WestJet Airlines' (WJAFF) CEO Gregg Saretsky on Q2 2016 Results - Earnings Call Transcript

| About: WestJet Airlines (WJAFF)

WestJet Airlines Ltd. (OTC:WJAFF) Q2 2016 Earnings Conference Call July 26, 2016 11:00 AM ET

Executives

Hugh Harley - IR

Gregg Saretsky - CEO

Harry Taylor - CFO

Bob Cummings - EVP Commercial

Cam Kenyon - EVP Operations

Ferio Pugliese - EVP WestJet & President of WestJet Encore

Analysts

Hunter Keay - Wolfe Research

Doug Taylor - Canaccord Genuity

Walter Spracklin - RBC Capital Markets

Konark Gupta - Macquarie

Cameron Doerksen - National Bank Financial

Kevin Chiang - CIBC World Markets

Turan Quettawala - Scotia Capital

Tim James - TD Securities

Chris Murray - AltaCorp Capital

Fadi Chamoun - BMO Capital Markets

Helane Becker - Cowen & Company

Ben Cherniavsky - Raymond James

David Tyerman - Cormark Securities Inc

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to WestJet’s 2016 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. [Operator Instructions]

As 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. Harry Taylor, Executive Vice President, Finance and Chief Financial Officer; Mr. Bob Cummings, Executive Vice President, Commercial; 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, Joe and good morning, everyone. Welcome to WestJet’s 2016 second quarter financial results conference call. I would like to provide you with an outline of today’s call. Gregg and Harry will provide some opening remarks which will be approximately 10 to 12 minutes. Following this, we will take questions from analyst and then we will conclude the call with the questions from the media.

When we are at the question-and-answer portion of the call. I would like to request that you limit yourself to one question and one follow-up. That should allow us to get as many questioners as possible in the hour we have allocated for this call.

Before turning the call over to Gregg, I would like to read the customary cautionary language. We caution you that today’s conference call will contain forward-looking statements about WestJet’s future financial and operational performance, including statements with respect to our outlook for the 2016 third quarter and full year. This information is based on certain assumptions and reflects WestJet’s expectations as of July 26, 2016 and accordingly are subject to change after such date.

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

Furthermore, certain non-GAAP measures and additional GAAP measures may be discussed or referred to on today’s conference call. Please refer to the section entitled Reconciliation of Non-GAAP and additional GAAP Measures in WestJet’s MD&A or financial results for the three months and six months ended June 30, 2016 for further information.

Now, I will pass the call over to Gregg.

Gregg Saretsky

Thanks, Hugh. Good morning, everyone and thank you for joining us. Today, we reported our 45th consecutive quarter of profitability with second quarter net earnings of $36.7 million and earnings per diluted share $0.30. We reported a return on invested capital of 11.4% for the 12 months ended June 30, 2016, which aligns with our expectations of achieving a long-term targeted range of 13% to 16%. Despite the continuing economic weakness in Alberta and Saskatchewan, I am very pleased with the positive momentum we are seeing in our business including strengthening topline revenue growth, record second quarter revenues and a record number of guest carried for second quarter. Our fundamentals remain strong and we are confident that the strategic initiatives we are pursuing position us for continued profitable growth.

As we indicated on our previous calls, we responded to the softening in the Western Canadian economy by making adjustments to our schedules and being fluid with our capacity plans, while committing that further reviews of planned growth would be under taken as necessary as we move through the year.

In terms of full year 2016, system-wide capacity, we still expect to grow between 7% and 9% year-over-year. As we stated before it's important to highlight again that of the system capacity growth in 2016, approximately 6 percentage points or three quarters of our growth using the midpoint of our range will be from our new 767 service. Excluding our 767 service our system-wide capacity growth in 2016 would be between 1% and 3% year-over-year.

For the third quarter of 2016, we anticipate topline revenue growth and continued strong traffic growth with year-over-year declines in RASM of 1% to 3%. A significant sequential improvement from our second quarter year-over-year RASM declines and much better than the trough at negative 11% and year-over-year RASM decline which we experience in the first quarter 2016.

WestJet Encore hit a milestone in the second quarter as it turned three years old. Today WestJet Encore has 30 Bombardier Q400 aircrafts deployed with 192 daily departures, serving 34 destinations. It started trans-border routes this year with service between Toronto and Boston, Halifax and Boston and last month we started service between Toronto and Nashville.

Turning to our wide-body operations, we began our trans-Atlantic service to London, Gatwick in May from five Canadian cities and though we had some early teething pains with the introduction of these aircraft, I am pleased to report that for July, up to yesterday, we are running at a completion rate of 100% with no third party support, while reliability as measured by completion rate is running at 97.6% since the very start of our program on May the 6th. Additionally we are extremely pleased with the guest response to our new London Gatwick services. Load factors are well ahead of system averages, the UK point of sales is very strong and Sixth Freedom traffic flows are exceeding expectations by a wide margin, which bodes well for future potential expansion of this new line of business.

We continue to advance our airline partnerships strategy in the second quarter, announcing a reciprocal frequent flier agreement with Qantas Airways, which allows members of the airlines respective frequent flier programs to earn and redeem their choice of either WestJet dollars or Qantas Points when travelling on flights of either airlines.

Overall our partnership revenues continue to grow and our virtual network including partnerships now allows our guests to access over 160 destinations via WestJet. Our products and services continue to resonate with our frequent fliers as evidenced by the strong growth in our rewards program, good traction with managed corporate business accounts and the number of guest to hold our WestJet RBS MarsterCard.

Specifically in terms of second quarter year-over-year growth, our active rewards members were up approximately 19%, our managed corporate business guests were up over 10% and our credit card holders, were up by approximately 40%. All of these positive trends create a great foundation for future revenue growth and helps cementing loyalty, well growing our ancillary revenues streams.

To wrap up my opening remarks, I would like to reiterate that the fundamentals of our business remains strong, despite continuing economic weakness in Alberta and Saskatchewan. Our recent successful completion of a U.S. $400 million investment grade, unsecured notes offering, speaks to the underlying quality of our proven business model. My thanks go to our almost 12,000 WestJetters for their continued energy and efforts in delivering our award winning brand of friendly, caring service to our guest.

I would also like to personally thank, all WestJetters, who came together to support the residents of Fort McMurray during the wildfire evacuations. We were honored to play an important role when the people Fort McMurray needed a hand. And we’re committed to assisting with the rebuilding their community.

Before turning the call over to Harry, I would like to check this opportunity to also personally thank Ferio Pugliese, for his leadership and invaluable contribution over his nine years at WestJet. We’ll miss him and wish him the best, in his new role as EVP Customer Care and Corporate Affairs at HydroOne.

