10-K
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number
000-49728
JETBLUE AIRWAYS
CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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87-0617894
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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118-29
Queens Boulevard
Forest Hills, New York 11375
(Address, including zip code, of registrants principal
executive offices)
(718) 286-7900
Registrants telephone number, including area code:
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange
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Title of each class
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on which registered
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Common Stock, $0.01 par value
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The NASDAQ Global Select Market
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Participating Preferred Stock Purchase Rights
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Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes x No o
Indicate by check mark whether the registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the
Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant as of June 30,
2008 was approximately $837,900,000 (based on the last reported
sale price on the NASDAQ Global Select Market on that date). The
number of shares outstanding of the registrants common
stock as of January 31, 2009 was 271,814,559 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its 2009
Annual Meeting of Stockholders, which is to be filed subsequent
to the date hereof, are incorporated by reference into
Part III of this
Form 10-K.
FORWARD-LOOKING
INFORMATION
Statements in this
Form 10-K
(or otherwise made by JetBlue or on JetBlues behalf)
contain various forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, which
represent our managements beliefs and assumptions
concerning future events. When used in this document and in
documents incorporated by reference, forward-looking statements
include, without limitation, statements regarding financial
forecasts or projections, and our expectations, beliefs,
intentions or future strategies that are signified by the words
expects, anticipates,
intends, believes, plans or
similar language. These forward-looking statements are subject
to risks, uncertainties and assumptions that could cause our
actual results and the timing of certain events to differ
materially from those expressed in the forward-looking
statements. It is routine for our internal projections and
expectations to change as the year or each quarter in the year
progresses, and therefore it should be clearly understood that
the internal projections, beliefs and assumptions upon which we
base our expectations may change prior to the end of each
quarter or year. Although these expectations may change, we may
not inform you if they do.
You should understand that many important factors, in addition
to those discussed or incorporated by reference in this report,
could cause our results to differ materially from those
expressed in the forward-looking statements. Potential factors
that could affect our results include, in addition to others not
described in this report, those described in Item 1A of
this report under Risks Related to JetBlue and
Risks Associated with the Airline Industry. In light
of these risks and uncertainties, the forward-looking events
discussed in this report might not occur.
ii
Overview
JetBlue Airways Corporation is a passenger airline that we
believe has established a new airline category a
value airline based on service, style,
and cost. Known for its award-winning customer service and free
TV as much as for its low fares, JetBlue believes it offers its
customers the best coach product in markets it serves, with a
strong core product and reasonably priced optional upgrades.
JetBlue operates primarily on point-to-point routes with its
fleet of 107 Airbus A320 aircraft and 35 EMBRAER 190
aircraft the youngest and most fuel-efficient fleet
of any major U.S. airline. As of December 31, 2008, we
served 52 destinations in 19 states, Puerto Rico,
Mexico and five countries in the Caribbean and Latin America.
Most of our flights have as an origin or destination, one of our
focus cities: Boston, Fort Lauderdale, Los Angeles/Long
Beach, New York/JFK, or Orlando. By the end of 2008, we operated
on average 600 daily flights. For the year ended
December 31, 2008, JetBlue was the 7th largest
passenger carrier in the United States based on revenue
passenger miles as reported by those airlines. As used in this
Form 10-K,
the terms JetBlue, we, us,
our and similar terms refer to JetBlue Airways
Corporation and its subsidiaries, unless the context indicates
otherwise.
JetBlue was incorporated in Delaware in August 1998 and
commenced service February 11, 2000. Our principal
executive offices are located at
118-29
Queens Boulevard, Forest Hills, New York 11375 and our telephone
number is
(718) 286-7900.
Our filings with the Securities and Exchange Commission, or the
SEC, are accessible free of charge at our website
http://investor.jetblue.com.
Information contained on our website is not incorporated by
reference in this report.
1
Our Value
Proposition
Our mission is to bring humanity back to air travel. We do this
by offering what we believe to be the best domestic coach
product, and giving our customers more value with their
purchase. The elements of our value proposition include:
High Quality Service and
Product. Onboard JetBlue, customers enjoy a
distinctive flying experience, which we refer to as the
JetBlue Experience, that includes friendly,
award-winning, customer service-oriented employees, new
aircraft, roomy leather seats with lots of legroom, 36 channels
of free
DirecTV®,
100 channels of free XM satellite radio and premium movie
channel offerings from JetBlue
Features®,
our source of first run films from multiple major movie studios
and other entertainment features available for purchase. Our
onboard offerings include free and unlimited brand name snacks
and beverages, premium beverages and specially-designed products
for our overnight flights. Our customers have told us that the
JetBlue Experience is an important reason why they choose us
over other airlines.
We strive to communicate openly and honestly with customers
about delays and service disruptions. We introduced the JetBlue
Airways Customer Bill of Rights in 2007, which provides for
compensation to customers who experience avoidable
inconveniences (and some unavoidable circumstances) and commits
us to perform at high service standards and holds us accountable
if we do not. We are the first and currently the only major
airline to provide such a fundamental benefit for our customers.
In 2008, we completed 98.4% of our scheduled flights. Unlike
most other airlines, we have a policy of not overbooking our
flights.
All of our aircraft are equipped with leather seats in a
comfortable single class layout. Our Airbus A320 aircraft,
with 150 seats, has a wider cabin than both the Boeing 737
and 757, two types of aircraft operated by many of our
competitors. Our Airbus A320 cabin has at least 34 inches
of seat pitch at every seat and as much as 38 inches of
seat pitch in our Even More Legroom rows, providing the most
legroom in coach of all U.S. airlines. Our EMBRAER 190
aircraft each have 100 seats that are wider than industry
average for this type of aircraft, arranged in a
two-by-two
seating configuration with either 32 or 33 inches between
rows of seats. We strive to continually enhance and refine our
product based on customer and crewmember feedback.
In 2008, we introduced refundable fares and new payment options
for our customers, and also launched jetblue.com en
español, a Spanish version of our website,
http://hola.jetblue.com/enes/.
Low Operating Costs. Our cost structure
has allowed us to offer fares lower than many of our
competitors. For the year ended December 31, 2008, our cost
per available seat mile, excluding fuel, of 5.94 cents is
among the lowest reported by all other major U.S. airlines.
Some of the factors that contribute to our competitive unit
costs are:
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High aircraft utilization. By scheduling and
operating our aircraft efficiently, we are able to spread our
fixed costs over a greater number of flights and available seat
miles. For the year ended December 31, 2008, our aircraft
operated an average of 12.1 hours per day, which we believe
is the highest among all major U.S. airlines. Our airport
operations allow us to schedule our aircraft with minimum ground
time.
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Low distribution costs. Our distribution costs
are low for several reasons. We use only electronic tickets,
which saves paper, postage, employee time and back-office
processing expense. For the year ended December 31, 2008,
77% of our sales were booked on www.jetblue.com, our
least expensive form of distribution, while 10% were booked
through our home-based reservation agents.
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Productive workforce. Our employee efficiency
results from flexible and productive work rules, effective use
of part-time employees and the use of technology to automate
tasks. For example, most of our reservation agents work from
their homes, providing better scheduling flexibility and
allowing employees to customize their desired schedules. We are
continually looking for ways to make our workforce more
efficient through the use of technology without compromising our
commitment to customer service.
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New and efficient aircraft. We maintain a
fleet consisting of only two types of aircraft, the Airbus A320
and the EMBRAER 190, which, with an average age of only
3.6 years, is the youngest fleet of
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any major U.S. airline. We believe that operating a young
fleet, which employs the latest technologies, results in our
aircraft being more efficient and dependable than older
aircraft. We operate the worlds largest fleet of Airbus
A320 aircraft, and have the best dispatch reliability of all U.S
major Airbus A320 aircraft operators. Operating only two types
of newer aircraft types results in cost savings over our
competitors who operate more aircraft types as maintenance
processes are simplified, spare parts inventory requirements are
reduced, scheduling is simplified and training costs are lower.
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Brand Strength. We believe that we have
created a widely recognized brand that differentiates us from
our competitors and identifies us as a safe, reliable,
value-added airline focused on customer service and providing a
high quality travel experience. Similarly, we believe that
customer awareness of our brand has contributed to the success
of our marketing efforts, and enables us to market ourselves as
a preferred marketing partner with companies across many
different industries. In 2008, we were voted Top Low Cost
Airline for Customer Satisfaction by J.D. Power and
Associates for the fourth consecutive year. We also earned
distinctions as the Best Large Domestic Airline (economy
class), Best Inflight Entertainment (domestic
flights) and Most Eco-friendly Airline in the
2008 Zagat Airline Survey. Additionally, the JetBlue Experience
won us Best In-Seat Comfort-Domestic Airline and
Best Onboard Entertainment-Domestic Airline from the
2008 Smarter Traveler Readers Choice Awards and, for the
second year in a row, the Best Inflight Entertainment
Experience in the Americas by the World Airline
Entertainment Association Avion Awards.
Strength of Our People. We believe that
we have developed a strong and vibrant service-oriented company
culture built around our five key values: safety, caring,
integrity, fun and passion. Our success depends on our ability
to continue hiring and retaining people who are friendly,
helpful, team-oriented and committed to delivering the JetBlue
Experience to our customers. Our culture is reinforced through
an extensive orientation program for our new employees, which
emphasizes the importance of customer service, productivity and
cost control. We also provide extensive training for our
employees, including a leadership program and other training
that emphasizes the importance of safety.
None of our employees are currently unionized. We believe that a
direct relationship with JetBlue leadership, and not third-party
representation, is in the best interests of our employees. In
November 2008, the JetBlue Pilots Association, or JBPA, filed a
petition with the National Mediation Board, or NMB, seeking to
become the collective bargaining representative of our pilots.
The NMB held an election, and the votes were counted on
February 3, 2009. JBPA failed to obtain the required number
of votes for union representation, and thus the pilots, like the
rest of our employees, remain non-union and retain their direct
relationship with JetBlue.
We enter into individual employment agreements with each of our
Federal Aviation Administration, or FAA, licensed employees,
which consist of pilots, dispatchers and technicians. Each
employment agreement is for a term of five years and
automatically renews for an additional five-year term unless the
employee elects not to renew it. Pursuant to these agreements,
these employees can only be terminated for cause. In the event
of a downturn in our business that would require a reduction in
work hours, we are obligated to pay these employees a guaranteed
level of income and to continue their benefits. In addition, we
provide what we believe to be industry-leading job protection
language in the agreements in the event of a merger or
acquisition scenario, including the establishment of a legal
defense fund to utilize for seniority integration negotiations.
We also stipulate that stapling as part of a seniority
integration plan is not acceptable and not permitted for our
pilots, dispatchers and technicians.
Our full-time equivalent employees at December 31, 2008
consisted of 1,745 pilots, 1,938 flight attendants, 3,079
airport operations personnel, 441 technicians, whom others refer
to as mechanics, 699 reservation agents, and 2,350
management and other personnel. At December 31, 2008, we
employed 8,902 full-time and 2,950 part-time employees.
Our leadership team has extensive and diverse airline industry
experience, and strives to communicate on a regular basis with
all JetBlue employees, keeping them informed about JetBlue
events and soliciting feedback for ways to improve our service,
teamwork and employees work environment.
3
Well-Positioned
in New York Metropolitan Area, the Nations Largest Travel
Market.
Since 2000, the majority of our operations have originated in
New York City, the nations largest travel market. We are
the largest airline at New Yorks John F. Kennedy
International Airport, or JFK, as measured by passengers and, by
the end of 2008, our domestic operations at JFK were almost
equal to those of all other airlines combined. In addition to
JFK, we serve Newarks Liberty International Airport, New
Yorks LaGuardia Airport, Newburgh, New Yorks Stewart
International Airport and White Plains, New Yorks
Westchester County Airport. JFK is New Yorks largest
airport, with an infrastructure that includes four runways,
large facilities and a convenient direct light-rail connection
to the New York City subway system and the Long Island Rail
Road. In October 2008, after three years of construction, we
commenced operations at our new 26-gate terminal at JFKs
Terminal 5. Terminal 5 has an optimal location with convenient
access to active runways, which we believe will increase the
efficiency of our operations. We believe that this new terminal
with its modern amenities, concession offerings and passenger
convenience will become as integral to the JetBlue Experience as
our in-flight entertainment systems. Operating out of the
nations largest travel market does make us susceptible to
certain operational constraints.
Our
Industry
The passenger airline industry in the United States has
traditionally been dominated by the major U.S. airlines,
the largest of which are American Airlines, Continental
Airlines, Delta Air Lines, Northwest Airlines, Southwest
Airlines, United Air Lines and US Airways. The
U.S. Department of Transportation, or DOT, defines the
major U.S. airlines as those airlines with annual revenues
greater than $1 billion. There are currently 18 passenger
airlines meeting that standard. These airlines offer scheduled
flights to most large cities within the United States and abroad
and also serve numerous smaller cities. The six largest major
U.S. airlines, other than Southwest, have adopted the
traditional hub and spoke network route system, or
traditional network. This type of system concentrates most of an
airlines operations at a limited number of hub cities,
serving the majority of other destinations in the system by
providing one-stop or connecting service through the hub.
Regional airlines, such as SkyWest Airlines and Mesa Airlines,
typically operate smaller aircraft on lower volume routes than
do traditional network airlines. Regional airlines typically
enter into relationships with one or more traditional network
airlines under which the regional airline agrees to use its
smaller aircraft to carry passengers booked and ticketed by the
traditional network airline between their hubs and a smaller
outlying city. There are currently six regional
U.S. airlines within the major designation.
Low-cost airlines largely developed in the wake of deregulation
of the U.S. airline industry in 1978, which permitted
competition on many routes for the first time. Southwest
Airlines pioneered the low-cost model, which enabled it to offer
fares that were significantly lower than those charged by
traditional network airlines. Excluding JetBlue, there are
currently three low-cost major U.S. airlines.
Following the September 11, 2001 terrorist attacks,
low-cost airlines were able to fill a significant capacity void
left by traditional network airline flight reductions. Lower
fares and increased low-cost airline capacity created an
unprofitable operating environment for the traditional network
airlines. Since 2001, the majority of traditional network
airlines have undergone significant financial restructuring,
including bankruptcies, mergers and consolidations. These
restructurings have allowed them to reduce labor costs,
restructure debt, terminate pension plans and generally reduce
their cost structure, increase workforce flexibility and provide
innovative offerings similar to those of the low-cost airlines,
while still maintaining their expansive route networks,
alliances and frequent flier programs. Although our costs remain
lower than those of our largest competitors, the difference in
the cost structures, and the competitive advantage previously
enjoyed by low-cost airlines, has diminished.
Competition
The airline industry is highly competitive. Airline profits are
sensitive to even slight changes in fuel costs, average fare
levels and passenger demand. Passenger demand and fare levels
historically have been influenced by, among other things, the
general state of the economy, international events, industry
capacity and pricing actions taken by other airlines. The
principal competitive factors in the airline industry are fares,
customer
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service, routes served, flight schedules, types of aircraft,
safety record and reputation, code-sharing relationships,
capacity, in-flight entertainment systems and frequent flyer
programs.
Our competitors and potential competitors include traditional
network airlines, low-cost airlines, regional airlines and new
entrant airlines, including a new business model known as the
ultra low cost carrier. Six of the other major
U.S. airlines are generally larger, have greater financial
resources and serve more routes than we do. Our competitors also
use some of the same advanced technologies that we do, such as
ticketless travel, laptop computers in the cockpit and website
bookings. Since deregulation of the airline industry in 1978,
there has been consolidation in the domestic airline industry.
In 2006 and 2007, the U.S. airline industry experienced
significant consolidation and several airlines filed for
bankruptcy protection with further consolidation and liquidation
occurring in 2008, largely as a result of high fuel costs and
continued strong competition. At least eight airlines that
operated from the U.S. ceased operations during 2008 and
the merger of Delta and Northwest became final, which created
the worlds largest airline. Further industry
consolidations or restructurings could result in our competitors
having a more rationalized route structure and lower operating
costs, which could enable them to compete more aggressively.
Price competition occurs through price discounting, fare
matching, increased capacity, targeted sale promotions and
frequent flyer travel initiatives, all of which are usually
matched by other airlines in order to maintain their share of
passenger traffic. A relatively small change in pricing or in
passenger traffic could have a disproportionate effect on an
airlines operating and financial results. Our ability to
meet this price competition depends on, among other things, our
ability to operate at costs equal to or lower than our
competitors. All other factors being equal, we believe customers
often prefer JetBlue and the JetBlue Experience.
During 2008, most traditional network airlines continued to
increase capacity on their international routes while reducing
domestic and Caribbean capacity. Virgin America continued to
expand in routes that compete directly with us, although other
carriers substantially reduced capacity in a number of our
markets. We are encouraged by continued capacity discipline
across the industry and expect it to continue through 2009, and
we believe the capacity cuts will help offset the impact of the
recessionary environment.
Airlines also frequently participate in marketing alliances,
which generally provide for code-sharing, frequent flyer program
reciprocity, coordinated flight schedules that provide for
convenient connections and other joint marketing activities.
These alliances also permit an airline to market flights
operated by other alliance airlines as its own. The benefits of
broad networks offered to customers could attract more customers
to these networks. We currently participate in marketing
alliances with Cape Air, an airline that services destinations
out of Boston and San Juan, Puerto Rico, and with Aer
Lingus, an airline based in Dublin, Ireland. We plan to pursue
other alliances with international airlines, including Deutsche
Lufthansa AG, which is a stockholder of JetBlue, to leverage our
presence at JFK.
Route
Network
Our operations primarily consist of transporting passengers on
our aircraft, with domestic U.S. operations, including
Puerto Rico, accounting for 92.5% of our capacity in 2008. The
historic distribution of our available seat miles, or capacity,
by region is as follows:
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Year Ended December 31,
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Capacity Distribution
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2008
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2007
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2006
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East Coast Western U.S.
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41.5
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47.4
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51.7
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Northeast Florida
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33.9
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31.8
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31.8
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Medium haul
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3.0
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2.8
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1.3
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Short haul
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7.6
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7.4
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6.6
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Caribbean, including Puerto Rico
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14.0
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10.6
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8.6
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Total
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100.0
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%
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100.0
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%
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100.0
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%
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5
We currently provide service to 52 destinations in
19 states, Puerto Rico, Mexico, and five countries in the
Caribbean and Latin America. We have begun service to the
following new destinations since December 31, 2007, as set
forth in the following table:
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Destination
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Service Commenced
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Puerto Plata, Dominican Republic
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January 2008
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St. Maarten, Netherlands Antilles
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January 2008
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Bogotá, Colombia
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January 2009
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We plan to commence service from Orlando, FL to San Jose,
Costa Rica in March 2009, service from New York to Montego Bay,
Jamaica in May 2009, and service from New York and Boston to Los
Angeles, CA in June 2009. In considering new markets, we focus
on those that have high average fares. In this process, we
analyze publicly available data from the DOT showing the
historical number of passengers, capacity and average fares over
time. Using this data, combined with our knowledge and
experience about how comparable markets have reacted in the past
when prices were increased or decreased, we forecast the level
of demand in a particular market expected to result from the
introduction of our service and lower prices, as well as the
anticipated response of existing airlines in that market.
We discontinued service to the following destinations since
December 31, 2007, as set forth in the following table:
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Destination
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Service Discontinued
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Nashville, TN
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January 2008
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Columbus, OH
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January 2008
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Tucson, AZ
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May 2008
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Ontario, CA
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September 2008
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We are the leading carrier in number of flights flown per day
between the New York metropolitan area and Florida.
Marketing
and Distribution
Our marketing objectives are to attract new customers to our
brand and give our current customers reasons to come back to us
again and again. Our key value proposition and marketing message
is that competitive fares and quality air travel need not be
mutually exclusive. Our competitive fares, high quality product
and outstanding customer service create the overall JetBlue
Experience that we believe is unique in the domestic airline
industry.
We market our services through advertising and promotions in
newspapers, magazines, television, radio, through the internet,
outdoor billboards, and through targeted public relations and
promotions. We engage in large multi-market programs, as well as
many local events and sponsorships, and mobile marketing
programs. Our targeted public and community relations efforts
promote brand awareness and complement our strong word-of-mouth
channel.
Our primary distribution channel is through our website,
www.jetblue.com, our lowest cost channel that is also
designed to ensure our customers have as pleasant an experience
booking their travel as they do in the air. The percentage of
our total sales booked on our website averaged 77% for the year
ended December 31, 2008. In 2008, our bookings through
global distribution systems, or GDSs and online travel agencies,
or OTAs, became our second largest distribution channel,
accounting for 13% of our sales. We booked the remaining 10% of
our 2008 sales through our 800-JETBLUE channel, staffed by our
home-sourced reservations agents. Our re-entry into GDSs in 2007
has supported our growth in the corporate market, as business
customers are more likely to book through a GDS, and while the
cost of sales through this channel is higher than through our
website, the average fare purchased via this channel is at least
17% higher, justifying the increased distribution costs. As a
result, we now participate in all four major GDSs and four major
OTAs. We continue to evaluate opportunities to broaden our
distribution channels based on a profitable cost yield ratio.
Our distribution mix creates significant cost savings and
enables us to build loyalty through increased customer
interaction.
6
We sell vacation packages through JetBlue Getaways, a one-stop,
value-priced vacation website designed to meet customers demand
for self-directed packaged travel planning. Getaways packages
offer competitive fares for air travel on JetBlue, a selection
of JetBlue-recommended hotels and resorts, car rentals and
attractions. We also offer a la carte hotel and car rental
reservations through our website.
Customer
Loyalty Program
JetBlues customer loyalty program, TrueBlue Flight
Gratitude, or TrueBlue, is an online program designed to reward
and recognize our most loyal customers. The program offers
incentives to increase travel on JetBlue and provides our
customers with additional services. TrueBlue members earn points
for each
one-way trip
flown based on the length of the trip. Points are accumulated in
an account for each member and expire after 12 months. A
free round trip award to any JetBlue destination is earned after
attaining 100 points within a consecutive 12 month period.
Awards are automatically generated and are valid for one year.
We now have nearly seven million TrueBlue members, and we expect
TrueBlue membership will continue to grow.
The number of estimated travel awards outstanding at
December 31, 2008 was approximately 196,000 awards and
includes an estimate for partially earned awards. The number of
travel awards used on JetBlue during 2008 was approximately
297,000, which represented 4% of our total revenue passenger
miles. Due to the structure of the program and low level of
redemptions as a percentage of total travel, the displacement of
revenue passengers by passengers using TrueBlue awards has been
minimal to date.
We have an agreement with American Express, under which it
issues co-branded credit cards allowing cardmembers to earn
points in TrueBlue. Through American Express, we also offer the
JetBlue Business Card, which provides small business owners with
a 5% discount on JetBlue travel and automatic enrollment in the
American Express OPEN
Savings®
program. In addition, small business owners with any American
Express OPEN small business card receive a 3% discount on
JetBlue travel. Every time cardmembers holding either a JetBlue
Card or a JetBlue Business Card from American Express earn the
equivalent of one TrueBlue point or purchase travel on JetBlue
before their points expire, all the points in their TrueBlue
account are extended for another 12 months. We also have an
agreement with American Express allowing its cardholders to
convert their Membership Reward points into JetBlue TrueBlue
points. We intend to pursue other marketing partnerships in the
future.
Maintenance
We have an FAA-approved maintenance program, which is
administered by our technical operations department. Consistent
with our core value of safety, we use qualified maintenance
personnel, ensure they have comprehensive training, and maintain
our aircraft and associated maintenance records in accordance
with, and often exceeding, FAA regulations.
The work performed on our fleet is divided into four general
categories of maintenance: aircraft line, aircraft heavy,
component and power plant. The bulk of line maintenance
requirements are handled by JetBlue technicians and inspectors
and consist of daily checks, overnight and weekly checks, A
checks, diagnostics and routine repairs. All other maintenance
activity is sub-contracted to business partner maintenance,
repair and overhaul organizations.
Aircraft heavy maintenance checks consist of a series of more
complex tasks that take from one to four weeks to accomplish.
The typical frequency for these events is once every
15 months. We send our aircraft to Aveos facilities in
Canada and El Salvador as well as to Empire Aero Center in Rome,
New York and Embraer Aircraft Maintenance Services in Nashville,
Tennessee. In all cases this work is performed with oversight by
JetBlue personnel.
Component and power plant maintenance, repairs and overhauls on
equipment such as engines, auxiliary power units, landing gears,
pumps and avionic computers are performed by a number of
different
FAA-approved
repair stations. For example, maintenance of our V2500 series
engines on our Airbus A320 aircraft is performed under a
15 year service agreement with MTU Maintenance Hannover
GmbH in Germany. Most of our maintenance service agreements are
based on a fixed cost per flying hour.
7
Aircraft
Fuel
In 2008, continuing a trend that began in 2005, fuel costs were
our largest operating expense due to high average fuel prices.
Fuel prices and availability are subject to wide price
fluctuations based on geopolitical factors and supply and demand
that we can neither control nor accurately predict. We use a
third party fuel management service to procure most of our fuel.
Our historical fuel consumption and costs were:
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Year Ended December 31,
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2008
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2007
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2006
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Gallons consumed (millions)
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453
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444
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377
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Total cost (millions)
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$
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1,352
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$
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929
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$
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752
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Average price per gallon
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$
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2.98
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$
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2.09
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$
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1.99
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Percent of operating expenses
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41.2
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%
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34.8
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%
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33.6
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%
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Total cost and average price per gallon each include effective
fuel hedging gains and losses and exclude taxes and fueling
services.
Throughout 2008, we entered into crude and heating oil option
contracts and swap agreements with a goal of achieving a
targeted hedge position of approximately 30% of our expected
consumption for the next twelve months to protect against
significant increases in fuel prices. Oil prices began declining
during the third quarter and, therefore, in October 2008, we
modified our fuel hedging program to minimize fuel hedging
losses in the event of further declines in oil prices. We began
selling swap contracts to our fuel hedge counterparties covering
60% of our fourth quarter 2008 swap contracts and all of our
2009 swap contracts. Additionally, we suspended our fuel hedging
program during the fourth quarter with the rapid decline in oil
prices and are currently in the process of revising this program
in light of the current levels of crude oil prices. At
December 31, 2008, we had hedged approximately 8% of our
projected 2009 fuel requirements. We had approximately
$117 million posted in collateral related to margin calls
on our outstanding 2009 fuel hedge contracts as of
December 31, 2008.
LiveTV,
LLC
LiveTV, LLC, a wholly owned subsidiary of JetBlue, provides
in-flight entertainment, voice communication and data
connectivity services for commercial and general aviation
aircraft. LiveTVs assets include certain tangible
equipment and interests in systems installed on its
customers aircraft, system components and spare parts in
inventory, an air-to-ground spectrum license granted by the
Federal Communications Commission, or the FCC, a network of
approximately 100 ground stations across the continental U.S.,
and rights to certain patents and intellectual property used for
live in-seat satellite television, XM Satellite Radio service,
wireless aircraft data communication service for in-flight
e-mail and
messaging, and cabin surveillance systems. LiveTVs major
competitors in the in-flight entertainment systems include
Rockwell Collins, Thales Avionics and Panasonic Avionics. Only
Panasonic is currently providing in-seat live television. In the
voice and data communication services market, LiveTVs
primary competitors are Aircell, Row 44, Panasonic, OnAir and
Aeromobile. These competitors offer data subscription services
while LiveTV provides free data connectivity to passengers
supported by advertising, ecommerce
and/or
airline customer payments.
LiveTV has contracts with eleven other domestic and
international commercial airlines for the sale of certain
hardware and installation, programming and maintenance of its
live in-seat satellite television as well as XM Satellite Radio
Service and certain other products and services. LiveTV also has
general aviation customers to which it supplies voice and data
communication services. LiveTV continues to pursue additional
customers.
Government
Regulation
General. We are subject to regulation
by the DOT, the FAA, the Transportation Security Administration,
or TSA, and other governmental agencies. The DOT primarily
regulates economic issues affecting air service, such as
certification and fitness, insurance, consumer protection and
competitive practices. The DOT has the authority to investigate
and institute proceedings to enforce its economic regulations
and may assess civil
8
penalties, revoke operating authority and seek criminal
sanctions. In February 2000, the DOT granted us a certificate of
public convenience and necessity authorizing us to engage in air
transportation within the United States, its territories
and possessions.
