B747-437B
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Westjet Accounting Practices Under Question

Sun May 09, 2004 10:05 am

The Canadian discount carrier Westjet is facing scrutiny from analysts and forensic accountants who believe that their accounting practices are overstating actual profits for the carrier by upto 35%.

The issue in question specifically deals with Westjet's practice of accounting for heavy maintenance by amortizing the cost over the period between checks. While this is a commonly accepted accepted technique, Westjet only accounts for these expenses after the first heavy maintenance check rather than amortizing the cost of the first check over the period between induction and the check. This has become an issue as Westjet continues to take deliveries of new 737 jets which are accounted for in this fashion.

This practice, while currently legal in Canada, has been reccomended for elimination by the American Institute of Certified Public Accountants. If Westjet were forced to adopt the standard industry practice of amortizing maintenance costs from the first quarter of operation, the airline's already depressed profit margins would likely be showing losses in recent quarters.

Analysts have also expressed concern about stock dilution as the airline issues increasing number of stock options to employees to compensate for lower base wages. The airline issued almost 70% year-on-year more stock options in 2003, leading to a 4% increase in outstanding shares and corresponding dilution in investor earnings. As the airline continues to grow either base wages will rise increasing expenses and thus depressing profits, or else more options will be issued causing continued dilution of equity and reduced investor returns.

Full article from the Globe and Mail.
"The A340-300 may boast a long range, but the A340 is underpowered" -- Robert Milton, CEO - Air Canada
 
Guest

RE: Westjet Accounting Practices Under Question

Sun May 09, 2004 10:20 am

Despite wheather or not it's felt the practices are qustionable, the fact is they are still legal. The airline has not done anything "legally wrong" as of yet. However they chose to state results, provided it is legal, I don't see a problem with it.
 
yul332LX
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RE: Westjet Accounting Practices Under Question

Sun May 09, 2004 10:31 am

That's right but it shows just how tricky numbers can be. You can easily turn a loss into a profit for a few quarters but eventually, "real" results will come out.

The fact that it is legal doesn't make it right. The thing is, there's no way to compare results in a giving industry when major companies in this industry use different accounting rules.
E volavo, volavo felice più in alto del sole, e ancora più su mentre il mondo pian piano spariva lontano laggiù ...
 
captaingomes
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RE: Westjet Accounting Practices Under Question

Sun May 09, 2004 10:44 am

One of the major concepts in accounting is conservatism, and it seems as though Westjet does anything but that. As Adrian says, what Westjet is doing is not illegal, but I, as an investor, or employee who is purchasing stocks, would definitely research further what strategies Westjet has in place to deal with the issues stated in the article. It is hard to say one way or another, but they do seem like legitimate concerns.

Will the future growth at Westjet keep up with the profitability needs? Obviously cash-flow doesn't seem to be a problem thus far, but it could very well be in the future. Is Westjet operating more on credit now than before? And with greater pressure to provide accounting profits in future quarters, that could drive the stock price down, which is a cornerstone to keeping the staff motivated, and at relatively low wages.

Just some points to consider. Westjet is definitely making things interesting in the airline, and financial world.
"it's kind of like an Airbus, it's an engineering marvel, but there's no sense of passion" -- J. Clarkson re: Coxster
 
jetset
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RE: Westjet Accounting Practices Under Question

Sun May 09, 2004 11:00 am

And Clive knows nothing about this either,right CanadaEH !
RGDS/JETSET
 
Skywatcher
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RE: Westjet Accounting Practices Under Question

Sun May 09, 2004 11:10 am

I wonder if they'll accrue an expense estimate for the litigation about the alledged cheating for accessing the confidential AC traffic data?

In fairness to Westjet, as of their most recent quarter they have finally started expensing stock option expenses.
 
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longhauler
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RE: Westjet Accounting Practices Under Question

Sun May 09, 2004 11:18 am

The accounting practice made sense when WJ was flying B737-200s, as there was a definite possibility that they never were going to perform heavy maintenance on those aircraft. They would just retire/sell or donate these aircraft when these checks came due, as the airframes became virtually worthless.

However, the initial queries started when it became apparent WJ was also doing it for their B737NGs. Yes, it is legal. Is is accurate, well again yes, because the cash flow had not yet occurred. However, it does not follow what just about every other air carrier does for accounting.

Something the Globe and Mail stated which I found interesting, is that if they had used these normal accounting practices, then they would not have shown a profit in the last two quarters.
Just because I stopped arguing, doesn't mean I think you are right. It just means I gave up!
 