And with that I would like to turn the call over to Harry.

Harry Taylor

Thank you Gregg, good morning everyone and thanks again for joining us today. As Gregg noted, this morning, we reported net earnings of $36.7 million or $0.30 per fully diluted share for the quarter, representing our 45th consecutive profitable quarter. We welcomed than 5.3 million guests onboard our aircraft in the three months ended June 30, 2016, a second quarter record. Our traffic in the second quarter increased by 10.6%, as we increased system capacity by 6.9% compared to the same period in 2015. This resulted in a second quarter load factor of 80.8%, up 2.7 percentage points from 2015. This increase in load factor, combined with 8.9% decrease in our yield, resulted in an overall decline in RASM of 5.8% year-over-year and a 0.8% increase in total revenue, this is our first quarterly year over year increase in top line revenue, since the third quarter of last year.

We continue to be pleased with the growth in our ancillary revenue stream. In the second quarter, ancillary revenue increased by 14.9% year-over-year to $95.2 million, amounting to $18.18 per guest, our highest ever. These increases are mainly attributable to first checked bag fees, including the new international fee, introduced in the first quarter of 2016 and our plus upgrade fees.

Turning to expenses, our total CASM for the second quarter was 1.3% lower year-over-year while CASM excluding fuel and employee profit share was 7% higher year-over-year at 9.93 cents. This increase in CASM, excluding fuel and employee profit share was due mainly to increases in depreciation and amortization expense, maintenance expense and operating expenses.

Fuel remains a significant cost at about 21% of our operating cost in the second quarter. In the second quarter of 2016, fuel cost per liter decreased by 23.2 % year-over-year to $0.53. Average jet fuel prices were U.S. $57 per barrel versus U.S. $76 per barrel in the second quarter of 2015, a decrease of approximately 25%. The benefit from the lower market price of U.S. dollar jet fuel on a year-over-year basis was partially offset by the weaker Canadian dollar.

Our balance sheet remains strong we ended the first quarter of 2016 with a cash and cash equivalents balance of $1.7 billion, representing 43% of our trailing 12 months revenue. On May 2nd Moody's assigned us an investment grade Baa2 senior unsecured issuer rating and a Baa2 senior unsecured notes rating with a stable outlook. As, Gregg mentioned during the quarter we successfully issues U.S. $400 million, 3.5% senior unsecured notes.

In the quarter, we took delivery of one three Bombardier Q400 aircraft and one Boeing 767. In addition we returned one leased 737. We continue to build our fleet of unencumbered aircraft ending the second quarter with 38 unencumbered aircraft, up from 14 at June 30, 2015. Our credit and liquidity metrics remains strong. As of June 30, 2016, our adjusted debt to equity ratio was 1.67, up from 1.27 at the end of 2015. And our adjusted net debt was $1.6 billion, up from $1.3 billion at December 31, 2015.

Our trailing 12 month EBITDAR was $937 million, resulting in an adjusted net debt to EBITDA ratio of 1.72, up from 1.29 at December 31, 2015. We’re pleased to announce that our 2016 third quarter dividend will be $0.14 per common voting and variable voting share, to be paid out on September 30, 2016. Our current dividend puts our payout ratio at 24% based on trailing 12 months adjusted net earnings per fully diluted share, up $2.34.

Our 2015 normal course issuer bid expired on May 12, 2016. Under this bid we repurchased and cancelled 5.3 million shares out of the authorized 6 million shares. On May 16, 2016 we launched a new normal course issuer bid to purchase up to 4 million shares. In the second quarter, we purchased and cancelled 1.1 million shares under this new bid for a total consideration of $24.9 million.

In closing I would like to cover some outlook items before handing over the call back to Gregg. For the third quarter of 2016, we expect system-wide capacity to be up between 9% and 10% year-over-year, primarily as a result of our new wide body service to London, Gatwick. We expect our domestic capacity to be flat to up 1% year-over-year in the third quarter.

In terms of the full year 2016 as Gregg indicated, we continue to anticipate system-wide capacity growth between 7% and 9% year-over-year and domestic capacity growth between 1.5% and 2.5% year-over-year. We expect CASM excluding fuel and employee profit share for the third quarter of 2016 to be up 1% to 1.5% year-over-year. For the full year 2016, we now expect CASM excluding fuel and employee profit share to up 2.5% to 3.5% year-over-year. This compares with our previous full year 2016 guidance about 0.5% to 2.5% year-over-year, with the difference primarily driven by higher guest experience cost related to London Gatwick irregular operations and timing of wide-body maintenance expenses which have been pull forward into the fourth quarter of 2016, partially offset by improve forecast Canadian dollar to U.S. dollar foreign exchange rates.

We continue to make progress on a number of cost reduction initiatives including optimizing our fleet maintenance plan based on global fleet best practices, pursuing fleet densification opportunities, renegotiating contracts with various vendors, and reducing non-essential costs.

As Gregg stated the fundamentals of our business remains strong and the strategic initiatives we are undertaking give us confidence in our ability to generate profitable growth. We are particularly proud of the following. Our investment-grade business model which enabled us to tap the U.S. market for a successful unsecured investment-grade note offering of $400 million. Our strong balance sheet with $1.7 billion of cash and cash equivalents, our young fleet with an average of 7.1 years, our growing number of unencumbered aircraft and our flexible plan for fleet growth, the continued successful expansion of WestJet Encore, our new wide-body initiatives and of course our award winning culture and unique brand of friendly, caring service.

In closing, I also want to thank all WestJetters for their commitment, hard work and terrific service to our guest in the past quarter.

With that I’ll hand it back to Gregg.

Gregg Saretsky

Thank you, Harry. Joe, we are ready for the Q&A portion.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will begin the analyst’s question-and-answer session. [Operator Instruction] Our first question today is from Hunter Keay with Wolfe Research. Please go ahead.

Hunter Keay

I apologies I miss the first 10 minutes of your prepared remarks, I was on this JetBlue call which went long, so I hope I am not asking something you already said, but of the 150 bids of incremental CASM how much of that is timing from the maintenance events and how much of that related to the fixed stuff and your regular ops?

Gregg Saretsky

Hunter, we had -- we’re not going to disclose this split between the two, but that’s the primary drivers of the change in the guidance.

Hunter Keay

Okay and then did I see in your MD&A that you accessed export financing for these Q4 purchases, is that true and if that’s true, how did you do that?

Gregg Saretsky

We have an agreement with the export development corporation of Canada to finance up to 80% of the purchase price of our Q400s to a maximum of $820 million and we routinely tap that line of financing for our Q400.

Hunter Keay

Okay, cool and then I guess may be to that just as a follow up, is this sort of a unique cargo, I mean that exists, that’s special for WestJet? Is it something that you expect to have an indefinite future or is this something that you’re afraid will go away at some point, I mean, I’ve never even heard of this before?