The FAA primarily regulates flight operations and, in
particular, matters affecting air safety, such as airworthiness
requirements for aircraft, the licensing of pilots, mechanics
and dispatchers, and the certification of flight attendants. The
civil aviation security functions of the FAA were transferred to
the TSA under the Aviation and Transportation Security Act. The
FAA requires each airline to obtain an operating certificate
authorizing the airline to operate at specific airports using
specified equipment. We have and maintain FAA certificates of
airworthiness for all of our aircraft and have the necessary FAA
authority to fly to all of the cities that we currently serve.
Like all U.S. certified carriers, we cannot fly to new
destinations without the prior authorization of the FAA. The FAA
has the authority to modify, suspend temporarily or revoke
permanently our authority to provide air transportation or that
of our licensed personnel, after providing notice and a hearing,
for failure to comply with FAA regulations. The FAA can assess
civil penalties for such failures or institute proceedings for
the imposition and collection of monetary fines for the
violation of certain FAA regulations. The FAA can revoke our
authority to provide air transportation on an emergency basis,
without providing notice and a hearing, where significant safety
issues are involved. The FAA monitors our compliance with
maintenance, flight operations and safety regulations, maintains
onsite representatives and performs frequent spot inspections of
our aircraft, employees and records.
The FAA also has the authority to issue maintenance directives
and other mandatory orders relating to, among other things,
inspection of aircraft and engines, fire retardant and smoke
detection devices, increased security precautions, collision and
windshear avoidance systems, noise abatement and the mandatory
removal and replacement of aircraft parts that have failed or
may fail in the future.
The TSA operates under the Department of Homeland Security and
is responsible for all civil aviation security, including
passenger and baggage screening, cargo security measures,
airport security, assessment and distribution of intelligence,
and security research and development. The TSA also has law
enforcement powers and the authority to issue regulations,
including in cases of national emergency, without a notice or
comment period.
We believe that we are operating in material compliance with
DOT, FAA and TSA regulations and hold all necessary operating
and airworthiness authorizations and certificates. Should any of
these authorizations or certificates be modified, suspended or
revoked, our business could be materially adversely affected.
We are also subject to state and local laws and regulations in a
number of states in which we operate.
Airport Access. In January 2007, the
High Density Rule, established by the FAA in 1968 to limit the
number of scheduled flights at JFK from 3:00 p.m. to
7:59 p.m., expired. As a result, like nearly every other
airport, the number of flights at JFK was no longer regulated
and airlines became able to schedule flights without
restrictions. As a result of over-scheduling beyond the
airports hourly capacity, congestion and delays increased
significantly in 2007.
Historically, JFK experienced congestion only from the late
afternoon to the early evening during the peak international
traffic period because of longer separations required between
the aircraft movements. However, over the past few years, JFK
has become increasingly busy and the significant increase in
arrivals and departures has created peak periods that regularly
overload the current Air Traffic Control, or ATC, system. ATC
ground delay programs at the New York metropolitan area airports
have become the rule, rather than the exception, during the peak
travel periods, and restrictions have been imposed on most of
the operational hours in the day. We continue to work actively
with the Port Authority of New York and New Jersey, or PANYNJ,
and the FAA, to find solutions to ease this congestion. In 2008,
the FAA imposed slot restrictions and hourly operational caps at
JFK and Newarks Liberty International Airport in an effort
to ease congestion in the New York metropolitan area airspace,
with the goal of reducing system congestion. Despite this
action, 2008 was one of the most challenging years for
disruptive operations in the New York metropolitan area, even
worse than 2007, prior to the hourly caps imposed by the FAA.
Contributing to these
9
difficulties was a 140% increase in the number of days ATC
imposed ground delay programs were in effect at JFK during July
and August 2008 compared to the same period in 2007.
On October 10, 2008, the DOT issued its final Congestion
Management Rule for JFK and Newark International Airport. The
rule contains caps on the number of scheduled operations that
may be conducted during specific hours and prohibits airlines
from conducting operations during those hours without obtaining
a slot (authority to conduct a scheduled arrival or departure).
In addition, the rule provides for the confiscation of 10% of
the slots over a five year period currently held by carriers and
reallocates them through an auction process. On December 8,
2008, the United States Court of Appeals for the District of
Columbia issued an order temporarily enjoining the auctions from
taking place until such time as the Court could rule on the
merits of the case challenging the proposed auctions. We are
participating in the litigation challenging the rule, which if
ultimately successful and the auctions are permitted to proceed,
we would likely lose a portion of our operating capacity at JFK,
which would negatively impact our ability to fully utilize our
new terminal and may result in increased competition, which
could harm our business.
At LaGuardia Airport, where we maintain a small presence, the
High Density Rule was replaced by the FAA with a temporary rule
continuing the strict limitations on operations during the hours
of 6:00 a.m. to 9:59 p.m. This rule had been
scheduled to expire in late 2007 upon the enactment of a
permanent rule restructuring the rights of carriers to operate
at LaGuardia. This final rule was issued in October 2008, but
its implementation has been partially stayed. Under the current
rule, our operations remain unaffected. Should new rules be
implemented in whole or in part, our ability to maintain a full
schedule at LaGuardia would likely be impacted.
Long Beach (California) Municipal Airport is a slot-controlled
airport as a result of a 1995 court settlement. Under the
settlement, there are a total of 41 daily non-commuter departure
slots and a single slot is required for every commercial
departure. There are no plans to eliminate slot restrictions at
the Long Beach Municipal Airport. In April 2003, the FAA
approved a settlement agreement among the City of Long Beach,
American Airlines, Alaska Airlines and JetBlue with respect to
the allocation of the slots, which also provides for a priority
allocation procedure should supplemental slots above the 41
current slots become available. We have 28 slots available for
use and currently operate 30 weekday roundtrip flights from
Long Beach Municipal Airport to 14 domestic cities.
Environmental. We are subject to
various federal, state and local laws relating to the protection
of the environment, including the discharge or disposal of
materials and chemicals and the regulation of aircraft noise,
which are administered by numerous state and federal agencies.
The Airport Noise and Capacity Act of 1990 recognizes the right
of airport operators with special noise problems to implement
local noise abatement procedures as long as those procedures do
not interfere unreasonably with the interstate and foreign
commerce of the national air transportation system. Certain
airports, including San Diego and Long Beach, California,
have established restrictions to limit noise, which can include
limits on the number of hourly or daily operations and the time
of such operations. These limitations serve to protect the local
noise-sensitive communities surrounding the airport. Our
scheduled flights at Long Beach and San Diego are in
compliance with the noise curfew limits, but when we experience
irregular operations, on occasion we violate these curfews. We
have agreed to a payment structure with the Long Beach City
Prosecutor for any violations, which we pay quarterly to the
Long Beach Public Library Foundation and are based on the number
of infractions in the preceding quarter. This local ordinance
has not had, and we believe that it will not have, a negative
effect on our operations.
We have also published our initial corporate sustainability
report, entitled the 1st Annual Environmental and
Social Report 2006, which is available on our website,
www.jetblue.com. The report addresses our environmental
efforts concerning greenhouse gas emissions, conservation
efforts and social responsibility initiatives.
Foreign Operations. International air
transportation is subject to extensive government regulation.
The availability of international routes to U.S. carriers
is regulated by treaties and related agreements between the
United States and foreign governments. We currently operate
international service to The Bahamas, the Dominican Republic,
Bermuda, Aruba, the Netherlands Antilles and Mexico. JetBlue
began service to Bogota,
10
Colombia in January 2009 and is scheduled to begin service to
San Jose, Costa Rica in March 2009 and Montego Bay, Jamaica
in May 2009. To the extent we seek to provide air transportation
to additional international markets in the future, we will be
required to obtain necessary authority from the DOT and the
applicable foreign government.
Foreign Ownership. Under federal law
and the DOT regulations, we must be controlled by
United States citizens. In this regard, our president and
at least two-thirds of our board of directors must be United
States citizens and not more than 24.99% of our outstanding
common stock may be voted by
non-U.S. citizens.
We believe that we are currently in compliance with these
ownership provisions.
Other Regulations. All air carriers are
also subject to certain provisions of the Communications Act of
1934 because of their extensive use of radio and other
communication facilities, and are required to obtain an
aeronautical radio license from the FCC. To the extent we are
subject to FCC requirements, we will take all necessary steps to
comply with those requirements. Our labor relations are covered
under Title II of the Railway Labor Act of 1926 and are
subject to the jurisdiction of the National Mediation Board. In
addition, during periods of fuel scarcity, access to aircraft
fuel may be subject to federal allocation regulations. We are
also subject to state and local laws and regulations at
locations where we operate and the regulations of various local
authorities that operate the airports we serve.
Civil Reserve Air Fleet. We are a
participant in the Civil Reserve Air Fleet Program which permits
the United States Department of Defense to utilize our aircraft
during national emergencies when the need for military airlift
exceeds the capability of military aircraft. By participating in
this program, we are eligible to bid on and be awarded peacetime
airlift contracts with the military.
Risks
Related to JetBlue
We operate in an extremely competitive industry.
The domestic airline industry is characterized by low profit
margins, high fixed costs and significant price competition. We
currently compete with other airlines on all of our routes. Many
of our competitors are larger and have greater financial
resources and name recognition than we do. Following our entry
into new markets or expansion of existing markets, some of our
competitors have chosen to add service or engage in extensive
price competition. Unanticipated shortfalls in expected revenues
as a result of price competition or in the number of passengers
carried would negatively impact our financial results and harm
our business. The extremely competitive nature of the airline
industry could prevent us from attaining the level of passenger
traffic or maintaining the level of fares required to maintain
profitable operations in new and existing markets and could
impede our growth strategy, which would harm our business.
Additionally, if a traditional network airline were to fully
develop a low cost structure, or if we were to experience
increased competition from low cost carriers, our business could
be materially adversely affected.
Our business is highly dependent on the price and
availability of fuel.
Our results of operations are heavily impacted by the price and
availability of fuel. Fuel costs, which increased significantly
in 2007 and 2008, comprise a substantial portion of our total
operating expenses and fuel has been our single largest
operating expense since 2005. Our 2008 average fuel price,
including the impact of fuel hedging, has nearly doubled since
2005, which has adversely affected our operating results.
Moreover, crude oil and fuel prices have become quite volatile,
with the spot price of crude oil dropping over 75% at the end of
the fourth quarter from the historic high observed in the early
part of the third quarter of 2008. Historically, fuel costs have
been subject to wide price fluctuations based on geopolitical
factors and supply and demand. The availability of fuel is not
only dependent on crude oil, but also refining capacity. When
even a small amount of the domestic or global oil refining
capacity becomes unavailable, supply shortages can result for
extended periods of time. The availability of fuel is also
affected by demand for home heating oil, gasoline and other
petroleum products, as well as crude oil reserves, dependence on
foreign imports of crude oil and potential hostilities in oil
producing areas of the world. Because of the effects of these
factors on the price and availability of fuel, the cost and
future availability of fuel cannot be predicted with any degree
of certainty.
11
Our aircraft fuel purchase agreements do not protect us against
price increases or guarantee the availability of fuel.
Additionally, some of our competitors may have more leverage
than we do in obtaining fuel. We have and may continue to enter
into crude oil and heating oil option contracts and swap
agreements to partially protect against significant increases in
fuel prices; however, such contracts and agreements do not
completely protect us against price increases, are limited in
fuel volume and duration, and can be less effective during
volatile market conditions. Under the fuel hedge contracts that
we may enter into from time to time, counterparties to those
contracts may require us to fund the margin associated with any
loss position on the contracts if the price of crude oils falls
below specified benchmarks. Meeting our obligations to fund
these margin calls could adversely affect our liquidity.
Due to the competitive nature of the domestic airline industry,
we have not been able to adequately increase our fares to offset
the increases in fuel prices and we may not be able to do so in
the future. Future fuel increases, continued high fuel price
volatility or fuel supply shortages may result in a curtailment
of scheduled services and could have a material adverse effect
on our financial condition and results of operations.
If we fail to successfully implement our growth strategy,
our business could be harmed.
We have grown, and expect to continue to grow our business by
increasing the frequency of flights to markets we currently
serve, expanding the number of markets we serve and increasing
flight connection opportunities. Increasing the number of
markets we serve depends on our ability to access suitable
airports located in our targeted geographic markets in a manner
that is consistent with our cost strategy. We may also need to
obtain additional gates at some of our existing destinations.
Any condition that would deny, limit or delay our access to
airports we currently serve or may seek to serve in the future
would constrain our ability to grow. Opening new markets
requires us to commit a substantial amount of resources, even
before the new services commence. Expansion is also dependent
upon our ability to maintain a safe and secure operation and
requires additional personnel, equipment and facilities. An
inability to hire and retain personnel, timely secure the
required equipment and facilities in a cost-effective manner,
efficiently operate our expanded facilities, or obtain the
necessary regulatory approvals may adversely affect our ability
to achieve our growth strategy, which could harm our business.
In addition, expansion to new international markets may have
other risks due to factors specific to those markets. We may be
unable to foresee all of the risks attendant upon entering
certain new international markets or respond adequately to these
risks, and our growth strategy and our business may suffer as a
result.
Due primarily to higher fuel prices, the competitive pricing
environment and other cost increases, it has become increasingly
difficult to fund our growth profitably. As a result, in 2006 we
began modifying our growth plans by deferring some of our
scheduled deliveries of new aircraft, selling or terminating our
leases for some of our aircraft, and leasing aircraft to other
operators. We may further reduce our future growth plans from
previously announced levels. In addition, our competitors often
add service, reduce their fares
and/or offer
special promotions following our entry into a new market. We
cannot assure you that we will be able to profitably expand our
existing markets or establish new markets, and if we fail to do
so, our business could be harmed.
LiveTV has contracts to provide in-flight entertainment products
and services with eleven other airlines. At December 31,
2008, LiveTV services were available on 358 aircraft under these
agreements, with firm commitments for 405 additional aircraft
through 2015, with options for 191 additional installations
through 2017. Performance under these agreements requires that
LiveTV hire, train and retain qualified employees, obtain
component parts unique to its systems and services from their
suppliers and secure facilities necessary to perform
installations and maintenance on those systems. Should LiveTV be
unable to satisfy its commitments under these third party
contracts, our business could be harmed.
We have a significant amount of fixed obligations and we
will incur significantly more fixed obligations, which could
harm our ability to meet our growth strategy and impair our
ability to service our fixed obligations.
As of December 31, 2008, our debt of $3.15 billion
accounted for 71% of our total capitalization. In addition to
long-term debt, we have a significant amount of other fixed
obligations under leases related to our aircraft, airport
terminal space, other airport facilities and office space. As of
December 31, 2008, future
12
minimum payments under noncancelable leases and other financing
obligations were approximately $1.10 billion for 2009
through 2013 and an aggregate of $1.92 billion for the
years thereafter. We have also constructed, and in October 2008
began operating, a new terminal at JFK under a
30-year
lease with the PANYNJ. The minimum payments under this lease are
being accounted for as a financing obligation and have been
included in the totals above.
As of December 31, 2008, we had commitments of
approximately $4.97 billion to purchase 128 additional
aircraft and other flight equipment through 2016, including
estimated amounts for contractual price escalations. We will
incur additional debt and other fixed obligations as we take
delivery of new aircraft and other equipment and continue to
expand into new markets. We typically finance our aircraft
through either secured debt or lease financing. The impact on
financial institutions from the current global credit and
liquidity crisis may adversely affect the availability and cost
of credit to JetBlue as well as to prospective purchasers of our
aircraft that we undertake to sell in the future, including
financing commitments that we have already obtained for
purchases of new aircraft or purchase commitments that we have
received from prospective purchasers of aircraft owned by us.
There can be no assurance that governmental responses to the
disruptions in the financial markets will stabilize the markets
or increase liquidity and the availability of credit. Although
we believe that debt, lease financing,
and/or other
fixed obligations should be available for our aircraft
deliveries, prospective purchasers of our aircraft, and other
areas of our business, we cannot assure you that we or they will
be able to secure such financing on terms acceptable to us or
them, or at all, any of which could harm our business.
Our high level of debt and other fixed obligations could:
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impact our ability to obtain additional financing to support
capital expansion plans and for working capital and other
purposes on acceptable terms or at all;
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divert substantial cash flow from our operations and expansion
plans in order to service our fixed obligations;
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require us to incur significantly more interest or rent expense
than we currently do, since a large portion of our debt has
floating interest rates and five of our aircraft leases have
variable-rate rent; and
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place us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to
capital resources.
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Our ability to make scheduled payments on our debt and other
fixed obligations will depend on our future operating
performance and cash flows, which in turn will depend on
prevailing economic and political conditions and financial,
competitive, regulatory, business and other factors, many of
which are beyond our control. We are principally dependent upon
our operating cash flows to fund our operations and to make
scheduled payments on debt and other fixed obligations. We
cannot assure you that we will be able to generate sufficient
cash flows from our operations to pay our debt and other fixed
obligations as they become due, and if we fail to do so our
business could be harmed. If we are unable to make payments on
our debt and other fixed obligations, we could be forced to
renegotiate those obligations or seek to obtain additional
equity or other forms of additional financing. To the extent we
finance our activities with additional debt, we may become
subject to financial and other covenants that may restrict our
ability to pursue our growth strategy or otherwise constrain our
operations. We cannot assure you that our renegotiation efforts
would be successful or timely or that we could refinance our
obligations on acceptable terms, if at all.
We may be subject to unionization, work stoppages,
slowdowns or increased labor costs.
Our business is labor intensive, with labor costs representing
approximately one-fourth of our operating expenses. Unlike most
airlines, we have a non-union workforce. The unionization of any
our employees could result in demands that may increase our
operating expenses and adversely affect our financial condition
and results of operations. Any of the different crafts or
classes of our employees could unionize at any time, which would
require us to negotiate in good faith with the employee
groups certified representative concerning a collective
bargaining agreement. Ultimately, if we and the representative
were unable to reach agreement on the terms of a collective
bargaining agreement and all of the major dispute resolution
processes of the Railway Labor Act were exhausted, we could be
subject to work slowdowns or stoppages. In addition, we may be
13
subject to disruptions by organized labor groups protesting our
non-union status. Any of these events would be disruptive to our
operations and could harm our business.
We rely on maintaining a high daily aircraft utilization
rate to keep our costs low, which makes us especially vulnerable
to delays.
We maintain a high daily aircraft utilization rate, which is the
amount of time that our aircraft spend in the air carrying
passengers. High daily aircraft utilization allows us to
generate more revenue from our aircraft and is achieved in part
by reducing turnaround times at airports so we can fly more
hours on average in a day. Aircraft utilization is reduced by
delays and cancellations from various factors, many of which are
beyond our control, including adverse weather conditions,
security requirements, air traffic congestion and unscheduled
maintenance. The majority of our operations are concentrated in
the Northeast and Florida, which are particularly vulnerable to
weather and congestion delays. Reduced aircraft utilization may
limit our ability to achieve and maintain profitability as well
as lead to customer dissatisfaction.
Our business is highly dependent on the New York
metropolitan market and increases in competition or congestion
or a reduction in demand for air travel in this market, or our
inability to operate reliably out of our new terminal at JFK, or
governmental reduction of our operating capacity at JFK, would
harm our business.
We are highly dependent on the New York metropolitan market
where we maintain a large presence with approximately 62% of our
daily flights having JFK, LaGuardia, Newark, Westchester County
Airport or Newburghs Stewart International Airport as
either their origin or destination. We have experienced an
increase in flight delays and cancellations at JFK due to
airport congestion, which has adversely affected our operating
performance and results of operations. Our business could be
further harmed by an increase in the amount of direct
competition we face in the New York metropolitan market or by
continued or increased congestion, delays or cancellations. Our
business would also be harmed by any circumstances causing a
reduction in demand for air transportation in the New York
metropolitan area, such as adverse changes in local economic
conditions, negative public perception of New York City,
terrorist attacks or significant price increases linked to
increases in airport access costs and fees imposed on passengers.
Any non-performance of the buildings critical systems at
Terminal 5, such as baggage sortation, information technology,
or customer notification systems, could negatively affect our
operations and harm our business.
On October 10, 2008, the DOT issued its final Congestion
Management Rule for JFK and Newark International Airport
imposing caps on operations and slot authority requirements and
confiscation measures through an auction process. We are
participating in the litigation challenging the rule, which if
ultimately successful and the auctions are permitted to proceed,
we would likely lose a portion of our operating capacity at JFK,
which would negatively impact our ability to fully utilize our
new terminal and may result in increased competition, which
could harm our business.
A substantial portion of our long-term marketable
securities are highly rated auction rate securities, and
failures in these auctions have and may continue to adversely
impact our liquidity and results of operations.
A substantial percentage of our marketable securities portfolio
is invested in highly rated auction rate securities. Auction
rate securities are securities that are structured to allow for
short-term interest rate resets; however contractual maturities
are often well in excess of ten years. At the end of each reset
period, investors can sell or continue to hold the securities at
par. Beginning in February 2008, due to then-prevailing
conditions in the credit markets, the auction process for all of
our auction rate securities failed, which resulted in the
interest rates on these investments resetting to predetermined
rates that were, in some instances, lower than current market
rates. We will not be able to liquidate our investments in these
types of securities until a future auction is successful, the
issuer redeems the securities, a buyer is found outside the
auction process, the securities mature, or there is a default
that requires immediate repayment by the issuer. Continued
failure of auctions have adversely impacted the liquidity and
overall value of our investments, and if one or more of the
issuers of the auction rate securities in our portfolio cannot
successfully close future auctions or their credit ratings
deteriorate, this could continue to have a material adverse
effect on our results of operations. As a
14
result of these circumstances, as of December 31, 2008, we
have adjusted the carrying value of these investments through a
net impairment charge of approximately $53 million. We
continue to monitor the markets for our auction rate securities
and any changes in their fair values may result in further
impairment charges.
We rely heavily on automated systems to operate our
business and any failure of these systems could harm our
business.
We are dependent on automated systems and technology to operate
our business, enhance customer service and achieve low operating
costs. These systems include our computerized airline
reservation system, flight operations system, telecommunications
systems, website, maintenance systems, check-in kiosks and
in-flight
entertainment systems. Since we only issue electronic tickets,
our website and reservation system, the latter of which we have
recently decided to replace, must be able to accommodate a high
volume of traffic and deliver important flight information.
These systems require upgrades or replacement periodically,
which involve implementation and other operational risks, and
our business may be harmed if we fail to replace or upgrade
systems successfully.
The performance and reliability of our automated systems is
critical to our ability to operate our business and compete
effectively. We rely on the providers of our current automated
systems for technical support, even in the event we select new
systems and service providers to meet our future needs. If the
current provider were to fail to adequately provide technical
support for any one of our key existing systems, we could
experience service disruptions, which, if they were to occur,
could result in the loss of important data, increase our
expenses, decrease our revenues and generally harm our business
and reputation. Furthermore, our automated systems cannot be
completely protected against events that are beyond our control,
including natural disasters, computer viruses or
telecommunications failures. Substantial or sustained system
failures could impact customer service and result in our
customers purchasing tickets from other airlines. We have
implemented security measures and change control procedures and
have disaster recovery plans; however, we cannot assure you that
these measures are adequate to prevent disruptions, which, if
they were to occur, could result in the loss of important data,
increase our expenses, decrease our revenues and generally harm
our business and reputation.
Our liquidity could be adversely impacted in the event one
or more of our credit card processors were to impose material
reserve requirements for payments due to us from credit card
transactions.
We currently have agreements with organizations that process
credit card transactions arising from purchases of air travel
tickets by our customers. Credit card processors have financial
risk associated with tickets purchased for travel, which can
occur several weeks after the purchase. Our credit card
processing agreements provide for reserves to be deposited with
the processor in certain circumstances. We currently have a
reserve posted for our major credit card processor; if
circumstances were to occur that would require us to deposit
additional reserves with one or more of our major processors,
the negative impact on our liquidity could be significant, which
could materially adversely affect our business.
Our maintenance costs will increase as our fleet
ages.
Because the average age of our aircraft is 3.6 years, our
aircraft require less maintenance now than they will in the
future. We have incurred lower maintenance expenses because most
of the parts on our aircraft are under multi-year warranties.
Our maintenance costs will increase significantly, both on an
absolute basis and as a percentage of our operating expenses, as
our fleet ages and these warranties expire.
If we are unable to attract and retain qualified personnel
or fail to maintain our company culture, our business could be
harmed.
We compete against the other major U.S. airlines for
pilots, mechanics and other skilled labor and some of them offer
wage and benefit packages that exceed ours. We may be required
to increase wages
and/or
benefits in order to attract and retain qualified personnel or
risk considerable employee turnover. If we are unable to hire,
train and retain qualified employees, our business could be
harmed and we may be unable to complete our growth plans.
15
In addition, as we hire more people and grow, we believe it may
be increasingly challenging to continue to hire people who will
maintain our company culture. One of our competitive strengths
is our service-oriented company culture that emphasizes
friendly, helpful, team-oriented and customer-focused employees.
Our company culture is important to providing high quality
customer service and having a productive workforce that helps
keep our costs low. As we continue to grow, we may be unable to
identify, hire or retain enough people who meet the above
criteria, including those in management or other key positions.
Our company culture could otherwise be adversely affected by our
growing operations and geographic diversity. If we fail to
maintain the strength of our company culture, our competitive
ability and our business may be harmed.
Our results of operations will fluctuate.
We expect our quarterly operating results to fluctuate due to
seasonality, with high vacation and leisure demand occurring on
the Florida routes between October and April and on our western
routes during the summer. Actions of our competitors may also
contribute to fluctuations in our results. We are more
susceptible to adverse weather conditions, including snow storms
and hurricanes, as a result of our operations being concentrated
on the East Coast, than are some of our competitors. As we enter
new markets, we could be subject to additional seasonal
variations along with any competitive responses to our entry by
other airlines. Price changes in aircraft fuel as well as the
timing and amount of maintenance and advertising expenditures
also impact our operations. As a result of these factors,
quarter-to-quarter comparisons of our operating results may not
be a good indicator of our future performance. In addition, it
is possible that in any future period our operating results
could be below the expectations of investors and any published
reports or analyses regarding JetBlue. In that event, the price
of our common stock could decline, perhaps substantially.
We are subject to the risks of having a limited number of
suppliers for our aircraft, engines and a key component of our
in-flight entertainment system.
Our current dependence on two types of aircraft and engines for
all of our flights makes us vulnerable to any problems
associated with the Airbus A320 aircraft or the IAE
International Aero Engines V2527-A5 engine and the EMBRAER 190
aircraft or the General Electric Engines CF-34-10 engine,
including design defects, mechanical problems, contractual
performance by the manufacturers, or adverse perception by the
public that would result in customer avoidance or in actions by
the FAA resulting in an inability to operate our aircraft.
Carriers that operate a more diversified fleet are better
positioned than we are to manage such events.
One of the unique features of our fleet is that every seat in
each of our aircraft is equipped with free
in-flight
entertainment including
DirecTV®.
An integral component of the system is the antenna, which is
supplied to us by EMS Technologies, Inc. If EMS were to stop
supplying us with its antennas for any reason, we would have to
incur significant costs to procure an alternate supplier.
Our reputation and financial results could be harmed in
the event of an accident or incident involving our
aircraft.
An accident or incident involving one of our aircraft, or an
aircraft containing LiveTV equipment, could involve significant
potential claims of injured passengers or others in addition to
repair or replacement of a damaged aircraft and its
consequential temporary or permanent loss from service. We are
required by the DOT to carry liability insurance. Although we
believe we currently maintain liability insurance in amounts and
of the type generally consistent with industry practice, the
amount of such coverage may not be adequate and we may be forced
to bear substantial losses from an accident. Substantial claims
resulting from an accident in excess of our related insurance
coverage would harm our business and financial results.
Moreover, any aircraft accident or incident, even if fully
insured, could cause a public perception that we are less safe
or reliable than other airlines, which would harm our business.
An ownership change could limit our ability to utilize our
net operation loss carryforwards.
As of December 31, 2008, we had approximately
$576 million of estimated federal net operating loss
carryforwards for U.S. income tax purposes that begin to
expire in 2022. Section 382 of The Internal Revenue Code
imposes limitation on a corporations ability to use its
net operating loss carryforwards if it experiences
16
an ownership change. In the event an ownership
change were to occur in the future, our ability to utilize
our net operating losses could be limited.
Risks
Associated with the Airline Industry
The airline industry is particularly sensitive to changes
in economic condition.
