WestJet Airlines' (WJAVF) CEO Gregg Saretsky on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: WestJet Airlines (WJAVF)

WestJet Airlines Ltd. (OTC:WJAVF) Q2 2014 Earnings Call July 29, 2014 10:00 AM ET

Executives

Hugh Harley - Director, IR

Gregg Saretsky - President & CEO

Vito Culmone - EVP, Finance & CFO

Bob Cummings - EVP, Sales, Marketing, & Guest Experience

Ferio Pugliese - EVP, WestJet & President, WestJet Encore

Analysts

Walter Spracklin - RBC Capital Markets

David Newman - Cormark Securities

Cameron Doerksen - National Bank Financial

Kevin Chiang - CIBC

Turan Quettawala - Scotia Capital

Ben Cherniavsky - Raymond James

Helane Becker - Cowen and Company

Glenn Engel - Bank of America-Merrill Lynch

Chris Murray - AltaCorp Capital

Tim James - TD Securities

David Tyerman - Canaccord Genuity

Ross Marowits - Canadian Press

Vanessa Lu - Toronto Star

Susan Taylor - Reuters

Frederic Tomesco - Bloomberg News

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to WestJet’s 2014 Second Quarter 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 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, President of WestJet Encore.

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

Hugh Harley

Thank you, operator, and good morning, everyone. Welcome to WestJet’s 2014 second quarter 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 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 securities 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 July 29, 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. Good morning everyone and thank you for joining us. We're very pleased to report a great second quarter with record net earnings of $51.8 million and earnings per share that increased 18% year-over-year $0.40 per share. The second quarter also marks our 37th consecutive quarter of profitability and the 8th consecutive quarter in which we exceeded our return on invested capital target of 12% by achieving 13.7%.

During the quarter, we also improved our on-time performance by 3.5 percentage points year-over-year to 84.5%. We continue to execute on our growth plans in the second quarter. WestJet Encore recently marked several major milestone celebrating its first birthday in June, welcoming one millionth guest and beginning service to Ontario, with service between Winnipeg and Thunder Bay and between Thunder Bay and Toronto.

Just last week, we announced that WestJet Encore will be coming to the Maritimes with non-stop service between Toronto and Fredericton, New Brunswick, scheduled to begin on April 15, 2015. In support of this growth, WestJet Encore yesterday exercised five additional purchase options for Q400 aircraft bringing its total firm commitments to 30 aircraft with 15 additional purchase options.

Today, WestJet Encore utilizes 13 Bombardier Q400 aircraft with 90 daily departures serving 18 destinations.

In June, WestJet expanded its reach with the successful launch of its first scheduled Trans-Atlantic service between Toronto and Dublin. Announced in November, 2013 the launch marked another milestone in the airline's18-year history. And as a result of strong bookings, this seasonal service was extended by three weeks to October 25, 2014.

We continue to grow our airline partnerships in the second quarter adding three new interline partners bringing our total number of airline partnership agreements to 37. Partnership revenues continue to grow and our vital network allows our guests to access over 150 destinations worldwide via WestJet.

In July, we announced our intention to begin flying our own wide body aircraft. I'm pleased to announce today that we have selected four Boeing 767-300ERW aircraft for that role. We expect to operate these aircraft initially on routes between Alberta and Hawaii in the winter season beginning in late 2015. this will replace our current seasonal service on these routes by our two Boeing 757s currently operated by Thomas Cook, which is ending in the spring of 2015.

Beginning in the summer of 2016 we will then look to use these aircraft to expand our network into overseas markets.

Turning now to our third quarter, we're seeing positive momentum as a result of the robust demand requirement and the further rollout of WestJet Encore plus the continued success of our fare bundles initiative. As such for the third quarter, we're expecting strong traffic and revenue growth and positive year-over-year RASM growth but moderated from the year-over-year RASM growth we experienced in the second quarter.

In terms of our outlook for CASM excluding fuel and profit share, we're expecting the third quarter of 2014 to be flat to up 1% as compared to the same period in 2013. I'm also pleased to report that we've lowered our full year 2014 guidance as a result of our continued cost discipline and a stronger Canadian U.S. dollar exchange rate than previously forecasted. Vito will provide further CASM details in his remarks.

In wrapping up, I want to thank our 10,000 WestJetters for continuing to deliver our brand of friendly, caring service to our guests everyday which was fundamental in WestJet's recent ranking by Interbrand Canada as one of the top 20 brands in the country. Thanks WestJetters.

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

Vito Culmone

Thank you, Gregg. Good morning everyone and thanks again for joining us today. This morning I'd like to focus my commentary in three primary areas, a quick overview of our second quarter operating results, an updated with respect to our recent financing activities, and of course outlook our view of how the third quarter and the balance of the year may be shaping up.

As Gregg highlighted, we had a great second quarter. This morning we reported record second quarter net earnings of $51.8 million or $0.40 per diluted share which represents our 37th consecutive quarter of profitability. The 17.6% increase in year-over-year earnings per share is particularly impressive in the face of an 8.3% increase in per unit fuel costs. We had both strong revenue performance and better than expected cost performance in the second quarter, resulting in operating margin expansion of 0.5 percentage points to 8.4%.

Our second quarter revenue increased 10.3% year-over-year to $930.3 million. And we welcomed almost $4.8 million guests on board our aircraft, a year-over-year increase of 6.2%.

On June 27, we set a single-day record flying almost 64,000 guests. Our traffic in the second quarter increased by 5.5% as we increased system capacity by 5.2%, as compared to the same period in 2013.

Our RASM in the second quarter increased 4.8% on a year-over-year basis, due primarily to a robust 4.5% increase in our yield. Our load factor in the second quarter was 79.6%, a 0.2 point increase from the second quarter of 2013.

We continue to see strong year-over-year ancillary revenue performance. In the second quarter, aancillary revenue increased by approximately 25% to $47.8 million and by 18% to $10.04 on a per guest basis. These increases are driven primarily by the success of fare bundles and our Plus product, which we launched on August 19, 2013.

In terms of costs, our total CASM for the second quarter was 4.2% higher year-over-year, due mainly to increases in aircraft fuel and maintenance expenses, partially offset by a decrease in in-flight expense.

CASM excluding fuel and employee profit share for the period was up 1.9% year-over-year and $9.23. The year-over-year increase in CASM excluding fuel and profit share in the second quarter was less than our previously disclosed guidance of up 3% to 4%, mainly driven by the impact of a stronger than expected Canadian to U.S. dollar exchange rate, lower cost of sales, lower negotiated technical operations cost recoveries, a change in planned advertising expense and, of course, the efforts of all WestJetters keeping a keen eye for cost reduction opportunities.

Fuel remains the largest portion of our cost at about 32% of total operating expenses in the second quarter of 2014. Fuel cost per ASM for the second quarter were $0.044 compared to $0.041 in the second quarter of 2013, an increase of 8.3%.

Average jet fuel prices were U.S.$123 dollars per barrel in the second quarter of 2014 versus a U.S.$117 per barrel in 2013, an increase of 5.1%. This year-over-year increase was compounded by the effect of the weaker Canadian dollar as average jet fuel prices in Canadian dollars increased to $134 a barrel, up 10.7% from $121 per barrel in the same period in the prior year, which represented, by the way, the lowest quarterly fuel cost of 2013.

