

Thanks so much good morning everyone. Just I guess focusing on the yields here and when I look at your RASM guidance for the first quarter of flat to up suggest that you’re probably going to do 2% to 2.5% yield if you assume 75% load factor on your new capacity like you did in fourth quarter. 2% to 2.5% will be quota departure I guess the average negative 0.4% for the year and I think there is some concern a little bit of concern is to whether A, the competitive environment will allow you to bring rates up like that? And B, does the travelers, the travelling public can observe that kind of 2% to 2.5% presumably you will be looking at this for the full year.

Just wondering if you could address those two issues, do you think is my math right on 2% to 2.5% given those assumptions and if so is there forward bookings or any of your work that you’ve done to suggest that Canadian travelers will absorb that kind of rate increase?

Gregg Saretsky

Yeah your math is good. We are expecting yields in the quarter to be in the range that you just talked about. And if you go back and look at starting second quarter last year the declines that we had in RASM and the trend that we had experienced since them. We’ve gone from numbers that were negative 4 to 4.5 to numbers that are now in the order you are talking about.

So a very good trend line may be I’d like Bob to give some share as well.

Bob Cummings

The trend line if you look at what we have in the revenue pipeline the plus fare bundles more and more Encore standalone really healthy yield and feed on to our network airline partnerships continues to contribute overall to RASM.

If you look at that trend line as Greg mentioned minus 4.6 year-over-year in Q2 minus 3.9 year-over-year in Q3 minus 0.6 in Q4. I will tell you that I’ll announce January results tomorrow and take a look at those with respect to load factors. So both load factor and the yields and held they are progressing with respect to both the yield and low factor end of the equation. We are very I don’t believe bullish is the right word with the FX headwind but we feel very positive that the trend life line that has happened over the last three quarters and I talked earlier around plus both on the advance booking and the upgrade side that we’re in good shape and the trend line that we talked about will continue on through 2014.

Gregg Saretsky

One last point we took a system wide far increase last week on Thursday 2% across our entire network. It was matched by all competitors so we got that on top of all the other contributors that Bob has touched on. We do not think – at this point.

Walter Spracklin – RBC Capital Markets

Okay. It’s really encouraging I mean that kind of increase is certainly a point offsetting Canadian dollar and I guess you mentioned right at the tree and I think that you are not seeing it affect demand does that indicate perhaps there is room to go further if need be if the Canadian dollar continues to appreciate how much how do you judge when on slight through something that you can pick up shift in demand pretty quickly and then act accordingly or is it just something that kind of plays itself out over time.

Gregg Saretsky

Well that’s clearly something we need to watch it’s early days on this fare increase to see we haven’t seen demand destruction you need to continue to watch for that. If we continue to face additional headwind over and above what we see and are talking about today clearly and other fair increase and a strong environment would be possible.

Walter Spracklin – RBC Capital Markets

That makes sense just to make sure you said Thursday, last Thursday matched by everyone was a 2% increase was that?

Gregg Saretsky

That’s correct.

Walter Spracklin – RBC Capital Markets

Great, okay. Well thank you very much for the color, appreciate it.

Gregg Saretsky

And Walter remember that our guests are buying roughly 6 weeks here on average so a fair increase you don’t really see the impact of that until about six weeks.

Walter Spracklin – RBC Capital Markets

That’s good point. Okay, thank you very much.

Operator

Next question is from Glenn Engel of Bank of America Merrill Lynch. Please go head.

Glenn Engel – Bank of America Merrill Lynch

Hi, good morning. Have you quantified what the actual impact just from the acceleration of depreciation and does that show up in the maintenance line or the depreciation line for the engines?

Vito Culmone

Glenn it’s Vito here and it will show up in both lines. And as far as Q1 the impact will be a 10 million approximately estimated $10 million charge in Q1 incremental depreciation.

Glenn Engel – Bank of America Merrill Lynch

And then afterwards?

Vito Culmone

Full year?