Fundamental and permanent changes in the domestic airline
industry began several years ago following five consecutive
years of losses being reported through 2005. These losses
resulted in airlines renegotiating or attempting to renegotiate
labor contracts, reconfiguring flight schedules, furloughing or
terminating employees, as well as considering other efficiency
and cost-cutting measures. Despite these actions, several
airlines have reorganized under Chapter 11 of the
U.S. Bankruptcy Code to permit them to reduce labor rates,
restructure debt, terminate pension plans and generally reduce
their cost structure. Since 2005, the U.S. airline industry
has experienced significant consolidation and liquidations.
Current unfavorable general economic conditions, such as higher
unemployment rates, a constrained credit market, housing-related
pressures, and increased business operating costs can reduce
spending for both leisure and business travel. Unfavorable
economic conditions could also impact an airlines ability
to raise fares to counteract increased fuel, labor, and other
costs. It is foreseeable that further airline reorganizations,
consolidation, bankruptcies or liquidations may occur in the
current recessionary environment, the effects of which we are
unable to predict. We cannot assure you that the occurrence of
these events, or potential changes resulting from these events,
will not harm our business or the industry.
A future act of terrorism, the threat of such acts or
escalation of U.S. military involvement overseas could
adversely affect our industry.
Even if not directed at the airline industry, a future act of
terrorism, the threat of such acts or escalation of
U.S. military involvement overseas could have an adverse
effect on the airline industry. In the event of a terrorist
attack, the industry would likely experience significantly
reduced demand. We cannot assure you that these actions, or
consequences resulting from these actions, will not harm our
business or the industry.
Changes in government regulations imposing additional
requirements and restrictions on our operations or the
U.S. Government ceasing to provide adequate war risk
insurance could increase our operating costs and result in
service delays and disruptions.
Airlines are subject to extensive regulatory and legal
requirements, both domestically and internationally, that
involve significant compliance costs. In the last several years,
Congress has passed laws, and the DOT, FAA and the TSA have
issued regulations relating to the operation of airlines that
have required significant expenditures. We expect to continue to
incur expenses in connection with complying with government
regulations. Additional laws, regulations, taxes and airport
rates and charges have been proposed from time to time that
could significantly increase the cost of airline operations or
reduce the demand for air travel. If adopted, these measures
could have the effect of raising ticket prices, reducing revenue
and increasing costs. We cannot assure you that these and other
laws or regulations enacted in the future will not harm our
business.
The U.S. Government currently provides insurance coverage
for certain claims resulting from acts of terrorism, war or
similar events. Should this coverage no longer be offered, the
coverage that would be available to us through commercial
aviation insurers may have substantially less desirable terms,
result in higher costs and not be adequate to protect our risk,
any of which could harm our business.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
17
Aircraft
As of December 31, 2008, we operated a fleet consisting of
107 Airbus A320 aircraft each powered by two IAE International
Aero Engines V2527-A5 engines and 35 EMBRAER 190 aircraft each
powered by two General Electric Engines CF-34-10 engines, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seating
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
|
|
Average Age
|
|
Aircraft
|
|
Capacity
|
|
|
Owned
|
|
|
Leased
|
|
|
Leased
|
|
|
Total
|
|
|
in Years
|
|
|
Airbus A320
|
|
|
150
|
|
|
|
79
|
|
|
|
4
|
|
|
|
24
|
|
|
|
107
|
|
|
|
4.0
|
|
EMBRAER 190
|
|
|
100
|
|
|
|
4
|
|
|
|
|
|
|
|
31
|
|
|
|
35
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
|
83
|
|
|
|
4
|
|
|
|
55
|
|
|
|
142
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our aircraft leases have an average remaining initial lease term
of approximately 12.7 years at December 31, 2008. The
earliest of these terms ends in 2009 and the latest ends in
2025. We have the option to extend most of these leases for
additional periods or to purchase aircraft at the end of the
related lease term. All but one of our 83 owned aircraft and all
23 owned spare engines are subject to secured debt financing. We
also own two EMBRAER 190 aircraft that are currently being
leased to another air carrier and are not included in the table
above.
In January 2008, we amended our Airbus A320 purchase agreement,
deferring delivery of 16 Airbus A320 aircraft originally
scheduled for delivery from 2011 through 2012 to 2012 through
2013. This amendment also affected our A320 purchase options as
follows: (1) the deferral of eight to 2013 and 2014,
(2) the conversion of eight into purchase rights for A320
aircraft delivery through 2015 and (3) the cancellation of
four. In May 2008, we again amended our Airbus A320 purchase
agreement, deferring delivery of 21 Airbus A320 aircraft
originally scheduled for delivery from 2009 through 2011 to 2014
through 2015. In July 2008, we amended our EMBRAER 190 purchase
agreement, deferring delivery of ten EMBRAER 190 aircraft
originally scheduled for delivery from 2009 through 2011 to
2016. As of December 31, 2008, including the effects of
these amendments, we had on order 128 aircraft, which are
scheduled for delivery through 2016 , with options to acquire
108 aircraft as follows:
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|
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|
|
|
|
|
|
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|
|
Firm
|
|
|
Option
|
|
|
|
Airbus
|
|
|
EMBRAER
|
|
|
|
|
|
Airbus
|
|
|
EMBRAER
|
|
|
|
|
Year
|
|
A320
|
|
|
190
|
|
|
Total
|
|
|
A320
|
|
|
190
|
|
|
Total
|
|
|
2009
|
|
|
3
|
|
|
|
8
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
3
|
|
|
|
3
|
|
|
|
6
|
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
2011
|
|
|
5
|
|
|
|
4
|
|
|
|
9
|
|
|
|
3
|
|
|
|
11
|
|
|
|
14
|
|
2012
|
|
|
13
|
|
|
|
10
|
|
|
|
23
|
|
|
|
4
|
|
|
|
12
|
|
|
|
16
|
|
2013
|
|
|
13
|
|
|
|
12
|
|
|
|
25
|
|
|
|
7
|
|
|
|
14
|
|
|
|
21
|
|
2014
|
|
|
12
|
|
|
|
12
|
|
|
|
24
|
|
|
|
4
|
|
|
|
21
|
|
|
|
25
|
|
2015
|
|
|
9
|
|
|
|
11
|
|
|
|
20
|
|
|
|
4
|
|
|
|
20
|
|
|
|
24
|
|
2016
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
70
|
|
|
|
128
|
|
|
|
22
|
|
|
|
86
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2008, we executed a purchase agreement relating to
the sale of four new EMBRAER 190 aircraft scheduled for initial
delivery to us in the first quarter of 2009 with subsequent
delivery of these aircraft to a third party scheduled to occur
immediately after such aircraft are received by us, subject to
certain contingencies. Two of these aircraft were sold in
January 2009; however, due to the adverse global economic
conditions and changes in the credit markets that occurred in
the fourth quarter of 2008, the sales of the other two aircraft
contemplated by the purchase agreement have been cancelled. The
impact of these sales is not reflected in the table above.
Facilities
We occupy all of our facilities at each of the airports we serve
under leases or other occupancy agreements. Our agreements for
terminal passenger service facilities, which include ticket
counter and gate space, operations support area and baggage
service offices, generally have terms ranging from less than one
18
year to five years, and contain provisions for periodic
adjustments of rental rates. We also are responsible for
maintenance, insurance, utilities and certain other
facility-related expenses and services. We have entered into use
arrangements at each of the airports we serve that provide for
the non-exclusive use of runways, taxiways and other airport
facilities. Landing fees under these agreements are typically
based on the number of landings and the weight of the aircraft.
In November 2005, we executed a lease agreement with the PANYNJ
for the construction and operation of Terminal 5, which became
our principal base of operations at JFK when we began to operate
from this new 635,000 square foot, 26-gate terminal in
October 2008. The lease term ends on October 22, 2038, the
thirtieth anniversary of the date of our beneficial occupancy of
the new terminal, and we have a one-time early termination
option five years prior to the end of the scheduled lease term.
Our West Coast operations are based at Long Beach Municipal
Airport, which serves the Los Angeles area. Our operations at
Bostons Logan International Airport are based at Terminal
C, where we currently operate nine gates and 28 ticket counter
positions. Our operations at Washingtons Dulles
International Airport are based at Terminal B, where we
currently operate four gates and ten ticket counter positions.
We lease a 70,000 square foot aircraft maintenance hangar
and an adjacent 32,000 square foot office and warehouse
facility at JFK to accommodate our technical support operations
and passenger provisioning personnel. The ground lease for this
site expires in 2030. In addition, we occupy a building at JFK
where we store aircraft spare parts and perform ground equipment
maintenance.
We also lease a flight training center at Orlando International
Airport, which encompasses 80,000 square feet and is
equipped with six full flight simulators, two cabin trainers, a
training pool, classrooms and support areas. This facility,
which is capable of housing eight full flight simulators, is
being used for the initial and recurrent training of our pilots
and in-flight crew, as well as support training for our
technical operations and airport crew. In addition, we lease a
70,000 square foot hangar at Orlando International Airport,
which is used by Live TV for the installation and maintenance of
in-flight satellite television systems and aircraft maintenance.
The ground leases for our Orlando facilities expire in 2035.
Our primary corporate offices are located in Forest Hills, New
York, where we occupy space under a lease that expires in 2012,
and our finance department is based in Darien, Connecticut,
where we occupy space under a lease that expires in 2011. Our
office in Salt Lake City, Utah, where we occupy space under a
lease that expires in 2014, contains a core team of employees
who are responsible for group sales, customer service, at-home
reservation agent supervision, disbursements and certain other
finance functions. In addition to the above, our information
technology department is based in Garden City, New York, where
we occupy space under a lease that expires in 2015.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
In the ordinary course of our business, we are party to various
legal proceedings and claims which we believe are incidental to
the operation of our business. We believe that the ultimate
outcome of these proceedings to which we are currently a party
will not have a material adverse effect on our business,
financial position, results of operations or cash flows.
19
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of our security holders
during the fourth quarter of 2008.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Certain information concerning JetBlues executive officers
as of the date of this report follows. There are no family
relationships between any of our executive officers.
David Barger, age 51, is our Chief Executive Officer
and has served in this capacity since May 2007. He is also a
member of our Board of Directors. He served as our President
from August 1998 to September 2007 and Chief Operating Officer
from August 1998 to March 2007. From 1992 to 1998,
Mr. Barger served in various management positions with
Continental Airlines, including Vice President, Newark hub. He
held various director level positions at Continental Airlines
from 1988 to 1995. From 1982 to 1988, Mr. Barger served in
various positions with New York Air, including Director of
Stations.
Russell Chew, age 56, is our President and Chief
Operating Officer and has served in these capacities since
September 2007 and March 2007, respectively. Mr. Chew
served as Chief Operating Officer of the Federal Aviation
Administration from 2003 until February 2007. Before joining the
FAA, Mr. Chew was employed by American Airlines, Inc. from
1985 through 2003, most recently as Managing Director of Systems
Operations Control.
Edward Barnes, age 44, is our Executive Vice
President and Chief Financial Officer, a position he has held
since November 2007. Mr. Barnes joined us in October 2006
as Vice President, Cost Management and Financial Analysis, and
more recently served as Vice President, Finance. His prior
experience includes serving as Vice President, Controller of JDA
Software from April 2005 through September 2006; Senior Vice
President, Chief Financial Officer at Assisted Living Concepts
from December 2003 to March 2005; and Vice President, Controller
at Pegasus Solutions from June 2000 to December 2003.
Previously, he served in various positions of increasing
responsibility at Southwest Airlines Co. and America West
Airlines, Inc., with his final position at America West as Vice
President, Controller of The Leisure Company, their vacation
packaging subsidiary. He is a Certified Public Accountant and a
member of the AICPA.
Robin Hayes, age 42, is our Executive Vice President
and Chief Commercial Officer. He joined JetBlue in August 2008
after nineteen years at British Airways. In his last role at
British Airways, Mr. Hayes served as Executive Vice
President for The Americas and before that he served in a number
of operational and commercial positions in the UK and Germany.
James Hnat, age 38, is our Executive Vice President
Corporate Affairs, General Counsel and Secretary and has served
in this capacity since April 2007. He served as our Senior Vice
President, General Counsel and Assistant Secretary since March
2006, and as our General Counsel and Assistant Secretary from
February 2003 to March 2006 and as our Associate General Counsel
from June 2001 to January 2003. Mr. Hnat is a member of the
bar of New York and Massachusetts.
20
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY; RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is traded on the NASDAQ Global Select Market
under the symbol JBLU. The table below shows the high and low
sales prices for our common stock.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007 Quarter Ended
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
17.02
|
|
|
$
|
11.33
|
|
June 30
|
|
|
12.08
|
|
|
|
9.72
|
|
September 30
|
|
|
11.99
|
|
|
|
8.53
|
|
December 31
|
|
|
9.98
|
|
|
|
5.90
|
|
|
|
|
|
|
|
|
|
|
2008 Quarter Ended
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
7.33
|
|
|
$
|
4.30
|
|
June 30
|
|
|
5.99
|
|
|
|
3.52
|
|
September 30
|
|
|
6.75
|
|
|
|
3.04
|
|
December 31
|
|
|
7.20
|
|
|
|
3.09
|
|
As of January 31, 2009, there were approximately 645
holders of record of our common stock.
We have not paid cash dividends on our common stock and have no
current intention of doing so, in order to retain our earnings
to finance the expansion of our business. Any future
determination to pay cash dividends will be at the discretion of
our Board of Directors, subject to applicable limitations under
Delaware law, and will be dependent upon our results of
operations, financial condition and other factors deemed
relevant by our Board of Directors.
21
Stock
Performance Graph
This performance graph shall not be deemed filed
with the SEC or subject to Section 18 of the Exchange Act,
nor shall it be deemed incorporated by reference in any of our
filings under the Securities Act of 1933, as amended.
The following line graph compares the cumulative total
stockholder return on our common stock with the cumulative total
return of the Standard & Poors 500 Stock Index
and the AMEX Airline Index from December 31, 2003 to
December 31, 2008. The comparison assumes the investment of
$100 in our common stock and in each of the foregoing indices
and reinvestment of all dividends. The stock performance shown
represents historical performance and is not representative of
future stock performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/03
|
|
|
12/31/04
|
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
JetBlue Airways Corporation
|
|
$
|
100
|
|
|
$
|
88
|
|
|
$
|
87
|
|
|
$
|
80
|
|
|
$
|
33
|
|
|
$
|
38
|
|
S&P 500 Stock Index
|
|
|
100
|
|
|
|
109
|
|
|
|
112
|
|
|
|
128
|
|
|
|
132
|
|
|
|
81
|
|
AMEX Airline Index(1)
|
|
|
100
|
|
|
|
98
|
|
|
|
89
|
|
|
|
95
|
|
|
|
56
|
|
|
|
40
|
|
(1) As of December 31, 2008, the AMEX Airline Index
consisted of Alaska Air Group Inc., AMR Corporation, Continental
Airlines Inc., Delta Air Lines, Inc., Gol Linhas Aereas
Inteligentes, JetBlue Airways Corporation, US Airways Group
Inc., Lan Airlines SA, SkyWest Inc., Southwest Airlines Co.,
Ryanair Holdings plc., Tam S.A., and UAL Corporation.
22
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following financial information for the five years ended
December 31, 2008 has been derived from our consolidated
financial statements. This information should be read in
conjunction with the consolidated financial statements and
related notes thereto included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in millions, except per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
3,388
|
|
|
$
|
2,842
|
|
|
$
|
2,363
|
|
|
$
|
1,701
|
|
|
$
|
1,265
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
1,352
|
|
|
|
929
|
|
|
|
752
|
|
|
|
488
|
|
|
|
255
|
|
Salaries, wages and benefits (1)
|
|
|
694
|
|
|
|
648
|
|
|
|
553
|
|
|
|
428
|
|
|
|
337
|
|
Landing fees and other rents
|
|
|
199
|
|
|
|
180
|
|
|
|
158
|
|
|
|
112
|
|
|
|
92
|
|
Depreciation and amortization (2)
|
|
|
205
|
|
|
|
176
|
|
|
|
151
|
|
|
|
115
|
|
|
|
77
|
|
Aircraft rent
|
|
|
129
|
|
|
|
124
|
|
|
|
103
|
|
|
|
74
|
|
|
|
70
|
|
Sales and marketing
|
|
|
151
|
|
|
|
121
|
|
|
|
104
|
|
|
|
81
|
|
|
|
63
|
|
Maintenance materials and repairs
|
|
|
127
|
|
|
|
106
|
|
|
|
87
|
|
|
|
64
|
|
|
|
45
|
|
Other operating expenses (3)
|
|
|
422
|
|
|
|
389
|
|
|
|
328
|
|
|
|
291
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,279
|
|
|
|
2,673
|
|
|
|
2,236
|
|
|
|
1,653
|
|
|
|
1,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
109
|
|
|
|
169
|
|
|
|
127
|
|
|
|
48
|
|
|
|
111
|
|
Other income (expense) (4)
|
|
|
(185
|
)
|
|
|
(128
|
)
|
|
|
(118
|
)
|
|
|
(72
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(76
|
)
|
|
|
41
|
|
|
|
9
|
|
|
|
(24
|
)
|
|
|
75
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
23
|
|
|
|
10
|
|
|
|
(4
|
)
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(76
|
)
|
|
$
|
18
|
|
|
$
|
(1
|
)
|
|
$
|
(20
|
)
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.34
|
)
|
|
$
|
0.10
|
|
|
$
|
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.30
|
|
Diluted
|
|
$
|
(0.34
|
)
|
|
$
|
0.10
|
|
|
$
|
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
3.2
|
%
|
|
|
6.0
|
%
|
|
|
5.4
|
%
|
|
|
2.8
|
%
|
|
|
8.8
|
%
|
Pre-tax margin
|
|
|
(2.2
|
)%
|
|
|
1.4
|
%
|
|
|
0.4
|
%
|
|
|
(1.4
|
)%
|
|
|
5.9
|
%
|
Ratio of earnings to fixed charges (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.6
|
x
|
Net cash provided by (used in) operating activities
|
|
$
|
(17
|
)
|
|
$
|
358
|
|
|
$
|
274
|
|
|
$
|
170
|
|
|
$
|
199
|
|
Net cash used in investing activities
|
|
|
(247
|
)
|
|
|
(734
|
)
|
|
|
(1,307
|
)
|
|
|
(1,276
|
)
|
|
|
(720
|
)
|
Net cash provided by financing activities
|
|
|
635
|
|
|
|
556
|
|
|
|
1,037
|
|
|
|
1,093
|
|
|
|
437
|
|
|
|
|
(1) |
|
In 2005, we recorded $7 million in non-cash stock-based
compensation expense related to the acceleration of certain
employee stock options. |
|
(2) |
|
In 2008, we wrote-off $8 million related to our temporary
terminal facility at JFK. |
|
(3) |
|
In 2008, 2007, and 2006, we sold nine, three, and five Airbus
A320 aircraft, respectively, which resulted in gains of
$23 million, $7 million, and $12 million,
respectively. In 2005, we wrote-off $6 million in
development costs relating to a maintenance and inventory
tracking system that was not implemented |
|
(4) |
|
In 2008, we recorded $13 million in additional interest
expense related to the early conversion of a portion of our 5.5%
convertible debentures due 2038 and $18 million in interest
income related to the gain on extinguishment of debt. In
December 2008, we recorded an other-than-temporary impairment of
$53 million related to the write-down of the value our
auction rate securities. |
|
(5) |
|
Earnings were inadequate to cover fixed charges by
$122 million, $1 million, $17 million and
$39 million for the years ended December 31, 2008,
2007, 2006, and 2005, respectively. |
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
561
|
|
|
$
|
190
|
|
|
$
|
10
|
|
|
$
|
6
|
|
|
$
|
19
|
|
Investment securities
|
|
|
254
|
|
|
|
644
|
|
|
|
689
|
|
|
|
478
|
|
|
|
431
|
|
Total assets
|
|
|
6,023
|
|
|
|
5,598
|
|
|
|
4,843
|
|
|
|
3,892
|
|
|
|
2,797
|
|
Total debt
|
|
|
3,155
|
|
|
|
3,048
|
|
|
|
2,840
|
|
|
|
2,326
|
|
|
|
1,545
|
|
Common stockholders equity
|
|
|
1,261
|
|
|
|
1,036
|
|
|
|
952
|
|
|
|
911
|
|
|
|
754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating Statistics (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers (thousands)
|
|
|
21,920
|
|
|
|
21,387
|
|
|
|
18,565
|
|
|
|
14,729
|
|
|
|
11,783
|
|
Revenue passenger miles (millions)
|
|
|
26,071
|
|
|
|
25,737
|
|
|
|
23,320
|
|
|
|
20,200
|
|
|
|
15,730
|
|
Available seat miles (ASMs)(millions)
|
|
|
32,442
|
|
|
|
31,904
|
|
|
|
28,594
|
|
|
|
23,703
|
|
|
|
18,911
|
|
Load factor
|
|
|
80.4
|
%
|
|
|
80.7
|
%
|
|
|
81.6
|
%
|
|
|
85.2
|
%
|
|
|
83.2
|
%
|
Breakeven load factor (6)
|
|
|
84.2
|
%
|
|
|
80.7
|
%
|
|
|
81.4
|
%
|
|
|
86.1
|
%
|
|
|
77.9
|
%
|
Aircraft utilization (hours per day)
|
|
|
12.1
|
|
|
|
12.8
|
|
|
|
12.7
|
|
|
|
13.4
|
|
|
|
13.4
|
|
Average fare
|
|
$
|
139.40
|
|
|
$
|
123.23
|
|
|
$
|
119.73
|
|
|
$
|
110.03
|
|
|
$
|
103.49
|
|
Yield per passenger mile (cents)
|
|
|
11.72
|
|
|
|
10.24
|
|
|
|
9.53
|
|
|
|
8.02
|
|
|
|
7.75
|
|
Passenger revenue per ASM (cents)
|
|
|
9.42
|
|
|
|
8.26
|
|
|
|
7.77
|
|
|
|
6.84
|
|
|
|
6.45
|
|
Operating revenue per ASM (cents)
|
|
|
10.44
|
|
|
|
8.91
|
|
|
|
8.26
|
|
|
|
7.18
|
|
|
|
6.69
|
|
Operating expense per ASM (cents)
|
|
|
10.11
|
|
|
|
8.38
|
|
|
|
7.82
|
|
|
|
6.98
|
|
|
|
6.10
|
|
Operating expense per ASM, excluding fuel (cents)
|
|
|
5.94
|
|
|
|
5.47
|
|
|
|
5.19
|
|
|
|
4.92
|
|
|
|
4.75
|
|
Airline operating expense per ASM (cents) (6)
|
|
|
9.87
|
|
|
|
8.27
|
|
|
|
7.76
|
|
|
|
6.91
|
|
|
|
6.04
|
|
Departures
|
|
|
205,389
|
|
|
|
196,594
|
|
|
|
159,152
|
|
|
|
112,009
|
|
|
|
90,532
|
|
Average stage length (miles)
|
|
|
1,120
|
|
|
|
1,129
|
|
|
|
1,186
|
|
|
|
1,358
|
|
|
|
1,339
|
|
Average number of operating aircraft during period
|
|
|
139.5
|
|
|
|
127.8
|
|
|
|
106.5
|
|
|
|
77.5
|
|
|
|
60.6
|
|
Average fuel cost per gallon
|
|
$
|
2.98
|
|
|
$
|
2.09
|
|
|
$
|
1.99
|
|
|
$
|
1.61
|
|
|
$
|
1.06
|
|
Fuel gallons consumed (millions)
|
|
|
453
|
|
|
|
444
|
|
|
|
377
|
|
|
|
303
|
|
|
|
241
|
|
Percent of sales through jetblue.com during period
|
|
|
76.7
|
%
|
|
|
75.7
|
%
|
|
|
79.1
|
%
|
|
|
77.5
|
%
|
|
|
75.4
|
%
|
Full-time equivalent employees at period end (6)
|
|
|
9,895
|
|
|
|
9,909
|
|
|
|
9,265
|
|
|
|
8,326
|
|
|
|
6,413
|
|
|
|
|
(6) |
|
Excludes results of operations and employees of LiveTV, LLC,
which are unrelated to our airline operations and are immaterial
to our consolidated operating results. |
The following terms used in this section and elsewhere in this
report have the meanings indicated below:
Revenue passengers represents the total
number of paying passengers flown on all flight segments.
Revenue passenger miles represents the number
of miles flown by revenue passengers.
Available seat miles represents the number of
seats available for passengers multiplied by the number of miles
the seats are flown.
Load factor represents the percentage of
aircraft seating capacity that is actually utilized (revenue
passenger miles divided by available seat miles).
24
Breakeven load factor is the passenger load
factor that will result in operating revenues being equal to
operating expenses, assuming constant revenue per passenger mile
and expenses.
Aircraft utilization represents the average
number of block hours operated per day per aircraft for the
total fleet of aircraft.
Average fare represents the average one-way
fare paid per flight segment by a revenue passenger.
Yield per passenger mile represents the
average amount one passenger pays to fly one mile.
Passenger revenue per available seat mile
represents passenger revenue divided by available seat miles.
Operating revenue per available seat mile
represents operating revenues divided by available seat miles.
Operating expense per available seat mile
represents operating expenses divided by available seat miles.
Operating expense per available seat mile, excluding
fuel represents operating expenses, less aircraft
fuel, divided by available seat miles.
Average stage length represents the average
number of miles flown per flight.
Average fuel cost per gallon represents total
aircraft fuel costs, which excludes fuel taxes, divided by the
total number of fuel gallons consumed.
25
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are an airline that provides award-winning customer service
primarily on point-to-point routes at competitive fares. Our
value proposition includes operating a young, fuel efficient
fleet with more legroom than any other domestic airlines
coach product, free in-flight entertainment, pre-assigned
seating, unlimited snacks, and the airline industrys only
Customer Bill of Rights. At December 31, 2008, we served 52
destinations in 19 states, Puerto Rico, and five countries
in the Caribbean and Latin America, and operated over 600
flights a day with a fleet of 107 Airbus A320 aircraft and 35
EMBRAER 190 aircraft.
In 2008, we reported a net loss of $76 million and an
operating margin of 3.2%, compared to net income of
$18 million and an operating margin of 6.0% in 2007. The
year-over-year decline in our financial performance was
primarily a result of a 43% increase in our realized fuel price
and a net $53 million impairment charge related to the
write-down of our auction rate securities, or ARS, which was
mitigated in part by continued modifications to our growth plans
and increased focus on revenue initiatives. Financial
institutions in the U.S. and around the world were, and
continue to be, severely impacted by the ongoing credit and
liquidity crisis. The significant distress experienced by
financial institutions has had, and may continue to have, far
reaching adverse consequences across many industries, including
the airline industry.
Our disciplined growth strategy begins with managing the growth,
size and age of our fleet. In 2008, in response to continuing
high fuel prices and the uncertain economic conditions, we
continued to carefully manage the size of our fleet. We modified
our Airbus A320 purchase agreement twice, resulting in the
deferral of 37 aircraft previously scheduled for delivery
between 2009 and 2011 to 2012 and 2015. We also modified our
EMBRAER 190 purchase agreement, deferring delivery of ten
EMBRAER 190 aircraft previously scheduled for delivery between
2009 and 2011 to 2016. We increased the size of our A320
operating fleet by three net aircraft during the year, through
the purchase of 12 new aircraft offset by the sale of nine of
our older aircraft. Our EMBRAER 190 operating fleet increased by
a total of five net aircraft during the year, through the
acquisition of seven new aircraft offset by our leasing of two
aircraft to another airline. We sold two EMBRAER 190 aircraft in
January 2009. We may further slow our fleet growth through
additional aircraft sales, leasing of aircraft, returns of
leased aircraft
and/or
deferral of aircraft deliveries.
Our growth in 2008 was achieved largely through adding more
flights to existing routes and new routes between existing
destinations. Additionally, we shifted some of our
transcontinental capacity to other routes, primarily Caribbean
routes. We added only two new destinations in 2008, compared to
the five that were added in 2007 and 16 that were added in 2006.
In 2008, we closed our operations in Nashville, TN, Columbus,
OH, Tucson, AZ and Ontario, CA, which allowed us to redeploy
aircraft to more profitable routes. In 2009, we plan to continue
to focus on adding service between existing destinations and
rational growth in the number of new destinations, including the
January 2009 addition of Bogotá, Colombia, the March 2009
addition of San José, Costa Rica, the May 2009
addition of Montego Bay, Jamaica, and the June 2009 addition of
Los Angeles, CA.