B747-437B
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RE: Westjet Accounting Practices Under Question

Sun May 09, 2004 11:47 am

However they chose to state results, provided it is legal, I don't see a problem with it.

If Westjet used the same accounting principles as Air Canada does, they would have shown an operating loss in recent quarters. That would mean no bonuses, lower stock prices and a direct hit to your pocketbook. Somehow I doubt you'd be particularly accepting of that, would you Adrian?

I've maintained for a long time that a number of startups, most notably JetBlue and Westjet, have inflated their published earnings through questionable accounting practices. In the case of JetBlue, the market eventually woke up to that fact (almost 18 months after I initially brought it up to my clients) and corrected its expectations accordingly. In the case of WestJet, there are other questionable practices there (such as their accounting for aircraft on longterm leases) that will eventually wind up with them either taking a hefty special charge (probably in Q1 2005) or retroactively restating lower earnings based on a change in GAAP.

The investor honeymoon with Westjet is quickly coming to an end. With a reduced ability to piggback stock prices to keep labor costs down, it will be interesting to see whether the kool-aid induced morale stays up as less money flows into employee pockets or whether the airline will be forced to pay market wages for base pay.
"The A340-300 may boast a long range, but the A340 is underpowered" -- Robert Milton, CEO - Air Canada
 
Olympus69
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RE: Westjet Accounting Practices Under Question

Sun May 09, 2004 10:55 pm

On a lighter note, there is a thread titled "AC reports dismal first quarter" - misquoting a press headline by changing 'better' to 'dismal'. Interestingly the first paragraph of the Globe and Mail article about WS refers to Westjet's "Dismal first quarter".
 
Goose
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RE: Westjet Accounting Practices Under Question

Sun May 09, 2004 11:11 pm

On a lighter note, there is a thread titled "AC reports dismal first quarter" - misquoting a press headline by changing 'better' to 'dismal'. Interestingly the first paragraph of the Globe and Mail article about WS refers to Westjet's "Dismal first quarter".

Not surprising. There's a handful of folks here who do quite a bit to perpetuate the WestJet corporate image; an unofficial Airliners.net WestJet Cheer Squad, you could say...

"WestJet! WestJet!! Rah rah RAH!!"

Now, there's a difference between being genuinely proud of the company you work for, and having a "could-do-no-wrong" misperception about them. I admire WestJet's customer service record and their awesome growth over the years.... but have noticed that some folks, especially employees, have seemingly let success go to their head, and sometimes throw caution to the wind.
"Talk to me, Goose..."
 
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yyz717
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RE: Westjet Accounting Practices Under Question

Mon May 10, 2004 4:56 am

As long as WJ's accounting practices are legal (which they are) and they disclose this particular depreciation schedule (which they have done), then investors have all the info they need to invest wisely (or not).

I dumped at the gybe mark in strong winds when I looked up at a Porter Q400 on finals. Can't stop spotting.
 
Goose
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RE: Westjet Accounting Practices Under Question

Mon May 10, 2004 5:19 am

As long as WJ's accounting practices are legal (which they are) and they disclose this particular depreciation schedule (which they have done), then investors have all the info they need to invest wisely (or not).

*shrug* They may be legal, but that doesn't mean they're not a cause for some caution.....
"Talk to me, Goose..."
 
captaingomes
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RE: Westjet Accounting Practices Under Question

Mon May 10, 2004 8:29 am

As long as Westjet continues with strong growth to counter the very high maintenance charges they will be faced with in their accounting in the next few years, then investors have nothing to worry about.
"it's kind of like an Airbus, it's an engineering marvel, but there's no sense of passion" -- J. Clarkson re: Coxster
 
captaingomes
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RE: Westjet Accounting Practices Under Question

Mon May 10, 2004 8:52 am

Brandon, this is the same issue, but it seems to be resurfacing. Why is it resurfacing, I don't know, but the Globe and Mail decided to write another article about it. Possibly the reason they did was due to the recent Q1 results at Westjet.

By the way Brandon, there are a few recent threads you may want to respond to.  Big thumbs up
"it's kind of like an Airbus, it's an engineering marvel, but there's no sense of passion" -- J. Clarkson re: Coxster
 
CanadaEH
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RE: Westjet Accounting Practices Under Question

Mon May 10, 2004 8:54 am

Yea I just got caught up reading them. To be quite honest, there isn't really much to respond to. Some of us can agree to disagree, I guess.
EH.