Glenn Engel – Bank of America Merrill Lynch

Yes.

Vito Culmone

It’s reflected in our full year guidance. I will get you the detail here, maybe offline. But all that is reflected in the revisions sheet at 1.5% to 2.5%.

Glenn Engel – Bank of America Merrill Lynch

But it sharply decelerates after the first quarter, that $10 million?

Vito Culmone

That’s correct. It’s weighted to the first quarter.

Glenn Engel – Bank of America Merrill Lynch

And your capacity guidance it’s up 8% in the first quarter and up 5% for the full year would imply capacity only 4% for the remaining quarter that seems awfully low to me?

Vito Culmone

Yeah. We are actually if you look at our plans through the end of the year we had indicated 4% to 6% guidance. If you look at our current plans we are more on the 6% end at the particular point but we will see what happens. So your assumption expect 8% in the first quarter and whatever the math looks like beyond that it’s pretty good model.

Gregg Saretsky

Glenn, just one thing to remember. As we move into the installation period and on to inflight entertainment and connectivity solution, we will be parking planes to facilitate those conversions. So we have a lever that we can pull to with respect to managing capacity subject to what we are seeing for demand in the market.

Glenn Engel – Bank of America Merrill Lynch

Is your CapEx 6.10 to 6.30 is that net or gross of the aircraft sales?

Vito Culmone

That’s net of the aircraft sales.

Glenn Engel – Bank of America Merrill Lynch

And then finally again if I took the full year guidance of up 1.5% to 2% was up 4% in the first quarter would imply CASM ex-fuel up only 1% and that’s even with capacity growth being much slower as the year progresses. So what are the other elements besides maintenance that makes the cost outlook look better as 2014 progresses?

Vito Culmone

Well, primarily the reflection, you start to see the impact of the $100 million business transformation. Inflight cost for the balance of the year we expect it to be down year-over-year. Good cost control we obviously get a bit of a some dilution through the ASM growth. But the main part of the story is the $100 million business transformation helping us offset.

Glenn Engel – Bank of America Merrill Lynch

Thank you very much.

Gregg Saretsky

You’re welcome.

Operator

The next question is from Chris Murray of AltaCorp Capital. Please go ahead.

Chris Murray – AltaCorp Capital Inc.

Thank you. Good morning, guys.

Gregg Saretsky

Good morning, Chris.

Chris Murray – AltaCorp Capital Inc.

Just looking at the capacity guidance for Q1 I think you said for the full year 4% to 6% and roughly half will come from Encore. What’s the impact in Encore in Q1 or is it, is this mainly just capacity that you guys are going to increase utilization on or – could you just give me some more color about where that capacity is actually coming from?

Bob Cummings

It’s Bob. The half the capacity ramps up more towards the end of the year when we get closer to the 16 aircraft. So taking the growth coming through mid-year you have a curve there from Q1 to Q4 as a percentage. So we are less than half the growth on the Encore side. So you can even probably to do a little bit of a linear equation there with the ramp up of the delivery on the Q400 side for Q1. We are flying quite aggressively utilization wise for 737s with the opportunities we have – and the possibilities associated with those for Q1. So most of it is on the 73 side or just proportionate on the 737 side in Q1.

Chris Murray – AltaCorp Capital Inc.

Okay. Great. And then just looking at cost profile I am just trying to get this maintenance cost. So if I understand the number of buckets into Q1,.sSo you are going to have the incremental depreciation, the maintenance cost. But I guess I am just trying to see year-over-year is there any impact on the drag, you mentioned that the RASM is getting helped a little bit by Encore but is Encore playing any more into the drag and RASM that you were expecting previously?

Vito Culmone

In RASM or CASM?

Chris Murray – AltaCorp Capital Inc.

Sorry, in CASM?