Gregg Saretsky

Well it does expire with the end of 2018, and we will have built out of our fleets by the end of 2018, it does have a cap of $820 million.

Harry Taylor

And Hunter EDC financing is available to pretty much any operator who is taking delivery of the Q400 aircrafts, including other Canadian operators.

Operator

Next question is from Doug Taylor with Canaccord Genuity. Please go ahead. Mr. Taylor, you’re on.

Doug Taylor

RASM continues to surprise positively here, I know the UK operation and the high load factors is one aspect, but can you comment of the trends specifically in the domestic and trans-broader markets?

Bob Cummings

It’s Bob here, we’ve a lot of positive drivers that we see continue into this the future, internally we have over the last six months or so adjusted our ramps strategy a little bit and adjusted our differentials between peek and off peak and that seems to be having the desired effect. Market, as well our capacity management both Harry and Gregg went through our capacity management for our non-Gatwick week system, our franchise being very responsible and certainly that is showing in the result.

Besides that we continue to improve our schedule, domestically and and I'll note Atlantic hand in particular that’s been helpful for us in the business market, we’re up over double digit growth revenue wise for corporate accounts even with the Alberta dip, our plus revenues are up 16% year over year, our ancillaries and the foundation we built there and adding first bag international, our credit card program, plus upgrades, our pre purchase, [indiscernible] is it getting some nice traction. WIBI [ph] is up nicely with respect to volumes, volumes are up double digit patterns, package prices are up nicely year-over-year. We’ve had some charter growth.

So a lot and lot of positive things happening and they should continue into the future, were we do have some challenges into some pockets of industry capacity

Ferio Pugliese

And Doug, Ferio here on the Encore side. If I can just add some color to that, because a lot of the domestic capacity is coming from Encore, we’re seeing some real nice growth in some of these markets, where we’ve gone in with schedule and enhancements and improvements and still seeing very good stimulation in those markets. Some cases as high as 120%, so these things are continuing to materialize as we grow that part of the business.

Doug Taylor

That’s very helpful, I guess that leads me to my next question. Last quarter, you were able to provide the expected sequential improvement in the RASM trends in the Q3, which surprised positively. I wonder if you’ll offer the same outlook into Q4 from where you stand right now.

Gregg Saretsky

As I said we have a lots of positive trends going -- it’s Bob, had a lot of positive trends going into Q4 and that's combined with some challenges we’ll have as I said into some industry growth. Of course Alberta will be a drag [ph] into the foreseeable future. It's too early for us to make a call at this point.

Doug Taylor

Okay, last question from me, I guess the cost question, the previous call asked a different way. I mean the irregular guest experience you flag is one of the key reasons for the increased CASM. I mean given Q2 CASM the launch quarter for the Gatwick service was at the low end of your CASM guidance range and I guess what I’m getting at is, is there a portion of these costs that are just structurally higher than you had expected at the outset or is this the increase guidance for CASM related to cost that should fall in Q3 and Q4 and then will be cleared up by that point? Thanks I’ll pass the line.

Harry Taylor

Alright, this is its Harry. We were actually at the top end of our guidance for Q2, 6.5% to 7%. These were coming into Q3, unforecast and we think we will have -- obviously we want to do everything we can to reduce those and as we work on improving reliability we’ll have less of them, but we wanted to make sure we will conservative forecast in it for our look, so there were no surprises on the down side to cost.

Operator

The next question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.

Walter Spracklin

Just coming back on your Gatwick, you mentioned Gregg some teething pains and certainly higher costs associated with that, tied in with that was the approach to go with the older jet and obviously some of the issues you had with the maintenance on that side, so if you are looking at the those teething pains with regards to this aircraft and some of the difficulties you had on the actual Gatwick service and presumably Gatwick was, of all the potential market out there, was the best one that you are looking at. Is it causing you to review at all your international strategy and can you talk to us about profitability on that route, is it profitable now or if it's not what your line of sight is on the profitability of that route?

Gregg Saretsky

Yes, thanks Walter. Let me make some general comments, then I’ll turn it over to Cam to talk about aircraft reliability. The guidance we gave when we announce the service with wide-body at London was that we expected the operation to be accretive to earnings that continues to be our expectation. We've been very presently surprised by the very robust demand we've seen operating at very high load factors and I commented that with the Sixth Freedom traffic which has far exceed to the expectation that we had for Sixth Freedom. All of this bodes well for future expansion of the wide-body operation, not the reverse.

Teething pains are teething pains every time we have a new fleet type enter into an operation, we have the same issues with the Q400 you might recall couple of years ago. And the 767s are operated reliably in their global fleets. There are a lots of different elements that fly them, so it's not an aged aircraft issue. I would say we had some maintenance issues on those aircrafts as they came out of the MRO facility that Boeing was managing for us and they were pressed into service because they were late coming out of the MRO, they were pressed into service before and out of that shake down period and those teething pains that are behind us.

All of that said our completion rate on the 767 since its first flight on May 6th took for London is running at 97.6%, which is about one point behind our 737 fleet. So a long way away from being horrible, but of course some of those early day operations is where the pain was felt and maybe Cam, you can just give us a quick update on that.

Cam Kenyon

Sure thank you Gregg. Good morning Walter, this is Cam. Just wanted to echo Gregg's comments reliability has obviously been our primary challenge. And we have taken multiple steps to address the reliability. We are actually very cautiously optimistic that we have turned the corner and are now seeing reliability that I think we reasonably expected when we started service to London, Gatwick. I would like to take this opportunity to thank our Tech Ops team, our flight crews and our operations control center, team members who’ve been working very hard to service our guest.

Gregg mentioned that we did take delivery of this aircrafts late from the maintenance facility that did the overhaul work. Most of the airplanes were about 55 days behind the originally planned schedule which reduced the time that is normally planned for in a shakeout period which is not uncommon for an aircraft to go through after major maintenance. So I think we are really seeing the reliability that we expected at the beginning, we’re trending in a positive direction and we are confidence that the primary reliability issues that we saw have been addressed or have been significantly mitigated and we look forward to the fleets continued improved reliability.

Walter Spracklin

Okay, no that’s great color, appreciate that. Second question here I guess is on your outlook, I guess Harry, this is probably for you, but there is still a pretty largest swing in your outlook from the second quarter incurred to your guidance for next quarter, particularly when CASM and implied yield, and you’ve talked a little bit about CASM already I guess, but just you going from 7% -- up 7% to only up 1%-1.5%. And just looking on our model, is there anything that we really -- is that maintenance expense really going to drop down now that the completion rates are improved. And likewise on yield, the implied yield here goes from anywhere around 9% in a quarter to depending on your assumptions on the other parts, but down only 2% and I know it bothers that's -- you said more disciplined, is that just an expectation for more or -- less sever pricing discounts in the third quarter?

