e10vk
UNITED STATES 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, 2010
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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 if 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 if 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 checkmark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes x No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) 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,
2010 was approximately $1,339,648,000 (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, 2011 was
294,752,749 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its 2011
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 competitive 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 115 Airbus A320 aircraft and 45 EMBRAER
190 aircraft the youngest and most fuel-efficient
fleet of any major U.S. airline. As of December 31,
2010, we served 63 destinations in 21 states, Puerto Rico,
and eleven 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 2010, we operated an
average of 650 daily flights. For the year ended
December 31, 2010 JetBlue was the 6th 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. As we
entered our second decade of operations in 2010, we continued to
work toward our goal to become the Americas Favorite
Airline for our employees (whom we refer to as
crewmembers), customers, and shareholders. We believe our
achieving this goal is dependent upon continuing to provide
superior customer service in delivering the JetBlue Experience
while maintaining financial strength. We do this by offering
what we believe to be the best domestic coach product and
providing our customers more value for their purchases, while
maintaining a low cost structure relative to our superior
product level. During 2010, we continued to make investments to
better position us for our future growth and success, including
the implementation of a comprehensive customer service system,
which has enabled us to add functionalities and enhance the
JetBlue experience, as well as modifying our fleet schedule, and
expanding our route network. 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. This includes friendly,
award-winning, customer service-oriented employees, new
aircraft, roomy leather seats with the most legroom in coach, 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 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 (as well as 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 U.S. major airline to provide such a fundamental
benefit to our customers. In 2010, we completed 98.1% 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 and are arranged in a
two-by-two
seating configuration with either 32 or 33 inches between
rows of seats. We continually strive to enhance and refine our
product based on customer and crewmember feedback.
Focus on Operating Costs. Historically,
our cost structure has allowed us to offer fares lower than many
of our competitors. We continue to focus on maintaining low
operating costs relative to the superior product offerings of
the JetBlue Experience. For the year ended December 31,
2010, our cost per available seat mile, excluding fuel, of 6.71
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, 2010, our aircraft
operated an average of 11.6 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. Historically, our
distribution costs have been low for several reasons. We issue
only electronic tickets, saving paper, postage, employee time
and back-office processing expense. Additionally, a majority of
our sales are booked through our website,
http://www.jetblue.com,
which is our least expensive form of distribution.
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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
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our reservation agents work from their homes, providing better
scheduling flexibility and allowing employees to customize their
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 aircraft types, the Airbus A320 and
the EMBRAER 190, which, with an average age of only
5.4 years, is the youngest fleet of any major
U.S. airline. We believe that operating a young fleet
having 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 in North America of all Airbus
A320 aircraft operators. Operating only two types of aircraft,
both of which are newer aircraft types, results in cost savings
over our competitors (who generally 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 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 which
provides a high quality travel experience. Similarly, we believe
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 2010, we were voted Top Low Cost
Airline for Customer Satisfaction by J.D. Power and
Associates for the sixth consecutive year. We also earned
distinctions for the third straight year as the Best Large
Domestic Airline (economy class) and Best Inflight
Entertainment (domestic flights) in the 2010 Zagat Airline
Survey. Additionally, the JetBlue Experience won us Best
Cabin Ambiance at the 2010 Passenger Choice Awards of the
Airline Passenger Experience Association. According to
Satmetrix, we were also recognized as the leader in the 2010 Net
Promoter Industry Benchmarks for customer loyalty in the airline
category.
Strength of Our People. We believe 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, retaining, and developing 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. During
2010, we invested in front line training for our customer
service teams to reinforce the importance and value of the
customer service experience.
None of our employees are currently unionized. We believe a
direct relationship with JetBlue leadership, not third-party
representation, is in the best interests of our employees,
customers, and shareholders. 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 renews for an additional five-year term unless the
employee is terminated for cause or the employee elects not to
renew. 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.
Our full-time equivalent employees at December 31, 2010
consisted of 1,897 pilots, 2,039 flight attendants, 3,393
airport operations personnel, 491 technicians (whom others refer
to as mechanics), 1,066 reservation agents, and 2,586 management
and other personnel. At December 31, 2010, we employed
9,626 full-time and 3,322 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 the Northeast, Caribbean and Latin America
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 2010, our domestic operations at JFK accounted for
more than 40% of all domestic passengers at that airport. 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. Operating out of the nations
largest travel market does make us susceptible to certain
operational constraints.
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 has helped increase the
efficiency of our operations. We believe this new terminal with
its modern amenities, concession offerings and passenger
conveniences has also improved the overall efficiency of our
operation and, more importantly, has significantly enhanced the
ground experience of our customers and has become an integral
part of the JetBlue Experience. The Terminal 5 experience has
been awarded top honors in four categories in the Airport
Revenue News 2010 Best Airport & Concessionaire
Awards, including Best Concessionaire Design,
Most Unique Services, Best Overall Concessions
Program, and Best Concessions Management Team.
Boston
New Englands Largest Transportation Center
We have been increasing our presence at Bostons Logan
International Airport, or Boston, another important travel
market in the Northeast region, and we are now the largest
carrier in Boston with the most departures and most destinations
served. By the end of 2010, our domestic operations at Boston
accounted for more than 19% of all domestic flights at that
airport. At Boston, we continue to capitalize on opportunities
of the changing competitive landscape by increasing our presence
and adding routes and frequencies. Our revamped customer loyalty
program, the added benefits of our new customer service system
implemented in early 2010, and product enhancements have allowed
us to build our relevance to business customers, especially in
Boston, where there is a significant business travel presence.