We have been busy on the financing side this quarter. We entered into a credit agreement with a syndicate of banks, which gives us access to a $250 million unsecured revolving credit facility. The credit facility is available for general corporate purposes, including funding aircraft acquisition. Amounts drawn on the facility bear interest at a floating rate, which was effectively 3.7% as of June 30, 2014.

At the end of the second quarter, we had drawn $100 million on this facility. This facility provides us with increased liquidity and flexibility going forward.

In July, we were very pleased to diversify our sources of financing with our inaugural offering of $400 million of 3.287% senior unsecured notes, which were rated BBB minus or investment grade by Standard & Poor's.

In our view, this financing represents a landmark deal for WestJet and one that reflects the strength of our business model and great crew of the 10,000 committed and talented WestJetters.

The investment grade debt market represents a significant new source of cost effective funding for WestJet and adds considerable flexibility to our fleet financing plans going forward.

Our adjusted debt equity ratio as of June 30, 2014 was 1.38, in line with the 1.38 ratio at the end of 2013. And our adjusted net debt was $1.2 billion at the end of second quarter, 30% higher than that at December 31, 2013, primarily as a result of aircraft additions in the amount of $338 million year-to-date in 2014 through the end of the second quarter.

Our trailing 12-month EBITDAR pierced through the $800 million mark for the first time, at $807 million, resulting in an adjusted net debt to EBITDAR ratio of 1.52 compared with 1.22 at the end of 2013.

We ended the second quarter of 2014 with a cash and cash equivalent balance of $1.1 billion, representing 28% of our trailing 12 month revenue in line with our internal guidance of approximately 30%.

We are pleased to announce our 2014 third quarter dividend of $0.12 per common share and voting variable share to be paid out on September 30, 2014. Our current dividend puts our payout ratio at 23% based on trailing 12 months earnings per share of $2.11. Our dividend and normal course issuer bid programs, which we first announced in November of 2010, have allowed us to return more than $500 million to shareholders on a combined basis.

Under our fourth NCIB, which we announced in May, we have so far repurchased and cancelled more than 192,000 shares representing 9.6% of the maximum number of shares we are authorized to repurchase for total consideration of $4.9 million.

Lastly, I'd like to cover a few outlook items before handing the call back to Gregg. For the full-year 2014, we now anticipate system wide capacity growth between 6% and 7% as we have added a modest amount of capacity in response to the robust demand environment. We continue to expect full year domestic capacity growth between 5% and 6%.

In terms of the third quarter of 2014, we expect system wide capacity of growth of 6.5% to 7% with domestic capacity to be up 4.5% to 5%. We continue to see a robust demand environment. And as a result, we continue to expect strong year-over-year traffic in revenue growth in the third quarter.

In terms of RASM in the third quarter, we anticipate positive year-over-year growth, though moderating from the growth we experienced in the second quarter.

For the third quarter of 2014, we expect CASM, excluding fuel and employee profit share, to be flat to up 1% year-over-year. We now expect a full-year 2014 CASM, excluding fuel and employee profit share, to be up 1.5% to 2% year-over-year, an improvement from our previous guidance of up 2% to 2.5%, driven by our continued cost discipline and the impact of a stronger Canadian to U.S. dollar exchange than previously forecasted. This full-year CASM, ex-fuel forecast is based on a foreign exchange rate assumption of CAD$1.09 to US$1.

Our fuel cost for the third quarter is projected between $0.91 and $0.93, representing a year-over-year change of down 1.1% based on current forecasted jet fuel prices of a US$118 per barrel and an average foreign exchange rate of approximately CAD$1.09 to US$1.

As we previously discussed and disclosed, we will now -- we will be delivering 10 of our oldest Boeing 738 NG-700 series aircraft to Southwest Airlines beginning in the second half of 2014 with final delivery expected in the first half of 2015. We expect to record a non-cash book loss of $50 million to $60 million calculated using a Canadian to U.S. dollar exchange rate of 1.09 for all 10 aircraft in accordance with accounting guidelines and consistent with our previous disclosures. A significant portion of this loss is driven by the strengthening of that exchange rate since the aircraft were originally purchased in the 2002 and 2003 period. In the third quarter of 2014, we anticipate recognizing a significant portion of this loss.

For the full-year 2014, we continue to forecast capital expenditures net of the proceeds from the sale of the first five aircraft to Southwest Airlines of approximately $620 million to $640 million. This remains unchanged from previous guidance. And for the third quarter of 2014, we expect our net capital expenditures to range between approximately a $140 million and $150 million.

Great quarter team WestJet. Please be safe and enjoy the rest of your summer. With that, I'll hand it back to Gregg.

Gregg Saretsky

Thanks Vito. Joe, I believe we are now ready for the Q&A portion.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

The first question take comes from Walter Spracklin from RBC Capital Markets. Please go ahead.

Walter Spracklin - RBC Capital Markets

Just want to say first up great quarter. Congratulations. Obviously, very proud of that, you are very proud of that. So, good job there. Want to focus, I guess, my first question on yield. Your yield came in very solidly. I don't know if this is something you can do on a call hear and I don't know if it's Vito that might be able to shed some light. But if you were to decompose the yield between ticket fares, mix of Encore traffic coming on to your network obviously, that at higher RASM and ancillary revenue impact, if you are to just kind of broadly decompose that yield, is there a way you can give us a rough estimate of how that would look?

Vito Culmone

Bob, do you want to grab that?

Bob Cummings

Yeah. I -- we haven't done that exact breakout. Just looking at the numbers in front of you, doing some rough math off the top of my head, over 50% of it is fare. And then, next would be ancillary and then Encore is starting to creep up every quarter with respect to its contribution to RASM. So I'll just give you general answer. And then, all those are heading in the right direction.

Walter Spracklin - RBC Capital Markets

Yeah. I know that. That's great. So really good kind of fare-based increases there, that's excellent. And I guess this is my second question. You are able to drive fare increases, which is great. It seems to be on the back of a very solid demand environment. I'm going to ask the question with a little bit of proviso. Where is that growth coming from? Is the most common question I am getting and especially when it compares to some other geographical segments in the world. And if you could sort of ex-out the stimulation that affect, understanding that that might be a driver, and I can understand that one. Is there anything else that's driving this very strong growth you are seeing? Because it seems that the Canada is getting a strong growth as well, so it doesn't look like it's necessarily fare or share gains. Can you talk to us a bit about where that growth is coming from and how sustainable it might be?

Gregg Saretsky

It really is a mix at the end of the day. Several of the investments we made in the last three to five years, you said to ex-out the stem but I am going to mention it anyways. Encore have significantly stimulated, particularly the new definitions it's going into. And then, the new non-stops and connections and what that's created with respect to network utility. And I'll say some stimulation or extra traffic as far as if that's concerned and there has been some stimulation or some additional traffic that way.

And then, when you look down into the U.S. and our airline partnerships and all of the new network utility and the virtual network and what that brings on to are network overall some of that would be shared and some of that would be some new traffic. So when you dissected all, we have several investments in demand streams that are all going into our network and we'll continue to ramp up as time goes on.

Walter Spracklin - RBC Capital Markets

So just so I understand, it could it be that Air Canada's Star Alliance and then your networks are gaining share versus the non-Star Alliance non-WestJet, code-share agreed partners, is that -- could that be -- is that what you are saying there Bob or?

Bob Cummings

Yeah.

Walter Spracklin - RBC Capital Markets

Okay.