Harry Taylor

I am taking that question. One factor that’s under the covers a little bit here is, there is pockets down into trans-border, Las Vegas, Florida, California whether there is affirmative industry capacity and as capacity swings from quarter-to-quarter and we have more domestic capacity in the summer, where have we divested in our system, where have we invested in business growth. Just a percentage of ASMs and the strength we are getting from those network investments and our domestic growth in general and moving traffic around across that country according to what's happening economically, those percentage swing the yield. So what I am saying at a high level is, lot of pressure in the pockets in trans-border and as we move capacity backup into domestic where we’re particularly strong and we have a particularly strong trend, that’s impacting the math. There is other factors, but that’s a fairly big one.

Walter Spracklin

So a pretty big mix affected essentially?

Harry Taylor

Yes.

Walter Spracklin

Okay. That makes sense.

Harry Taylor

And Walter, Harry here. On the CASM side, we are entering a more comparable, if you will, second half. Like we said at the top, we’ve aim -- we’ve got the full 767 flying in Q3 and Q4, which are adding a lot of ASMs relative to, what they add in the first half of the year. So that’s part of which bringing CASM down.

In addition, we’re not into overlap of a more comparable Canadian dollar, U.S. dollar exchange rate, which impacts our operating leases, our maintenance fair cost, our written fees et cetera. So it’s more comparable, we know that was, as you know driving a lot of the cost inflation in the first half, we’re also through most of the discount rate change on the maintenance provisions, increased maintenance events on credits as we extended a lease last year, so it’s a more normal comparison on year-on-year basis. Depreciation, amortization will remain high as we have a bigger fleet that we own, but that are the two biggest drives, the ASMs and changes in maintenance from first half to second half that changes CASM outline.

Operator

The next question is from Konark Gupta with Macquarie. Please go ahead.

Konark Gupta

Just have a follow up question on the cost side, so I understand that there is some issues on the London routes that will impact the cost, but which line items should we be looking at in terms of the most impact from those guest experience cost? And also have you baked in any cost reduction on the navigation side after NAF Canada announced the rate reduction from September I guess?

Harry Taylor

Konark it’s Harry, the guest experience size get pretty well in the other, that way you see it. Maintenance is obviously in maintenance, so the pull forward of the wide-body maintenance in the Q4 will be on the maintenance line. Have we baked in based on our estimates, yes, we have been baked in the changes to the NAF Canada fees, some temporary, some permanent. So that’s included in our forecast and our guidance.

Konark Gupta

Thanks Harry and a follow up Harry on the interest expense, I saw the capitalize life interest went up slightly, which make sense, given the new debt. But I think it probably could go higher, right, as the debt probably closed in June. So what a good run rate number for the capital life interest [ph] for the next few quarters?

Harry Taylor

We don’t issue specific line item guidance, so just stay tuned.

Konark Gupta

But do you directionally expect it to go up?

Harry Taylor

A little bit, yes.

Operator

The next question comes from Cameron Doerksen with National Bank Financial. Please go ahead.

Cameron Doerksen

I guess my first question just on the fleet. If you look ahead to 2017, you got six narrow body leases that you can return. Have you made any decisions on those aircraft and I guess also on the fleet. If you do decide to expand on the international routes, are there more 767s available and are those something that you’re looking to -- is that the route you would go, is to add more aircraft in that fleet type?

Gregg Saretsky

Yes Cam we’ll give full 2017 guidance on our next quarterly call, as we historically do at Q3, so not going to guide on 2017 capacity today. We do have six lease returns as you pointed out. We’ve made no firm decisions on that yet and with respect to the expansion of the wide-body fleet, we like the early day returns that we’re seeing, it give us a lot of encouragement about doing more of that. But at this point we have no additional wide bodies that we had sourced and we have private negotiation with relatives of those wide-bodies that we have to undertake before that -- these can expand. So there is couple of pieces we have work in progress there.

Cameron Doerksen

Okay. The second question you’ve had -- you gave this unsecured debt and given there has also been some changes in aircraft financing and the various rate. I'm just wondering if you can give us or know what your blended interest rate is right now and what do you think the opportunities are to lower that even further?

Gregg Saretsky

I can't disclose -- can't tell you top of my head about blended interest rate. But opportunities to lower it, we took advantage of the let's say the bond market to go in at what we think were very attractive rates, 3.5% on the U.S. notes, we swapped it back to Canadian dollars, so that we didn’t have the exposure to U.S. dollars which is below many other rates. So that's one of the reasons that we were interested in it.

In terms of the outlook for rates and what we’ll do, we don’t have any need for more financing for a good 18 months, but we’ll remain opportunistic, if -- as we get closer and see the need, see a market opening we’ll try to keep our financing rates as low as we possibly can. We’re always looking for lowest cost source of financing to fund our capital expenditures.

Harry Taylor

And Cam, obviously, the other piece I would add is, being an investment grade credit gives us access to very favorable rates. In fact the most amongst Canadian airlines and so I think that's all to say, we expect rates that continue to be low.

Operator

The next question comes from Kevin Chiang with CIBC World Markets. Please go ahead.

Kevin Chiang

Maybe just first question, just on the corporate traveler markets, sound like demand is strong with the growth in your plus segment and some of the corporate account growth you've noted. But when we look at the yields, some of the U.S. airlines have commented on the weakness for close-in fares purchased by these higher yielding business travelers. Just wondering what you are seeing on this front, are these close-in fairs holding in for WestJet or maybe its difference just given some of the growth initiatives you have?

Bob Cummings

It's Bob here. Kevin I would say we’re already based outside of Alberta with respect to corporate penetration. So with respect to our shares, I'll say outside of Alberta for corporate growth and penetrating that market and tools that we’ve employed to do that scheduled frequent flier program, plus and so forth. We are seeing a lot of traction. The year-over-year yields are down, if you segment out that piece of business, whereas volumes are significantly up, with our cost structure though we are receiving really nice top line profitability. We did a quasi P&L on what that looks like and projecting it forward. So the WestJet approach, essentially a penetrations approach, high value pricing and driving up throughout the volume. We’re now seeing our -- we have the schedule and the overall value preposition particularly outside of Alberta to drive that.

Alberta year-over-year we’re now comping low oil prices, so with respect to close-in booking and with that looks like, it's less dramatic on a year-over-year basis in Alberta. [Multiple Speakers]

Harry Taylor

On the macro basis we are seeing weakness in close-in fares, but what WestJet is experiencing is actually a gain in share and so our absolute mix is improving, and so net-net it's a good thing for us.