Vito Culmone

In CASM. Yeah, absolutely. I mean and that’s why we are particularly pleased quite frankly with our 2013 results and even our 2014 projection. I mean obviously we are disappointed with the uptick in CASM guidance tracing exclusively to the two factors we’ve mentioned the foreign exchange and the change in the engine overhaul plan. But when you consider the stage length and you adjust our 2014 CASM projection to some of the stage length, the stage length when you include Encore is I think down 4% into 2014.

So we are seeing a drag related to that, I wouldn’t call it drag it’s just the way the numbers work out obviously. And we hope to pick up some of that, the corollary effect through the RASM improvement.

Chris Murray – AltaCorp Capital Inc.

Okay. Great. And then just a quick house-keeping. You said you are going to lease the two additional aircraft in order to facilitate the IFE switch over. We have to actually park additional aircraft over the two to sort of on a run rate basis until that’s done?

Gregg Saretsky:

Yeah you seem more familiar with maybe the direct business schedule it looks like

Bob Cummings

Yeah we haven’t made that determination yet, Chris. I mean I think what means that we have a ton of flexibility. If demand stays strong we fly them, if demand weakens we ground them and we use the extra aircraft availability to accelerate the installation of the new system. So we have got that flexibility.

Chris Murray – AltaCorp Capital Inc.

Okay. Great. Thanks guys.

Operator

Next question is from Tim James of TD Securities. Please go ahead

Tim James – TD Securities

Thank, good morning. Is there any update on discussions with the pilots group towards achieving a new contract?

Gregg Saretsky

Nothing to update, Tim. What I’ll tell you is that our proactive communication team which is all of our employee associations are up for reelection, that cycle is every two years and they are just starting that. This month they do nominations, in month of March they do the elections and then in the month of April they take office. So our WestJet Pilot Association is in a transition as are the other employee associations with respect to who will be the executive of the association as we enter into the next round of negotiations.

In the meantime they are doing a lot of work with their membership around what kind of representation the membership wants and what are the key issues. Obviously we are ready to go as-soon-as WJPA signals to us that they are ready to go.

We certainly don’t want to be dragging their feet and we are anxious to bring new agreements to our pilots, as well the Flight Attendant Association is also entering negotiations this month. And so I’d expect over the next six months or so that we will have negotiations under with two of the employee groups. And looking for a quick resolution on both those contracts.

Tim James – TD Securities

Okay. Thank you. My next question just turning to Encore sort of a two-part question. One, I am just wondering when Encore was launched and through the early part of last year you indicated that you expected it to be accretive to earnings I believe for its first year. I am wondering if you can address if that was in fact the case, number one.

And then secondly could you just maybe reflect back on Encore over the past six months and just kind of things that went well, challenges and just give us a general overview on your feelings about how the business has progressed to-date?

Gregg Saretsky

Maybe I’ll take the first part and Ferio you can take the second. Early days obviously as it relates to Encore from a financial perspective. But Tim at this point we can tell you that bottom-line impact when we look at all the different components of the contribution on an enterprise wide basis, we are pleased with it and it is accretive to WestJet overall and slightly ahead of our planned expectations at this point but pretty early days. Flip it over to Ferio for the second?

Ferio Pugliese

Yeah. Hi, Tim, Ferio here. We are quite pleased with the direction that the organization has taken in the last six months from start-up. They have obviously increased utilization as each month has gone by. Response from the communities as Gregg indicated has been very, very positive. We’ve seen what they are introducing – and a strong brand that we’ve managed to certainly see a very, very healthy load factor as a result of that. And we’ve had a couple of operational challenges in the winter, dealing with winter operations. It’s our first year at it with the new aircraft and nothing there that we believe is insurmountable or causing us any concern.

In fact as we’ve seen ourselves move out of December we’re seeing improvements on our completion rate and our arrivals within 15 minutes coming back online and around we are pleased with that level of performance. But overall if I had the sense that the last six months we are quite pleased with the way this has come off. And most importantly very, very pleased with the response we’ve been getting from the market with this new operation.