In January 2008, we issued and sold approximately
42.6 million shares of our common stock to Deutsche
Lufthansa AG for approximately $300 million, net of
transaction costs. Following the consummation of this
transaction, Deutsche Lufthansa AG owned approximately 19% of
our total outstanding shares of common stock. In addition to
providing us much needed financial flexibility, we believe that
this investment by one of the most highly respected leaders and
most recognized brands in the global airline industry to be an
affirmation of the JetBlue brand and business model.
On October 22, 2008, we opened our new 26-gate terminal at
JFKs Terminal 5. Adjacent to this terminal is a 1,500
space parking structure and access to the AirTrain via a
connection bridge. We believe that this new terminal with its
modern amenities, concession offerings and passenger convenience
will become as integral to our customers JetBlue
Experience as our in-flight entertainment systems.
Airlines operating in the New York metropolitan area airspace
faced another difficult year in 2008. As a result of 2007 being
one of the worst years on record for flight delays, the DOT
limited the number of flights in and out of JFK during 2008.
Despite this effort to alleviate congestion in the nations
largest travel market,
26
operating conditions continued to worsen in 2008. These
challenging operating conditions were especially difficult
during the summer months of 2008 when ground delay programs were
in effect more days than not. We continue to work actively with
the Port Authority of New York and New Jersey, or PANYNJ, and
the Federal Aviation Administration, or FAA, to find solutions
to ease this congestion.
We derive our revenue primarily from transporting passengers on
our aircraft. Passenger revenue accounted for 90% of our total
operating revenues for the year ended December 31, 2008.
Revenues generated from international routes, excluding Puerto
Rico, accounted for 10% of our total passenger revenues in 2008.
Revenue is recognized either when transportation is provided or
after the ticket or customer credit expires. We measure capacity
in terms of available seat miles, which represents the number of
seats available for passengers multiplied by the number of miles
the seats are flown. Yield, or the average amount one passenger
pays to fly one mile, is calculated by dividing passenger
revenue by revenue passenger miles.
We strive to increase passenger revenue primarily by increasing
our yield per flight, which produces higher revenue per
available seat mile, or RASM. Our objective is to optimize our
fare mix to increase our overall average fare and, in certain
markets, utilize our network to maximize connecting
opportunities while continuing to provide our customers with
competitive fares. When we enter a new market, our fares are
designed to stimulate demand, particularly from fare-conscious
leisure and business travelers who might otherwise have used
alternate forms of transportation or would not have traveled at
all. In addition to our regular fare structure, we frequently
offer sale fares with shorter advance purchase requirements in
most of the markets we serve and match the sale fares offered by
other airlines. In 2008, we introduced our Even More Legroom, or
EML, seats, an optional upgrade to our product that offers seats
with additional seat pitch for a modest additional fee, which
has also allowed us to increase passenger revenues.
Other revenue consists primarily of fees charged to customers in
accordance with our published policies relating to reservation
changes and baggage limitations, the marketing component of
TrueBlue point sales, concession revenues and revenues earned by
our subsidiary, LiveTV, LLC, for the sale of, and on-going
services provided for, in-flight entertainment systems sold to
other airlines.
We maintain one of the lowest cost structures in the industry
due to the young average age of our fleet, a productive
workforce, and cost discipline. In 2009, we plan to continue our
focus on cost control while improving the JetBlue Experience for
our customers. The largest components of our operating expenses
are aircraft fuel and salaries, wages and benefits provided to
our employees. Unlike most airlines, we have a
non-union
workforce, which we believe provides us with more flexibility
and allows us to be more productive, although we are subject to
ongoing attempts at unionization. The price and availability of
aircraft fuel, which is our single largest operating expense,
are extremely volatile due to global economic and geopolitical
factors that we can neither control nor accurately predict.
Sales and marketing expenses include advertising and fees paid
to credit card companies. Our distribution costs tend to be
lower than those of most other airlines on a per unit basis
because the majority of our customers book directly through our
website or our agents. Maintenance materials and repairs are
expensed when incurred unless covered by a third party services
contract. Because the average age of our aircraft is
3.6 years, all of our aircraft require less maintenance now
than they will in the future. Our maintenance costs will
increase significantly, both on an absolute basis and as a
percentage of our unit costs, as our fleet ages. Other operating
expenses consist of purchased services (including expenses
related to fueling, ground handling, skycap, security and
janitorial services), insurance, personnel expenses, cost of
goods sold to other airlines by LiveTV, professional fees,
passenger refreshments, supplies, bad debts, communication
costs, gains on aircraft sales and taxes other than payroll
taxes, including fuel taxes.
The airline industry is one of the most heavily taxed in the
U.S., with taxes and fees accounting for approximately 14% of
the total fare charged to a customer. Airlines are obligated to
fund all of these taxes and fees regardless of their ability to
pass these charges on to the customer. Additionally, if the TSA
changes the way the Aviation Security Infrastructure Fee is
assessed, our security costs may be higher.
The airline industry has been intensely competitive in recent
years, due in part to persistently high fuel prices and the
adverse financial condition of many of the domestic airlines. In
2005 US Airways and America West merged, and each of Delta Air
Lines and Northwest Airlines filed for bankruptcy protection.
Both Delta and Northwest emerged from bankruptcy in 2007 with
lower costs and, in 2008, they merged their operations,
27
actions which have, and will continue to allow them to compete
more vigorously. In 2008, as a result of continued high fuel
prices and challenging economic conditions, at least eight
domestic airlines ceased their operations. We are unable to
predict what the effect of further industry consolidation would
be for us or for the airline industry in general.
Our ability to be profitable in this competitive environment
depends on, among other things, operating at costs equal to or
lower than those of our competitors, continuing to provide high
quality customer service and maintaining adequate liquidity
levels. Although we have been able to raise capital and continue
to grow, the highly competitive nature of the airline industry
and the impact of the current economic recession could prevent
us from attaining the passenger traffic or yields required to be
profitable in new and existing markets.
The highest levels of traffic and revenue on our routes to and
from Florida are generally realized from October through April,
and on our routes to and from the western United States in the
summer. Many of our areas of operations in the Northeast
experience bad weather conditions in the winter, causing
increased costs associated with de-icing aircraft, cancelled
flights and accommodating displaced passengers. Our Florida and
Caribbean routes experience bad weather conditions in the summer
and fall due to thunderstorms and hurricanes. As we enter new
markets, we could be subject to additional seasonal variations
along with competitive responses to our entry by other airlines.
Given our high proportion of fixed costs, this seasonality may
cause our results of operations to vary from quarter to quarter.
Outlook
for 2009
Our focus in 2009 will continue to be on rational growth,
rigorous cost control and revenue optimization while managing
risk in an uncertain and recessionary economic environment. We
expect the slower growth trend that we began to see in 2008 to
continue through 2009. However, we will continue to reallocate
capacity in order to take advantage of market opportunities,
including potential further reductions in transcontinental
flights and an increased Caribbean presence. In addition, we are
continuously looking to expand our other revenue opportunities.
We expect our full-year operating capacity for 2009 to decrease
approximately 2% to 0% over 2008 with the addition of three new
Airbus A320 aircraft and eight new EMBRAER 190 aircraft to our
operating fleet, offset by the planned lease return of one of
our Airbus A320 aircraft during the year and the sale of two of
our EMBRAER 190 aircraft in January 2009. Assuming fuel prices
of $1.99 per gallon, net of effective hedges, our cost per
available seat mile for 2009 is expected to decrease by 5% to 7%
over 2008. Our operating margin is expected to be between 12%
and 14% and our pre-tax margin is expected to be between 6% and
8% for the full year. We expect our corrected first quarter 2009
weighted shares outstanding to be 243.9 (basic and diluted) with
full year 2009 estimates to be 244.6 (basic) and 275.6 (diluted).
Results
of Operations
The U.S. domestic airline environment was extremely
challenging throughout 2008 primarily due to high aircraft fuel
prices and vigorous price competition, along with a softening
demand environment attributable to deteriorating economic
conditions. However, due to the optimization of our own fare
mix, average fares for the year increased 13% over 2007 to $139,
while load factor declined 0.3 points to 80.4% from the full
year 2007.
Our on-time performance, defined by the DOT as arrivals within
14 minutes of schedule, was 73.2% in 2008 compared to 70.2% in
2007. While we saw some improvement in our on-time performance
on a year-over-year, it continued to be affected by the fact
that a significant percentage of our flights operate out of
three of the most congested and delay-prone airports in the
U.S., as reflected by our 98.4% and 98.0% completion factors in
2008 and 2007, respectively.
Year
2008 Compared to Year 2007
We reported a net loss of $76 million in 2008 compared to
net income of $18 million in 2007. In 2008, we had
operating income of $109 million, a decrease of
$60 million over 2007, and our operating margin was 3.2%,
down 2.8 points from 2007. Diluted loss per share was $0.34 for
2008 compared to diluted earnings per share of $0.10 for 2007.
28
Operating Revenues. Operating revenues
increased 19%, or $546 million, primarily due to an
increase in passenger revenues. The $420 million increase
in passenger revenues was attributable to a 14% increase in
yield due to higher average fare offset by a slightly lower load
factor. Passenger revenues were also higher due to a 5% increase
in departures. Included in passenger revenues are the fees
collected from passengers related to our new EML product upgrade.
Other revenue increased 61%, or $126 million, primarily due
to higher change fees and excess baggage fees of
$68 million resulting from more passengers, the
introduction of the second checked bag fee in 2008, and
increased change fee rates. Other revenue also increased due to
higher LiveTV third-party revenues, rental income, mail
revenues, in-flight sales, and the marketing component of
TrueBlue point sales.
Operating Expenses. Operating expenses
increased 23%, or $606 million, primarily due to a 43%
increase in average fuel price per gallon and operating an
average of 12 additional aircraft, which provided us with higher
capacity. Operating capacity increased 2% to 32.44 billion
available seat miles in 2008 due to having 9% more average
aircraft in-service. Operating expenses per available seat mile
increased 21% to 10.11 cents. Excluding fuel, our cost per
available seat mile increased 9% in 2008. In detail, operating
costs per available seat mile were (percent changes are based on
unrounded numbers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(in cents)
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
4.17
|
|
|
|
2.91
|
|
|
|
43.1
|
%
|
Salaries, wages and benefits
|
|
|
2.14
|
|
|
|
2.03
|
|
|
|
5.2
|
|
Landing fees and other rents
|
|
|
.62
|
|
|
|
.57
|
|
|
|
8.8
|
|
Depreciation and amortization
|
|
|
.63
|
|
|
|
.55
|
|
|
|
14.7
|
|
Aircraft rent
|
|
|
.40
|
|
|
|
.39
|
|
|
|
2.5
|
|
Sales and marketing
|
|
|
.47
|
|
|
|
.38
|
|
|
|
23.4
|
|
Maintenance materials and repairs
|
|
|
.39
|
|
|
|
.33
|
|
|
|
18.4
|
|
Other operating expenses
|
|
|
1.29
|
|
|
|
1.22
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10.11
|
|
|
|
8.38
|
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, our average aircraft utilization declined 5% to 12.1. A
lower aircraft utilization results in fewer available seat miles
and, therefore, higher unit costs. We estimate that more a
significant portion of the year-over-year increase in our total
cost per available seat mile was attributable to the decrease in
our aircraft utilization and also was a significant factor of
the increase in each component.
Aircraft fuel expense increased 46%, or $423 million, which
includes the effective portion of fuel hedging, due to a 43%
increase in average fuel cost per gallon, and nine million more
gallons of aircraft fuel consumed resulting in $20 million
of additional fuel expense. Aircraft fuel prices continued to
ascend to record high levels during most of 2008, with our
average fuel price per gallon at $2.98 compared to $2.09 for the
year ended December 31, 2007. Our fuel costs represented
41% and 35% of our operating expenses in 2008 and 2007,
respectively. Based on our expected fuel volume for 2009, a $.10
per gallon increase in the cost of aircraft fuel would increase
our annual fuel expense by approximately $47 million. Cost
per available seat mile increased 43% primarily due to higher
fuel prices.
Salaries, wages and benefits increased 7%, or $46 million,
due primarily to a 4% increase in average full-time equivalent
employees and increases in pay rates, offset by a decrease in
overtime pay that was incurred in connection with the
weather-related events in the first quarter of 2007. The
increase in average full-time equivalent employees is partially
driven by our policy of not furloughing employees during
economic downturns. Cost per available seat mile increased 5% as
a result of the increases in salaries, wages, and benefits
Landing fees and other rents increased 11%, or $19 million,
due to a 5% increase in departures over 2007 and increased
airport rents associated with increased rates in existing
markets as well as the opening of two new cities in 2008. Cost
per available seat mile increased 9% due to the increased rents.
29
Depreciation and amortization increased 17%, or
$29 million, primarily due to having an average of 85 owned
and capital leased aircraft in 2008 compared to 78 in 2007 and
an $8 million asset write-off related to our temporary
terminal facility at JFK in 2008, as well as $5 million in
depreciation related to our new terminal at JFK in 2008. Cost
per available seat mile was 15% higher due to the asset
write-off.
Aircraft rent increased 4%, or $5 million, due to operating
an average of five more aircraft under operating leases in 2008
compared to 2007. Cost per available seat mile increased 3% due
to a higher percentage of our fleet being leased.
Sales and marketing expense increased 26%, or $30 million,
primarily due to $16 million in higher credit card fees
resulting from increased passenger revenues and $5 million
in commissions related to our participation in GDSs, as well as
$10 million in higher advertising costs in 2008, which
included the launch of our Happy Jetting campaign.
On a cost per available seat mile basis, sales and marketing
expense increased 23%, primarily due to higher advertising costs
and higher credit card fees associated with our increase in
average fares. We book the majority of our reservations through
a combination of our website and our agents (77% and 10% in
2008, respectively).
Maintenance materials and repairs increased 19%, or
$21 million, due to 12 more average operating aircraft in
2008 compared to 2007 and a gradual aging of our fleet. Cost per
available seat mile increased 18%, primarily due to an increase
in the average age of our fleet. Maintenance expense is expected
to increase significantly as our fleet ages.
Other operating expenses increased 8%, or $33 million,
primarily due to taxes associated with the increase in fuel
price, more LiveTV third-party customers, higher variable costs
associated with a 2% increase in capacity and a 3% increase in
the number of passengers served. Other operating expenses
include the impact of $23 million and $7 million in
gains on sales of aircraft in 2008 and 2007, respectively. Other
operating expenses were further offset in 2008 by
$7 million for certain tax incentives. Cost per available
seat mile increased 7% due primarily to additional LiveTV
third-party customer installations and taxes associated with the
increase in fuel price.
Other Income (Expense). Interest expense
increased 3%, or $7 million, primarily due to the impact of
partial conversion of our 5.5% convertible debentures due 2038
and the associated $11 million of accelerated payments from
the escrow accounts for these securities, $2 million in
issuance cost write-offs and increases of $33 million in
interest associated with the debt financing for new aircraft
deliveries and other non-aircraft related debt. Interest expense
was reduced by approximately $43 million due to lower
interest rates and the scheduled pay downs of our long-term debt
obligations and an additional $8 million related to retired
debt for sold aircraft. Interest expense also included an
increased accretion in interest related to the construction
obligation for our new terminal at JFK, of which
$12 million was capitalized. This increase in capitalized
interest was offset by lower balances on our pre-delivery
deposit facility and lower interest rates.
Interest income and other decreased 102%, or $55 million,
primarily due to a $53 million net impairment charge for
ARS and a $20 million decrease in interest income due to
lower rates of return in 2008, offset partially by
$18 million in gains on the extinguishment of debt.
Our effective tax rate was 0% in 2008 compared to 55% in 2007,
mainly due to the establishment of a valuation allowance of
$21 million related to our $67 million ARS impairment.
Our effective tax rate differs from the statutory income tax
rate due to the non deductibility of certain items for tax
purposes and the relative size of these items to our pre-tax
loss of $76 million in 2008 and pre-tax income
$41 million in 2007.
Year
2007 Compared to Year 2006
We had net income of $18 million in 2007 compared to a net
loss of $1 million in 2006. In 2007, we had operating
income of $169 million, an increase of $42 million
over 2006, and our operating margin was 6.0%, up 0.6 points from
2006. Diluted earnings per share were $0.10 for 2007 and $0.00
for 2006.
Operating Revenues. Operating revenues
increased 20%, or $479 million, primarily due to an
increase in passenger revenues. The $413 million increase
in passenger revenues was attributable to a 7.4% increase in
30
yield due to higher average fare offset by a slightly lower load
factor. Passenger revenues were also higher due to a 24%
increase in departures.
Other revenue increased 47%, or $66 million, primarily due
to higher change fees and excess baggage fees of
$28 million resulting from more passengers and higher
rates. Other revenue also increased due to higher LiveTV
third-party revenues of $12 million, rental income of
$8 million, mail revenues of $3 million and the
marketing component of TrueBlue pint sales of $3 million.
Operating Expenses. Operating expenses
increased 20%, or $437 million, primarily due to operating
an average of 21 additional aircraft, which provided us with
higher capacity, and a 5% increase in average fuel price per
gallon. Operating capacity increased 12% to 31.9 billion
available seat miles in 2007 due to having 20% more average
aircraft in-service. Our increase in capacity was partially
offset by a 3% reduction in available seat miles due to the
removal of a row of seats on our Airbus A320 aircraft in the
first quarter of 2007. Operating expenses per available seat
mile increased 7% to 8.38 cents. Excluding fuel, our cost per
available seat mile increased 5% in 2007. In detail, operating
costs per available seat mile were (percent changes are based on
unrounded numbers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(in cents)
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
2.91
|
|
|
|
2.63
|
|
|
|
10.7
|
%
|
Salaries, wages and benefits
|
|
|
2.03
|
|
|
|
1.94
|
|
|
|
5.1
|
|
Landing fees and other rents
|
|
|
.57
|
|
|
|
.55
|
|
|
|
2.5
|
|
Depreciation and amortization
|
|
|
.55
|
|
|
|
.53
|
|
|
|
4.2
|
|
Aircraft rent
|
|
|
.39
|
|
|
|
.36
|
|
|
|
7.2
|
|
Sales and marketing
|
|
|
.38
|
|
|
|
.36
|
|
|
|
4.3
|
|
Maintenance materials and repairs
|
|
|
.33
|
|
|
|
.30
|
|
|
|
8.8
|
|
Other operating expenses
|
|
|
1.22
|
|
|
|
1.15
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8.38
|
|
|
|
7.82
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007, our average stage length declined 5% to
1,129 miles due to increased operation of the
shorter-range
EMBRAER 190 aircraft. A shorter average stage length results in
fewer available seat miles and, therefore, higher unit costs. We
estimate that more than half of the year-over-year increase in
our total cost per available seat mile was attributable to the
decrease in our average stage length and also was a significant
factor of the increase in each component.
Aircraft fuel expense increased 24%, or $177 million, due
to 67 million more gallons of aircraft fuel consumed
resulting in $133 million of additional fuel expense and a
5% increase in average fuel cost per gallon, or
$44 million. Aircraft fuel prices remained at or near
historically high levels in 2007, with our average fuel price
per gallon at $2.09 compared to $1.99 for the year ended
December 31, 2006. Our fuel costs represented 35% and 34%
of our operating expenses in 2007 and 2006, respectively. Our
fuel consumption per block hour decreased 3% due to utilization
of the lighter EMBRAER 190 aircraft and various fuel
conservation initiatives. Cost per available seat mile increased
11% primarily due to higher fuel prices and decreased stage
length.
Salaries, wages and benefits increased 17%, or $95 million,
due primarily to changes in our employee retirement plan,
increases in our 2007 pilot pay rates, increased profit sharing,
and overtime pay resulting from the weather-related events in
the first quarter of 2007. Specifically, we recorded
$20 million of profit sharing in 2007 compared to
$3 million in 2006. Cost per available seat mile increased
5% as a result of the 2007 pilot pay increases and profit
sharing.
Landing fees and other rents increased 14%, or $22 million,
due to a 24% increase in departures over 2006 and increased
airport rents associated with opening five new cities in 2007.
Cost per available seat mile increased 3% due to the decrease in
average stage length.
31
Depreciation and amortization increased 16%, or
$25 million, primarily due to having an average of 78 owned
and capital leased aircraft in 2007 compared to 67 in 2006.
Aircraft rent increased 20%, or $21 million, due to seven
new EMBRAER 190 aircraft leases. Cost per available seat mile
increased 7% due to a higher percentage of our fleet being
leased.
Sales and marketing expense increased 16%, or $17 million,
primarily due to $11 million in higher credit card fees
resulting from increased passenger revenues and $5 million
in commissions related to our participation in GDSs. On a cost
per available seat mile basis, sales and marketing expense
increased 4% primarily due to higher credit card fees and more
GDS commissions. We book the majority of our reservations
through a combination of our website and our agents (76% and 16%
in 2007, respectively).
Maintenance materials and repairs increased 21%, or
$19 million, due to 21 more average operating aircraft in
2007 compared to 2006 and a gradual aging of our fleet. Cost per
available seat mile increased 9%, primarily due to an increase
in the average age of our fleet. Maintenance costs are expected
to increase significantly as our fleet ages.
Other operating expenses increased 19%, or $61 million,
primarily due to higher variable costs associated with 12%
increased capacity and a 15% increase in the number of
passengers served. $4 million of the increase is related to
LiveTVs development of in-flight data connectivity and
$5 million is attributable to higher interrupted trip
expenses. In addition, other operating expenses include
$7 million and $12 million in gains on sales of
aircraft in 2007 and 2006, respectively. Cost per available seat
mile increased 6% due primarily to fewer gains on the sale of
aircraft.
Other Income (Expense). Interest expense
increased 31%, or $52 million, primarily due to increases
of $34 million in interest associated with the debt or
capital lease financing for new aircraft deliveries,
$13 million of interest for the financing of previously
unsecured property and $18 million of interest related to
our construction obligation for our new terminal at JFK.
Interest expense was reduced by approximately $7 million
due to the scheduled pay downs of our long-term debt obligations
and by an additional $6 million related to retired debt for
sold aircraft. The increase in capitalized interest was
primarily attributable to the higher interest expense incurred
for our new terminal.
Interest income and other increased 96%, or $26 million,
primarily due to a $17 million increase in interest income
due to higher average cash and investment balances and fuel
hedge gains of $5 million in 2007 compared to fuel hedge
losses of $5 million in 2006. We are unable to predict the
amount of accounting ineffectiveness related to our crude and
heating oil derivative instruments each period, or the potential
loss of hedge accounting, which is determined on a
derivative-by-derivative
basis, due to the volatility in the market for these commodities.
Our effective tax rate decreased to 55% in 2007 from 109% in
2006. Our effective tax rate differs from the statutory income
tax rate due to the nondeductibility of certain items for tax
purposes and the relative size of these items to our pre-tax
income of $41 million and $9 million in 2007 and 2006,
respectively.
32
Quarterly
Results of Operations
The following table sets forth selected financial data and
operating statistics for the four quarters ended
December 31, 2008. The information for each of these
quarters is unaudited and has been prepared on the same basis as
the audited consolidated financial statements appearing
elsewhere in this
Form 10-K.
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|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
Statements of Operations Data (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
816
|
|
|
$
|
859
|
|
|
$
|
902
|
|
|
$
|
811
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
308
|
|
|
|
370
|
|
|
|
394
|
|
|
|
280
|
|
Salaries, wages and benefits
|
|
|
178
|
|
|
|
168
|
|
|
|
173
|
|
|
|
175
|
|
Landing fees and other rents
|
|
|
51
|
|
|
|
49
|
|
|
|
52
|
|
|
|
48
|
|
Depreciation and amortization (1)
|
|
|
45
|
|
|
|
46
|
|
|
|
54
|
|
|
|
60
|
|
Aircraft rent
|
|
|
32
|
|
|
|
32
|
|
|
|
33
|
|
|
|
32
|
|
Sales and marketing
|
|
|
39
|
|
|
|
42
|
|
|
|
38
|
|
|
|
33
|
|
Maintenance materials and repairs
|
|
|
33
|
|
|
|
32
|
|
|
|
32
|
|
|
|
30
|
|
Other operating expenses (2)
|
|
|
113
|
|
|
|
99
|
|
|
|
104
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
799
|
|
|
|
838
|
|
|
|
880
|
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
17
|
|
|
|
21
|
|
|
|
22
|
|
|
|
49
|
|
Other income (expense) (3)
|
|
|
(30
|
)
|
|
|
(31
|
)
|
|
|
(26
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(13
|
)
|
|
|
(10
|
)
|
|
|
(4
|
)
|
|
|
(49
|
)
|
Income tax expense (benefit)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(8
|
)
|
|
$
|
(7
|
)
|
|
$
|
(4
|
)
|
|
$
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
2.2
|
%
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
|
|
6.1
|
%
|
Pre-tax margin
|
|
|
(1.5
|
)%
|
|
|
(1.2
|
)%
|
|
|
(0.5
|
)%
|
|
|
(6.0
|
)%
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers (thousands)
|
|
|
5,518
|
|
|
|
5,637
|
|
|
|
5,657
|
|
|
|
5,108
|
|
Revenue passenger miles (millions)
|
|
|
6,563
|
|
|
|
6,756
|
|
|
|
6,848
|
|
|
|
5,904
|
|
Available seat miles ASM (millions)
|
|
|
8,395
|
|
|
|
8,383
|
|
|
|
8,154
|
|
|
|
7,510
|
|
Load factor
|
|
|
78.2
|
%
|
|
|
80.6
|
%
|
|
|
84.0
|
%
|
|
|
78.6
|
%
|
Breakeven load factor (4)
|
|
|
82.2
|
%
|
|
|
84.1
|
%
|
|
|
89.7
|
%
|
|
|
80.6
|
%
|
Aircraft utilization (hours per day)
|
|
|
12.9
|
|
|
|
12.6
|
|
|
|
11.7
|
|
|
|
11.2
|
|
Average fare
|
|
$
|
135.64
|
|
|
$
|
138.13
|
|
|
$
|
142.55
|
|
|
$
|
141.37
|
|
Yield per passenger mile (cents)
|
|
|
11.40
|
|
|
|
11.53
|
|
|
|
11.78
|
|
|
|
12.23
|
|
Passenger revenue per ASM (cents)
|
|
|
8.92
|
|
|
|
9.29
|
|
|
|
9.89
|
|
|
|
9.62
|
|
Operating revenue per ASM (cents)
|
|
|
9.72
|
|
|
|
10.24
|
|
|
|
11.07
|
|
|
|
10.80
|
|
Operating expense per ASM (cents)
|
|
|
9.51
|
|
|
|
9.99
|
|
|
|
10.80
|
|
|
|
10.14
|
|
Operating expense per ASM, excluding fuel (cents)
|
|
|
5.84
|
|
|
|
5.59
|
|
|
|
5.96
|
|
|
|
6.42
|
|
Airline operating expense per ASM (cents) (4)
|
|
|
9.37
|
|
|
|
9.69
|
|
|
|
10.56
|
|
|
|
9.86
|
|
Departures
|
|
|
52,265
|
|
|
|
52,236
|
|
|
|
51,125
|
|
|
|
49,763
|
|
Average stage length (miles)
|
|
|
1,131
|
|
|
|
1,138
|
|
|
|
1,132
|
|
|
|
1,075
|
|
Average number of operating aircraft during period
|
|
|
136.3
|
|
|
|
139.6
|
|
|
|
142.2
|
|
|
|
139.9
|
|
Average fuel cost per gallon
|
|
$
|
2.65
|
|
|
$
|
3.17
|
|
|
$
|
3.42
|
|
|
$
|
2.67
|
|
Fuel gallons consumed (millions)
|
|
|
117
|
|
|
|
116
|
|
|
|
115
|
|
|
|
105
|
|
Percent of sales through jetblue.com during period
|
|
|
76.7
|
%
|
|
|
77.2
|
%
|
|
|
76.9
|
%
|
|
|
75.7
|
%
|
Full-time equivalent employees at period end (4)
|
|
|
10,165
|
|
|
|
9,856
|
|
|
|
9,398
|
|
|
|
9,895
|
|
|
|
|
(1) |
|
During the third quarter, we wrote off $8 million related
to our temporary terminal facility at JFK. |
33
|
|
|
(2) |
|
During the second, third and fourth quarters, we sold a total of
nine aircraft, which resulted in gains of $13 million,
$2 million and $8 million, respectively. |
|
(3) |
|
During the third and fourth quarters, we recorded an additional
$5 million and $8 million, respectively, in interest
expense related to the early conversion of a portion of our 5.5%
convertible debentures due 2038. Additionally, in the third and
fourth quarters, we recognized $12 million and
$6 million in interest income related to the gain on
extinguishment of debt, respectively. In the fourth quarter, we
recorded a net
other-than-temporary
impairment of $53 million related to the write-down in the
value of our ARS. |
|
(4) |
|
Excludes results of operations and employees of LiveTV, LLC,
which are unrelated to our airline operations and are immaterial
to our consolidated operating results. |
Although we have continued to experience significant revenue
growth, this trend may not continue. We expect our expenses to
continue to increase significantly as we acquire additional
aircraft, as our fleet ages and as we expand the frequency of
flights in existing markets and enter into new markets.