Kevin Chiang

Right, that’s very helpful. And maybe just turning to Encore, I think some of the comments you made in past call recall as you stimulate demand of introductorily rates and I am just wondering is the anniversary of some of these news routes put in place back in 2015, what kind of yield improvements have you seen as these routes mature and you stimulate demand over 100% on some of these new markets? Are you seeing a meaningful yield improvement at this time or maybe the economic environments is not allowing that to happen at this juncture?

Ferio Pugliese

Yes, I think I’ll leave Bob's comments on this on yield. So what we are seeing with respect to growth in those markets Kevin, it's very healthy and it's tracking against plan. When we launched Encore, we broke the flying down into three primary segments, which was optimization, flying standalone and network feed. And so part of it is as you remember it was freeing up 37 [ph] capacity, deploying the trans-comm, the internationally picked some of that up with more economical flying with the Q400 on these short haul flights.

And then when we actually launched into some of the new markets, the Nanaimo, the Brandon, the Terrace. We've seen growth in those markets as high as 400% to as low as 10% in some of the markets that obviously had a higher degree of competition of service. So that combined with now as the fleet starts to scale up and we get more capacity coming in and it's giving us more flexibility to refine this schedule, and by refining the schedule then we’re picking up on both at leisure and that business segment.

And in addition we are continuing to see some good network fee out of that, we’re roughly 40% to 50% of those stepping on a Q400 or getting off in the hubs and getting off and getting on to 737. So we have really like the way this business is shaping up and hence the reason for the confidence for us to go forward with the additional nine Q400s which allows us to scale up to be 45 as planned.

Bob Cummings

Just to elaborate a little bit on the yield question, it's Bob here. 30 planes in now and lot of data to look at and as Ferio said, the mix between leisure and business, and where we put more frequency in, we kind of trade in number of markets that seem to work well for the business traveler and as well in terms of the routes and finding the right time and so forth. We are increasing the business mix and with that we talked about close-in bookings a few minutes ago, we are actually seeing an increase in close-in booking in Encore Overall and that’s primarily because of the growing schedule utility and mix is very favorable in terms of who’s driving yield the right for us.

Kevin Chiang

That’s helpful thank you very much.

Operator

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

Turan Quettawala

Maybe I would touch upon new lease the launch here, can you talk a little bit about whether you think it will have material impact here over the next year or two, in terms of the results? And we going into a sort of an extended period tough yields here?

Bob Cummings

Bob here, with the number of aircraft it’s -- the math isn’t that significant when you look at the pricing to be competitive and the level of stimulation that does occur. Brand wise as well, I will note that in Western Canada in particular we are quite strong besides our network strength and other attributes that are enabling us to compete.

But if you do the sure math on ASMs and the potential impact and what that looks like, it’s not that big at this point, but certainly we’re keeping an eye on it.

Harry Taylor

Yes our forward guidance, which is greatly improved contemplates all of the market dynamics, which we’re now facing. I will remind you Turan as you know Canada is a very sparsely populated country and this space that new lease is competing in is a boneyard. Just go back and thing about JetsGo and Greyhound Air and Routes Air, none of them made it and it’s a difficult space and we’re going to continue to protect our franchise.

Turan Quettawala

Not, but I guess, it can cause some pain in the meantime right. I guess the next question I wanted to ask was a little bit on the 767 and as you move them towards the Hawaii market, I guess in the winter, is there any risk may be, in terms of the complex of the operation or something because obviously you been having some problems with the 767, so should we be comfortable that there should be no issues there, once you move them over?

Harry Taylor

Well we flew them last year in the Hawaiian market from Western Canada and had a great winter so, that the utilization on that fleet type also drops because the stage length goes from a ten hour stages length to a six and half hour stage length and so that gives us more maintenance touch line. So no, you should rest very comfortably that these planes will operate reliably as they did during our first season.

Turan Quettawala

Perfect, that’s great thank you. And may be just one last one if I could sneak one in the, in terms of Encore, Gregg it looks like you’ve got a good trading ground here for executive going to more utility like business, I’m sure it’s the stability of airline business right? That’s helping?

Gregg Saretsky

No comments Turan.

Turan Quettawala

I guess, do you have any replacement thought, may be that you can share with us Gregg?

Gregg Saretsky

Well, Cam is stepping into the void as Ferio transitions out of here in the middle of August. The Encore leadership team will report to Cam and we have a search underway, an executive search to find Ferio’s successor. It’s a very attracted piece of business, I think, we’ll be able to attract some good talent into it.

Operator

The next question comes from Tim James with TD Securities. Please go ahead.

Tim James

Just want to return to the 767 operations for a minute, try and understand again the nature of the, the cost on the increase cost guidance for this year. May be a way of looking, at your asking a question is how your long term view of the cost of operating new 767 into the Gatwick market, has that changed, should we take this sort of slight uptick in cost times for this year and kind of be thinking that carries forward or is this kind of a one year event?

Harry Taylor

Tim its Harry, we’re thinking of this as a transitory issue and we haven’t changed our point of view in what we think to medium-long term across profile is of this aircraft.

Gregg Saretsky

Maybe just to give some color Tim on that, the 767 hick-ups that we had on early days, were very costly. Because there is AU legislation that required us to pay EUR600 per interrupted guest, these things are very full, so every time there is a hick-up in this 260 people will having to pay EUR600 to and doesn’t take long in a quarter to rack up a significant bill and that’s what you’re seeing reflected on the P&L for Q2. Now that said, we’re happy that in the first 25 days of July we’ve had a 100% completion factor and so that should give everybody confidence that it’s not a run rate thing, it was a blip and the blip is behind us, knock on wood.

Tim James

Okay great thank you. And then just staying with kind of the Gatwick theme here, you’ve mentioned load factors very-very strong, I think above your expectation. Can we talk about demand in more general on the London Gatwick services, has it been tracking in line above and below your expectation, I'm thinking in terms of revenue here, not just kind of thinking traffic or pricing but revenue overall?

Bob Cummings

It's Bob here. As we contemplated wide-body and started to narrow in were initially we wanted to launch wide-body outside of our franchise, we quickly look to Gatwick and Alberta, the historical demand has the profitability numbers and looked at that and we were very in the end of that market and what kind of returns it was throwing off, particularly with the fuel environment. And we have not been disappointed on that the commercial side, we are very happy from a commercial perspective. I will just emphasize some of the points that Gregg made.

The demand channels on the UK side, some of that would have been the exchange rate early, but the Sixth Freedom they've exceeded expectations outside in Canada our network and brand for a strong Canadian point of sale that have certainly delivered and the overall traffic on the route and the of yields that we're seeing and as well as will see in the future in particular in the peak months the revenue per guest I will say is above breakeven numbers and I will even say well above breakeven numbers and the shoulders are healthy as well.

