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Rating Action:

Moody's changes WestJet's Baa2 outlook to negative

Global Credit Research - 15 May 2017

Toronto, May 15, 2017 -- Moody's Investors Service, ("Moody's") today revised WestJet Airlines Ltd.'s ("WestJet") rating outlook to negative from stable. WestJet's Baa2 issuer and senior unsecured notes ratings were affirmed.

"The negative outlook reflects our view that WestJet will be challenged to achieve the deleveraging we had previously expected, with its concurrent wide body expansion program and the creation of an ultra-low-cost carrier", said Jamie Koutsoukis, vice president and senior analyst with Moody's

Outlook Actions:

..Issuer: WestJet Airlines Ltd

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: WestJet Airlines Ltd

.... Issuer Rating, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

RATINGS RATIONALE

WestJet's Baa2 rating is driven by its strong market position in the duopolistic Canadian market, good profitability (adjusted EBITDA margin of 24% in 2016), and expected adjusted leverage below 2.5x, but tempered by the risks of two new major business strategies. There are execution risks and leverage implications of starting an ultra-low-cost carrier (ULCC) and a major expansion of international routes through the purchase of at least ten new wide-body planes (Boeing 787's). Current leverage of 3x is high for the rating, partially the result of the company debt prefunding aircraft deliveries that do not begin until later in 2017. Leverage should fall below 2.5x by 2018 as new aircraft are placed into service and generate cash flow. However the company may face headwinds to achieving this, as there is competitive pressure from Air Canada (B1 positive) as well as the execution risk of moving away from its single plane type, low-cost carrier strategy by diversifying into ULCC and international long-haul.

WestJet has very good liquidity, supported by $1.6 billion of cash at Q1/17 and a $300 million unused revolver due June 2019. These sources are more than sufficient to fund mandatory annual debt repayments around $150 million for each of 2017 and 2018. We expect WestJet's ongoing aircraft purchases to contribute to about $175 million of negative free cash flow for 2017. WestJet's credit facility contains two financial covenants -- minimum pooled asset coverage ratio of 1.5x and minimum fixed charge coverage ratio of 1.25x and we expect the airline to maintain robust cushion under both.

The negative outlook reflects our view that WestJet has execution risk in its ability to reduce and maintain leverage below 2.5x by 2018, due to several factors including, possible increasing fuel costs, foreign exchange, increased competition and the execution risks and leverage pressures of both its new wide-body international expansion strategy and its concurrent plan to launch a ULCC.

WestJet's rating could be downgraded should adjusted debt/ EBITDA not sustainably move back below 2.5x or EBIT/Interest falls below 4x (3.0x and 7.0x at March17).

WestJet's rating could be upgraded should it meaningfully diversify its operations while maintaining consistent operating results and profitability and Debt/EBITDA is sustained below 2x and EBIT/Interest above 6x during periods of weak demand (3.0x and 7.0x at March17).

WestJet Airlines Ltd, headquartered in Calgary, Alberta, is the second-largest Canadian air carrier, providing scheduled passenger services to 100 destinations in Canada, the US, Central America, the Caribbean and Europe. Revenue for the year ended December 2016 was $4.1 billion. WestJet and its regional carrier, WestJet Encore, operated a total fleet of 155 aircraft.

The principal methodology used in these ratings was Global Passenger Airlines published in May 2012. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jamie Koutsoukis
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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