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