Westjet Airlines Research Paper

Intermediate Accounting

Research Project

Table of Contents

Introduction        3

Key Financial Reporting Issues        4

Frequent Flier Accounting        4

Lease Contract        4

Fuel Risk        5

Accounting Standards        6

Frequent Flier Accounting        6

Lease        7

Fuel risks        7

Management Manipulation and Uncertainty Analysis        8

Deferred Reward Programs        8

Operating Leases        9

Fuel Risks        11

Influence on Earnings and Ratios        11

Lease        11

Loyalty points        12

Fuel risk        14

Conclusion        14

Exhibition        15

References:        17

Introduction

Low-cost carrier WestJet Airlines is Canada's second largest airline.  It offers scheduled service to over 100 destination along with its regional subsidiary WestJet Encore, which operates a fleet of turboprop aircraft in a network of destinations in Canada and one destination in the U.S. In the face of intensified competition from other discount airlines, Westjet has interline and codeshare arrangements with more than a dozen other carriers. The agreements  allow multiple airlines to sell space on the same flight as if it were their flight and facilitate travel for guests who require flights with more than one airline to reach their final destination. Combined with its airline partners, WestJet virtual network provides their guests access to over 160 destinations which include Canada, the United States, Mexico, Central America, the Caribbean and Europe. WestJet also operates WestJet Vacation, which provides air, hotel, car and excursion packages to various sun destinations including Mexico and the Caribbean, as well as the Dominican Republic, Hawaii and Florida. With competition fierce for consumer dollars, WestJet has created and implemented a Frequent Guest Loyalty Reward Program that aims to foster a sense of loyalty among their clients. The rewards program allows guests to accumulate credits based on their WestJet travel spend to be used towards future flights and vacation packages (WestJet, 2015).

There are several key financial ratios that we will consider while analyzing WestJet’s performance. Debt to equity is a critical ratio to determine WestJet’s financial leverage. It indicates how much debt that Westjet is taking to finance its assets compared to its shareholders’ equity. It is also essential to review its Return on Asset as WestJet owns substantial amount of assets and the per dollar amount it earns on its asset helps to represent the company’s efficient use of these assets. Additionally, we will consider its Asset Turnover Ratio to measure the overall efficiency of WestJet.

Key Financial Reporting Issues

• Frequent Flier Accounting

The airline industry is a highly seasonal and competitive industry. Many airline operators focus on maintaining market share and encouraging travellers to stay loyal to their business. Loyalty programs are a common practice for companies to acquire and retain customers. Customers earn points for flying on the airline, and points can be redeemed for free or discounted goods and services. Company’s ratios may be significantly different from one another depending on the accounting policy the company chooses for the loyalty program. Some companies unbundle their sales based on estimated fair value and journals the loyalty points as unearned revenue. Revenue is recognized when service is provided. Other companies take an incremental cost model by treating cost of fulfillment as an expense. The expense is then accrued as a “cost to fulfill”. As a result, the first method will result in higher revenue compared to the latter one (The new revenue recognition standard — airlines, Ernst & Young).