Bob Cummings

No, we're not going to speak on Air Canada's traffic; you'll have to ask them that. What we are seeing is the significant amount of flow under the WestJet network from WestJet Encore almost one to two guests. One in two guests are flowing onto our 737 operation, that's significant. And the GDP is good. And we are seeing a multiplier effect in the GDP. The traffic is strong across all geographies. We have new service to Ireland. That service has performed exceptionally well. We're also benefiting from a fairly significant amount of flow to Newfoundland in association with that service to Ireland. So we have a bunch of new source markets that are actually performing very, very well. Trans-border traffic is strong, maybe benefiting from the stronger U.S.-Canadian dollar exchange rate. And I think all geographies are performing very well.

Operator

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

David Newman - Cormark Securities

HI guys, great quarter. Just couple of questions here on, first of all, maybe housekeeping one. Vito, maybe just the FX impact on revenue RASM cost in EPS. What are we looking at in terms of magnitude on the quarter?

Vito Culmone

The FX impact we averaged that approximately at 1.09 during the quarter as compared to 1.02 last year. And from a pre-tax operating expense range, I'd put the $13 million to $15 million impact.

David Newman - Cormark Securities

Sorry, say it again, $30 million to $50 million?

Vito Culmone

$13 million to $15 million in the quarter.

David Newman - Cormark Securities

$13 million, yeah. That makes sense. Okay. Good, good, good. And then strategically, obviously you're moving forward to international strategy with the pilot's blessing. So a two-part questions on this one. So how was the relationship with the pilots, and attendants and WestJet management? And how just threat of unionization diminishing, and certainly prop showing like looked healthy, everything looked pretty decent in the quarter. And obviously this is encouraging, right, I would imagine for the employees to be sharing in that profit, but has that subsided?

Gregg Saretsky

Well, we're certainly working very hard with our employee associations. We have active contract negotiations ongoing with our flight attendant group. And we will be reengaging with pilots on their full a new contract shortly after Labor Day. But we have been sitting on our laurels for the last couple of months. We've actually nailed two new agreements with our pilots, one that facilitated the announcement this morning about wide body, and the another that will facilitate the movement of WestJet Encore pilots into our jet operation, which is industry-leading]agreements unseen elsewhere in our business. So I would say the level of engagement with both the pilots and flight attendants is very good. We share a goal of wanting to get to a new long-term agreement that continues to award our people for their great service and for being productive.

David Newman - Cormark Securities

And then just on the business, as you move along here, obviously, things are looking good, things are settling down, operation at airline is showing good metric, as the ticking here at a Swiss watch kind of pace where you might think about the baggage fee once again and how WestJet might think about how they would introduced that or would be a sort of a WestJet manner like $10 or how would you think about that?

Gregg Saretsky

Well, we're thinking about it, so I don't have an answer really that might satisfy you, David. But what I will say is that further unbundling of our fare structure to provide even lower airfares for our guests is a priority for us. But we're not going to move in that direction until we're absolutely confident that we have set WestJetter up for success. And this change, this change in our business model is a significant one, because it could potentially result in a different number of carry-on bags. Fewer bags in the belly means more progress based to sell. And so there are whole bunch of dependencies here, including along the technology front, which needs to come together before we need to make a decision in which way to move.

David Newman - Cormark Securities

Any timeline on the technology side or how is it coming along?

Gregg Saretsky

I think we said earlier, we expect to be in position for the end of the year and that timeline is still intact.

Operator

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

Cameron Doerksen - National Bank Financial

I guess, my question is on your relative cost competitiveness. I've seen in the press quite a bit of a news about potential new ultra low-cost competitors starting up in Canada. It would seem to me that a new competitor, their biggest advantage would probably be on the labor side, which I guess for you and then the quarter made up sort of 20% to 25% of total costs. I'm just wanted to - any other cost beside the labor where a new competitor might have an advantage over WestJet?

Gregg Saretsky

I don't see advantages, maybe disadvantages. There are scale disadvantages. There is disadvantage in fuel contracts. We're basically buying the same airplanes, we're going to pay similar rents. We still might have an advantage because we have better credit risk, lower access to capital. But our model is one, which has been a winning formula since 1996 and it's really built on staying lean, keeping our fares low and creating remarkable experiences for our guests.

So to the extent that there are other lower cost operators that see opportunities, they are going to mets with the pretty strong response from WestJet and our people are ready for any challenge.

Cameron Doerksen - National Bank Financial

Good. I guess maybe second question is shifting gears on the recent financing at pretty, pretty attractive rates on the new debt. Are there any opportunities for you to buy or leases, or perhaps to retire some of the higher cost aircraft related debt earlier with this new financing?

Vito Culmone

Cameron, its Vito. Thanks for the question. Definitely, obviously as we look at our financing plans going forward, the low cost of that under the current environment is something that we continue to explore and use to our advantage as much as possible. We're currently renewing in discussions with respect to the 12 lease renewals for next year. We have 12 leases expiring in 2015 and those 12 leases were in discussions with our lessors in regards to that. And a number of things didn't come out of that. Obviously, potential purchase of some of those aircraft or renewals and extensions at, obviously, more favorable rates in the current lease rates associated with those 12 leases.

So we'll continue to explore that. I mean our average cost of debt on existing debt is around 5.5% on our debt. So as we move forward here and retire some of the XM debt in 2015 and 2016, we'll be looking to obviously reduce our average cost of interest per owned aircraft for sure.

Operator

The next question is from Kevin Chiang of CIBC. Please go ahead.

Kevin Chiang - CIBC

Great quarter. And thanks for taking my question. I guess the first one, I see you continue to sign inter-line agreement, I don't think you've a code-share agreement for a little bit of time here. Just wondering as you move forward with your wide-body strategy, is it something you would look to accelerate or maybe of putting it on pause as you focus on your internal growth initiatives here?

Vito Culmone

Thanks for the question, Kevin. We do expect to be converting more of those inter-line agreements to code shares. That is just a matter of the time that it takes to do that. We've been very focused on moving to make our frequent flyer programs, WestJet work program fully reciprocal with earn and burn opportunities on both American and Delta. So that’s priority one and two. After that comes converting more inter-line to code-share, and I think we're in good shape there too.

Kevin Chiang - CIBC

And just a follow up on that, I think the code-shares you have with the two U.S. airlines are the only ones you have with the reciprocal agreement. As you move towards the wide-body strategy, it doesn't make sense to convert some of those unilateral agreements to reciprocal as well, some of the international agreements.

Vito Culmone

Yes. Absolutely. I mean we've been reluctant to enter into a reciprocal agreements with the long-haul carriers, because there is a lot of effort required in supporting code-share. And if the guest this line from say, Toronto to Montreal to get on Air France to go to Paris, we get that short tail-end and incur all the cost and work associate with making that booking when the code-share partner gets the long-haul segment. As our network continues to morph and we start have long-haul segments then I think fully reciprocal code-shares with long-haul international airlines also makes sense.

Kevin Chiang - CIBC

Perfect. And maybe I'll just try approaching, I think David's earlier question a little bit differently. Just trying to get a sense, it seems like you do have a lot of ancillary revenue opportunities. We saw a pretty significant bump up in the [back off] of last year with the fare bundling and there are some opportunities in 2015. Are you able to provide any type of, I guess, guidance or targets in terms of the opportunity for another step

I guess guidance or targets in terms of the opportunity for another step function up when we look out into 2015 as we start to monetize these other opportunities?