Accordingly, the comparison of the financial data for the
quarterly periods presented may not be meaningful. In addition,
we expect our operating results to fluctuate significantly from
quarter to quarter in the future as a result of various factors,
many of which are outside our control. Consequently, we believe
that quarter-to-quarter comparisons of our operating results may
not necessarily be meaningful and you should not rely on our
results for any one quarter as an indication of our future
performance.
Liquidity
and Capital Resources
At December 31, 2008, we had cash and cash equivalents of
$561 million, compared to cash and cash equivalents of
$190 million at December 31, 2007. Cash flows used in
operating activities totaled $17 million in 2008 compared
to cash flows provided by operating activities of
$358 million in 2007 and $274 million in 2006. The
$375 million decrease in cash flows from operations in 2008
compared to 2007 was primarily as a result of a 43% higher price
of fuel in 2008 compared to 2007 and the $149 million in
collateral we posted for margin calls related to our outstanding
fuel hedge and interest rate swap contracts, offset in part by
higher yields. We also posted $70 million in restricted
cash that collateralizes letters of credit issued to certain of
our business partners, including $55 million for our
primary credit card processor. Cash flows from operations in
2007 compared to 2006 increased due to the growth of our
business. We rely primarily on cash flows from operations to
provide working capital for current and future operations.
At December 31, 2008, we had two lines of credit, totaling
$163 million secured by all of our ARS, as well as one
short-term borrowing facility for certain aircraft predelivery
deposits. At December 31, 2008, we had a total of
$173 million in borrowings outstanding under these
facilities.
Net cash provided by investing and financing activities was
$388 million in 2008 compared to net cash used in investing
and financing activities of $178 million in 2007 and
$270 million in 2006.
Investing Activities. During 2008, capital
expenditures related to our purchase of flight equipment
included expenditures of $587 million for 18 aircraft and
four spare engines, $49 million for flight equipment
deposits and $7 million for spare part purchases. Capital
expenditures for other property and equipment, including ground
equipment purchases and facilities improvements, were
$60 million. Expenditures related to the construction of
our new terminal at JFK totaled $142 million. Net cash
provided by the sale of investment securities was
$328 million. Other investing activities included the
receipt of $299 million in proceeds from the sale of nine
aircraft.
During 2007, capital expenditures related to our purchase of
flight equipment included expenditures of $531 million for
17 aircraft and four spare engines, $128 million for flight
equipment deposits and $12 million for spare part
purchases. Capital expenditures for other property and
equipment, including ground equipment purchases and facilities
improvements, were $74 million. Expenditures related to the
construction of our new terminal at JFK totaled
$242 million. Net cash provided by the sale of investment
securities was $78 million. Other investing activities
included the receipt of $100 million in proceeds from the
sale of three Airbus A320 aircraft, the release of
$72 million related to restricted cash that collateralized
a letter of credit we had posted in connection with our new
terminal lease at JFK and the refund of $12 million in
flight equipment deposits related to aircraft delivery deferrals.
34
Financing Activities. Financing activities
during 2008 consisted primarily of (1) the issuance of
approximately 42.6 million shares of common stock to
Deutsche Lufthansa AG for approximately $300 million, net
of transaction costs, (2) our public offering of
$201 million aggregate principal amount of 5.5% convertible
debentures due 2038, raising net proceeds of approximately
$165 million after depositing $32 million in separate
interest escrow accounts for these securities and issuance
costs, (3) our issuance of $340 million in fixed rate
equipment notes to various financial institutions secured by
eleven aircraft, (4) our issuance of $181 million in
floating rate equipment notes to various financial institutions
secured by six aircraft, (5) proceeds of two lines of
credit totaling $163 million collateralized by our ARS,
(6) reimbursement of construction costs incurred for our
new terminal at JFK of $138 million, (7) the financing
of four spare engine purchases of $26 million, (8) the
sale and leaseback over 18 years of one aircraft for
$26 million by a U.S. leasing institution,
(9) scheduled maturities of $404 million of debt,
including the repayment of $174 million principal amount of
3.5% convertible debt issued in 2003, (10) the repayment of
$209 million of debt in connection with the sale of nine
aircraft and (11) the repurchase of $73 million
principal amount of 3.75% convertible debentures due 2035 for
$55 million.
Financing activities during 2007 consisted primarily of
(1) the sale and leaseback over 18 years of seven
EMBRAER 190 aircraft for $183 million by a
U.S. leasing institution, (2) our issuance of
$278 million in fixed rate equipment notes to various
European financial institutions secured by eight Airbus A320
aircraft, (3) our issuance of $69 million in floating
rate equipment notes to various European financial institutions
secured by two Airbus A320 aircraft, (4) reimbursement of
construction costs incurred for our new terminal at JFK of
$242 million, (5) the financing of four spare engine
purchases of $29 million, (6) scheduled maturities of
$197 million of debt, and (7) the repayment of
$68 million of debt in connection with the sale of three
Airbus A320 aircraft.
In June 2006, we filed an automatic shelf registration statement
with the SEC relating to our sale, from time to time, in one or
more public offerings of debt securities, pass-through
certificates, common stock, preferred stock
and/or other
securities. The net proceeds of any securities we sell under
this registration statement may be used to fund working capital
and capital expenditures, including the purchase of aircraft and
construction of facilities on or near airports. Through
December 31, 2008, we had issued a total of
$635 million of securities under this registration
statement.
In April 2008, we filed a prospectus supplement under our
automatic shelf registration statement registering the shares of
our common stock issued to Deutsche Lufthansa AG in January
2008. Such shares were registered pursuant to our obligations
under our registration rights agreement with Deutsche Lufthansa
AG. We have not received the proceeds of any shares sold by
Deutsche Lufthansa AG.
None of our lenders or lessors are affiliated with us. Our
short-term borrowings consist of a floating rate facility with a
group of commercial banks to finance aircraft predelivery
deposits and a secured line of credit, used for general
operating activities.
Capital Resources. We have been able to
generate sufficient funds from operations to meet our working
capital requirements. Other than two lines of credit, which are
secured by ARS held by us, and our short-term aircraft
predelivery deposit facility, substanitally all of our property
and equipment is encumbered. We typically finance our aircraft
through either secured debt or lease financing. At
December 31, 2008, we operated a fleet of 142 aircraft, of
which 55 were financed under operating leases, four were
financed under capital leases and the remaining 83 were financed
by secured debt. Financing in the form of secured debt or leases
has been arranged for all three Airbus A320 aircraft and for the
six net EMBRAER 190 aircraft scheduled for delivery in
2009. Although we believe that debt
and/or lease
financing should be available for our remaining aircraft
deliveries, we cannot assure you that we will be able to secure
financing on terms attractive to us, if at all. While these
financings may or may not result in an increase in liabilities
on our balance sheet, our fixed costs will increase
significantly regardless of the financing method ultimately
chosen. To the extent we cannot secure financing, we may be
required to modify our aircraft acquisition plans or incur
higher than anticipated financing costs.
Working Capital. We had a working capital
deficit of $119 million at December 31, 2008, which is
customary for airlines since air traffic liability is classified
as a current liability, compared to a working capital deficit of
$140 million at December 31, 2007. Our working capital
includes the fair value of our fuel hedge
35
derivatives, which was a liability of $128 million at
December 31, 2008 and an asset of $33 million at
December 31, 2007. We reduced our December 31, 2008
liability associated with these instruments by posting
$138 million in cash collateral with our counterparties.
Also contributing to our working capital deficit is the
classification of our $244 million of ARS as long-term
assets at December 31, 2008.
At December 31, 2007, we had $611 million invested in
ARS, which were included in short-term investments. Beginning in
February 2008, all of the ARS then held by us experienced failed
auctions which resulted in us continuing to hold these
securities beyond the initial auction reset periods. With
auctions continuing to fail through the end of 2008, we have
classified all of our ARS as long-term, since maturities of the
underlying debt securities range from 20 to 40 years.
Although the auctions for the securities have failed, we have
not experienced any defaults and continue to earn and receive
interest on all of these investments at the maximum contractual
rate. As a result of the illiquidity in the market following the
auction failures, we have recorded an other-than-temporary
impairment charge of $67 million through earnings related
to the ARS we hold, bringing the carrying value at
December 31, 2008 to $244 million.
All of our ARS are collateralized by student loan portfolios
(substantially all of which are guaranteed by the United States
Government), $284 million par value of which had a AAA
rating and the remainder of which had an A rating. Despite the
quality of the underlying collateral, the market for ARS and
other securities has been diminished due to the lack of
liquidity experienced in the market throughout 2008 and expected
to be experienced into the future. We continue to monitor the
market for our ARS and any change in their fair values will be
reflected in other income/expense in future periods.
During 2008, various regulatory agencies began investigating the
sales and marketing activities of the banks and broker-dealers
that sold ARS, alleging violations of federal and state laws in
connection with these activities. One of the two broker-dealers
from which we purchased ARS has since announced settlements
under which they will repurchase the ARS at par at a future
date. As a result of our participation in this settlement
agreement, UBS is required to repurchase our ARS brokered by
them beginning June 10, 2010. We have participated in this
settlement agreement and accordingly have a separate put
agreement asset recorded at fair value of $14 million on
our consolidated balance sheet at December 31, 2008.
We expect to meet our obligations as they become due through
available cash, investment securities and internally generated
funds, supplemented as necessary by debt
and/or
equity financings and proceeds from aircraft sale and leaseback
transactions. We have recently sold two EMBRAER 190 aircraft in
January 2009 and may further reduce our obligations through
additional aircraft sales
and/or
return of leased aircraft; however, our ability to do so is
dependent on factors outside of our control, including the
ability of the prospective purchasers to obtain third-party
financing. We expect to generate positive working capital
through our operations. However, we cannot predict what the
effect on our business might be from the extremely competitive
environment we are operating in or from events that are beyond
our control, such as the extreme volatility in fuel prices, the
current economic recession and global credit and liquidity
crisis, weather-related disruptions, the impact of airline
bankruptcies or consolidations, U.S. military actions or
acts of terrorism. Assuming that we utilize the predelivery
short-term borrowing facility available to us, as well as our
two lines of credit, we believe the working capital available to
us will be sufficient to meet our cash requirements for at least
the next 12 months.
Contractual
Obligations
Our noncancelable contractual obligations at December 31,
2008 include (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due in
|
|
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Long-term debt and capital lease obligations (1)
|
|
$
|
4,055
|
|
|
$
|
301
|
|
|
$
|
533
|
|
|
$
|
292
|
|
|
$
|
283
|
|
|
$
|
473
|
|
|
$
|
2,173
|
|
Lease commitments
|
|
|
2,021
|
|
|
|
223
|
|
|
|
201
|
|
|
|
186
|
|
|
|
166
|
|
|
|
139
|
|
|
|
1,106
|
|
Flight equipment obligations
|
|
|
4,975
|
|
|
|
350
|
|
|
|
300
|
|
|
|
465
|
|
|
|
925
|
|
|
|
960
|
|
|
|
1,975
|
|
Short-term borrowings
|
|
|
120
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing obligations and other (2)
|
|
|
3,645
|
|
|
|
182
|
|
|
|
141
|
|
|
|
154
|
|
|
|
188
|
|
|
|
205
|
|
|
|
2,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,816
|
|
|
$
|
1,176
|
|
|
$
|
1,175
|
|
|
$
|
1,097
|
|
|
$
|
1,562
|
|
|
$
|
1,777
|
|
|
$
|
8,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes actual interest and estimated interest for
floating-rate debt based on December 31, 2008 rates. |
36
|
|
|
(2) |
|
Amounts include noncancelable commitments for the purchase of
goods and services. |
The interest rates are fixed for $1.58 billion of our debt
and capital lease obligations, with the remaining
$1.45 billion having floating interest rates. The floating
interest rates adjust quarterly or semi-annually based on the
London Interbank Offered Rate, or LIBOR. The weighted average
maturity of all of our debt was nine years at December 31,
2008. We are not subject to any financial covenants in any of
our debt obligations, except for the requirement to maintain
$300 million in cash and cash equivalents related to our
$110 million line of credit agreement entered into in July
2008. Our spare parts pass-through certificates issued in
November 2006 require us to maintain certain non-financial
collateral coverage ratios, which could require us to provide
additional spare parts collateral or redeem some or all of the
related equipment notes. At December 31, 2008, we were in
compliance with all covenants of our debt and lease agreements
and 89% of our owned property and equipment was collateralized.
We have operating lease obligations for 55 aircraft with lease
terms that expire from 2009 to 2025. Five of these leases have
variable-rate rent payments that adjust semi-annually based on
LIBOR. We also lease airport terminal space and other airport
facilities in each of our markets, as well as office space and
other equipment. We have $27 million of restricted assets
pledged under standby letters of credit related to certain of
our leases which will expire at the end of the related lease
terms.
Including the effects of the 2008 amendments to our Airbus and
EMBRAER purchase agreements, our firm aircraft orders at
December 31, 2008 consisted of 58 Airbus A320 aircraft and
70 EMBRAER 190 aircraft scheduled for delivery as follows: 11 in
2009, 6 in 2010, 9 in 2011, 23 in 2012, 25 in 2013, 24 in 2014,
20 in 2015, and 10 in 2016. We meet our predelivery deposit
requirements for our aircraft by paying cash or by using
short-term borrowing facilities for deposits required six to
24 months prior to delivery. Any predelivery deposits paid
by the issuance of notes are fully repaid at the time of
delivery of the related aircraft.
We also have options to acquire 22 additional Airbus A320
aircraft for delivery from 2011 through 2015 and 86 additional
EMBRAER 190 aircraft for delivery from 2009 through 2015. We can
elect to substitute Airbus A321 aircraft or A319 aircraft for
the A320 aircraft until 21 months prior to the scheduled
delivery date for those aircraft not on firm order.
In October 2008, we began operating out of our new Terminal 5 at
JFK, or Terminal 5, which we had been constructing since
November 2005. The construction and operation of this facility
is governed by a lease agreement that we entered into with the
PANYNJ in 2005. We are responsible for making various payments
under the lease, including ground rents for the new terminal
site which began on lease execution in 2005 and facility rents
that commenced in October 2008 upon our occupancy of the new
terminal. The facility rents are based on the number of
passengers enplaned out of the new terminal, subject to annual
minimums. The PANYNJ has reimbursed us for costs of this project
in accordance with the terms of the lease, except for
approximately $76 million in leasehold improvements that
have been provided by us. For financial reporting purposes, this
project is being accounted for as a financing obligation, with
the constructed asset and related liability being reflected on
our balance sheets. Minimum ground and facility rents for this
terminal totaling $1.29 billion are included in the
commitments table above as lease commitments and financing
obligations.
Anticipated capital expenditures for facility improvements,
spare parts and ground purchases in 2009 are projected to be
approximately $185 million. Our commitments also include
those of LiveTV, which has several noncancelable long-term
purchase agreements with its suppliers to provide equipment to
be installed on its customers aircraft, including
JetBlues aircraft.
We enter into individual employment agreements with each of our
FAA-licensed employees. Each employment agreement is for a term
of five years and automatically renews for an additional
five-year term unless either the employee or we elect not to
renew it. Pursuant to these agreements, these employees can only
be terminated for cause. In the event of a downturn in our
business that would require a reduction in work hours, we are
obligated to pay these employees a guaranteed level of income
and to continue their benefits. As we are not currently
obligated to pay this guaranteed income and benefits, no amounts
related to these guarantees are included in the table above.
37
Off-Balance
Sheet Arrangements
None of our operating lease obligations are reflected on our
balance sheet. Although some of our aircraft lease arrangements
are variable interest entities, as defined by FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, or FIN 46, none of them require
consolidation in our financial statements. The decision to
finance these aircraft through operating leases rather than
through debt was based on an analysis of the cash flows and tax
consequences of each option and a consideration of our liquidity
requirements. We are responsible for all maintenance, insurance
and other costs associated with operating these aircraft;
however, we have not made any residual value or other guarantees
to our lessors.
We have determined that we hold a variable interest in, but are
not the primary beneficiary of, certain pass-through trusts
which are the purchasers of equipment notes issued by us to
finance the acquisition of new aircraft and certain aircraft
spare parts owned by JetBlue and held by such pass-through
trusts. These pass-through trusts maintain liquidity facilities
whereby a third party agrees to make payments sufficient to pay
up to 18 months of interest on the applicable certificates
if a payment default occurs. The liquidity providers for the
Series 2004-1
aircraft certificates and the spare parts certificates are
Landesbank Hessen-Thüringen Girozentrale and Morgan Stanley
Capital Services Inc. The liquidity providers for the
Series 2004-2
aircraft certificates are Landesbank Baden-Württemberg and
Citibank, N.A.
We utilize a policy provider to provide credit support on our
Class G-1
and
Class G-2
floating rate enhanced equipment notes. The policy provider has
unconditionally guaranteed the payment of interest on the
certificates when due and the payment of principal on the
certificates no later than 18 months after the final
expected regular distribution date. The policy provider is MBIA
Insurance Corporation (a subsidiary of MBIA, Inc.). Financial
information for the parent company of the policy provider is
available at the SECs website
at http://www.sec.gov
or at the SECs public reference room in
Washington, D.C.
We have also made certain guarantees and indemnities to other
unrelated parties that are not reflected on our balance sheet,
which we believe will not have a significant impact on our
results of operations, financial condition or cash flows. We
have no other off-balance sheet arrangements. See Notes 2,
3 and 12 to our consolidated financial statements for a more
detailed discussion of our variable interests and other
contingencies, including guarantees and indemnities.
Critical
Accounting Policies and Estimates
The preparation of our financial statements in conformity with
generally accepted accounting principles requires management to
adopt accounting policies and make estimates and judgments to
develop amounts reported in our financial statements and
accompanying notes. We maintain a thorough process to review the
application of our accounting policies and to evaluate the
appropriateness of the estimates that are required to prepare
our financials statements. We believe that our estimates and
judgments are reasonable; however, actual results and the timing
of recognition of such amounts could differ from those
estimates. In addition, estimates routinely require adjustment
based on changing circumstances and the receipt of new or better
information.
Critical accounting policies and estimates are defined as those
that are reflective of significant judgments and uncertainties,
and potentially result in materially different results under
different assumptions and conditions. The policies and estimates
discussed below have been reviewed with our independent
registered public accounting firm and with the Audit Committee
of our Board of Directors. For a discussion of these and other
accounting policies, see Note 1 to our consolidated
financial statements.
Passenger revenue. Passenger ticket sales are
initially deferred in air traffic liability. The air traffic
liability also includes customer credits issued and unused
tickets whose travel date has passed. Credit for unused tickets
and customer credits can each be applied towards another ticket
within 12 months of the original scheduled service or
12 months from the issuance of the customer credit. Revenue
is recognized when transportation is provided or when a ticket
or customer credit expires. We also defer in the air traffic
liability, an estimate for customer credits issued in
conjunction with the JetBlue Airways Customer Bill of Rights
that are expected to be ultimately redeemed. These estimates are
based on historical experience and are periodically evaluated,
and adjusted if necessary, based on actual credit usage.
Accounting for long-lived assets. In
accounting for long-lived assets, we make estimates about the
expected useful lives, projected residual values and the
potential for impairment. In estimating useful lives and
38
residual values of our aircraft, we have relied upon actual
industry experience with the same or similar aircraft types and
our anticipated utilization of the aircraft. Changing market
prices of new and used aircraft, government regulations and
changes in our maintenance program or operations could result in
changes to these estimates. The amortization of our purchased
technology, which resulted from our acquisition of LiveTV in
2002, is based on the average number of aircraft in service and
expected to be in service as of the date of their acquisition.
This method results in an increasing annual expense through 2009
when the last of these aircraft are expected to be placed into
service and is adjusted to reflect changes in our contractual
delivery schedule.
Our long-lived assets are evaluated for impairment at least
annually or when events and circumstances indicate that the
assets may be impaired. Indicators include operating or cash
flow losses, significant decreases in market value or changes in
technology. As our assets are all relatively new and we continue
to have positive cash flow, we have not identified any
significant impairments related to our long-lived assets at this
time.
Stock-based compensation. The adoption of
SFAS 123(R) in 2006 required the recording of stock-based
compensation expense for issuances under our stock purchase plan
and stock incentive plan over their requisite service period
using a fair value approach similar to the pro forma disclosure
requirements of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, or
SFAS 123. We use a Black-Scholes-Merton option pricing
model to estimate the fair value of share-based awards under
SFAS 123(R), which is the same valuation technique we
previously used for pro forma disclosures under SFAS 123.
The Black-Scholes-Merton option pricing model incorporates
various and highly subjective assumptions. We estimate the
expected term of options granted using an implied life derived
from the results of a lattice model, which incorporates our
historical exercise and post-vesting cancellation patterns,
which we believe are representative of future behavior. The
expected term of restricted stock units is based on the
requisite service period of the awards being granted. The
expected term for our employee stock purchase plan valuation is
based on the length of each purchase period as measured at the
beginning of the offering period. We estimate the expected
volatility of our common stock at the grant date using a blend
of 75% historical volatility of our common stock and 25% implied
volatility of two-year publicly traded options on our common
stock as of the option grant date. Our decision to use a blend
of historical and implied volatility was based upon the volume
of actively traded options on our common stock and our belief
that historical volatility alone may not be completely
representative of future stock price trends. Regardless of the
method selected, significant judgment is required for some of
the valuation variables. The most significant of these is the
volatility of our common stock and the estimated term over which
our stock options will be outstanding. The valuation calculation
is sensitive to even slight changes in these estimates.
Lease accounting. We operate airport
facilities, offices buildings and aircraft under operating
leases with minimum lease payments associated with these
agreements recognized as rent expense on a straight-line basis
over the expected lease term. Within the provisions of certain
leases there are minimum escalations in payments over the base
lease term, as well as renewal periods. The effects of the
escalations have been reflected in rent expense on a
straight-line basis over the lease term, which includes renewal
periods when it is deemed to be reasonably assured that we would
incur an economic penalty for not renewing. The amortization
period for leasehold improvements is the term used in
calculating straight-line rent expense or their estimated
economic life, whichever is shorter. Had different conclusions
been reached with respect to the lease term and related renewal
periods, different amounts of amortization and rent expense
would have been reported.
Derivative instruments used for aircraft
fuel. We utilize financial derivative instruments
to manage the risk of changing aircraft fuel prices. We do not
purchase or hold any derivative instrument for trading purposes.
At December 31, 2008, we had a $128 million liability
related to the net fair value of our derivative instruments. The
majority of our financial derivative instruments are not traded
on a public exchange. Fair values are assigned based on
commodity prices that are provided to us by independent third
parties. When possible, we designate these instruments as cash
flow hedges for accounting purposes, as defined by Statement of
Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, or
SFAS 133, which permits the deferral of the effective
portions of gains or losses until contract settlement.
SFAS 133 is a complex accounting standard, requiring that
we develop and maintain a significant amount of documentation
related to (1) our fuel hedging program and strategy,
(2) statistical analysis supporting a highly correlated
relationship between the underlying commodity in the derivative
financial instrument and the
39
risk being hedged (i.e. aircraft fuel) on both a historical and
prospective basis and (3) cash flow designation for each
hedging transaction executed, to be developed concurrently with
the hedging transaction. This documentation requires that we
estimate forward aircraft fuel prices since there is no reliable
forward market for aircraft fuel. These prices are developed
through the observation of similar commodity futures prices,
such as crude oil
and/or
heating oil, and adjusted based on variations to those like
commodities. Historically, our hedges have settled within
24 months; therefore, the deferred gains and losses have
been recognized into earnings over a relatively short period of
time.
Fair value measurements. We adopted Statement
of Financial Accounting Standard No. 157, Fair Value
Measurements, or SFAS 157, which establishes a
framework for measuring fair value and requires enhanced
disclosures about fair value measurements, on January 1,
2008. SFAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants. SFAS 157 also requires
disclosure about how fair value is determined for assets and
liabilities and establishes a hierarchy for which these assets
and liabilities must be grouped, based on significant levels of
inputs. We rely on unobservable (level 3) inputs,
which are highly subjective, in determining the fair value of
certain assets and liabilities including ARS and our interest
rate swaps.
ARS are long-term debt securities for which interest rates reset
regularly at pre-determined intervals, typically 28 days,
through an auction process. We held ARS, with a total par value
of $311 million and $611 million as of
December 31, 2008 and 2007, respectively. Beginning in
February 2008, all of the ARS held by us experienced failed
auctions which resulted in our continuing to hold these
securities beyond the initial auction reset periods. With
auctions continuing to fail through the end of 2008, we have
classified all of our ARS as long term, since maturities of
underlying debt securities range from 20 to 40 years.
Although the auctions for the securities have failed,
$18 million have been redeemed by their issuers at par, we
have not experienced any defaults and continue to earn and
receive interest on all of these investments at the maximum
contractual rate. At December 31, 2007, these securities
were valued based on the markets in which they were trading, a
level 1 input, which equaled their par value. The estimated
fair value of these securities at December 31, 2008,
however, no longer approximated par value and was estimated
through discounted cash flows, a level 3 input. Our
discounted cash flow analysis considered, among other things,
the quality of the underlying collateral, the credit rating of
the issuers, an estimate of when these securities are either
expected to have a successful auction or otherwise return to par
value and expected interest income to be received over this
period, which was estimated to be an average of eight years.
Because of the inherent subjectivity in valuing these
securities, we also considered independent valuations obtained
for each of our ARS held as of December 31, 2008 in
estimating their fair values.
All of our ARS are collateralized by student loan portfolios
(substantially all of which are guaranteed by the United States
Government), $284 million of which had a AAA rating and the
remainder had an A rating. Despite the quality of the underlying
collateral, the market for ARS and other securities has been
diminished due to the lack of liquidity experienced in the
market throughout 2008 and expected to be experienced into the
future. Through September 30, 2008, we had experienced a
$13 million decline in fair value, which we had classified
as temporary and reflected as an unrealized loss in other
comprehensive income. Through the fourth quarter, however, the
lack of liquidity in the capital markets not only continued, but
deteriorated further, resulting in the decline in fair value
totaling $67 million at December 31, 2008. This
decline in fair value was also deemed to be other than temporary
due to the continued auction failures and expected lack of
liquidity in the capital markets into the foreseeable future,
which resulted in an impairment charge being recorded in other
income/expense. We continue to monitor the market for our ARS
and any change in their fair values will be reflected in other
income/expense in future periods.
We have elected to apply the fair value option under Statement
of Financial Accounting Standard 159, The Fair Value Option
for Financial Assets and Financial Liabilities, to an
agreement with one of our ARS broker, to repurchase, at
par. We recorded a $14 million gain associated with fair
value of this put option, which offsets $15 million of
related ARS impairment included in other income/expense. The
fair value of the put is determined by comparing the fair value
of the related ARS, as described above, to their par values and
also considers the credit risk associated with the broker. This
put option will be adjusted on each balance sheet date based on
its then fair value. The fair value of the put option is based
on unobservable inputs and is therefore classified as
level 3 in the hierarchy.
40
In February 2008, we entered into interest rate swaps, which
qualify as cash flow hedges in accordance with SFAS 133.
The fair values of our interest rate swaps were initially based
on inputs received from the counterparty. These values were
corroborated by adjusting the active swap indications in quoted
markets for similar terms (6-8 years) for the specific
terms within our swap agreements. There was no ineffectiveness
relating to these interest rate swaps in 2008, with all of the
unrealized losses being deferred in accumulated other
comprehensive income.