So with our model and with our ancillary model and everything going forward from both a macro perspective and then our first year results and some of the less in fact we’ll be of the apply going forward with respect to both booking curves and channels and so forth. We feel very bullish about Gatwick in particular.

Gregg Saretsky

Tim I would add that as there always been the case WestJet approached our entry into Gatwick very conservatively, we actually signaled to the market perhaps our folly in retrospect that this was an experiment. And so it allowed people to try and move capacity against us to make sure the experiment failed and we saw that in spades, we saw every one of our Canadian competitors add capacity I the market against us, we saw our British competitor updated to A-830 and not withstanding all of that we're operating well above their system average load factor in this market and are very pleased with this 30 days results that we’re seeing.

Tim James

Okay, I was trying to get a sense for as the great load factors that better than expected load factors were driven by demand and customer take up that was strong or whether you had to price a little more aggressively than maybe expected in order to get those great load factors. But if I'm hearing you correctly that that's not necessarily the case. The revenue from this business has been at least in line with what you've been thinking coming into the season?

Gregg Saretsky

Yes it really characterize it.

Tim James

Okay, and just my last question the full time equivalent employees up 6.6% on a per RASM basis in the quarter similar to the capacity growth I guess there is additional employees may be coming in due to the London services. But my question is does and if so when employee growth on a per RASM basis. When does that start to drop down or when does the growth in employees slow to a level where it's growing below capacity growth?

Harry Taylor

Tim, its Harry. The biggest driver of FTE growth as you call it is Encore, as we’re building that business and it's growing, we’re adding and these are frontline people, not G&A adds. So flight crew, in-flight Tech Ops et cetera, to support a business that is growing at a quite high rate. So once that business matures and is built out then we will start to see that significant increase in FTEs.

Gregg Saretsky

Yes, I remember this and interesting map there because of WestJet's stage length only being the addition of staff is operating staff and so its formula, every airplane that arrives has five crews have catch attached to it and there is two flight attendants and two pilots, and they’re flying shorter state length. So our FTE per ASM actually goes up for that very reason.

I’ll tell you that our back office functions are undergoing a bit of a trimming, we’ve reduced our overhead expense in all of the fixed areas that support the organization and so it's a bit of -- it's bad math to look at it on a per ASM basis, it might be more interesting to look at per departure basis. Generally we don’t -- we are not adding ASM -- I am sorry, we are not adding FTEs faster than we’re growing the operations, but there is one-to-one relationship there.

And just [indiscernible], so you know on the Encore side, Encore is operating purely as an operating arm. We have been leveraging shared services through this model with WestJet, so support on the marketing, network planning, all of the other staff functions, we’re not duplicating those within the Encore. So when you see some of that FTE rises to Harry’s point, there are pure direct FTEs to support the fleet growth.

Harry Taylor

And that’s the growth of FTE for Q2, we were as on a per -- even with all of that on a per ASM bases, we were down slightly. So the combination of what we are doing and the in-directs is blunting the -- what's going in direction of per ASM basis.

Tim James

Okay so it's the on core operation that is biasing that FTE per ASM higher and when the built out of Encore is more or less complete, that number should -- that growth rate should decline if not turn negative I assume?

Harry Taylor

That’s correct.

Tim James

Okay great thank you very much.

Operator

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

Chris Murray

Just turning back on the wide-body plan, I’m just trying to understand little bit of cost profiles as we go through the back half of the year. I guess a couple of pieces to this question, the maintenance you are doing, how much of that would you characterize as catching up and getting the equipment maybe up to the specification and reliability you want. And how much of that is just regular maintenance that you said that got pulled ahead? And then can you let us know what the status would be of some of the leased reserves that you’ve been over the last little bit?

Harry Taylor

Maybe I just crack at the 767 cost profile. We referenced in our comments that we’re pulling forward the 767 maintenance. We had planned to have two aircraft go those just the regular phase checks in Q4 and the other two to following in Q1. But since peak flying season to Hawaii happens in Q1 we rather not have those aircraft out of service. So we’re going to include early the maintenance expenses associate with two additional tails at the end of this year. Which means that expense move out of Q1 next year.

So if that’s simply a timing thing and is unrelated to anything but the aircraft, it’s just -- it's a phase check and that’s done on a certain cadence, that’s the timing on that piece. We have however spent some money on capital side acquiring spare parts and rotables to be in a better position to handle some of the ageing aircraft issues that we’ve experienced to improve that reliability, but that’s not on the expense line, that’s on the CapEx.

Gregg Saretsky

Yes, and I think we’ve had a higher number of maintenance events than we had originally projected in our maintenance on the 767 fleet and we are hoping that that is through the shakeout process that will decline overtime. Because we own the 767s, there is no effect on our maintenance provision and all. Chris I think that was your second question. And as we returned a plane in the second quarter and we’ve also just returned another one, so we’re learning there are provisions are in good shape, as we returned least plans, so we haven’t changed any outlook in terms of provision other then, the discount rate, which is down a little bit.

Chris Murray

Yes sorry I think what I was trying to get at is, right now I think you’re running with at least spare from the Omni to the Gatwick route, so I’m wondering if you going to have to keep that fifth aircraft available to you just until you feel comfortable with the aircraft?

Gregg Saretsky

It flew away at the beginning of July and it’s gone and not planned to come back.

Chris Murray

And then moving on, just think you a little bit about internally, I mean is there a lot of stuff going on, but with Ferio leaving, can you guess, may be go through again, sort of what the management plan is, on who’s is going to be doing what and running Encore and also kind of keeping an eye on ops with the lot of things going on?

Gregg Saretsky

Well we’ve a very experienced team running that operation. We got very qualified VP of maintenance and a VP of flight ops and an individual who is doing a great job running in-flight services and so that while operation will continue as it has. And the interns that are reporting to Ferio, in his absence they report to Cam, who is the EVP of operation at WestJet and he’ll do double duty. But make no mistake, we have a very experienced and qualified team at WestJet Encore who will keep that operation going.

Chris Murray

Okay, right guys, and then just a last question for you, you made a mention in your, in the notes on the MD&A about further expansion and the chart of around in the Q4, any more color on what that might mean financially or to the other revenue lines?

Bob Cummings

Bob here, we did have a delay in the announcement and we do expect this area is a ramp up in the second half of 2016, so stay tuned.

Harry Taylor

[Multiple speakers] revenue that has a margin on it. So it’s a good piece of business in a relatively good Western Canadian economy.