Gregg Saretsky

One point, Tim I may make is recall that while we are not providing segmented results for the two entities, what we are seeing WestJet Encore is about 50% to 60% of all over the guests are connecting to and from WestJet’s 737 operations which is tracking quite a bit ahead of where we had anticipated that to be. And so the network impact of the Encore operation is obviously having very positive impact on WestJet.

Tim James – TD Securities

You said 50% to 60% that sounds like a great number that is very strong. Is that partly the nature of where the Q400 are operating like as that business matures and the new routes are added on and where the new capacity is allocated or the incremental capacity? Is that number destined to sort of go lower towards maybe close to where you would have thought or do you think there is really it’s just there’s more connection, more demand for connection than you expected?

Bob Cummings

It’s Bob here. We’re essentially doing the network planning and the opportunities in the three buckets appear to be from new communities into our hubs and bigger centers there’s more of a traffic there and then new non-stops and then mixing in with the 737s and helping us with frequency and helping us with emission gain for specific planes on our peak times.

And if you look at all three of those all three of those are contributing really at or above the business plan and the business case and then going forward with respect to where we deploy between those three opportunities and then how are the impacts overall accretively. I will just say it’s positive at this particular point to forecast the mix of one over another at this particular point. I hesitate to do that, we hesitate to do that, there’s lots of opportunity and in the country and then as we get more and more experience we’ll deploy between three opportunities.

Gregg Saretsky

And just add to that the demand on U.S., the push on demand for connectivity we’re particularly seeing that in the new destinations, so we strategically chose some of those here in the west that there is high demand for connectivity into the WestJet network coming out of those new destinations.

Tim James – TD Securities

Okay. And just one final question returning to a comment you made earlier about the impact of accelerated overhaul engine overhauls I think you indicated about $10 million incremental impact on depreciation in the first quarter. Correct me if I am wrong. You also indicated there would be a bit of an impact on maintenance as well. Is that $10 million just a depreciation impact and there is another influence on maintenance or is that sort of a combined impact or am I interpreting that wrong?

Vito Culmone

Yeah on an aggregated basis we expect the incremental costs associated with the change to be in the order of $22 million. Again that’s all reflected in our 1.5% to 2.5% updated guidance and you can – you will see the balance of that likely hit the maintenance line.

Tim James – TD Securities

And so that’s 22 million over the course of the year?

Vito Culmone

Yes, exactly.

Tim James – TD Securities

Okay, thank you.

Gregg Saretsky

You’re welcome.

Operator

The next question is from David Tyerman of Canaccord Genuity. Please go ahead.

David Tyerman – Canaccord Genuity

Yeah sorry I just wanted to clarify that number so $22 million which some is in depreciation some in maintenance?

Vito Culmone

That’s correct David. $22 million of sum which is in depreciation and balance of it is in maintenance cost and again as I said we’ve reflected all of that in our updated guidance of 1.5% to 2.5%.

David Tyerman – Canaccord Genuity

Alright. Do you have an idea roughly of split, Vito?

Vito Culmone

At this point you know it’s probably premature for us to assume to provide this split. If it’s going to be repair related cost that hits the maintenance line, if it’s an overhaul related cost then you got some depreciation related, some accelerated depreciation so at this point I’d prefer not to provide a split David.

David Tyerman – Canaccord Genuity

Okay that’s fine. I am just wondering if you guys can provide an idea or quantification of the benefit from the fare bundles and plus in Q4?

Bob Cummings

Yeah I mean if you look at year-over-year on our ancillary I am trying to put the numbers, I think you have 8.94 to 10.09 something in that magnitude, so if you look at magnitude, most of that was the upgrade and then the plus as the fare class being brought in advance let’s just say December had a really-really nice run rate as far as that’s concerned. I am not going to give you the number at this point but it is quite a bit on top of the number just indicated, ancillary wide that’s the upper end of the guidance that we talk about.

Earlier in the year we had added $25 to our change in [inaudible] bundle and that shifted as well.