Frequent flyer accounting. We utilize a number
of estimates in accounting for our TrueBlue customer loyalty
program, which are consistent with industry practices. We record
a liability, which was $5 million as of December 31,
2008, for the estimated incremental cost of providing free
travel awards, including an estimate for partially earned
awards. The estimated cost includes incremental fuel, insurance,
passenger food and supplies, and reservation costs. In
estimating the liability, we currently assume that 90% of earned
awards will be redeemed and that 30% of our outstanding points
will ultimately result in awards. Periodically, we evaluate our
assumptions for appropriateness, including comparison of the
cost estimates to actual costs incurred as well as the
expiration and redemption assumptions to actual experience.
Changes in the minimum award levels or in the lives of the
awards would also require us to reevaluate the liability,
potentially resulting in a significant impact in the year of
change as well as in future years.
We also sell TrueBlue points to participating partners. Revenue
from these sales is allocated between passenger revenues and
other revenues. The amount attributable to passenger revenue is
determined based on the fair value of transportation expected to
be provided when awards are redeemed and is recognized when
travel is provided. Total sales proceeds in excess of the
estimated transportation fair value is recognized at the time of
sale. Deferred revenue was $54 million at December 31,
2008.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The risk inherent in our market risk sensitive instruments and
positions is the potential loss arising from adverse changes to
the price of fuel and interest rates as discussed below. The
sensitivity analyses presented do not consider the effects that
such adverse changes may have on the overall economic activity,
nor do they consider additional actions we may take to mitigate
our exposure to such changes. Variable-rate leases are not
considered market sensitive financial instruments and,
therefore, are not included in the interest rate sensitivity
analysis below. Actual results may differ. See Notes 1, 2
and 13 to our consolidated financial statements for accounting
policies and additional information.
Aircraft fuel. Our results of operations are
affected by changes in the price and availability of aircraft
fuel. To manage the price risk, we use crude or heating oil
option contracts or swap agreements. Market risk is estimated as
a hypothetical 10% increase in the December 31, 2008 cost
per gallon of fuel. Based on projected 2009 fuel consumption,
such an increase would result in an increase to aircraft fuel
expense of approximately $75 million in 2009, compared to
an estimated $128 million for 2008 measured as of
December 31, 2007. As of December 31, 2008, we had
hedged approximately 8% of our projected 2009 fuel requirements.
All hedge contracts existing at December 31, 2008 settle by
the end of 2009. We expect to realize approximately
$93 million in losses during 2009 which was deferred in
other comprehensive income as of December 31, 2008 related
to our outstanding fuel hedge swaps.
Interest. Our earnings are affected by changes
in interest rates due to the impact those changes have on
interest expense from variable-rate debt instruments and on
interest income generated from our cash and investment balances.
The interest rate is fixed for $1.58 billion of our debt
and capital lease obligations, with the remaining
$1.45 billion having floating interest rates. If interest
rates average 10% higher in 2009 than they did during 2008, our
interest expense would increase by approximately
$4 million, compared to an estimated $10 million for
2008 measured as of December 31, 2007. If interest rates
average 10% lower in 2009 than they did during 2008, our
interest income from cash and investment balances would decrease
by approximately $1 million, compared to $5 million
for 2008 measured as of December 31, 2007. These amounts
are determined by considering the impact of the hypothetical
interest rates on our variable-rate debt, cash equivalents and
investment securities balances at December 31, 2008 and
2007.
Fixed Rate Debt. On December 31, 2008,
our $303 million aggregate principal amount of convertible
debt had a total estimated fair value of $359 million,
based on quoted market prices. If interest rates were 10% higher
than the stated rate, the fair value of this debt would have
been $379 million as of December 31, 2008.
41
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
561
|
|
|
$
|
190
|
|
Investment securities
|
|
|
10
|
|
|
|
644
|
|
Receivables, less allowance (2008-$5; 2007-$2)
|
|
|
86
|
|
|
|
92
|
|
Inventories, less allowance (2008-$4; 2007-$2)
|
|
|
30
|
|
|
|
26
|
|
Restricted cash
|
|
|
78
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
91
|
|
|
|
111
|
|
Deferred income taxes
|
|
|
106
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
962
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
3,832
|
|
|
|
3,547
|
|
Predelivery deposits for flight equipment
|
|
|
163
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,995
|
|
|
|
3,785
|
|
Less accumulated depreciation
|
|
|
406
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,589
|
|
|
|
3,449
|
|
|
|
|
|
|
|
|
|
|
Other property and equipment
|
|
|
487
|
|
|
|
475
|
|
Less accumulated depreciation
|
|
|
134
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
Assets constructed for others
|
|
|
533
|
|
|
|
452
|
|
Less accumulated depreciation
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
528
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
4,470
|
|
|
|
4,246
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
244
|
|
|
|
|
|
Purchased technology, less accumulated amortization (2008-$61;
2007-$48)
|
|
|
8
|
|
|
|
21
|
|
Restricted cash
|
|
|
69
|
|
|
|
53
|
|
Other
|
|
|
270
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
591
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
6,023
|
|
|
$
|
5,598
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
JETBLUE
AIRWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
144
|
|
|
$
|
140
|
|
|
|
|
|
Air traffic liability
|
|
|
445
|
|
|
|
426
|
|
|
|
|
|
Accrued salaries, wages and benefits
|
|
|
107
|
|
|
|
110
|
|
|
|
|
|
Other accrued liabilities
|
|
|
113
|
|
|
|
120
|
|
|
|
|
|
Short-term borrowings
|
|
|
120
|
|
|
|
43
|
|
|
|
|
|
Current maturities of long-term debt and capital leases
|
|
|
152
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,081
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
|
|
|
2,883
|
|
|
|
2,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSTRUCTION OBLIGATION
|
|
|
512
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED TAXES AND OTHER LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
194
|
|
|
|
192
|
|
|
|
|
|
Other
|
|
|
92
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286
|
|
|
|
280
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 25,000,000 shares
authorized, none issued
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 500,000,000 shares
authorized, 288,633,882 issued and 271,763,139 outstanding in
2008 and 181,593,440 shares issued and outstanding in 2007
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
Treasury stock, at cost; 16,878,876 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
1,256
|
|
|
|
853
|
|
|
|
|
|
Retained earnings
|
|
|
86
|
|
|
|
162
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
(84
|
)
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,261
|
|
|
|
1,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
6,023
|
|
|
$
|
5,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$
|
3,056
|
|
|
$
|
2,636
|
|
|
$
|
2,223
|
|
Other
|
|
|
332
|
|
|
|
206
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
3,388
|
|
|
|
2,842
|
|
|
|
2,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
1,352
|
|
|
|
929
|
|
|
|
752
|
|
Salaries, wages and benefits
|
|
|
694
|
|
|
|
648
|
|
|
|
553
|
|
Landing fees and other rents
|
|
|
199
|
|
|
|
180
|
|
|
|
158
|
|
Depreciation and amortization
|
|
|
205
|
|
|
|
176
|
|
|
|
151
|
|
Aircraft rent
|
|
|
129
|
|
|
|
124
|
|
|
|
103
|
|
Sales and marketing
|
|
|
151
|
|
|
|
121
|
|
|
|
104
|
|
Maintenance materials and repairs
|
|
|
127
|
|
|
|
106
|
|
|
|
87
|
|
Other operating expenses
|
|
|
422
|
|
|
|
389
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,279
|
|
|
|
2,673
|
|
|
|
2,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
109
|
|
|
|
169
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(232
|
)
|
|
|
(225
|
)
|
|
|
(173
|
)
|
Capitalized interest
|
|
|
48
|
|
|
|
43
|
|
|
|
27
|
|
Interest income and other
|
|
|
(1
|
)
|
|
|
54
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(185
|
)
|
|
|
(128
|
)
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(76
|
)
|
|
|
41
|
|
|
|
9
|
|
Income tax expense
|
|
|
|
|
|
|
23
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(76
|
)
|
|
$
|
18
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.34
|
)
|
|
$
|
0.10
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.34
|
)
|
|
$
|
0.10
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(76
|
)
|
|
$
|
18
|
|
|
$
|
(1
|
)
|
Adjustments to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(1
|
)
|
|
|
23
|
|
|
|
10
|
|
Depreciation
|
|
|
189
|
|
|
|
161
|
|
|
|
136
|
|
Amortization
|
|
|
21
|
|
|
|
19
|
|
|
|
18
|
|
Stock-based compensation
|
|
|
16
|
|
|
|
15
|
|
|
|
21
|
|
Gains on sale of flight equipment and extinguishment of debt
|
|
|
(41
|
)
|
|
|
(9
|
)
|
|
|
(8
|
)
|
Collateral posted on derivative instruments
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
Auction rate securities impairment, net
|
|
|
53
|
|
|
|
|
|
|
|
|
|
Restricted cash held for business partners
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
Changes in certain operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in receivables
|
|
|
4
|
|
|
|
(14
|
)
|
|
|
(12
|
)
|
Decrease (increase) in inventories, prepaid and other
|
|
|
(10
|
)
|
|
|
3
|
|
|
|
(28
|
)
|
Increase in air traffic liability
|
|
|
19
|
|
|
|
86
|
|
|
|
97
|
|
Increase in accounts payable and other accrued liabilities
|
|
|
15
|
|
|
|
36
|
|
|
|
33
|
|
Other, net
|
|
|
13
|
|
|
|
20
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(17
|
)
|
|
|
358
|
|
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(654
|
)
|
|
|
(617
|
)
|
|
|
(996
|
)
|
Predelivery deposits for flight equipment
|
|
|
(49
|
)
|
|
|
(128
|
)
|
|
|
(106
|
)
|
Assets constructed for others
|
|
|
(142
|
)
|
|
|
(242
|
)
|
|
|
(149
|
)
|
Proceeds from sale of flight equipment
|
|
|
299
|
|
|
|
100
|
|
|
|
154
|
|
Refund of predelivery deposits for flight equipment
|
|
|
|
|
|
|
12
|
|
|
|
19
|
|
Purchase of held-to-maturity investments
|
|
|
|
|
|
|
(11
|
)
|
|
|
(23
|
)
|
Proceeds from maturities of held-to-maturity investments
|
|
|
|
|
|
|
24
|
|
|
|
15
|
|
Purchase of available-for-sale securities
|
|
|
(69
|
)
|
|
|
(654
|
)
|
|
|
(1,002
|
)
|
Sale of available-for-sale securities
|
|
|
397
|
|
|
|
719
|
|
|
|
797
|
|
Return of security deposits
|
|
|
1
|
|
|
|
72
|
|
|
|
|
|
Increase in restricted cash and other assets, net
|
|
|
(30
|
)
|
|
|
(9
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(247
|
)
|
|
|
(734
|
)
|
|
|
(1,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
320
|
|
|
|
26
|
|
|
|
28
|
|
Issuance of long-term debt
|
|
|
716
|
|
|
|
376
|
|
|
|
855
|
|
Aircraft sale and leaseback transactions
|
|
|
26
|
|
|
|
183
|
|
|
|
406
|
|
Short-term borrowings
|
|
|
17
|
|
|
|
48
|
|
|
|
45
|
|
Borrowings collateralized by ARS
|
|
|
163
|
|
|
|
|
|
|
|
|
|
Construction obligation
|
|
|
138
|
|
|
|
242
|
|
|
|
179
|
|
Repayment of long-term debt and capital lease obligations
|
|
|
(673
|
)
|
|
|
(265
|
)
|
|
|
(390
|
)
|
Repayment of short-term borrowings
|
|
|
(52
|
)
|
|
|
(44
|
)
|
|
|
(71
|
)
|
Other, net
|
|
|
(20
|
)
|
|
|
(10
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
635
|
|
|
|
556
|
|
|
|
1,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
|
|
371
|
|
|
|
180
|
|
|
|
4
|
|
Cash and cash equivalents at beginning of period
|
|
|
190
|
|
|
|
10
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
561
|
|
|
$
|
190
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
JETBLUE
AIRWAYS CORPORATION
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at December 31, 2005
|
|
|
173
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
764
|
|
|
|
145
|
|
|
|
|
|
|
|
911
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Change in fair value of derivatives, net of $5 in taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
Exercise of common stock options
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Stock issued under crewmember stock purchase plan
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Balance at December 31, 2006
|
|
|
178
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
813
|
|
|
|
144
|
|
|
|
(7
|
)
|
|
|
952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
Reclassification into earnings, net of $5 in taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
Change in fair value of derivatives, net of $13 in taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
Exercise of common stock options
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Stock issued under crewmember stock purchase plan
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
182
|
|
|
$
|
2
|
|
|
|
|
|
|
$
|
|
|
|
$
|
853
|
|
|
$
|
162
|
|
|
$
|
19
|
|
|
$
|
1,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
(76
|
)
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses, net of $47 in taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72
|
)
|
|
|
(72
|
)
|
Reclassifications into earnings, net of $21 in taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
(103
|
)
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses, net of $5 in taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Reclassifications into earnings, net of $5 in taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(179
|
)
|
Exercise of common stock options
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Stock issued under crewmember stock purchase plan
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Proceeds from secondary offering, net of offering expenses
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
301
|
|
Shares loaned under 2008 Share Lending Agreement
|
|
|
44
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Conversions of 2008 Series A and B convertible notes
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
Shares returned pursuant to 2008 share lending
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
289
|
|
|
$
|
3
|
|
|
|
17
|
|
|
$
|
|
|
|
$
|
1,256
|
|
|
$
|
86
|
|
|
$
|
(84
|
)
|
|
$
|
1,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
JetBlue Airways Corporation is an innovative passenger airline
that provides award winning customer service at competitive
fares primarily on point-to-point routes. We offer our customers
a high quality product with young, fuel-efficient aircraft,
leather seats, free in-flight entertainment at every seat,
pre-assigned seating and reliable performance. We commenced
service in February 2000 and established our primary base of
operations at New Yorks John F. Kennedy International
Airport, or JFK, where we now have more enplanements than any
other airline. As of December 31, 2008, we served 52
destinations in 19 states, Puerto Rico, Mexico, and five
countries in the Caribbean and Latin America. LiveTV, LLC, or
LiveTV, a wholly owned subsidiary, provides in-flight
entertainment systems for commercial aircraft, including live
in-seat satellite television, digital satellite radio, wireless
aircraft data link service and cabin surveillance systems.
|
|
Note 1
|
Summary
of Significant Accounting Policies
|
Basis of Presentation: Our consolidated
financial statements include the accounts of JetBlue Airways
Corporation, or JetBlue, and our subsidiaries, collectively
we or the Company, with all intercompany
transactions and balances having been eliminated. Air
transportation services accounted for substantially all the
Companys operations in 2008, 2007 and 2006. Accordingly,
segment information is not provided for LiveTV. Certain prior
year amounts have been reclassified to conform to the current
year presentation.
Use of Estimates: We are required to
make estimates and assumptions when preparing our consolidated
financial statements in conformity with accounting principles
generally accepted in the United States that affect the amounts
reported in our consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates.
Fair Value: Effective January 1,
2008, we adopted Statement of Financial Accounting Standard
No. 157, Fair Value Measurements, or SFAS 157,
which establishes a framework for measuring fair value and
requires enhanced disclosures about fair value measurements.
SFAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants. SFAS 157 also requires
disclosure about how fair value is determined for assets and
liabilities and establishes a hierarchy for which these assets
and liabilities must be grouped, based on significant levels of
inputs. See Note 13 for more information, including a
listing of our assets and liabilities required to be measured at
fair value on a recurring basis and where they are classified
within the hierarchy as of December 31, 2008
Cash and Cash Equivalents: Our cash and
cash equivalents include short-term, highly liquid investments
which are readily convertible into cash. These investments
include money market securities with maturities of three months
or less when purchased that are considered to be easily tradable.
Restricted Cash: Restricted cash
primarily consists of security deposits and performance bonds
for aircraft and facility leases, funds held in escrow for
estimated workers compensation obligations, and funds held
as collateral for our primary credit card processor.
Accounts and Other
Receivables: Accounts and other receivables
are carried at cost. They primarily consist of amounts due from
credit card companies associated with sales of tickets for
future travel and amounts due from counterparties associated
with fuel derivative instruments that have settled. We estimate
an allowance for doubtful accounts based on known troubled
accounts, if any, and historical experience of losses incurred.
Investment Securities: Investment
securities consist of the following: (a) auction rate
securities stated at fair value; (b) investment-grade
interest bearing instruments classified as held-to-maturity
investments and
47
stated at amortized cost; and (c) derivative instruments
stated at fair value, net of collateral postings. When sold, we
use a specific identification method to determine the cost of
the securities.
At December 31, 2008 investment securities, excluding fuel
hedge derivatives, were transferred to trading securities and
consisted of $244 million in student loan bonds and at
December 31, 2007 were classified as available-for-sale and
consisted of $591 million in student loan bonds and
$20 million in other securities.
Inventories: Inventories consist of
expendable aircraft spare parts, supplies and aircraft fuel.
These items are stated at average cost and charged to expense
when used. An allowance for obsolescence on aircraft spare parts
is provided over the remaining useful life of the related
aircraft.
Property and Equipment: We record our
property and equipment at cost and depreciate these assets on a
straight-line basis to their estimated residual values over
their estimated useful lives. Additions, modifications that
enhance the operating performance of our assets, and interest
related to predelivery deposits to acquire new aircraft and for
the construction of facilities are capitalized.
Estimated useful lives and residual values for our property and
equipment are as follows:
|
|
|
|
|
|
|
|
|
Estimated Useful Life
|
|
Residual Value
|
|
|
Aircraft
|
|
25 years
|
|
|
20
|
%
|
In-flight entertainment systems
|
|
12 years
|
|
|
0
|
%
|
Aircraft parts
|
|
Fleet life
|
|
|
10
|
%
|
Flight equipment leasehold improvements
|
|
Lease term
|
|
|
0
|
%
|
Ground property and equipment
|
|
3-10 years
|
|
|
0
|
%
|
Leasehold improvements
|
|
Lower of 15 years or lease term
|
|
|
0
|
%
|
Buildings on leased land
|
|
Lease term
|
|
|
0
|
%
|
Property under capital leases are recorded at an amount equal to
the present value of future minimum lease payments computed on
the basis of our incremental borrowing rate or, when known, the
interest rate implicit in the lease. Amortization of property
under capital leases is on a straight-line basis over the
expected useful life and is included in depreciation and
amortization expense.
We record impairment losses on long-lived assets used in
operations when events and circumstances indicate that the
assets may be impaired and the undiscounted future cash flows
estimated to be generated by these assets are less than the
assets net book value. If impairment occurs, the loss is
measured by comparing the fair value of the asset to its
carrying amount. Impairment losses are recorded in depreciation
and amortization expense. In 2008, we recorded an impairment
loss of $8 million related to the write-off our temporary
terminal facility at JFK.
In 2008, we sold nine aircraft, which resulted in gains of
$23 million. In 2007, we sold three aircraft, which
resulted in gains of $7 million. In 2006, we sold five
aircraft, which resulted in gains of $12 million. The gains
on our sales of aircraft are included in other operating
expenses.
Passenger Revenues: Passenger revenue
is recognized, net of the taxes that we are required to collect
from our customers, including federal transportation taxes,
security taxes and airport facility charges, when the
transportation is provided or after the ticket or customer
credit (issued upon payment of a change fee) expires. Tickets
sold but not yet recognized as revenue and unexpired credits are
included in air traffic liability.
LiveTV Revenues and Expenses: We
account for LiveTVs revenues and expenses related to the
sale of hardware, maintenance of hardware, and programming
services provided, as a single unit in accordance with Emerging
Issues Task Force Issue
00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables. Revenues and expenses related to these
components are recognized ratably over the service periods,
which currently extend through 2017. Customer advances are
included in other liabilities.
Airframe and Engine Maintenance and
Repair: Regular airframe maintenance for
owned and leased flight equipment is charged to expense as
incurred unless covered by a third-party services contract. In
2006 and 2005, we commenced separate services agreements
covering the scheduled and unscheduled repair of airframe line
replacement unit components and the engines on our Airbus A320
aircraft. These agreements, which range from ten to
15 years, require monthly payments at rates based either on
the number of cycles
48
each aircraft was operated during each month or the number of
flight hours each engine was operated during each month, subject
to annual escalations. These payments are expensed as the
related flight hours or cycles are incurred.
Advertising Costs: Advertising costs,
which are included in sales and marketing, are expensed as
incurred. Advertising expense in 2008, 2007 and 2006 was
$52 million, $41 million and $40 million,
respectively.
Loyalty Program: We account for our
customer loyalty program, TrueBlue Flight Gratitude, by
recording a liability for the estimated incremental cost for
points outstanding and awards we expect to be redeemed. We
adjust this liability, which is included in air traffic
liability, based on points earned and redeemed as well as
changes in the estimated incremental costs associated with
providing travel.
We also sell points in TrueBlue to third parties. A portion of
these point sales is deferred and recognized as passenger
revenue when transportation is provided. The remaining portion,
which is the excess of the total sales proceeds over the
estimated fair value of the transportation to be provided, is
recognized in other revenue at the time of sale. Deferred
revenue for points not redeemed is recorded upon expiration.
Income Taxes: We account for income
taxes utilizing the liability method. Deferred income taxes are
recognized for the tax consequences of temporary differences
between the tax and financial statement reporting bases of
assets and liabilities. A valuation allowance for net deferred
tax assets is provided unless realizability is judged by us to
be more likely than not. We adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an Interpretation of FASB Statement
No. 109, or FIN 48, on January 1, 2007. Our
policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense.
Stock-Based Compensation: Effective
January 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standards 123(R), Share-Based
Payment, and related interpretations, or SFAS 123(R),
to account for stock-based compensation using the modified
prospective transition method and therefore did not restate our
prior period results. SFAS 123(R) supersedes Accounting
Principles Board Opinion 25, Accounting for Stock Issued to
Employees, or APB 25, and revises guidance in Statement of
Financial Accounting Standards 123, Accounting for
Stock-Based Compensation, or SFAS 123. Among other
things, SFAS 123(R) requires that compensation expense be
recognized in the financial statements for share-based awards
based on the grant date fair value of those awards. The modified
prospective transition method applies to (a) unvested stock
options under our amended and restated 2002 Stock Incentive
Plan, or the 2002 Plan, and issuances under our Crewmember Stock
Purchase Plan, as amended, or CSPP, outstanding as of
December 31, 2005 based on the grant date fair value
estimated in accordance with the pro forma provisions of
SFAS 123, and (b) any new share-based awards granted
subsequent to December 31, 2005, based on the grant-date
fair value estimated in accordance with the provisions of
SFAS 123(R). Additionally, stock-based compensation expense
includes an estimate for pre-vesting forfeitures and is
recognized over the requisite service periods of the awards on a
straight-line basis, which is generally commensurate with the
vesting term.
SFAS 123(R) requires the benefits associated with tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow rather than as an operating
cash flow as previously required. In 2008, we recorded
$1 million in excess tax benefits generated from option
exercises and RSU vestings. We did not record any excess tax
benefit generated from option exercises in 2007 or 2006.
Our policy is to issue new shares for purchases under our CSPP
and issuances under our 2002 Plan.
New
Accounting Standards:
In May 2008, the Financial Accounting Standards Board, or FASB,
issued FSP APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled In Cash upon Conversion (Including Partial Cash
Settlement), which applies to all convertible debt
instruments that have a net settlement feature,
which means instruments that by their terms may be settled
either wholly or partially in cash upon conversion. Under FSP
APB 14-1,
the liability and equity components of convertible debt
instruments that may be settled wholly or partially in cash upon
conversion must be accounted for separately in a manner
reflective of their issuers nonconvertible debt borrowing
rate. Previous guidance provided for accounting of this type of
convertible debt
49
instruments entirely as debt. FSP APB
14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods
within those fiscal years. We have considered the impact of our
adoption of FSP APB
14-1 on our
consolidated financial statements, and we estimate that our
$250 million aggregate principal amount of
33/4%
convertible unsecured debentures due 2035 will have an
approximate initial measurement of a $200 million liability
component and a $50 million equity component. We estimate
we would have had an additional $10 million in interest
expense in each of the years ended December 31, 2006, 2007,
and 2008.
In March 2008, the FASB issued SFAS 161, Disclosures
about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133, which enhances the
disclosure requirements related to derivative instruments and
hedging activity to improve the transparency of financial
reporting, and is effective for fiscal years and interim periods
beginning after November 15, 2008. We are currently
evaluating the impact of adoption of SFAS 161.
|
|
Note 2
|
Long-term
Debt, Short-term Borrowings and Capital Lease
Obligations
|
Long-term debt and the related weighted average interest rate at
December 31, 2008 and 2007 consisted of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Secured Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate equipment notes, due through 2020 (1)
|
|
$
|
659
|
|
|
|
4.5
|
%
|
|
$
|
724
|
|
|
|
6.7
|
%
|
|
|
|
|
Floating rate enhanced equipment notes (2) (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class G-1,
due through 2016
|
|
|
296
|
|
|
|
4.0
|
%
|
|
|
321
|
|
|
|
5.6
|
%
|
|
|
|
|
Class G-2,
due 2014 and 2016
|
|
|
373
|
|
|
|
2.8
|
%
|
|
|
373
|
|
|
|
5.7
|
%
|
|
|
|
|
Class B-1,
due 2014
|
|
|
49
|
|
|
|
7.1
|
%
|
|
|
49
|
|
|
|
8.3
|
%
|
|
|
|
|
Class C, due through 2008
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
8.5
|
%
|
|
|
|
|
Fixed rate equipment notes, due through 2023
|
|
|
1,075
|
|
|
|
5.9
|
%
|
|
|
778
|
|
|
|
6.7
|
%
|
|
|
|
|
Fixed rate special facility bonds, due through 2036 (4)
|
|
|
85
|
|
|
|
6.0
|
%
|
|
|
85
|
|
|
|
6.0
|
%
|
|
|
|
|
UBS line of credit (5)
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33/4%
convertible debentures due in 2035 (6)
|
|
|
177
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
51/2%
convertible debentures due in 2038 (7)
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31/2%
convertible notes due in 2033 (8)
|
|
|
1
|
|
|
|
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Leases (9)
|
|
|
141
|
|
|
|
5.4
|
%
|
|
|
148
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and capital lease obligations
|
|
|
3,035
|
|
|
|
|
|
|
|
3,005
|
|
|
|
|
|
|
|
|
|
Less: current maturities
|
|
|
(152
|
)
|
|
|
|
|
|
|
(417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
$
|
2,883
|
|
|
|
|
|
|
$
|
2,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest rates adjust quarterly or semi-annually based on the
London Interbank Offered Rate, or LIBOR, plus a margin. |
|
(2) |
|
In November 2006, we completed a public offering of
$124 million of pass-through certificates to finance
certain of our owned aircraft spare parts. Separate trusts were
established for each class of these certificates. The entire
principal amount of the
Class G-1
and
Class B-1
certificates is scheduled to be paid in a lump sum on the
applicable maturity date. The interest rate for all certificates
is based on three month LIBOR plus a margin. Interest is payable
quarterly. |
|
(3) |
|
In November 2004 and March 2004, we completed public offerings
of $498 million and $431 million, respectively, of
pass-through certificates to finance the purchase of 28 new
Airbus A320 aircraft delivered through 2005. Separate trusts
were established for each class of these certificates. Quarterly
principal payments are required on the
Class G-1
certificates. The entire principal amount of the
Class G-2
certificates is scheduled to be paid in a lump sum on the
applicable maturity dates. In June and November |
50
|
|
|
|
|
2008, we fully repaid the principal balances of the Class C
certificates. In February 2008, we entered into interest rate
swap agreements that have effectively fixed the interest rate
for the remaining term of our
Class G-1
certificates for the November 2004 offering. These certificates
had a balance of $141 million at December 31, 2008 and
an effective interest rate of 4.6%. The interest rate for all
other certificates is based on three month LIBOR plus a margin.