Gregg Saretsky

No, I think your observations are correct. As we look at the U.S. carriers, a significant amount of their earnings this quarter has come from ancillary revenues and they range from something in the order of $10 I guess all the way up to $55 I guess depending on how unbundled each of those operators is. We see that opportunity. We see it really as an opportunity for us to take our fares down to become more aggressive in the low fare space in Canada and to give our guest the choice with respect to what additional services or products they want to pay for as opposed having it all bundled in a fare where they're paying higher fares for services that perhaps they don't value.

So you are asking a right question. We see this as a big revenue opportunity. We are going to do it in a way that our WestJetters can be proud of and that will be executed in the smallest a way as possible but we are not there yet. Until make a decision when we get closer to feeling like some of these other common conditions present have been met.

Vito Culmone

What I will add to that is we launched our fare products about a year ago and then we have been well accepted in the market and that platform and those capabilities underneath have certainly positioned as well to evolve those fare products take advantages of some of the opportunities that you are talking about and it's well-positioned ourselves in the market both defensively and offensively.

Operator

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

Turan Quettawala - Scotia Capital

Good morning, gentlemen. I guess maybe first question just on the slight ASM increase that you talked about on the second half of the year. Is it just coming mainly from my utilization and I assume it's also partly the three weeks of additional Dublin service is that right?

Gregg Saretsky

Bob, why don’t you get that.

Bob Cummings

We throughout the year we adjust our network according to markets and competitive condition, demanding competitive conditions. And from the results you can see that we have a healthy demand environment. So we are flying our aircraft hard through the end of the year.

Turan Quettawala - Scotia Capital

So it is higher utilization?

Bob Cummings

Yes.

Turan Quettawala - Scotia Capital

Okay. And also just quickly on the 767s. I'm just wondering about the cabin interior there, I assume there is going to be a plus on there. Just wondering if there is any decision on whether you can thinking about getting a full business class on the wide bodies?

Bob Cummings

There will be a plus section. We are not thinking that as we don't have business class domestically we are not planning on having business class internationally, and that product will be designed very much like core WestJet. It's going to be focused on being a great value for guests to value the service, the type of service that WestJet has been known for, caring, friendly, engaged employees delivering a low fare product to guests who value our convenience in our services and that's what the wide body operation be as well.

Turan Quettawala - Scotia Capital

Great. And if I may just ask one more on the rewards program. Gregg, can you talk a little bit about how that is progressing? And I guess broadly speaking, do you see an opportunity here to sort of maybe think about increasing loyalty amongst business passengers by doing upgrades and so and so forth or is just Plus doing so well that there is no need to do that?

Gregg Saretsky

Plus is doing very well. I think we had said from the launch we expect it to be $50 million incremental revenue. It hasn’t been at the high end of that. I would say there is enough momentum that we will surpass $80 million top end of the range. We want to be very careful about the providing products for free and it's certainly not free to us, but we want to recognize loyalty of guests who fly more frequently with us. And so we are going to take a very cautious and balanced approached. And the team that's working and the rewards program have some exciting announcements to make here in the next month or two relative to that question and the benefits we can provide to people who fly more frequently with us.

Turan Quettawala - Scotia Capital

That's great. Thank you very much, and just to clarify the $80 million surplus is that 2014 now?

Vito Culmone

Yes.

Operator

Next question is from Ben Cherniavsky of Raymond James. Please go head. Go ahead, sir.

Ben Cherniavsky - Raymond James

Hi, good quarter, congratulations. One of the things I want to ask about is the 767s. Can you disclose where they are coming from? How did you source these aircrafts? I'm interested mostly in ETOPS certification and whether or not they have them and whether or not you will have it as soon as you get it or you are going to have to earn that certification by flying it yourself for some time?

Gregg Saretsky

Yes, so ETOPS certification is something that each carrier has to apply for individually; it doesn't come with an aircraft. The aircraft comes equipped with equipment that allows us to fly ETOPS but the operator has to get that from Transport Canada. So we will have fly the 767s in non-ETOPS markets for a period of 90 or more days to get that certification to fly them using 180 minute role. We are not disclosing whether it's coming from other than to say they are U767s that will be completely refurbished before they went to service at WestJet and they will have an interior that will be modern and be fitted with our newest in-flight entertainment system. These aircrafts will have wing width. So they get the benefit of fuel savings and it will be a very comfortable ride.

Ben Cherniavsky - Raymond James

So correct me if I am wrong, but you are saying you will have to fly the aircraft to get the certification yourself, the non-ETOPS, does that mean you can’t fly them to Hawaii right out of the gate?

Gregg Saretsky

No, like we did at the 737 these aircrafts have to go into proving runs for a period of time and so they will fly at the end our scheduled network for a period of 90 days at which point time we expect to gain the Transport Canada approval for ETOPS providing to (inaudible).

Ben Cherniavsky - Raymond James

Right. So we will see them the next summer presumably or?

Gregg Saretsky

Yes.

Ben Cherniavsky - Raymond James

In the domestic market?

Gregg Saretsky

We haven't disclosed where they are going.

Ben Cherniavsky - Raymond James

Okay. But obviously they won't be going to Hawaii; they will be in your existing network, and they are not going to London either anything like that?

Gregg Saretsky

Not, next summer, no.

Ben Cherniavsky - Raymond James

Okay. Just going back to I guess, I think when the first question is may be Walter raised it about pricing and all the different things that are going into it. I mean I stripped out your ancillary revenue which was impressive and good to see and adjusted for your stage because your stage down dramatically with the Q400s and that's having a big impact on your yields obviously, I figured that net ancillaries and stage or yields were up by about 1% may be 0.9% by my math. So you have got – is that really just and then you got the plus product which doesn't necessarily fall into ancillaries depending on whether or not it's part of the gate. Correct?

Gregg Saretsky

Plus, we are seeing over 50% of the revenues at this point coming into the ancillary category.

Ben Cherniavsky - Raymond James

Right.

Gregg Saretsky

And so you can pick up plus that way. The other presale into the product is ramping up nicely month over month and it's nice to see that that improvements in that take. You are right in terms of the business change with respect to its mix on stage length and they can through those impacts and looking at the market that way. When you look at capacity increases and how all that sorting itself true with the yields, we feel that the environmental overall is very healthy and then what we are reporting into the market with respect to increased schedule utility, new service and the products contributing as you are talking about and mixing that all together it's run a nice trajectory and I think it's going according to plan.

Ben Cherniavsky - Raymond James

Sorry go ahead.

Bob Cummings

I just wanted to add that it's a pretty rare that you get fire on all cylinders and we have got a situation here where our operation is underpinned by a strong economy, we have got new revenue sources coming from a bunch of areas, unbundling, Plus, airline partners, WestJet Encore, incremental flow, and then on top of that we are benefiting from higher yields that are coming from a mix of getting some traction in the corporate business travel sector which is a function of the network utility and the product that we're bringing into market. So the conclusion of a lot of work that has come together over many months. It's nice --

Ben Cherniavsky - Raymond James

Yes, and I see that but I think my point is it looks to me most likely it's a strategic gain in the yields rather than I mean, I would argue with the strong economic backdrop I mean it mostly depends we are sitting there in Calgary probably feel that way and I recognize a lot of your traffics coming from there, but underlying demand does not appear to be that strong. I mean less than 1% of yield growth to me looks like that’s a function of unbundling and your corporate initiative and Plus and etc. etc. rather than getting underlying fairs up, which I guess goes to my next and last question and Gregg will go back to I think I asked you this in one of the previous quarters and again I don't want to reign on a parade because I think you guys have done great job and obviously your cost control is good when you just (inaudible) stage as well. But the decision to increase capacity, ROIC, it's good you are exceeding your target but against the backdrop what we are seeing in the US where RASM is going up by more than what you guys are reporting, capacity is going up by less than what you guys are planning and ROICs are much higher, thoughts about raising that target again and trying to get maybe over 15% ROIC because lot of your peers are doing that.