Gregg Saretsky

I will give you just a little bit more color on the number. The progress number in 2012 Q4 was $8 I guess and this year we came in at $10.09/. So on a per unit basis it was 26% improvement on a guest basis. The main drivers of that Bob touched on I am going to say 60% of that was related plus and then we saw some very robust improvements or increases in change in cancel.

David Tyerman – Canaccord Genuity

Okay so 60% of from 8 to 10 bucks.

Gregg Saretsky

Was plus in respect to – and remember plus comes two ways. Plus comes through the plus fare which obviously you will see that reflected in our revenue number and then plus-plus also at the airport when you are upgrading it comes through the ancillary and that’s what we’re discussing. We’re discussing the second segment there.

David Tyerman – Canaccord Genuity

Okay so you got the revenue impact plus that ancillary.

Gregg Saretsky

Yeah.

David Tyerman – Canaccord Genuity

Okay, perfect. And then just last question I had so it looks like you are going to have quite a lot of margin compression in Q1, presumably the dollar and the engine situation. Is it possible to catch up in Q2 or is that too fast do you think just given the magnitude of the changes that have happened to you?

Gregg Saretsky

Yeah I mean you are absolutely right as it relates to Q1 I mean we are lapping a very, very I think it was our highest Q1 ever so as we look at Q1 right now based on the guidance we provided and you triangulate your numbers we still see Q1 2014 as very robust from an overall perspective but your comment around margin compression I can see how you get there. And as we move into Q3 and the balance of the year obviously little too early to tell how all this is shaking up but you know you heard us reference the price increase you will start to see that more fulsomely reflected in Q2 David.

David Tyerman – Canaccord Genuity

Okay, sounds like I have to wait. Okay, thanks guys.

Operator

(Operator Instructions). Next question is a follow up question from Hunter Keay of Wolfe Research. Please go ahead.

Hunter Keay – Wolfe Research

Hi, thank you again for taking my follow up. Just two other quick questions. The schedule data shows some pretty aggressive growth from Air Canada in the domestic markets which I think is a little out of sync for what they have guided to from domestic Canadian capacity. So I guess the question is A are you seeing that as well and B how is that kind of shaking out as it pertains to growth in your markets for the foreseeable future?

Bob Cummings

Hunter this is Bob Cummings. In the domestic market with respect to our on core plan and its ramping up at a percentage of domestic growth over the year. We still in the early parts deploying that network and the prototype opportunity that we have so we’re bullish on that. And then with respect to 737 and our plans for the end of the year and how that’s going to shake up competitively we’re seeing more competitive pressure in terms of pricing but I would say the market as a whole in Canada over the last year, year and a half the few price increases that have occurred I would say it’s still quite healthy to the capacity and that can take further capacity and both carriers can still price at what I call a comfortable level.

Gregg Saretsky

Yeah we’re not seeing Hunter Air Canada signaling anything different with respect to domestic capacity. Their Q4 domestic capacity was up 3.2%, ours was up 5.3%. You’ve seen our guidance and I think their guidance improved full year capacity system wide 9 to 11 and have commented that that’s largely all international. Unless they change the plan and you will get to hear that next week we’re not seeing or expecting there to be a bigger departure in our domestic capacity.

Hunter Keay – Wolfe Research

Okay, yeah thanks Gregg and another of the quick follow up and I apologize I know you are sick of this topic on bag fees but I guess one of my question for you is how many customers do you assume you would lose if you were to implement a first check bag fee?

Gregg Saretsky

I don’t know that we would assume we would lose any to be honest. I mean certainly all of our competitors on the transport are operating with load factors similar to ours. Hard to say that we’re getting any advantage in the market by not charging for bag but as I have already said we’re just not in a position with that technologically to be announcing today that we are moving forward with first bag. We got to get ourselves in that position first before we make a determination on for it to proceed.

Hunter Keay – Wolfe Research

All right Gregg that’s really helpful. Thank you very much.

Gregg Saretsky

Thank you.