Interest is payable quarterly. |
|
(4) |
|
In December 2006, the New York City Industrial Development
Agency issued special facility revenue bonds for JFK and, in
November 2005, the Greater Orlando Aviation Authority issued
special purpose airport facilities revenue bonds, in each case
for reimbursement to us for certain airport facility
construction and other costs. We have recorded the issuance of
$39 million (net of $1 million discount) and
$45 million (net of $2 million discount),
respectively, principal amount of these bonds as long-term debt
on our consolidated balance sheet because we have issued a
guarantee of the debt payments on the bonds. This fixed rate
debt is secured by leasehold mortgages of our airport facilities. |
|
(5) |
|
On December 10, 2008, we entered into the UBS auction rate
security loan program under a credit line agreement with UBS
Securities LLC and UBS Financial Services Inc, or UBS, which
provides us with a no net cost loan in the principal amount of
$53 million. However, this credit line agreement calls for
all interest income earned on the ARS being held by UBS to be
automatically transferred to UBS. This line of credit is secured
by approximately $85 million in par value of our ARS being
held by UBS. The term of the credit line is through at least
June 30, 2010. |
|
(6) |
|
In March 2005, we completed a public offering of
$250 million aggregate principal amount of
33/4%
convertible unsecured debentures due 2035, which are currently
convertible into 14.6 million shares of our common stock at
a price of approximately $17.10 per share, or
58.4795 shares per $1,000 principal amount of debentures,
subject to further adjustment. Upon conversion, we have the
right to deliver, in lieu of shares of our common stock, cash or
a combination of cash and shares of our common stock. |
|
|
|
At any time, we may irrevocably elect to satisfy our conversion
obligation with respect to the principal amount of the
debentures to be converted with a combination of cash and shares
of our common stock. At any time on or after March 20,
2010, we may redeem any of the debentures for cash at a
redemption price of 100% of their principal amount, plus accrued
and unpaid interest. Holders may require us to repurchase the
debentures for cash at a repurchase price equal to 100% of their
principal amount plus accrued and unpaid interest, if any, on
March 15, 2010, 2015, 2020, 2025 and 2030, or at any time
prior to their maturity upon the occurrence of a specified
designated event. Interest is payable semi-annually on March 15
and September 15. |
|
|
|
In 2008, we repurchased a total of $73 million principal
amount of the debentures for $54 million. The
$18 million net gain from these transactions is recorded in
interest income and other in the accompanying consolidated
statements of operations. |
|
(7) |
|
On June 4, 2008, we completed a public offering of
$100.6 million aggregate principal amount of 5.5%
Series A convertible debentures due 2038, or the
Series A Debentures, and $100.6 million aggregate
principal amount of 5.5% Series B convertible debentures
due 2038, or the Series B Debentures, and collectively with
the Series A Debentures, the Debentures. The Debentures are
general senior obligations secured in part by an escrow account
for each series. We deposited approximately $32 million of
the net proceeds from the offering, representing the first six
scheduled semi-annual interest payments on the Debentures, into
escrow accounts for the exclusive benefit of the holders of each
series of Debentures. The total net proceeds of the offering
were approximately $165 million, after deducting
underwriting fees and other transaction related expenses as well
as the $32 million escrow deposit. Interest on the
Debentures is payable semi-annually on April 15 and
October 15. |
|
|
|
Holders of the Series A Debentures may convert them into
shares of our common stock at any time at a conversion rate of
220.6288 shares per $1,000 principal amount of
Series A Debenture. Holders of the Series B Debentures
may convert them into shares of our common stock at any time at
a conversion rate of 225.2252 shares per $1,000 principal
amount of Series B Debenture. The conversion rates are
subject to adjustment should we declare common stock dividends
or effect any common stock splits or similar transactions. If
the holders convert the Debentures in connection with any
fundamental corporate change that occurs prior to
October 15, 2013 for the Series A Debentures or
October 15, 2015 for the Series B Debentures, the
applicable conversion rate may be increased depending upon our
then current common |
51
|
|
|
|
|
stock price. The maximum number of shares of common stock into
which all Debentures are convertible, including pursuant to this
make-whole fundamental change provision, is 54.4 million
shares. Holders who convert their Debentures prior to
April 15, 2011 will receive, in addition to the number of
shares of our common stock calculated at the applicable
conversion rate, a cash payment from the escrow account for
Debentures of the series converted equal to the sum of the
remaining interest payments that would have been due on or
before April 15, 2011 in respect of the converted
Debentures. |
|
|
|
We may redeem any of the Debentures for cash at a redemption
price of 100% of their principal amount, plus accrued and unpaid
interest at any time on or after October 15, 2013 for the
Series A Debentures and October 15, 2015 for the
Series B Debentures. |
|
|
|
Holders may require us to repurchase the Debentures for cash at
a repurchase price equal to 100% of their principal amount plus
accrued and unpaid interest, if any, on October 15, 2013,
2018, 2023, 2028, and 2033 for the Series A Debentures and
October 15, 2015, 2020, 2025, 2030, and 2035 for the
Series B Debentures; or at any time prior to their maturity
upon the occurrence of a specified designated event. |
|
|
|
On June 4, 2008, in conjunction with the public offering of
the Debentures described above, we also entered into a share
lending agreement with Morgan Stanley & Co.
Incorporated, an affiliate of the underwriter of the offering,
or the share borrower, pursuant to which we loaned the share
borrower approximately 44.9 million shares of our common
stock. Under the share lending agreement, the share borrower
sold the borrowed shares of JetBlue common stock in a registered
public offering and used the short position resulting from the
sale of the shares of our common stock to facilitate the
establishment of hedge positions by investors in the Debentures
offering. The common stock was sold at a price of $3.70 per
share. Under the share lending agreement, the share borrower is
required to return the borrowed shares when the debentures are
no longer outstanding. We did not receive any proceeds from the
sale of the borrowed shares by the share borrower, but we did
receive a nominal lending fee of $0.01 per share from the share
borrower for the use of borrowed shares. |
|
|
|
We evaluated the various embedded derivatives within the
supplemental indenture for bifurcation from the Debentures under
the applicable provisions. Based upon our detailed assessment,
we concluded these embedded derivatives were either
(i) excluded from bifurcation as a result of being clearly
and closely related to the Debentures or are indexed to our
common stock and would be classified in stockholders
equity if freestanding or (ii) the fair value of the
embedded derivatives was determined to be immaterial. |
|
|
|
The net proceeds from our public offering of the Debentures
described above were used for the repurchase of substantially
all of our $175 million principal amount of 3.5%
convertible notes due 2033, issued in July 2003, which became
subject to repurchase at the holders option on
July 15, 2008 (see (8) below). |
|
|
|
Through December 31, 2008, approximately $76 million
principal amount of the Debentures were voluntarily converted by
holders. As a result, we issued 16.9 million shares of our
common stock. Cash payments from the escrow accounts related to
these conversions were $11 million, and borrowed shares
equivalent to the number of shares of our common stock issued
upon these conversions were returned to us pursuant to the share
lending agreement described above. At December 31, 2008,
the remaining principal balance is $126 million, which is
currently convertible into 28.0 million shares of our
common stock. At December 31, 2008, the amount remaining in
these escrow accounts was $17 million, which is reflected
as restricted cash on our condensed consolidated balance sheets. |
|
(8) |
|
In July 2003, we sold $175 million aggregate principal
amount of 3.5% convertible unsecured notes due 2033, which are
currently convertible into 6.2 million shares of our common
stock at a price of approximately $28.33 per share, or
35.2941 shares per $1,000 principal amount of notes,
subject to further adjustment and certain conditions on
conversion. In July 2008, holders required us to repurchase
approximately $174 million principal amount of the notes at
par, plus accrued interest upon the first repurchase date.
Interest is payable semi-annually on January 15 and July 15. |
|
(9) |
|
At December 31, 2008 and 2007, four capital leased Airbus
A320 aircraft are included in property and equipment at a cost
of $152 million with accumulated amortization of
$9 million and $4 million, respectively. The future
minimum lease payments under these noncancelable leases are
$15 million per year through 2011, $14 million per
year in 2012 and 2013 and $138 million in the years
thereafter. Included in the future minimum lease payments is
$70 million representing interest, resulting in a present |
52
|
|
|
|
|
value of capital leases of $141 million with a current
portion of $7 million and a long-term portion of
$134 million. |
Maturities of long-term debt and capital leases, including the
assumption that our convertible debt will be converted upon the
first put date, for the next five years are as follows (in
millions):
|
|
|
|
|
2009
|
|
$
|
152
|
|
2010
|
|
|
388
|
|
2011
|
|
|
160
|
|
2012
|
|
|
161
|
|
2013
|
|
|
361
|
|
We currently utilize a funding facility to finance aircraft
predelivery deposits. This facility allows for borrowings of up
to $30 million, of which $20 million was unused as of
December 31, 2008. Commitment fees are 0.6% per annum on
the average unused portion of the facility. The weighted average
interest rate on these outstanding short-term borrowings at
December 31, 2008 and 2007 was 5.6% and 6.7%, respectively.
In July 2008, we obtained a line of credit with Citigroup Global
Markets, Inc. which allows for borrowings of up to
$110 million through July 20, 2009. Advances under
this agreement bear interest at the rate of Open Federal Funds
rate plus 2.30%. This line of credit is secured by
$227 million par value of our auction rate securities, or
ARS, being held by Citigroup, with total borrowings available
subject to reduction should any of the collateral be sold, or
should there be a significant drop in the fair value of the
underlying collateral. Advances may be used to fund working
capital requirements, capital expenditures or other general
corporate purposes, except that they may not be used to purchase
any securities or to refinance any debt. We have provided
various representations, warranties and other covenants,
including a covenant to maintain at least $300 million in
cash and cash equivalents throughout the term of the agreement.
The agreement also contains customary events of default. Upon
the occurrence of an event of default, the outstanding
obligations under the agreement may be accelerated and become
due and payable immediately. In connection with this agreement,
we agreed to release the lender from certain potential claims
related to our ARS in certain specified circumstances. At
December 31, 2008, the entire $110 million was
outstanding on this line of credit.
At December 31, 2008, we were in compliance with the
covenants of all our debt and lease agreements. We are subject
to certain collateral ratio requirements in our spare parts
pass-through certificates and spare engine financing issued in
November 2006 and December 2007, respectively. If we fail to
maintain these collateral ratios, we will be required to provide
additional collateral or redeem some or all of the equipment
notes so that the ratios return to compliance.
In 2008, we received $299 million related to the sale of
nine owned aircraft and repaid $210 million in associated
debt. Aircraft, engines, predelivery deposits and other
equipment and facilities having a net book value of
$3.32 billion at December 31, 2008 were pledged as
security under various loan agreements. Cash payments of
interest, net of capitalized interest, aggregated
$166 million, $175 million and $133 million in
2008, 2007 and 2006, respectively.
53
The carrying amounts and estimated fair values of our long-term
debt at December 31, 2008 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Public Debt
|
|
|
|
|
|
|
|
|
Floating rate enhanced equipment notes
|
|
|
|
|
|
|
|
|
Class G-1,
due through 2016
|
|
$
|
296
|
|
|
$
|
189
|
|
Class G-2,
due 2014 and 2016
|
|
|
373
|
|
|
|
196
|
|
Class B-1,
due 2014
|
|
|
49
|
|
|
|
30
|
|
Fixed rate special facility bonds, due through 2036
|
|
|
85
|
|
|
|
43
|
|
33/4%
convertible debentures due in 2035
|
|
|
177
|
|
|
|
134
|
|
51/2%
convertible debentures due in 2038
|
|
|
126
|
|
|
|
217
|
|
31/2%
convertible notes due in 2033
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Non-Public Debt
|
|
|
|
|
|
|
|
|
Floating rate equipment notes, due through 2020
|
|
|
659
|
|
|
|
547
|
|
Fixed rate equipment notes, due through 2023
|
|
|
1,075
|
|
|
|
1,022
|
|
The estimated fair values of our publicly held long-term debt
were based on quoted market prices. The fair value of our
non-public debt was estimated using discounted cash flow
analysis based on our current borrowing rates for instruments
with similar terms. The fair values of our other financial
instruments approximate their carrying values.
We lease aircraft, as well as airport terminal space, other
airport facilities, office space and other equipment, which
expire in various years through 2035. Total rental expense for
all operating leases in 2008, 2007 and 2006 was
$243 million, $225 million and $190 million,
respectively. We have $27 million in assets that serve as
collateral for letters of credit related to certain of our
leases, which are included in restricted cash.
At December 31, 2008, 55 of the 142 aircraft we operated
were leased under operating leases, with initial lease term
expiration dates ranging from 2009 to 2026. Five of the 55
aircraft operating leases have variable rate rent payments based
on LIBOR. Leases for 47 of our aircraft can generally be renewed
at rates based on fair market value at the end of the lease term
for one or two years. We have purchase options in 45 of our
aircraft leases at the end of the lease term at fair market
value and a one-time option during the term at amounts that are
expected to approximate fair market value. During 2008, we
entered into a sale and leaseback transaction for one EMBRAER
190 aircraft acquired during the year, which is being accounted
for as an operating lease. There were no material deferred gains
recorded related to this transaction.
Future minimum lease payments under noncancelable operating
leases with initial or remaining terms in excess of one year at
December 31, 2008, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
|
|
|
Other
|
|
|
Total
|
|
|
2009
|
|
$
|
179
|
|
|
$
|
44
|
|
|
$
|
223
|
|
2010
|
|
|
158
|
|
|
|
43
|
|
|
|
201
|
|
2011
|
|
|
146
|
|
|
|
40
|
|
|
|
186
|
|
2012
|
|
|
130
|
|
|
|
36
|
|
|
|
166
|
|
2013
|
|
|
109
|
|
|
|
30
|
|
|
|
139
|
|
Thereafter
|
|
|
719
|
|
|
|
387
|
|
|
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum operating lease payments
|
|
$
|
1,441
|
|
|
$
|
580
|
|
|
$
|
2,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We hold variable interests in 45 of our 55 aircraft operating
leases, which are owned by single owner trusts whose sole
purpose is to purchase, finance and lease these aircraft to us.
Since we do not participate in
54
these trusts and we are not at risk for losses, we are not
required to include these trusts in our consolidated financial
statements. Our maximum exposure is the remaining lease
payments, which are reflected in the future minimum lease
payments in the table above.
In October 2008, we began operating out of our new Terminal 5 at
JFK, or Terminal 5, which we had been constructing since
November 2005. The construction and operation of this facility
is governed by a lease agreement that we executed with the Port
Authority of New York and New Jersey, or PANYNJ, in 2005. Under
the terms of this lease agreement, we were responsible for the
construction of a 635,000 square foot
26-gate
terminal, a parking garage, roadways and an AirTrain Connector,
all of which are owned by the PANYNJ and which are collectively
referred to as the Project. The lease term ends in 2038 and we
have a one-time early termination option in 2033.
We are responsible for various payments under the lease,
including ground rents for the new terminal site which began on
lease execution in 2005, and facility rents that commenced in
2008 when we took beneficial occupancy of Terminal 5. The
facility rents are based on the number of passengers enplaned
out of the new terminal, subject to annual minimums. The PANYNJ
has reimbursed us for the costs of constructing the Project in
accordance with the lease, except for approximately
$76 million in leasehold improvements that have been
provided by us and which are classified as leasehold
improvements and included in ground property and equipment on
our consolidated balance sheets.
We are considered the owner of the Project for financial
reporting purposes only and are required to reflect an asset and
liability for the Project on our balance sheets. Through
December 31, 2008, exclusive of ground property, we had
paid $589 million in Project costs and have capitalized
$68 million of interest, which are reflected as Assets
Constructed for Others in the accompanying consolidated balance
sheets. Reimbursements from the PANYNJ and financing charges
totaled $589 million through December 31, 2008 and are
reflected as Construction Obligation in our consolidated balance
sheets, net of $17 million in scheduled facility payments
to the PANYNJ made in 2007 and 2008.
Certain elements of the Project, including the parking garage
and Airtrain Connector, are not subject to the underlying ground
lease and, following their delivery to and acceptance by the
PANYNJ in October 2008, we no longer have any continuing
involvement in these elements as defined in Statement of
Financial Accounting Standards No. 98, Accounting for
Leases. As a result, Assets Constructed for Others and
Construction Obligation were both reduced by $125 million
in a non-cash transaction. Our continuing involvement in the
remainder of the Project precludes us from sale and leaseback
accounting; therefore the cost of these elements of the Project
and the related liability will remain on our balance sheets and
accounted for as a financing.
Assets Constructed for Others are being amortized over the
shorter of the 25 year non-cancellable lease term or their
economic life. Facility rents will be recorded as debt service
on the Construction Obligation, with the portion not relating to
interest reducing the principal balance. Ground rents are being
recognized on a straight-line basis over the lease term and are
reflected in the future minimum lease payments table included in
Note 3. Minimum estimated facility payments, including
escalations, associated with this lease are approximated to be
$30 million in 2009, $34 million in 2010,
$38 million in 2011, $39 million in 2012,
$40 million in 2013 and $817 million thereafter.
Payments could exceed these amounts depending on future
enplanement levels at JFK. Included in the future minimum lease
payments is $512 million representing interest.
We have subleased a portion of Terminal 5, primarily space for
concessionaires. Minimum lease payments due to us are subject to
various escalation amounts over a ten year period and also
include a percentage of gross receipts, which may vary from
month to month. Future minimum lease payments due to us are
approximated to be $8 million in 2009, $7 million in
2010 and $8 million in each of 2011 through 2013.
55
|
|
Note 5
|
Stockholders
Equity
|
Our authorized shares of capital stock consist of
500 million shares of common stock and 25 million
shares of preferred stock. The holders of our common stock are
entitled to one vote per share on all matters which require a
vote by the Companys stockholders as set forth in our
Amended and Restated Certificate of Incorporation and Bylaws.
In January 2008, we completed a $301 million, net of
transaction costs, equity offering to Deutsche Lufthansa AG, or
Lufthansa. Under the terms of the agreement, Lufthansa
purchased, in a private placement, approximately
42.6 million newly issued shares of JetBlue common stock,
which represented approximately 19% of JetBlues then
outstanding common stock. Under the terms of the agreement, as
amended, two Lufthansa nominees, Christoph Franz and Stephan
Gemkow, were appointed to our Board of Directors.
Pursuant to our amended Stockholder Rights Agreement, which
became effective in February 2002, each share of common stock
has attached to it a right and, until the rights expire or are
redeemed, each new share of common stock issued by the Company
will include one right. Upon the occurrence of certain events
described below, each right entitles the holder to purchase one
one-thousandth of a share of Series A participating
preferred stock at an exercise price of $35.55, subject to
further adjustment. The rights become exercisable only after any
person or group acquires beneficial ownership of 15% or more
(25% or more in the case of certain specified stockholders) of
the Companys outstanding common stock or commences a
tender or exchange offer that would result in such person or
group acquiring beneficial ownership of 15% or more (25% or more
in the case of certain stockholders) of the Companys
common stock. If after the rights become exercisable, the
Company is involved in a merger or other business combination or
sells more than 50% of its assets or earning power, each right
will entitle its holder (other than the acquiring person or
group) to receive common stock of the acquiring company having a
market value of twice the exercise price of the rights. The
rights expire on April 17, 2012 and may be redeemed by the
Company at a price of $.01 per right prior to the time they
become exercisable.
As of December 31, 2008, we had a total of
138.8 million shares of our common stock reserved for
issuance under our CSPP, our 2002 Plan, our convertible debt,
and our share lending facility. As of December 31, 2008, we
had a total of 16.9 million shares of treasury stock,
almost all of which resulted from the return of borrowed shares
under our share lending agreement. Refer to Note 2 for
further details on the share lending agreement and Note 7
for further details on our stock-based compensation.
|
|
Note 6
|
Earnings
(Loss) Per Share
|
The following table shows how we computed basic and diluted
earnings (loss) per common share for the years ended December 31
(dollars in millions; share data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
(76
|
)
|
|
$
|
18
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic earnings (loss)
per share
|
|
|
226,262
|
|
|
|
179,766
|
|
|
|
175,113
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
|
|
|
|
4,483
|
|
|
|
|
|
Unvested common stock
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding and assumed
conversions for diluted earnings (loss) per share
|
|
|
226,262
|
|
|
|
184,260
|
|
|
|
175,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, a total of approximately
28.0 million shares of our common stock, which were loaned
to our share borrower pursuant to the terms of our share lending
agreement as described in Note 2 were issued and are
outstanding for corporate law purposes, and holders of the
borrowed shares have all the rights of a holder of our common
stock. However, because the share borrower must return all
borrowed shares
56
to us (or identical shares or, in certain circumstances, the
cash value thereof), the borrowed shares are not considered
outstanding for the purpose of computing and reporting basic or
diluted earnings (loss) per share.
A total of 38.3 million shares for the year ended
December 31, 2008 and a total of 20.8 million shares
for each of the years ended December 31, 2007 and 2006,
which are issuable upon conversion of our convertible debt were
excluded from the diluted earnings per share calculation since
the assumed conversions would be anti-dilutive. We also excluded
27.2 million, 24.7 million and 31.1 million
shares issuable upon exercise of outstanding stock options for
the years ended December 31, 2008, 2007 and 2006,
respectively, from the diluted earnings (loss) per share
computation since their exercise price was greater than the
average market price of our common stock or they were otherwise
anti-dilutive.
|
|
Note 7
|
Stock-Based
Compensation
|
Fair Value Assumptions: We use a
Black-Scholes-Merton option pricing model to estimate the fair
value of share-based awards under SFAS 123(R) for issuances
under our CSPP and stock options under our 2002 Plan. The
Black-Scholes-Merton option pricing model incorporates various
and highly subjective assumptions, including expected term and
expected volatility. We have reviewed our historical pattern of
option exercises under our 2002 Plan, and have determined that
meaningful differences in option exercise activity existed among
employee job categories. Therefore, for all stock options
granted after January 1, 2006, we have categorized these
awards into three groups of employees for valuation purposes. We
have determined there were no meaningful differences in employee
activity under our CSPP due to the broad-based nature of the
plan.
We estimate the expected term of options granted using an
implied life derived from the results of a lattice model, which
incorporates our historical exercise and post-vesting employment
termination patterns, which we believe are representative of
future behavior. The expected term for our restricted stock
units is based on the associated service period. The expected
term for our CSPP valuation is based on the length of each
purchase period as measured at the beginning of the offering
period.
We estimate the expected volatility of our common stock at the
grant date using a blend of 75% historical volatility of our
common stock and 25% implied volatility of two-year publicly
traded options on our common stock as of the option grant date.
Our decision to use a blend of historical and implied volatility
was based upon the volume of actively traded options on our
common stock and our belief that historical volatility alone may
not be completely representative of future stock price trends.
Our risk-free interest rate assumption is determined using the
Federal Reserve nominal rates for U.S. Treasury zero-coupon
bonds with maturities similar to those of the expected term of
the award being valued. We have never paid any cash dividends on
our common stock and we do not anticipate paying any cash
dividends in the foreseeable future. Therefore, we assumed an
expected dividend yield of zero.
Additionally, SFAS 123(R) requires us to estimate
pre-vesting forfeitures at the time of grant and periodically
revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. We record stock-based
compensation expense only for those awards expected to vest
using an estimated forfeiture rate based on our historical
pre-vesting forfeiture data. Previously, we accounted for
forfeitures as they occurred under the pro forma disclosure
provisions of SFAS 123 for periods prior to 2006.
The following table shows our assumptions used to compute the
stock-based compensation expense and pro forma information for
stock option grants and purchase rights under our CSPP issued
for the years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected term (years)
|
|
|
6.0
|
|
|
|
4.1-6.8
|
|
|
|
4.1-7.0
|
|
Volatility
|
|
|
47.7
|
%
|
|
|
42.5
|
%
|
|
|
44.1
|
%
|
Risk-free interest rate
|
|
|
3.0
|
%
|
|
|
4.6
|
%
|
|
|
4.8
|
%
|
Weighted average fair value of stock options
|
|
$
|
3.45
|
|
|
$
|
4.91
|
|
|
$
|
5.32
|
|
57
|
|
|
|
|
|
|
CSPP
|
|
|
|
2006
|
|
|
Expected term (years)
|
|
|
0.5-2.0
|
|
Volatility
|
|
|
44.5
|
%
|
Risk-free interest rate
|
|
|
5.0
|
%
|
Weighted average fair value of purchase rights
|
|
$
|
3.75
|
|
Unrecognized stock-based compensation expense was approximately
$24 million as of December 31, 2008, relating to a
total of two million unvested restricted stock units and five
million unvested stock options under our 2002 Plan. We expect to
recognize this stock-based compensation expense over a weighted
average period of approximately two years. The total fair value
of stock options vested during the years ended December 31,
2008, 2007 and 2006 was approximately $9 million,
$6 million and $2 million, respectively.
Stock Incentive Plan: The 2002 Plan, which
includes stock options issued during 1999 through 2001 under a
previous plan as well as all options issued since, provides for
incentive and non-qualified stock options and restricted stock
units to be granted to certain employees and members of our
Board of Directors, as well as deferred stock units to be
granted to members of our Board of Directors. The 2002 Plan
became effective following our initial public offering in April
2002.
During 2007, we began issuing restricted stock units under the
2002 Plan. These awards will vest in annual installments over
three years or upon the occurrence of a change in control as
defined in the 2002 Plan. Our policy is to grant restricted
stock units based on the market price of the underlying common
stock on the date of grant.
The following is a summary of restricted stock unit activity for
the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at beginning of year
|
|
|
71,418
|
|
|
$
|
10.42
|
|
Granted
|
|
|
1,799,849
|
|
|
|
6.12
|
|
Vested
|
|
|
(23,805
|
)
|
|
|
10.42
|
|
Forfeited
|
|
|
(111,791
|
)
|
|
|
6.35
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of year
|
|
|
1,735,671
|
|
|
$
|
6.22
|
|
|
|
|
|
|
|
|
|
|
During 2008, we also began issuing deferred stock units under
the 2002 Plan. These awards will vest immediately upon being
granted to members of the Board of Directors. During the year
ended December 31, 2008, we granted 70,000 deferred stock
units at a weighted average grant date fair value of $5.00, all
of which remain outstanding at December 31, 2008.
Prior to January 1, 2006, stock options under the 2002 Plan
became exercisable when vested, which occurred in annual
installments of three to seven years. For issuances under the
2002 Plan beginning in 2006, we revised the vesting terms so
that all options granted vest in equal installments over a
period of three or five years, or upon the occurrence of a
change in control. All options issued under the 2002 Plan expire
ten years from the date of grant. Our policy is to grant options
with an exercise price equal to the market price of the
underlying common stock on the date of grant.
58
The following is a summary of stock option activity for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
29,731,932
|
|
|
$
|
12.30
|
|
|
|
31,089,745
|
|
|
$
|
12.13
|
|
|
|
31,086,422
|
|
|
$
|
11.52
|
|
Granted
|
|
|
54,000
|
|
|
|
7.03
|
|
|
|
2,926,250
|
|
|
|
10.94
|
|
|
|
4,360,949
|
|
|
|
11.43
|
|
Exercised
|
|
|
(718,226
|
)
|
|
|
1.12
|
|
|
|
(1,823,903
|
)
|
|
|
4.25
|
|
|
|
(3,011,260
|
)
|
|
|
3.75
|
|
Forfeited
|
|
|
(461,316
|
)
|
|
|
11.79
|
|
|
|
(737,127
|
)
|
|
|
11.87
|
|
|
|
(344,398
|
)
|
|
|
12.11
|
|
Expired
|
|
|
(1,364,275
|
)
|
|
|
14.62
|
|
|
|
(1,723,033
|
)
|
|
|
15.73
|
|
|
|
(1,001,968
|
)
|
|
|
15.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
27,242,115
|
|
|
|
12.47
|
|
|
|
29,731,932
|
|
|
|
12.30
|
|
|
|
31,089,745
|
|
|
|
12.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at end of year
|
|
|
22,464,451
|
|
|
|
12.38
|
|
|
|
22,537,850
|
|
|
|
12.19
|
|
|
|
24,881,786
|
|
|
|
11.86
|
|
Available for future grants (1)
|
|
|
19,867,014
|
|
|
|
|
|
|
|
12,589,744
|
|
|
|
|
|
|
|
6,022,883
|
|
|
|
|
|
|
|
|
(1) |
|
On January 1, 2009, the number of shares reserved for
issuance was increased by 10,870,200 shares. |
The following is a summary of outstanding stock options at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Vested and Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
Range of
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Value
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Value
|
|
exercise prices
|
|
Shares
|
|
|
Life (years)
|
|
|
Price
|
|
|
(millions)
|
|
|
Shares
|
|
|
Life (years)
|
|
|
Price
|
|
|
(millions)
|
|
|
$0.33 to $4.00
|
|
|
3,614,114
|
|
|
|
2.2
|
|
|
$
|
1.86
|
|
|
$
|
18
|
|
|
|
3,614,114
|
|
|
|
2.2
|
|
|
$
|
1.86
|
|
|
$
|
18
|
|
$7.03 to $29.71
|
|
|
23,628,001
|
|
|
|
5.7
|
|
|
|
14.10
|
|
|
|
|
|
|
|
18,850,337
|
|
|
|
5.3
|
|
|
|
14.40
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,242,115
|
|
|
|
5.2
|
|
|
|
12.47
|
|
|
$
|
18
|
|
|
|
22,464,451
|
|
|
|
4.8
|
|
|
|
12.38
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value, determined as of the date of
exercise, of options exercised during the twelve months ended
December 31, 2008, 2007 and 2006 was $3 million,
$15 million and $25 million, respectively. We received
$1 million, $8 million and $11 million in cash
from option exercises for the years ended December 31,
2008, 2007 and 2006, respectively.