Gregg Saretsky

Yes, there is certainly a whole lot of consolidation going on in the States which is quite different than in Canada where you have got every Canadian airline expanding as much as they Air Canada and WestJet but some expanding transAt CanJets getting into the space. So we have got an environment here which is being buoyed by frankly certainly in Western Canada underlying economic strength. There are pockets of capacity that is creating a little bit of headwind. But listen we have been in this business for 18 years and every year we have been drawing at faster rate than the GDP and doing that successfully generating record profits and we are not at the mature state that these U.S. carriers are. There is a lot of geographies in Canada that WestJet doesn't touch and WestJet Encore is going get into those geographies really creates a very different fundamental for us that is new and we are seeing a lot of flow on to the main line and that utility is gaining attraction with corporate travelers which is just contributing to yield improvements. And so I think we have got some good momentum going and we are going to keep our foot on the accelerator.

Ben Cherniavsky - Raymond James

Sorry to interrupt, but just because you pointed out as you are planned to increase your capacity -- the incremental capacity and mostly related to Encore and the regional markets that are on top?

Gregg Saretsky

Yes, this year 50% of our growth is coming from the original operation on the other hand

Ben Cherniavsky - Raymond James

Yeah, but the decision to increase your incremental capacity in the back half of the year Encore related?

Gregg Saretsky

No, it's more jet and utilizations related.

Bob Cummings

Ben, you have downward forces on your yield and revenue your upward forces and your downward forces with respect to how you look at that P&L, how you look at that investment-wise. We are very prudent to take the sitting in the room and starting at course that makes you think is the most sensible for our shareholders.

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 couple of questions on the 767s in terms of timing and pilot training costs, and then the number of seats on the 767 versus the Thomas Cook 757s. So maybe you could sort of one at a time, if you have to fly in for 90 days in advance I'm assuming they come in August or September which would kind of employ your pilots have to go into training I want to say April May, so maybe you can clarify that for me first.

Gregg Saretsky

Yes, I'll describe the size of the aircraft. 757 had 211 seats. This aircraft is like 262, so a little bit bigger. We saw from the 757 results that the series of flights operated with very high load factors. So we have absolutely no trepidation in our ability to fill 262 seats. The aircraft will arrive and go into scheduled service next summer. And so we will have the first of our pilots who become the trainers and check standards pilots on that aircraft go into training in the February, March, April timeframe and the line pilots would follow a couple of months later. So I remind everybody that we are starting next winter schedule with two aircraft. So the number of pilots in training for that specific fleet type is small and it will be plus or minus surrounding here on our financials, just because of the size of the operation relative to our base.

Helane Becker - Cowen and Company

Okay. Great, I wanted to get at that. And then my other -- thank you. And you obviously entered that load factor question. And then can you just say or have you decided the mix of the extra like room seats versus the regular core product seats on the 262?

Gregg Saretsky

We haven't finalized the low but what I will tell you on existing 737 so we get 18 premium seats on an average configuration of about 142. And so then the percentage of premium seat on 767 would be lower than that. Mostly because these aircrafts are flying in leisure markets where as a lot of our 737s are flying in business markets.

Helane Becker - Cowen and Company

Great. Okay. Thank you. And then the other question I have is, is there anything you can do to mitigate your tax expense through either owning more of your aircraft or I don’t know, any other thing you can do to mitigate that line item?

Vito Culmone

Yes, Helen. Hi, it’s Vito here. Our tax planning team works hard obviously on optimization. Yes, you are correct that when you own your aircraft you get an accelerated depreciation for tax purposes at the end of the day effectively that is a timing difference between your accounting tax and your actual cash taxes. So we do everything we can obviously within the purviews of the tax laws and working with this year in a transparent manner in all those functions, but it’s a good problem to have when you are paying taxes and we anticipate continuing to do so as we move forward.

Helane Becker - Cowen and Company

Okay, and then just maybe one more I can speak in here. On the maintenance line which on a percentage basis it seem to increase a lot. Is that just due to the bigger fleet or is there something in there in the second quarter that made it a little bit higher than maybe it was in you know in the first and the second?

Vito Culmone

It was in the first quarter we have $13 million of year-over-year increases and in the second quarter we’ve actually got a little less. We have got $11 million of year-over-year increases in our maintenance line. And there are two drivers to that. Primarily, our cash expenses in the quarter were approximately accounted for half of that increase of $6 million and the primary drivers there are Encore first of all. Obviously we had no Encore, no meaning for Encore’s maintenance related expenses in the prior year and this year we do and obviously some 737 increases in heavy truck related expenses. So that accounts for effectively the drivers of the increase and the cash related components of the maintenance expense.

We also saw at approximately a $5 million dollar increase in the provision for our lease return conditions in Q2. And that basically relates the fact that we were cycling a favorable discount rate adjustment in the prior year. So those are the main drivers of the change in delta in our maintenance expense in Quarter 2.

Operator

The next question is from Glenn Engel with Bank of America-Merrill Lynch. Please go ahead.

Glenn Engel - Bank of America-Merrill Lynch

Good morning and congratulations. Your depreciation limit and your aircraft lease both were about 10% less in the second quarter than the first quarter, what drove that?

Vito Culmone

Well, depreciation in primarily you recall in Q1 we have some in relation to some engines that we overhauled earlier than anticipated and as a result we had some effective I will call it, a write-off of engines defectively or accelerated depreciation in Q1 primarily related to engines and we didn't have that in Q2. That was a primary driver.

As far as leases, I will just have to check the number of leases. Fairly I would expect those to be pretty consistent I mean, just grab that. Yes, in Q1 we had a 3% increase year-over-year in leasing costs and in Q2 we have a 2% increase year-over-year. So leases have no significant change quarter-over-quarter roughly the same number of months as prior year. And you'll have some minor deltas related to FX as you know we do in respect to the aircraft leases.

Glenn Engel - Bank of America Merrill Lynch

In first quarter, just forget the first quarter benefits from Thomas Cook or has lease, wet leasing in there and that's what makes the number drop first to second quarter?

Vito Culmone

That's correct. There is more wet leasing in any Q1. Thank you for that one you're correct.

Glenn Engel - Bank of America Merrill Lynch

I guess two on the capacity front. Can we assume them that next year won't look that different than this year and at what point both you and Air Canada growing so much faster than GDP, do we start getting concerned?

Vito Culmone

Well, we've given guidance yet for next year. What we said is probably a safe assumption. Certainly with the exercising of the options and the growth that we anticipate in the Encore fleet, and the geography in Canada, which is still being trapped by monopoly level air fares, we think that there is a significant amount of stimulation as we move east in the country but we seem in the west as we've entered some of these single carrier markets. So you shouldn't have concerns with growth for next year for the simple reason that some of the fundamentals that we've been able to expose this year will also be in play next year.