Operator

This concludes the analyst Q&A portion of today’s call. We’ll now take questions from members of the media. (Operator Instructions). The first question is from [Scott Deveau] of The National Post. Please go head.

Unidentified Analyst

So I understand that you are going to make an announcement by the end of the on connectivity but in terms of the rollout I mean do you still need to get certification at this point and then I mean how far ahead are we then to start to see it?

Gregg Saretsky

So yes we do need certification in time we make the modification to the aircraft we need FAA And Transport Canada both to provide that. So the STC process to supplemental type certification process is typically 90 days, in fact it could be longer as we saw when we changed our configuration last year first quarter recall that, that drag on and on because it just allows that’s – FAA bureaucracy.

So don’t know if 90 days is enough it could take longer but right now we’re planning for 90 days and that will put our first installs into Q4 and active by end of the year.

Unidentified Analyst

And have you started that process I mean is that something that begins once you make the announcement or have you already started to do a little testing with Transport Canada?

Gregg Saretsky

No we haven’t started we were just – we haven’t in fact even got a signed definitive agreement yet signed by both parties but we’ll be in that position by the end of the month and that’s when we’ll kick off that process.

Right now we are focusing on making sure that our employees are most impacted by our end plans and the decisions are the first to see it, feel it touch it and provide some good feedback to us before we take anything public. So that puts pilots and flight attendants right in front of the queue and we’re going to be visiting our airport crew lounges over the next couple of weeks to let them have a first look at what we plan to do.

Unidentified Analyst

So you will be able to implement the inflight entertainment system before the Wi-Fi goes into place that I am assuming?

Gregg Saretsky

Well there is lots of components to this product. It’s going to have a lot of choice for our guests to make, one aspect of which is the connectivity component. And so yes we could deliver some of the other components earlier before we deliver that connectivity component.

Unidentified Analyst

And where are though, I mean how many planes you have dark right now?

Gregg Saretsky

Eight. These planes while they are dark have tablets on. So any flight with 3:20 hours, a guest has a chance to rent a tablet and we’re trying to isolate these 800s on our longer hauls like Hawaii and to Southern markets where they have more than 3:20 hours and where they can take advantage of that bridge with tablets that we make available for rent.

Unidentified Analyst

All right. So outside of the inflight entertainment the first bag in price increases what are levers you have to pull to increase ancillary revenue at this point?

Gregg Saretsky

Nothing to talk about on those obviously we’ve got change these and we’ve got pre-reserved seating and we have buy onboard food and other things, our credit card partner with RBC we’ve got the Affinity card revenue stream we’ve got other partners that can drive ancillary revenues for us as we grow our revert program.

Bob Cummings

It’s Bob and our plus product which is continuing to work that in the fare bundles we just got research on the bundles and they are showing high value. So the evolution of that looking to plus product our airline partnership 91% of those seats sold through airline partnerships on to WestJet Metal or WestJet planes are flights that are full.

So we have some levers that are ramping up nicely with respect to what we currently have in our product set and then we continue to work on things behind the scenes to continue to fill the pipeline that we’ll announce when the time comes.

Unidentified Analyst

Okay. Thanks a lot.

Operator

The next question is from Ross [Marvich] of the Canadian Press. Please go head.

Unidentified Analyst

Yes I wanted to ask you again about baggage fees it sounds like it’s not if but when you are going to be implementing them is that right?

Gregg Saretsky

No, we haven’t made that decision I said that we’ll make a decision when we are in a position to do that and we understand how the technology will support. If the IT team and our – come back and can deliver solution that is commercially reasonable seasonable and competitive we wouldn’t go forward with implementing the first bag fee. So we really need to break on the technology that led us in a position to make that decision.

Unidentified Analyst

Okay. And the second thing I want to asked you is about Europe how soon before you are going to be adding other European destinations?