The number of shares reserved for issuance under the 2002 Plan
will automatically increase each January by an amount equal to
4% of the total number of shares of our common stock outstanding
on the last trading day in December of the prior calendar year.
In no event will any such annual increase exceed
12.2 million shares. The 2002 Plan will terminate no later
than December 31, 2011.
Crewmember Stock Purchase Plan: Our CSPP,
which is available to all employees, had 5.1 million shares
of our common stock initially reserved for issuance at its
inception in April 2002. Through 2008, the reserve automatically
increased each January by an amount equal to 3% of the total
number of shares of our common stock outstanding on the last
trading day in December of the prior calendar year. The CSPP was
amended in 2008 to eliminate this automatic reload feature and
will terminate no later than the last business day of April 2012.
The CSPP has a series of successive overlapping
24-month or
6-month
offering periods, with a new offering period beginning on the
first business day of May and November each year. Employees can
only join an offering period on the start date and participate
in one offering period at a time. Employees may contribute up to
10% of their pay, through payroll deductions, toward the
purchase of common stock. Purchase dates occur on the last
business day of April and October each year.
Effective May 1, 2007, all new CSPP participation is
considered non-compensatory following the elimination of the
24-month
offering period and the reduction of the purchase price discount
from 15% to 5%. Participants previously enrolled were allowed to
continue to purchase shares in their compensatory offering
periods until those offering periods expired in 2008. The
modification to our CSPP plan was done in conjunction with the
modifications to our employee retirement plan discussed in
Note 10.
59
Prior to the 2007 amendment, if the fair market value per share
of our common stock on any purchase date within a particular
offering period was less than the fair market value per share on
the start date of that offering period, then the participants in
that offering period were automatically transferred and enrolled
in the new two-year offering period which began on the next
business day following such purchase date and the related
purchase of shares. During 2006, certain participants were
automatically transferred and enrolled in new offering periods
due to decreases in our stock price.
Should we be acquired by merger or sale of substantially all of
our assets or sale of more than 50% of our outstanding voting
securities, then all outstanding purchase rights will
automatically be exercised immediately prior to the effective
date of the acquisition at a price equal to 95% of the fair
market value per share immediately prior to the acquisition.
The following is a summary of CSPP share reserve activity for
the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
|
Available for future purchases, beginning of year
|
|
|
20,076,845
|
|
|
|
|
|
|
|
16,908,852
|
|
|
|
|
|
|
|
13,706,245
|
|
|
|
|
|
Shares reserved for issuance
|
|
|
5,447,803
|
|
|
|
|
|
|
|
5,328,277
|
|
|
|
|
|
|
|
5,178,659
|
|
|
|
|
|
Common stock purchased
|
|
|
(1,974,266
|
)
|
|
$
|
4.65
|
|
|
|
(2,160,284
|
)
|
|
$
|
8.15
|
|
|
|
(1,976,052
|
)
|
|
$
|
8.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future purchases, end of year
|
|
|
23,550,382
|
|
|
|
|
|
|
|
20,076,845
|
|
|
|
|
|
|
|
16,908,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS 123(R) requires that deferred taxes be recognized on
temporary differences that arise with respect to stock-based
compensation attributable to nonqualified stock options and
awards. However, no tax benefit is recognized for stock-based
compensation attributable to incentive stock options (ISO) or
CSPP shares until there is a disqualifying disposition, if any,
for income tax purposes. A portion of our stock-based
compensation is attributable to ISO and CSPP shares; therefore,
our effective tax rate is subject to fluctuation.
Purchased technology, which is an intangible asset related to
our September 2002 acquisition of the membership interests of
LiveTV, is being amortized over seven years based on the average
number of aircraft expected to be in service as of the date of
acquisition. Purchased technology will become fully amortized in
2009.
Through December 31, 2008, LiveTV had installed in-flight
entertainment systems for other airlines on 358 aircraft and had
firm commitments for installations on 405 additional aircraft
scheduled to be installed through 2015, with options for 191
additional installations through 2017. Revenues in 2008, 2007
and 2006 were $58 million, $40 million and
$29 million, respectively. Deferred profit on hardware
sales and advance deposits for future hardware sales are
included in long term liabilities in our consolidated balance
sheets was $19 million and $29 million at
December 31, 2008 and 2007, respectively. Deferred profit
to be recognized on installations completed through
December 31, 2008 will be approximately $6 million in
2009, $2 million per year from 2010 through 2012,
$1 million in 2013 and $4 million thereafter.
The provision (benefit) for income taxes consisted of a current
expense of $1 million for 2008 and the following for the
years ended December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1
|
)
|
|
$
|
18
|
|
|
$
|
9
|
|
State and foreign
|
|
|
|
|
|
|
5
|
|
|
|
1
|
|
Deferred income tax expense (benefit)
|
|
$
|
(1
|
)
|
|
$
|
23
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
The effective tax rate on income (loss) before income taxes
differed from the federal income tax statutory rate for the
years ended December 31 for the following reasons (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income tax expense (benefit) at statutory rate
|
|
$
|
(27
|
)
|
|
$
|
14
|
|
|
$
|
3
|
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax, net of federal benefit
|
|
|
(4
|
)
|
|
|
3
|
|
|
|
|
|
Stock-based compensation
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
Non-deductible meals
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Non-deductible costs
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
23
|
|
|
|
|
|
|
|
1
|
|
Other, net
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
|
|
|
$
|
23
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no cash payments for income taxes in 2008, 2007 and
2006.
The net deferred taxes below include a current net deferred tax
asset of $110 million and a long-term net deferred tax
liability of $194 million at December 31, 2008, and a
current net deferred tax asset of $41 million and a
long-term net deferred tax liability of $192 million at
December 31, 2007.
The components of our deferred tax assets and liabilities as of
December 31 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
213
|
|
|
$
|
231
|
|
Employee benefits
|
|
|
23
|
|
|
|
18
|
|
Deferred revenue
|
|
|
60
|
|
|
|
38
|
|
Derivative instruments
|
|
|
54
|
|
|
|
|
|
Investment securities
|
|
|
21
|
|
|
|
|
|
Other
|
|
|
24
|
|
|
|
41
|
|
Valuation allowance
|
|
|
(26
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
369
|
|
|
|
325
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
|
(453
|
)
|
|
|
(463
|
)
|
Other
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(453
|
)
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(84
|
)
|
|
$
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, we had U.S. Federal regular and
alternative minimum tax net operating loss (NOL)
carryforwards of $576 million and $452 million,
respectively, which begin to expire in 2022. In addition, at
December 31, 2008, we had deferred tax assets associated
with state NOL and credit carryforwards of $20 million and
$4 million, respectively. The state NOLs begin to expire in
2011 through 2022, while the credits carryforward indefinitely.
Our NOL carryforwards at December 31, 2008, include an
unrecorded benefit of approximately $9 million related to
stock-based compensation that will be recorded in equity when,
and to the extent, realized. Section 382 of the Internal
Revenue Code imposes limitations on a corporations ability
to use its NOL carryforwards if it experiences an
ownership change. As of December 31, 2008, our
valuation allowance did not include any amounts attributable to
this limitation; however, if an ownership change
were to occur in the future, the ability to use our NOLs could
be limited.
In evaluating the realizability of the deferred tax assets,
management assesses whether it is more likely than not that some
portion, or all, of the deferred tax assets, will be realized.
Management considers, among other things, the generation of
future taxable income (including reversals of deferred tax
liabilities) during the
61
periods in which the related temporary differences will become
deductible. At December 31, 2008, we provided a
$26 million valuation allowance, $21 million of which
relates to an unrealized tax capital loss on investment
securities, to reduce the deferred tax assets to an amount that
we consider is more likely than not to be realized.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follow (in millions):
|
|
|
|
|
Unrecognized tax benefits December 31, 2007
|
|
$
|
2
|
|
Increases for tax positions taken during the current period
|
|
|
6
|
|
|
|
|
|
|
Unrecognized tax benefits December 31, 2008
|
|
$
|
8
|
|
|
|
|
|
|
Interest and penalties accrued on unrecognized tax benefits were
not significant. If recognized, $7 million of the
unrecognized tax benefits at December 31, 2008 would impact
the effective tax rate. We do not expect any significant change
in the amount of these unrecognized tax benefits within the next
twelve months. As a result of NOLs and statute of limitations in
our major tax jurisdictions, years 2000 through 2008 remain
subject to examination by the relevant tax authorities.
|
|
Note 10
|
Employee
Retirement Plan
|
We sponsor a retirement savings 401(k) defined contribution
plan, or the Plan, covering all of our employees. In 2008, we
matched 100% of our employee contributions up to 5% of their
compensation in cash, which vests over five years of service
measured from an employees hire date. Prior to 2007, the Company
match was up to 3% of employee contributions. Participants are
immediately vested in their voluntary contributions.
A component of the Plan is a profit sharing retirement plan. In
2007, we amended the profit sharing retirement plan to provide
for Company contributions, subject to Board of Director
approval, to be 5% of eligible non-management employee
compensation or 15% of pre-tax earnings, whichever is greater.
Prior to the 2007 amendment, we contributed 15% of our pre-tax
earnings, adjusted for stock option compensation expense, which
was distributed on a pro rata basis based on employee
compensation. These contributions vest immediately. Our
contributions expensed for the Plan in 2008, 2007 and 2006 were
$43 million, $39 million and $13 million,
respectively.
As of December 31, 2008, our firm aircraft orders consisted
of 58 Airbus A320 aircraft, 70 EMBRAER 190 aircraft and 21 spare
engines scheduled for delivery through 2016. Committed
expenditures for these aircraft and related flight equipment,
including estimated amounts for contractual price escalations
and predelivery deposits, will be approximately
$350 million in 2009, $300 million in 2010,
$465 million in 2011, $925 million in 2012,
$960 million in 2013 and $1.98 billion thereafter. We
have options to purchase 22 Airbus A320 aircraft scheduled for
delivery from 2011 through 2015 and 86 EMBRAER 190 aircraft
scheduled for delivery from 2010 through 2015. Debt or lease
financing has been arranged for all of our three Airbus A320 and
for all of our six net EMBRAER 190 aircraft scheduled for
delivery in 2009. However, there is no associated recourse with
the committed financing in the event the financial institution
providing this financing fails to perform as anticipated.
In September 2008, we announced the long-term lease of two of
our owned EMBRAER 190 aircraft that have since been delivered to
Azul Linhas Aereas Brasileiras, SA, or Azul, a new airline
founded by David Neeleman, our former CEO and Chairman of the
Board. One aircraft was leased in September and the other leased
in October, each with a lease term of 12 years. Under the
terms of these leases, we recorded approximately $2 million
in rental income during 2008. Future lease payments due to us
over the next five years are approximately $6 million per
year. Additionally, in September 2008, we executed, and
subsequently amended, a purchase agreement relating to the sale
of two new EMBRAER 190 aircraft scheduled for initial delivery
to us in the first quarter of 2009. The subsequent sales of
these aircraft to a third party occurred immediately after such
aircraft were received by us in January 2009. We understand that
these two EMBRAER 190 aircraft are being operated by Azul, in
addition to the two leased aircraft described above.
62
Although no contractual commitment exists, Azul has also held
discussions with LiveTV regarding LiveTVs ability to
provide in-flight entertainment systems and services.
We utilize several credit card processors to process our ticket
sales. Our agreements with these processors do not contain
covenants, but do generally allow the processor to withhold cash
reserves to protect the processor for potential liability for
tickets purchased, but not yet used for travel. We have not
historically had cash reserves withheld; however, in June 2008
we issued a $35 million letter of credit, collateralized by
cash, to one of our processors. In October 2008, this letter of
credit was increased to $55 million. We may be required to
issue additional collateral to our credit card processors and
other key vendors in the future.
Our commitments also include those of LiveTV, which has several
noncancelable long-term purchase agreements with its suppliers
to provide equipment to be installed on its customers
aircraft, including JetBlues aircraft. Committed
expenditures to these suppliers are approximately
$42 million in 2009, $7 million in 2010, $10 million
in 2011 and $1 million in 2012.
We enter into individual employment agreements with each of our
FAA-licensed employees, which include pilots, dispatchers and
technicians. Each employment agreement is for a term of five
years and automatically renews for an additional five-year term
unless either the employee or we elect not to renew it by giving
at least 90 days notice before the end of the relevant
term. Pursuant to these agreements, these employees can only be
terminated for cause. In the event of a downturn in our business
that would require a reduction in work hours, we are obligated
to pay these employees a guaranteed level of income and to
continue their benefits if they do not obtain other aviation
employment. None of our employees are covered by collective
bargaining agreements with us.
The Company is party to legal proceedings and claims that arise
during the ordinary course of business. We believe that the
ultimate outcome of these matters will not have a material
adverse effect upon our financial position, results of
operations or cash flows.
We self-insure a portion of our losses from claims related to
workers compensation, environmental issues, property
damage, medical insurance for employees and general liability.
Losses are accrued based on an estimate of the ultimate
aggregate liability for claims incurred, using standard industry
practices and our actual experience.
We are a party to many routine contracts under which we
indemnify third parties for various risks. These indemnities
consist of the following:
All of our bank loans, including our aircraft and engine
mortgages, contain standard provisions present in loans of this
type which obligate us to reimburse the bank for any increased
costs associated with continuing to hold the loan on our books
which arise as a result of broadly defined regulatory changes,
including changes in reserve requirements and bank capital
requirements. These indemnities would have the practical effect
of increasing the interest rate on our debt if they were to be
triggered. In all cases, we have the right to repay the loan and
avoid the increased costs. The term of these indemnities matches
the length of the related loan up to 12 years.
Under both aircraft leases with foreign lessors and aircraft and
engine mortgages with foreign lenders, we have agreed to
customary indemnities concerning withholding tax law changes
under which we are responsible, should withholding taxes be
imposed, for paying such amount of additional rent or interest
as is necessary to ensure that the lessor or lender still
receives, after taxes, the rent stipulated in the lease or the
interest stipulated under the loan. The term of these
indemnities matches the length of the related lease up to
18 years.
We have various leases with respect to real property, and
various agreements among airlines relating to fuel consortia or
fuel farms at airports, under which we have agreed to standard
language indemnifying the lessor against environmental
liabilities associated with the real property or operations
described under the agreement, even if we are not the party
responsible for the initial event that caused the environmental
damage. In the case of fuel consortia at airports, these
indemnities are generally joint and several among the
63
participating airlines. We have purchased a stand alone
environmental liability insurance policy to help mitigate this
exposure. Our existing aviation hull and liability policy
includes some limited environmental coverage when a clean up is
part of an associated single identifiable covered loss.
Under certain contracts, we indemnify specified parties against
legal liability arising out of actions by other parties. The
terms of these contracts range up to 30 years. Generally,
we have liability insurance protecting ourselves for the
obligations we have undertaken relative to these indemnities.
On October 10, 2008, the DOT issued its final Congestion
Management Rule for JFK and Newark International Airport. The
rule continues caps on the number of scheduled operations that
may be conducted during specific hours and prohibits airlines
from conducting operations during those hours without obtaining
a slot (authority to conduct a scheduled arrival or departure).
In addition, the rule provides for the confiscation of 10% of
the slots over a five year period currently held by carriers and
reallocates them through an auction process over a five year
period. On December 8, 2008, the United States Court of
Appeals for the District of Columbia issued an order temporarily
enjoining the auctions from taking place until such time as the
court could rule on the merits of the case challenging the
proposed auctions. We are participating in the litigation
challenging the rule, which if ultimately unsuccessful and the
auctions are permitted to proceed, would likely result in our
losing a portion of our operating capacity at JFK, which would
negatively impact our ability to fully utilize our new Terminal
5 and may result in increased competition.
LiveTV provides product warranties to third party airlines to
which it sells its products and services. We do not accrue a
liability for product warranties upon sale of the hardware since
revenue is recognized over the term of the related service
agreements of up to 12 years. Expenses for warranty repairs
are recognized as they occur. In addition, LiveTV has provided
indemnities against any claims which may be brought against its
customers related to allegations of patent, trademark, copyright
or license infringement as a result of the use of the LiveTV
system. LiveTV customers include other airlines, which may be
susceptible to the inherent risks of operating in the airline
industry
and/or
economic downturns, which may in turn have a negative impact on
our business.
We are unable to estimate the potential amount of future
payments under the foregoing indemnities and agreements.
|
|
Note 13
|
Fair
Value, Financial Instruments and Risk Management
|
SFAS 157 requires disclosure about how fair value is
determined for assets and liabilities and establishes a
hierarchy for which these assets and liabilities must be
grouped, based on significant levels of inputs as follows:
|
|
|
|
Level 1
|
quoted prices in active markets for identical assets or
liabilities;
|
|
|
Level 2
|
quoted prices in active markets for similar assets and
liabilities and inputs that are observable for the asset or
liability; or
|
|
|
Level 3
|
unobservable inputs for the asset or liability, such as
discounted cash flow models or valuations.
|
The determination of where assets and liabilities fall within
this hierarchy is based upon the lowest level of input that is
significant to the fair value measurement.
64
The following is a listing of our assets and liabilities
required to be measured at fair value on a recurring basis and
where they are classified within the SFAS 157 fair value
hierarchy (as described in Note 1) as of
December 31, 2008 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
409
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
409
|
|
Restricted cash
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
Auction rate securities (ARS)
|
|
|
|
|
|
|
|
|
|
|
244
|
|
|
|
244
|
|
Put option related to ARS
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
549
|
|
|
$
|
|
|
|
$
|
258
|
|
|
$
|
807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel derivatives
|
|
$
|
|
|
|
$
|
128
|
|
|
$
|
|
|
|
$
|
128
|
|
Interest rate swap
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
128
|
|
|
$
|
10
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 2 for fair value information related to our
outstanding debt obligations as of December 31, 2008. The
following table reflects the activity for the major classes of
our assets and liabilities measured at fair value using
level 3 inputs (in millions) for the three and twelve
months ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction Rate
|
|
|
Put Option
|
|
|
Interest Rate
|
|
|
|
|
|
|
Securities
|
|
|
related to ARS
|
|
|
Swaps
|
|
|
Total
|
|
|
Balance as of December 31, 2007
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Transfers in
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
255
|
|
Total gains or (losses), realized or unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(67
|
)
|
|
|
14
|
|
|
|
|
|
|
|
(53
|
)
|
Included in comprehensive income
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Purchases, issuances and settlements, net
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
244
|
|
|
$
|
14
|
|
|
$
|
(10
|
)
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents: Our cash and
cash equivalents include money market securities that are
considered to be highly liquid and easily tradable. These
securities are valued using inputs observable in active markets
for identical securities and are therefore classified as
level 1 within our fair value hierarchy.
We maintain cash and cash equivalents with various high quality
financial institutions or in short-term duration high quality
debt securities. Investments in highly liquid debt securities
are stated at fair value. The majority of our receivables result
from the sale of tickets to individuals, mostly through the use
of major credit cards. These receivables are short-term,
generally being settled shortly after the sale. The carrying
values of all other financial instruments approximated their
fair values at December 31, 2008 and 2007.
Auction rate securities: ARS are
long-term debt securities for which interest rates reset
regularly at pre-determined intervals, typically 28 days,
through an auction process. We held ARS, with a total par value
of $311 million and $611 million as of
December 31, 2008 and 2007, respectively. Beginning in
February 2008, all of the ARS held by us experienced failed
auctions which resulted in our continuing to hold these
securities beyond the initial auction reset periods. With
auctions continuing to fail through the end of 2008, we have
classified all of our ARS as long term, since maturities of
underlying debt securities range from 20 to 40 years.
Although the auctions for the securities have failed,
$18 million have been redeemed by their issuers at par, we
have not experienced any defaults and continue to earn and
receive interest on all of these investments at the maximum
contractual rate. At December 31, 2007, these securities
were valued based on the markets in which they were trading, a
level 1 input, which equaled their par value. The estimated
fair value of these securities at December 31, 2008,
however, no longer approximates par value and was estimated
through discounted cash flows, a level 3 input. Our
discounted cash flow analysis considered, among other things,
the quality of the underlying collateral, the credit rating of
the issuers, an estimate of when these
65
securities are either expected to have a successful auction or
otherwise return to par value and expected interest income to be
received over this period. Because of the inherent subjectivity
in valuing these securities, we also considered independent
valuations obtained for each of our ARS as of December 31,
2008 in estimating their fair values.
All of our ARS are collateralized by student loan portfolios
(substantially all of which are guaranteed by the United States
Government), $284 million par value of which had a AAA
rating and the remainder had an A rating. Despite the quality of
the underlying collateral, the market for ARS and other
securities has been diminished due to the lack of liquidity
experienced in the market throughout 2008 and expected to be
experienced into the future. Through September 30, 2008, we
had experienced a $13 million decline in fair value, which
we had classified as temporary and reflected as an unrealized
loss in other comprehensive income. Through the fourth quarter,
however, the lack of liquidity in the capital markets not only
continued, but deteriorated further, resulting in the decline in
fair value totaling $67 million at December 31, 2008.
This decline in fair value was also deemed to be other than
temporary due to the continued auction failures and expected
lack of liquidity in the capital markets continuing into the
foreseeable future, which resulted in an impairment charge being
recorded in other income/expense. In February 2009, we sold
certain ARS for $29 million, an amount which approximated
their fair value as of December 31, 2008. The proceeds from
these sales were used to reduce our $110 million line of
credit. We continue to monitor the market for our ARS and any
change in their fair values will be reflected in other
income/expense in future periods.
During 2008, various regulatory agencies began investigating the
sales and marketing activities of the banks and broker-dealers
that sold ARS, alleging violations of federal and state laws in
connection with these activities. UBS, one of the two
broker-dealers from which we purchased ARS, subsequently
announced settlements under which they will repurchase the ARS
at par at a future date. As a result of our participation in
this settlement agreement, UBS is required to repurchase from
us, ARS brokered by them, which had a par value of
$85 million at December 31, 2008, beginning in June
2010. Refer to Note 2 for further details on our
participation in UBSs auction rate security program.
Put option related to ARS: We have
elected to apply the fair value option under SFAS 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, to UBSs agreement to repurchase, at par,
ARS brokered by them as described above. The $14 million
fair value of this put option is included in other long term
assets in our consolidated balance sheets with the resultant
gain offsetting $15 million of related ARS impairment
included in other income/expense. The fair value of the put is
determined by comparing the fair value of the related ARS, as
described above, to their par values and also considers the
credit risk associated with UBS. This put option will be
adjusted on each balance sheet date based on its then fair
value. The fair value of the put option is based on unobservable
inputs and is therefore classified as level 3 in the
hierarchy.
Interest rate swaps: In February 2008,
we entered into interest rate swaps, which qualify as cash flow
hedges in accordance with Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, or SFAS 133. The fair values of
our interest rate swaps were initially based on inputs received
from the counterparty. These values were corroborated by
adjusting the active swap indications in quoted markets for
similar terms (6-8 years) for the specific terms within our
swap agreements. There was no ineffectiveness relating to these
interest rate swaps for the three or twelve months ended
December 31, 2008, with all of the unrealized losses being
deferred in accumulated other comprehensive income. At
December 31, 2008, we had posted cash collateral with our
counterparties totaling $11 million for our interest rate
swap contracts, which was reflected as a reduction of our hedge
liability.
Aircraft fuel derivatives: Our heating
oil swaps and heating oil collars are not traded on public
exchanges. Their fair values are determined based on inputs that
are readily available from public markets; therefore, they are
classified as level 2 inputs. The effective portion of
realized aircraft fuel hedging derivative gains/(losses) is
recognized in fuel expense, while ineffective gains/(losses) are
recognized in interest income and other. All cash flows related
to our fuel hedging derivative instruments classified as cash
flow hedges are included in operating cash flows.
We are exposed to the effect of changes in the price and
availability of aircraft fuel. To manage this risk, we
periodically purchase crude or heating oil option contracts or
swap agreements. Prices for these commodities are normally
highly correlated to aircraft fuel, making derivatives of them
effective at offsetting
66
aircraft fuel prices to provide some short-term protection
against a sharp increase in average fuel prices. The fair values
of our derivative instruments are estimated through the use of
standard option value models
and/or
present value methods with underlying assumptions based on
prices observed in commodity futures markets. The following is a
summary of our derivative contracts (in millions, except as
otherwise indicated):
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2008
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2007
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|
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At December 31:
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Fair value of fuel derivative instruments at year end
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$
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(128
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)
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$
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33
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Longest remaining term (months)
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12
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9
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Hedged volume (barrels)
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870
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1,506
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2008
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2007
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2006
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Year ended December 31:
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|
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|
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Hedge effectiveness net gains (losses) recognized in aircraft
fuel expense
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$
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48
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$
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35
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|
$
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(4
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)
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Hedge ineffectiveness net gains recognized in other income
(expense)
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|
|
4
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5
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|
|
|
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|
Other fuel derivative net losses recognized in other income
(expense)
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|
|
|
|
|
|
|
|
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(5
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)
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Percentage of actual consumption economically hedged
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|
38
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%
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|
59
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%
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64
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%
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Ineffectiveness results when the change in the total fair value
of the derivative instrument does not exactly equal the change
in the value of our expected future cash outlays for the
purchase of aircraft fuel. To the extent that the periodic
changes in the fair value of the hedging instruments are not
effective, the ineffectiveness is recognized in other income
(expense) immediately. Likewise, if a hedge ceases to qualify
for hedge accounting, those periodic changes in the fair value
of the derivative instruments are recognized in other income
(expense) in the period of the change. When aircraft fuel is
consumed and the related derivative contract settles, any gain
or loss previously deferred in other comprehensive income is
recognized in aircraft fuel expense.
Any outstanding derivative instruments expose us to credit loss
in the event of nonperformance by the counterparties to the
agreements, but we do not expect that any of our three
counterparties will fail to meet their obligations. The amount
of such credit exposure is generally the fair value of our
outstanding contracts. To manage credit risks, we select
counterparties based on credit assessments, limit our overall
exposure to any single counterparty and monitor the market
position with each counterparty. Some of our agreements require
cash deposits if market risk exposure exceeds a specified
threshold amount. We do not use derivative instruments for
trading purposes.
In accordance with our fuel hedging agreements our
counterparties may require us to fund all, or a portion of, our
loss position on these contracts. The amount of margin, if any,
is periodically adjusted based on the fair value of the fuel
hedge contracts. At December 31, 2008, we had posted cash
collateral with our counterparties totaling $117 million
for our 2009 contracts, which was reflected as a reduction of
our fuel hedge liability.
Due to the decline in fuel prices during the fourth quarter, we
began selling swap contracts to the same fuel counterparties
covering a majority of our fourth quarter 2008 swap contracts
and all of our 2009 swap contracts, effectively capping our
losses related to further oil price declines. As of
December 31, 2008, we have effectively exited all of our
open swap contracts by entering into reverse swap sales with the
same counterparties for the same quantity and duration of our
existing swap contracts. The forecasted fuel consumption, for
which these transactions were designated as cash flow hedges, is
still expected to occur; therefore, amounts deferred in other
comprehensive income related to these contracts will remain
deferred until the forecasted fuel consumption occurs. As of
December 31, 2008, we had deferred $93 million of
losses in other comprehensive income associated with these
contracts.
As of December 31, 2008, excluding the contracts that we
effectively exited, all of our outstanding derivative contracts
were designated as cash flow hedges for accounting purposes.
While outstanding, these contracts are recorded at fair value on
the balance sheet with the effective portion of the change in
their fair value being reflected in accumulated other
comprehensive income (loss). At December 31, 2007, 100% of
our derivative contracts were designated as cash flow hedges for
accounting purposes.
67
We have currently suspended our fuel hedging program and are
revising the program in light of current crude oil prices.
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Note 14
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Quarterly
Financial Data (Unaudited)
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Quarterly results of operations for the years ended December 31
are summarized below (in millions, except per share amounts):