Operator

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

Chris Murray - AltaCorp Capital

Just going back, you were talking a little bit about the -- as you sell the aircraft to Southwest, you have to recognize, I guess, a loss at some point. Just so I understand what that is really going to look like when we see Q3 reporting, I assume that number will be coming through the P&L; it just won't be a booked charge or an equity charge?

Vito Culmone

Yes, that will be coming through the P&L. We expect it below the line non-operating is where we expect to book that. And as I said we expected total loss to be in the magnitude of CAD$50 million to CAD$60 million with a substantial portion of that being booked in Q3.

Chris Murray - AltaCorp Capital

So when you say substantial, more than two-thirds, that sort of thing?

Vito Culmone

Yes.

Chris Murray - AltaCorp Capital

Okay, great. And then, just, you had some fortune with using some excise taxes, I guess, but really I noticed in your disclosure, you talked about it a little bit, but can you give us any idea what you think the change in taxes -- in aviation taxes in Ontario is going to mean to your overall in the plane cost, and if you think there is going to be any mitigation or may be variability in terms of either passing that through or any impact you may see in terms of passengers?

Vito Culmone

Yes, you know Chris, we're definitely disappointed with the decision that the Ontario Government made. We obviously understand the fiscal challenges Ontario is having. So we think at the end of the day raising taxes in that matter is an easy cash grab and is a disservice frankly to economic stimulation in the province. We anticipate that the year-over-year impact will aggregate to approximately CAD$14 million to CAD$15 million when the increase in taxes is fully phased in the next three years.

So ultimately who pays for that? Consumers end up paying for that and so we have to keep our cost as low as possible and will continue to provide value to our consumers but those sorts of things don't help.

Operator

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

Tim James - TD Securities

Just wanted to talk about the CAD$80 million or approximately CAD$80 million in incremental revenue that you now expect from the Plus cabin for 2014 now. It is good to see you reaching the high end of guidance there. Beyond that, does that portion of revenue grow in line with fares in general, do you believe, or do you think you can raise fares in the premium cabin at a greater rate than overall fares, going forward?

Vito Culmone

Tim that's a great question. I mean typically a lot of the demand that we see in that cabin is more price inelastic because they are traveling for business and the product represents significant value to them because this is in effect WestJet's business product and our competitors' business products price often times are hundred or more percent higher. So there is some room for us to play the fares in that Plus section. There is room for us to play with the upgrade that departure inside 24 hours we're seeing people not hesitating at all to pay for some of the perks that come with the top seats.

And then longer-term, I think there is some I call it dynamic pricing available to us, we're seeing other airlines in different geographies playing with so five-day a week, five-time a day. So we've launched this in a very simple way. But I think your point is when I see this there is some significant upside there in the product.

Tim James - TD Securities

Okay, thank you. Turning to Encore, are you seeing any moderation yet in the percentage of Encore passengers that are connecting onto mainline flights? I believe, Gregg, you mentioned one in two passengers, approximately, as connecting now. That's a great number. Are you seeing any change in that trend since Encore was launched last year?

Gregg Saretsky

It really is a function of the network and where we're deploying the aircraft and how we're looking at that route with respect to how it contributes on a pure P&L basis, as well as how it contributes to overall accretively to our network and schedule utility and at the WestJet level our profitability.

Right now we are slightly less than 50% connecting. That has changed a little bit with the route mix and over time where that settles out we have lots of plans in the east between new destinations, new nonstop some improvement flying. And so that number may change around a little bit. But I think where it now is you'll see a range on either side of it and just depending on how we continue to rollout the network every six months or we've been dribbling it out we'll see the mix change a little bit around that. But we're getting a real good idea on the three types of flying how they contribute and how to optimize their supply mix going forward.

Tim James - TD Securities

So as you look forward and you look at how you roll out Encore over the coming years and those three types of flying, do you, I mean, I assume we would be crazy to think that it could stay close to 50% if you look out two or three years from now. It's got to go below that, does it not?

Gregg Saretsky

If you look at Central and Eastern Canada there is a number of underserved monopoly type pricing market that would feed into I'll say our core network, there are seven networks. So there is significant number of opportunities as we continue to deploy more planes over time. So I mean we'll see what the future looks like two to three years out but there is certainly opportunity as we see it as we deploy the network in Central and Eastern Canada.

Tim James - TD Securities

Okay. My next question, I guess for Vito here, are there any actual changes in forecast expenses for the balance of the year? Or is the reduction in CASM guidance simply a function of the FX rate assumption and the increase in planned capacity growth?

Vito Culmone

Yes, it's a combination of things, Tim fairly obviously the capacity growth and the higher utilization. The foreign exchange is a big driver as well, the previous guidance obviously I think we had seen to 112 now we're coming in 109 but as well the company across all the business units just continued to nose to the grindstone. Our cost of sales, the sales team is doing an incredible job as far as renegotiating contracts and we are seeing benefit across all the business units from a focus perspective so a combination of things but real savings there as well.

Tim James - TD Securities

Okay and then just my last question finally here. I'm just wondering if you can comment if there were any geographic regions of notable either strength in demand, in revenue, or notable regions of weakness or a competitiveness.

Gregg Saretsky

No, I'll take that Tim, this is Gregg. We're seeing strength really right across the board. There are some small pockets where as Western Encore and its markets we had the competition significantly ramp up their own capacity. And so we're seeing a little bit of softness there and more on the yield side than anything else. But generally at the system level we're seeing good strength in transporter and international markets, good strength domestically, and surprising strength in many of these regional markets that Encore is entering.

Operator

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

David Tyerman - Canaccord Genuity

Yes, good morning. I would like to come back to the ROIC question. So you have a number of opportunities to improve profitability and some of them are happening, like the ancillaries. You have the bags ahead and what have you. I was wondering if you could talk philosophically about how you see this being translated into either growth or ROIC, because your ROIC isn't moving, but your growth is moving quite a bit. So it looks like you are translating a lot of this stuff into growth, rather than ROIC. Is that the general idea of what we should expect?

Vito Culmone

Yes, I think that's probably fair. We set a goal for ourselves of 12% across the cycle. We've been for the last several quarters at 13.7%. So we either need to upwardly revise our 12% target to something higher or we say, look, we don't know exactly where we're on the cycle but probably closer to the top of it than the bottom of it. And so we have to go through the cycle and still maintain these types of earnings and I think that's how we're setting up the business.

Secondarily, I will say that we see a lot of opportunities that's we exercised five more options on the Q400, to expand our network. We are aware of the low-cost carrier to that and so we're working hard to keep cost low in our business and providing the market with enough capacity to bring attractively low-priced fares to the marketplace that our cost structure permits. So there is a whole bunch of really objectives that is meeting here simultaneously.

Gregg Saretsky

The only thing I would add is just a recognition, of course, that with these initiatives, Encore, Plus, we're very much still in startup mode on these. So as we move forward here over the next few years we really do see an opportunity to not only grow it but also move into a bit of an optimization through those channels.

David Tyerman - Canaccord Genuity

Okay, that's helpful. And just may be just an extension of that, the U.S. airlines do seem to be getting good multiples. Your multiple, in my opinion, has notably lagged, and I'm wondering if the ROIC element is part of the issue here. Certainly, most of the investors I talk to, particularly American ones seem to respond extremely well to the whole capacity control or ROIC debate. I'm wondering if you have any thoughts on that.