Gregg Saretsky

Well I think we need to get to December 1st and see how Dublin pencils out and what we pointed to strong advance bookings and we do expect to actually generate positive margin even in its first year. Let’s see those numbers first and I think a logical time to expand that would be summer 2015 if everything comes in as we expect it to.

Bob Cummings

What’s been there for us is, it’s Bob on the regulation front, the operational front taxation building the point of sale capabilities that Greg has talked about. It’s been a nice safe controlled experience for us with respect to getting experience where we can make the decision that Gregg talked about with respect to further capacity deployment.

Unidentified Analyst

So 2015 is when you could be adding what is it four other destinations or?

Gregg Saretsky

I don’t think we have put a limit on it but there is many of the things we can fly and make 12 points of ROIC so there could be many more or no more.

Unidentified Analyst

In the past you talked about you can see five destinations as being initial effort?

Gregg Saretsky

Well I think if you look at the range emission capability to 737 it puts the circle over the UK and it’s far more than four cities to serve in the UK but we shouldn’t conclude anything from that other than as a certain limitation on the aircraft and we will exploit every one of them that makes sense.

Unidentified Analyst

Okay. And finally in terms of wide bodies does this where do you stand on that consideration if you are looking at going further field?

Gregg Saretsky

I don’t have to change anything, Ross. We’ve talked on many calls in the past that we have a study underway looking at what might make sense. if a wide body makes sense and what the timing to that might be in flight so no decision to make.

Unidentified Analyst

So no idea you can’t say anything about timing of when we might hear more on that.

Gregg Saretsky

Not today, no.

Unidentified Analyst

Okay, thanks.

Operator

The next question is from [Vanessa Lu] of the Toronto Star Please go head.

Unidentified Analyst

Hi, good morning. I just wanted to ask about the math you said it was 2% across the board increasing domestic air fares was there any increase in across the board or down sales air fares?

Gregg Saretsky

Yes it’s 2% system wide so all markets got the same increase.

Unidentified Analyst

Okay. System line. And you said the competitors followed suit in Canada and the United States?

Bob Cummings

Yes and what I will mention it’s Bob is we’ve avoided price increases as much as possible in the last couple of years and it is matter of fact having followed when competitors have led price increases. But we held off as long as we could with the FX situation and really felt the need with respect to our shareholder and hoping to consider to have the price increase at this time.

Unidentified Analyst

And that’s related directly to the falling Canadian dollars so are you imagining more increases to come as the dollar continue to slide?

Bob Cummings

We’ll assess that going forward we’re going to let this seat for a bit. We’re looking to the future with respect to what the cost side equation looks like with all those variables in place. We are a low fare low cost airline and we don’t increase prices we have fare range.

So we don’t take these price increases lightly with respect to what it means for consumers but we continue to assess the situation and cost continue to go up. And it looks like if competitors lead price increases or the market with respect to where it is sitting we will take that move if we need to.

Gregg Saretsky

And may be one final comment and we are running WestJet like a business and so if it makes sense to it makes sense that we need to offset some of the input cost increases as a result of the change in foreign exchange. We will make whatever changes are smart for the business respecting of course the impact on demand when we increase prices. So we’re watching this very closely and are going to be smart about how we manage the business.

Unidentified Analyst

Okay, great. And just clarification on the bags fee, the first bag fee what you are looking for is potentially for trans-border or are you looking at first bag charge for domestic flight?

Gregg Saretsky

We haven’t made a decision there at all yet, with respect to first bag. As I said we want to make sure that we have the technology that can support any which way you want to go with the bag charge and until such time as our technology providers us give us the answer we’re just not in a position to make a decision about yet, when how or what that might look like.

Unidentified Analyst

Okay. Thank you very much.

Operator

This conduces the Q&A session for today’s call. I will now turn the call back over to Hugh Harley for closing comments.

Hugh Harley

Thank you for joining us this morning. This call has been webcast and will be archived in the Media and Investor Relations section of WestJet.com. This call is also available for replay and calling details are provided in our news release this morning. Thank you again for listening and for your interest in WestJet.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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