Operator

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

Fadi Chamoun

I have a bit of a big picture question here. If I look at your net debt to EBITDAR, it has gone from about 1 time four years ago, to 1.7 times and if I look at your return on invested capital, it has gone from the mid teen-ish to sort of flow double digit and now you are targeting 13 to 16, so obviously you think that these assets are under earning. How do you get back to this range, do you need to slow the pace of the growth and allow for some of these growth initiatives whether it’s Encore or international to mature, or is just a function of, coming of this downturn that we saw, in your key market of the West?

Gregg Saretsky

Yes, I mean that the math that works, Fadi, there is an R and then there is the IC, and on the R side initiative with softness in Western Canada that is cyclical, it will come back and on the IC, we’ve been spending a fair amount of money on fleet renewal, the expansion of the Q4100 operation. Delivery payments on max aircrafts will start arriving next near, new wide-body operations. So there is amount going to that IC.

In market were, there are relatively new service, new lines of business, that we expect overtime will generate great returns and we still -- we haven’t changed our view, that the right number for WestJet is 15% to 16% growth over the cycle, it just happened to be at a low points in the western Canadian cycle.

Bob Cummings

And just piling on, Fadi, it's the short-term pressures on the ROIC, we believe the medium and long-term returns and growth are there and therefore we will achieve our targets ROIC in the medium to long-term, which developed with a view which we’ve tested and looked at and still believe over the an economic cycle we will earn 13% to 16%.

Fadi Chamoun

Okay, but on the growth side, I mean you have been growing fairly fast in the past few years Encore and more recently international. Do you need to slow that pace of growth at this point compared to what we’ve seen in order to see those assets catch up from a ROIC point of view?

Gregg Saretsky

Yes, I think we are not going to this has guide on 2017 capacity, I’ll have to wait till next quarter and we’ll give you more visibility to that. But we are only growing at 1% to 3%, if we exclude the 767 which was a bit of a unique animal. And that 1% to 3% is right in line with what's happen with GDP and the multiple that applies to travel when GDP is expanding at 1.5%. So I think we’re right in the sweet spot. We do have the down draft in the Western Canadian economy that is hitting us perhaps uniquely and although harder, we've been moving assets away from that and we do expect the Western Canadian economy to recover and we’ll be in great shape.

So, I think the long-term view our position of long-term view is that, it's all exactly where it needs to be and we have moderated capacity growth already this year and we’ll share with you our plans for 2017 next quarter.

Fadi Chamoun

Okay, thanks for your thoughts.

Operator

The next question comes from Helane Becker with Cowen & Company. Please go ahead.

Helane Becker

I think Gregg you might have said that you were seeing good point of sale in the UK for you product and I'm kind of wondering if the UK vote to leave the EU has had any effect on that.

Gregg Saretsky

No we've seen the impact as a result of the Brexit vote. To the extent that the pounds sterling has weakened, I suspect that that puts some downward pressure on UK point of sale, but that makes our model even more attractive. Because our model, we are the only LCC operating into Canada on the North Atlantic, which means that our fares are lower than all of the incumbent carriers and the way we are selling that is by adding ancillary revenue opportunities to pay-per-bag and pay-for-meals and that pays for other perks that you liked. And so I think to the extent that the Brits become more price sensitive that plays really to the strength of our model, so I expect that might actually be a plus for WestJet.

Helane Becker

And I know I should know this and I'm going to apologize, but I don’t, is this going to be year around service?

Gregg Saretsky

Yes, it is.

Helane Becker

Okay, and then my other question is, I think you said that you were enjoying some success from the trans-border, market as well I think you also said that there may be some areas like cost Las Vegas, Florida and California where there might be some weakness, but in the main are you -- I think your comment was that Encore was actually doing well. So is there a thought to maybe shift some of the markets that aren’t doing as well to Encore service rather than using the 737?

Ferio Pugliese

We have though that, we do have great potential for Encore down sales and our initial service into Boston from Halifax and Toronto are quiet happy with it and that bodes well for service along the border in the future. The comment on trans-border that I will make is that the exchange rate has moved travel patterns up to around a little bit, we are seeing a few more people go to Mexico. And as well I mentioned earlier in the call that we do have some industry capacity that’s at fairly high levels with reflect to year-over-year growth in some regions and that’s putting some downward pressure on pricing yields.

Helane Becker

Okay, and then if I could just ask one last question. I think you alluded to in the one of the press releases that there was continuing weakness in Alberta, what percent now of your capacity goes through the region or its goes to Calgary?

Bob Cummings

It's Bob here. Direct point of sales of Alberta we’re -- we’ve gone down a 1% or 2%. Depending on the quarter we’re 25 to 27 direct point of sale in Alberta and then we’re anywhere between above 40 and 45, touching Alberta. The mix has gone down a couple of percent we’re growing area as we have in the past and that moving capacity prudently two other regions that are more prosperous at this point. And, quite frankly, causing us to diversify, and longer-term that will be better for us.

Helane Becker

Right, got you. Okay, well thanks guys, thank you for the help.

Operator

The next is from Ben Cherniavsky with Raymond James. Please go ahead.

Ben Cherniavsky

Gregg you made some reference to regulation 261 and in Europe, but was going be one of my question, but to the extent that any of the IROPs resulted in flight credits. Can you just talk about how that -- like how does that impact to RASM and your -- and effectively that’s a discount on the fair in the future correct?

Gregg Saretsky

That’s correct.

Ben Cherniavsky

So how does that get -- how do you recognize that? Like that’s when they book a flight and they travel in the future than --.

Gregg Saretsky

Yes. [Multiple speakers].

Ben Cherniavsky

Sorry continue.

Gregg Saretsky

You say the guest gets a choice of taking cash, or taking future travel credit at their election. If they take cash that’s an immediate hit to our P&L, if they take that future travel credit that liability is released when the travel is booked and flown.

Ben Cherniavsky

And was there enough of that -- I mean by the sound of it there were some pretty significant travel credit issued with Gatwick and I understand that that’s come and gone, but does that have some implications going forward on recognizing the revenue and the deletion of RASM from that?

Gregg Saretsky

No only 10% of our guests are likely to take the travel credit, 90% took the cash.

Ben Cherniavsky

Okay, great. And then just with respect to the current status of any kind of agreement as you have with your pilots, if you where do you expand wide-body fleet beyond four aircraft, you need to have pilots agree to that? My understanding is the limit right now is of a fleet size of four wide-bodies.

Gregg Saretsky

Yes that’s correct. So any expansion of that wide-body fleet require a new negotiated agreement.

Ben Cherniavsky

And are you guys discussing like what would be any potential objection that pilots or anyone else are needing other WestJetters would have to expanding initiative at this point?