Vito Culmone

Well, I'm happy to jump in on that one. Clearly I think capacity which is probably the primary driver of that and if rate is alluded to different market conditions in the U.S. versus Canada we are very, very pleased with our results here in Q2 but when you -- you're absolutely right. When you stack them up to the U.S. carriers we're not in the top quartile there as far as operating margin results and whatnot. So plenty for room for us to expand margins as we move forward is our goal.

Gregg Saretsky

And David, you're probably aware of this more than anybody that there is a seasonality at the northern latitudes so the Canadian second quarter is not nearly as strong as the U.S. second quarter. I think you need to compare our third quarter results to their second quarter results and then you can have a more meaningful conversation.

David Tyerman - Canaccord Genuity

Sure, no, I am thinking more in the last 12 months. But I will leave that. It is just something to muse on. Just a question on the 767s. So do you guys think that you will have an absolute cost advantage in the wide-bodies versus your major competitor?

Gregg Saretsky

You know it's hard at that stage length to have an absolute advantage. And so there's not just one competitor in these markets there are many.

David Tyerman - Canaccord Genuity

Sure.

Gregg Saretsky

And so what we need to leverage is the network strength because this is a very large Canadian long haul carrier that doesn't have a network to develop from so we've got that advantage. We've got the advantage of the low cost money that we're using to finance this growth so we'll have an advantage on that line of our business. We have very productive crews and so we'll probably have an advantage on that line of the business. But at the end of the day much of these costs get overwhelmed by fuel because of the stage line and so it will be tough to have cost advantage we're going to have to play using some of our advantages.

David Tyerman - Canaccord Genuity

Okay, that's helpful. Thank you. And then on the fare bundles, et cetera, the Plus, where exactly are you now? Are you nearly done in terms of at the CAD$80 million or is there quite a bit more to go at this point?

Bob Cummings

I'll take that. Vito alluded to we're still early lifecycle or early to mid-lifecycle. We are improving our selling process with our positioning the product through various parts of the booking process and up through the flight itself. And we're seeing the numbers ramp up or continue to ramp up as we put retail and marketing and selling efforts against the product. And so there is sales, there is still upside and we're continuing to see that upside every month and we're continuing to stand back and look at the different opportunity in sales. But I will state the value research has come back very, very favorably. So the marketing perspective starting with the product, starting with the value to the consumer, there is high value. So there is lots of opportunity yet with that as the base line are present.

David Tyerman - Canaccord Genuity

So, Bob, if you were thinking about it, would you be 50% there, 75%, any broad brush?

Bob Cummings

There is still opportunity. We have both penetration and I would say price value levers that we can use. And it's interesting we're talking about long haul earlier and certainly the learning's that we have on our Plus product and then applying back to how we incorporate into long haul is -- we are looking forward to that as well.

David Tyerman - Canaccord Genuity

Okay. Fair enough.

Gregg Saretsky

Yes, Dave, this is Gregg. I mean I would say I'm very, very bullish on the prospect for ancillary revenue even absent a big business model change, I think we had earlier questions on are we going to start charging for bags. Even absent that this is a product that we haven't even anniversaried yet, our first anniversary and we've seen great traction in the marketplace. So we've got a lot of levers yet we can move, I would expect to see over the next several year that line of ancillary revenue moving in a very significant way that's certainly the goal.

David Tyerman - Canaccord Genuity

Okay, that's clear. Just, finally, there were a few items that were listed that I didn't totally understand what you were saying. You mentioned lower negotiated technical operation cost recoveries as one of the CASM drivers. What is that?

Vito Culmone

Well, basically with many of our suppliers we're always engaged in further opportunities and in Q2 we are happy to realize along the technical operations line primarily has some savings.

Gregg Saretsky

It's a procurement team going out and really beating up in some of the suppliers and getting contracts frankly that are closer to market.

David Tyerman - Canaccord Genuity

Okay, okay, thank you. That helps. And you also mentioned a change in planned advertising spend, so is this a permanent change or is this just shifting stuff around, or --

Gregg Saretsky

Yes, we pulled down full year cost on advertising and Bob anything else you want to add to that.

Bob Cummings

Well, it's been interesting over the last couple of years how much the marketing sales were changing. The digital capability of mobile is ramping up. Our investments in mobile, the recent launch of our app and what we're seeing with respect to traction there. And our social media efforts with respect to that contributing to some of our branding versus traditional medium is we are evolving and evolving quickly with respect to our marketing communications and brand communications mix and we've seen success with what I will call that the new medium over the last couple of years. And we sat down and took a real hard look at our tracking with respect to costs this year, this year. We changed the mix through the end of the year and that will likely mean we will change the mix going forward. So you can look for those type of efficiencies to continue.

David Tyerman - Canaccord Genuity

Okay, perfect, thank you. And then, the last one is in the marketing general and admin, you said you recorded an amount of CAD$5.3 million related -- relating to a pending settlement with a vendor. I take it that's a gain? One-off?

Vito Culmone

No, that's an expense, that's a provision David.

David Tyerman - Canaccord Genuity

Okay. It's a provision. Okay.

Vito Culmone

Yes.

David Tyerman - Canaccord Genuity

And what is it?

Vito Culmone

It's a planned settlement and negotiated as we are looking with our in-flight entertainment and making the transition from live TV to Panasonic.

David Tyerman - Canaccord Genuity

Okay. And sorry, is this a one-off, Vito?

Vito Culmone

We should hope so.

Operator

The next question is follow-up from Tim James of TD Securities. Please go ahead

Tim James - TD Securities

I just wanted to circle back on the approximately CAD$80 million number, just to make sure I'm understanding how your defining that. That is the incremental revenue from the Plus cabin product, is that right, relative to if that footprint was used for economy seating? And does that include both the revenue that is flowing through ancillary and through passenger revenue?

Vito Culmone

Tim, that's correct. It is ancillary in terms of the bias that occurs within 24 hour and then we taken the incremental layer that we put on our fare structure with respect to selling that you classify. So --

Tim James - TD Securities

Okay.

Vito Culmone

It is incremental at the end of the day. And I think that answers your question.

Operator

This concludes the Q&A session for analysts of today's call. We will now take questions from members of the media. (Operator Instructions).

The next question is from Ross Marowits of Canadian Press. Please go ahead.

Ross Marowits - Canadian Press

Yes, I wanted to just clarify the 4767 those were all the in system as of the summer 2016?

Gregg Saretsky

Yes, that's correct.

Ross Marowits - Canadian Press

Starting then. Now you don't want to be specific about destinations but are you looking at servicing Europe from east and west or could there be Asia or some other markets that you go after?

Gregg Saretsky

It could be any of them I think, we are keeping all of those options open to us.

Ross Marowits - Canadian Press

Okay. And in terms of baggage fees you said that you're going to have more results from your technical investigation by the end of the year, what's the earliest that you could have any changes implemented?

Gregg Saretsky

As soon as we get WestJet is comfortable that we've thought of everything that needs to be thought of if we want to move in a direction that change up how we treat checked baggage. So we don't really have a timeframe for that, it's all a function of operational readiness, preparedness and the end of the day whether or not we want to take that step and change the way it should be.

Ross Marowits - Canadian Press

So could it be the winter of 2000 -- next winter or would it be more Spring or summer?

Gregg Saretsky

It could be that. It could be nothing at all. And I think we're keeping all of our options open --

Ross Marowits - Canadian Press

All right. And finally in terms of Southwest do you have any comments about their potential rival in the market?

Gregg Saretsky

Well, I think airlines move their assets where they see opportunities and that is main difference how WestJet use the world and the expansion that we've undertaken Southwest sees opportunity I think they announced not only Canada, but the Caribbean and Alaska and Hawaii. They take that number of opportunities as do we. So we will be ready to meet whatever competitor wants to come and take us on and Southwest is very good competitor but our job is to make sure that WestJet is in a position to be a fierce competitor as well.

Vito Culmone

I will just add that a bit our -- I think we talked about what the analyst is we are setup from a fair structure standpoint to change our product up a bit to cater to the pricing at those markets and lead competition is what we see to that -- for that segment going forward. We talked about some of the readiness around that. And as well I will point to our core and how we dealt that business to adapt to the market needs, the pricing is a part of the markets that that served and that has served and how successful that is. And then we talk about this a little bit with long haul. But our breadth and depth of network in Canada to compete and its acceptance to transporter markets we're well positioned as far as that's concerned, should we need to compete more, or when we need to compete more, in for that transporter traveler.

Gregg Saretsky

You know, if I can Ross it's a very heavily contested market and we are competing today with a legend and sprit who are approaching 5 million Canadians from cross-border airports they would need to fly to Canadian airports. We already have super ultra-low cost competition sitting at Buffalo and Burlington and Dillingham and all these airports that are within a very short driving distance at many of our metropolitan centers. So last time I look Southwest costs were significantly higher than those two airlines. So we're doing that already and that's why there is much focus on needing to get cost out, we can do better job with that.

Ross Marowits - Canadian Press

But really you talked about a low cost threat. Who were you specifically referring to then?

Vito Culmone

We hear rumors that there being other Canadian airlines that wanting to get into the space and so.

Ross Marowits - Canadian Press

So it wasn't Southwest that you're referring to then?

Vito Culmone

Not specifically.

Operator

The next question is from Vanessa Lu with Toronto Star. Please go head.

Vanessa Lu - Toronto Star

Just a follow up on Ross's question, do you think that the landing fees and the costs of some airlines to operate out of Canadian airports would be a huge challenge for Southwest?

Vito Culmone

It is, it is perhaps as well Vanessa, and I think we've been on record, look we're looking forward to the policy review that Transport Canada is undertaking. We have serious competitive challenges here in Canada because of the cost of our infrastructure, made only worse by the Ontario Government decision to further tax fuel, which means that Canadian air carriers will continue to look even more so more expensive than low cost flying from cross-border towns. And it may well be that the Ontario Government has less tax because more people choose to fly from Buffalo. So it's a very concerning issue for all Canadian carriers and it's one that the Federal Government needs to put some thinking toward as this policy review gets underway.

Vanessa Lu - Toronto Star

Right. And did you have a dollar figure with the airline fuel increase will have on WestJet's bus like the incremental cost?

Vito Culmone

Yes. CAD$14 million to CAD$15 million Vanessa when it's fully saved in.

Vanessa Lu - Toronto Star

Per year, when fully saved in. Okay.

Vito Culmone

Yes, per annum

Vanessa Lu - Toronto Star

Okay, great. And one final just sort of technical question. I guess I didn't really understand on the new 767s that you're acquiring. You're not disclosing where they're coming from, so are you buying them or leasing them?

Vito Culmone

We haven't. They are coming from Boeing. So I mean we have disclosed as we and we have -- we have not made a final determination as to whether we are purchasing or leasing those aircrafts, that's an option available to us. And we will make that determination as we get a little closer to the delivery date.

Operator

The next question is from Susan Taylor with Reuters. Please go head.

Susan Taylor - Reuters

Hi there. I'm going to harp on Southwest again apologies. But maybe you could talk a bit about how you view their potential entry and how serious a competitive threat it actually is, given some of the other conditions that you talked about with the other reporters earlier.

Vito Culmone

Well, Southwest is a great competitor as they have a great product and a low cost structure and so there would be somebody that would represent a threat to all Canadian operators because of the strength and their own network utility. That said we are already losing five, more than five million guests here to lower cost competitors at U.S. border airports. These are all people that could otherwise be fine WestJet and Air Canada and the other Canadian carriers.

So it isn't like Southwest represents the first threat. The threat is here, it's real now this five million Canadians were driving across the border and so that's a big problem for the Canadian Aviation Industry that you know the airlines can solve it themselves.

Susan Taylor - Reuters

And you mentioned Transport Canada is to review their policy review. Do you sense that there may be any kind of shift or change affecting landing fees and other costs that might respond to airlines call to kind of level the playing field about?

Vito Culmone

Well, that's something that we will have to wait and see what's in the final, the recommendation and then the Government has to decide whether or not they want to do something with that recommendation and so that's all a wait and see. The policy review was -- the policy was last looked at seven years ago. So it's been a long time since the parties had a chance to look at this, sector competitiveness is something that is very important to the Canadian Government it's very important to Canadian Airlines and frankly it's very important to Canadian consumers. Because there is a lot of additional review they can throwing off by airline operations Canada still will target some restaurants or some taxi drivers and so forth. So there is a lot of take here and that we're looking forward to review helping to resolve some of these longstanding matters.

Susan Taylor - Reuters

Well last one on Southwest. There was some discussion about the positioning of WestJet and how it's in a good place to respond to the entry of Southwest or other competitors. Is there anything else that you might do preemptively in advance of their arrival?

Vito Culmone

Airlines succeed when they run get business, they are operationally efficient, they have a great culture of people and engagement. We are very lucky because 85% of WestJetters are owners in the company, they act like owners and we're going to elaborate all of those strengths that we have our people and our low-cost business model and we will be ready for whoever wants to come and take us on. That’s the nature of the businesses.

Operator

The next question is from Frederic Tomesco of Bloomberg News. Please go ahead.

Frederic Tomesco - Bloomberg News

Just a couple of quick questions on the 767, you have an idea at this point of what the refurbishment cost might be and that's may you can share with us?

Vito Culmone

The aircraft as we've been taken from Boeing that's all inclusive in what we’ve negotiated with Boeing and for the time being we are not prepared to disclose any of the financial details in regard to this aircraft. Other than this say that we are very happy these are more mature aircrafts and our cost profile from a cost ownership perspective will be very competitive in the marketplace.

Frederic Tomesco - Bloomberg News

Are you concerned that this is going to drive up operating costs given the age of these aircrafts which is literally higher than the current fleet that you have?

Vito Culmone

Well, clearly older aircraft there are associated costs with it from our reliability. These aircrafts actually as are currently been operating have a high degree of reliability. So just like everything else average age of fleet, it's -- our maintenance team and our operations team are clearly focused on that objective as its strategic objective for us to be able to continue to operate aging aircraft as we move forward in a cost effective manner.

Gregg Saretsky

And these aircrafts will be competing against similarly aged aircraft at our other competitors. So we are not competitive stance from that perspective.

Frederic Tomesco - Bloomberg News

Fair enough. And then as you look at 2016 is there scope to add wide bodies beyond the four or will that be a true your oneness if 2016 is deemed to be year one?

Vito Culmone

We've been sure that while we're resourcing these aircrafts there is a pipeline of additional units and we're exploring opportunities to bring in additional units if that makes sense and contribute to our ROIC charges.

Frederic Tomesco - Bloomberg News

Do you have that flexibility built-in?

Vito Culmone

We do.

Operator

There are no more questions at this time. I will now turn the call back over to Mr. Harley.

Hugh Harley

Okay. 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 second quarter earnings release we issued earlier 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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