Gregg Saretsky

That’s a great question, we’re not sure why there would be objections, but I will tell you that there is a view among the pilots that they deals that they struck for the first four aircraft would not be reflective of what they would expect would be the deal for something that is anything other than an experiment.

So we’re in this waltz now around what might that look like, if it’s no longer an experiment than it has to continue to provide economics that make it in our best interest to expand that fleet. So if we can’t come the terms on what those economic need to look like than there will be no expansion of that fleet, it’s simple at that. And I’m hoping that we’ll get to an engagements that results in a good answer for all WestJet including our pilots.

Ben Cherniavsky

And there is been some back and forth internally that’s been well discussed and documents, is there any, like your profit share provision is down in the quarter, and year-to-date, is there any cause for concern about getting this kind of buy in from the employees on future growth initiatives and just keeping the culture strong et cetera. I mean I know you did some great things in Fort McMurray that reflect the true sort of WestJet colors but, there is another issue that I like I said has been well document, were is at sort of slandering now?

Gregg Saretsky

The profit share provision is trued up quarterly, so what you’re seeing is just a true up. We expect to have a healthy profit share distribution with our employees this year. And off course as you just said, all that contributes to the strong culture we enjoy at WestJet.

Bob Cummings

Ben it’s Bob, I’ll just comment that, we work very closely with all of our employee groups and WestJet on communicating, the investments and were we going with our strategy in business model, to have healthy business in the future and that’s -- those discussions and those relationships continue. And the understanding around business cycles and so forth. We spend a lot of time going through that with our employee, communicating that to them and going through the highs and lows, when it means to profit share and so forth.

Operator

The next question is from David Tyerman with Cormark Securities Inc. please go ahead.

David Tyerman

On Western Canada, were you seeing any change on the impact of the severe economic down turn at this point?

Bob Cummings

It’s Bob here, Western Canada is too broad of a statement, we’re actually seeing DC and Vancouver, we have a [indiscernible] franchise in the Vancouver now that is quite robust. We’re actually seeing Manitoba is quite strong as well, Gregg mentioned that Alberta and Saskatchewan were soft.

We keep debating internally whether we hit the bottom or not and can declare an upturn, we’re not ready to do that, or not. So we’re not ready to do that yet. We have probably close to a calendar year here to adapt and that’s what we’ve done from the moving capacity around and adapting to the environment here. What it does to our up taking, we’ll certainly enjoy that uptick and adapt accordingly in terms of advantage of that and the great franchise that we build in Alberta and Saskatchewan.

Gregg Saretsky

And it’s a cycle David, so we’re not doing anything silly in the short term that ruins or weakens our franchise here in Alberta. So we’re kind sucking it up and we know that this will turn, we’ve been here before in Alberta, we’ll wait for it to turn and we’ll benefit from the upswing.

David Tyerman

Is this the main reason, that you have been seeing margin compression in the last three quarters and looks like again in Q3 again?

Bob Cummings

It’s Bob here, it’s certainly if you do a factor analysis, it’s certainly been the bigger contributors particularly as you go back, it’s lessening quarter-over-quarter as we adapt and we get closer to the year-over-year comps. The industry is often, a big factor in the industry is industry capacity we are seeing our major competitor put industry capacity into specific regions which does impact pieces of our profitability as well.

David Tyerman

Can you identify what those are?

Gregg Saretsky

I mentioned that's down south into certain regions, there has been some capacity put into those regions, and you add that all up and there is a bit if it that factors in.

David Tyerman

Okay, so mainly down south and is that --?

Bob Cummings

Yes, the other factor is, you have to sure about math happening here now with the 767. If you run through the stage length through it actually has about a 1.8% drag on RASM, so if you look at that and if you factor that into some degree this is actually pretty good results that are in a pretty good trend that we are now seeing in terms of the guidance for Q3.

David Tyerman

Okay, and then just last question on London. Can you give us an idea of where you are in the development of that route? When would you expect that to be at maturity? So there is normal pricing and so on?

Gregg Saretsky

Well, we are certainly going to learn a ton from year one here with respect to the booking curves, how do you use the channels and how to optimize. So if you don’t learn quick in this industry, you are road kill. So we’ll take a lot of learning's from Q1, even from the first year here which we’re deeming successful and we’re happy with and we’ll apply those to Q2 and you’re seeing better results.

Bob Cummings

Yes, but let's be clear, we’re three months into a brand new operation, we're very happy with the results. I'm not sure there is a lot of learning's, we just carry on and carrying on.

David Tyerman

Okay, but it wouldn’t be at normal profitability wouldn’t imagine right away we wouldn’t.

Gregg Saretsky

Well not with the ROIC that we experienced, that certainly has had a dampening impact on profitability, but I would expect a normal run rate would be an operation that's operating at 98.6% reliability which would be equal to our 737 fleet and that will make a lot of extraneous cost that are creating the down draft on those economics, but certainly on the revenue side having full flights, the development of fixed rate and traffic flows and filling up our first cabin where people are paying a premium, all of those things have been early day experiences and I think we are very --.

Bob Cummings

Our ancillary model is connecting so forth, so those are all going to all improve overtime as well too.

David Tyerman

But is the pricing normal at this point, like it seems very lower when we look at pricing on your versus others.

Gregg Saretsky

While we took penetration pricing as WestJet has done in its history back through 1996. We've gone into four to five horizons for new markets and gone in with aggressive pricing and then adapted from there and benefitted from stimulations. When all is said and done, this year you will see stimulation into the wide-body market. There was some skepticism whether you could stimulate or move traffic around within the wide-body market, I think when the dust settles you are going to see that that WestJet did that, and certainly high load factors make the math work because it's the revenue you get from the entire troop.

Bob Cummings

And David we are not selling the whole plane at that $270 million, that's currently our seat sale to London and there is a revenue management function that manages into the flights and flights categories and if anybody get some price softening a month ago for the month of July you will see that we were selling in the $700 and $800 one way price range. So I think it’s all just normal RM.

David Tyerman

So would you just would you say you are at normal pricing now on that route?

Bob Cummings

Yes, I thinks that any market has a mix of econo, flex and plus fares, and London is no different.

David Tyerman

Okay, that's helpful. Thank you.

Operator

This concludes your time allocated for questions. I will now hand the call back over to Hugh Harley for closing remarks.

Hugh Harley

Before I officially close the call, I want to announce that we will be hosting an Investor Day here in Calgary at our campus on Wednesday December 07. A marker calendar invite will be coming out shortly.

Thank you for joining us this morning. This call has been webcast and will be archived in the Media & Investor Relations section of westjet.com. This call is also available for replay and call-in details were provided in our second quarter earnings release we issued earlier this morning. Thank you again for listening and for your interest in WestJet.

Operator

This concludes today’s conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.

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