Caribbean
and Latin America
The growth of our route network in 2009 and 2010 was primarily
through the addition of new destinations in the Caribbean and
Latin America, markets which have historically matured more
quickly than mainland flights of a comparable distance. As of
December 31, 2010, approximately 23% of our capacity was in
the Caribbean and Latin America; and we expect this number to
continue to grow as we continue to seize opportunities. Traffic
from visiting friends and relatives strongly complements leisure
travel in the Caribbean region allowing for our growth and
success in this area of our network. Additionally, competitive
landscape changes in San Juan, Puerto Rico have allowed us
to increase significantly our presence there as one of the
largest airlines serving the Luis Muñoz Marin International
Airport.
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 United Air Lines, Delta Air Lines,
American Airlines, Southwest Airlines and US Airways. The
U.S. Department of Transportation, or DOT, defines the
major U.S. airlines as those airlines with annual revenues
of at least $1 billion; there are currently 12 passenger
airlines meeting this standard. These airlines offer scheduled
flights to most large cities within the United States and abroad
and also serve numerous smaller cities. Six of the largest major
U.S. airlines 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 one of its hubs.
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Regional airlines, such as SkyWest 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 two 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. As a result, while 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.
During 2009, most traditional network airlines began to reduce
capacity on their international routes while continuing to
reduce overall domestic and Caribbean capacity by redeploying
the capacity to more regional routes. 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 2011.
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 service, routes served, flight schedules, types of
aircraft, safety record and reputation, code-sharing and
interline relationships, capacity, in-flight entertainment
systems and frequent flyer programs.
Our competitors and potential competitors include traditional
network airlines, low-cost airlines, and regional airlines. Five
of the other major U.S. airlines are larger, have greater
financial resources and serve more routes than we do. Our
competitors also use some of the same technologies that we do
such as laptop computers in the cockpit and website bookings. In
recent years, the U.S. airline industry experienced
significant consolidation, bankruptcy protection, and
liquidation largely as a result of high fuel costs and continued
strong competition. The merger of United Airlines and
Continental Airlines created the worlds largest airline in
2010 on the heels of the Delta Airlines and Northwest Airlines
merger in 2009. Additionally, in September 2010, low cost
carrier Southwest Airlines announced plans to acquire AirTran
Airways. Further industry consolidation or restructuring may
result in our competitors having a more rationalized route
structure and lower operating costs, enabling them to compete
more aggressively.
Price competition occurs through price discounting, fare
matching, increased capacity, targeted sale promotions,
ancillary fee additions 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, including only charging
for fees that we believe carry an intrinsic value for the
customer. All other factors being equal, we believe customers
often prefer JetBlue and the JetBlue Experience.
5
Commercial
Partnerships
Airlines 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 commercial agreements are typically structured in one of
three ways: 1) an interline agreement which allows for a
customer to book one ticket with itineraries on multiple
airlines; 2) a codeshare in which one airline places its
name and flight number on flights operated by another airline;
and 3) capacity purchase agreements. The benefits of broad
networks offered to customers could attract more customers to
these networks. We currently participate in several marketing
partnerships, primarily interline agreements, and will continue
to seek additional strategic opportunities as they arise to grow
our network. Our current partnerships are structured with
gateways in New Yorks JFK, Boston, or Washington DCs
Dulles International Airport allowing international travelers,
whom we do not otherwise serve, to easily access many of our key
domestic and Caribbean routes. Our partners include Deutsche
Lufthansa AG, one of the worlds preeminent airlines and
our largest shareholder; Cape Air, an airline that services
destinations out of Boston and San Juan, Puerto Rico; Aer
Lingus, an airline based in Dublin, Ireland; American Airlines,
one of the largest airlines in the world; South African Airways,
Africas most awarded airline; El Al Israel Airlines,
Israels national airline; and Emirates, one of the
worlds largest international carriers.
Route
Network
Our operations primarily consist of transporting passengers on
our aircraft with domestic U.S. operations, including
Puerto Rico, accounting for 85% of our capacity in 2010. 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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2010
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2009
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2008
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East Coast Western U.S.
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34.5
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%
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34.7
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%
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41.5
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Northeast Florida
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31.4
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32.8
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33.9
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Medium haul
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3.3
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3.5
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3.0
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Short haul
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7.6
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7.7
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7.6
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Caribbean, including Puerto Rico
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23.2
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21.3
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14.0
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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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As of December 31, 2010, we provided service to 63
destinations in 21 states, Puerto Rico, and eleven
countries in the Caribbean and Latin America. We have begun
service to the following new destinations since
December 31, 2009:
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Destination
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Service Commenced
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Punta Cana, Dominican Republic
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May 2010
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Washington, DC/Reagan National
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November 2010
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Hartford, Connecticut
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November 2010
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We began service to Providenciales, Turks & Caicos
Islands in February 2011. We intend to begin service to
Anchorage, Alaska and Marthas Vineyard, Massachusetts in
May 2011. In considering new markets, we focus on those that are
underserved or 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
expected level of demand that may result in a particular market
from our introduction of service and lower prices, as well as
the anticipated response of existing airlines in that market.
We are the leading carrier in number of flights flown per day
between the New York metropolitan area and Florida. As of
December 31, 2010, we also offer service to the most
non-stop destinations of any carrier out of Boston.
6
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
time and time 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.
During 2010 we implemented a new integrated customer service
system, which includes a reservations system, website, revenue
management system, revenue accounting system, and a customer
loyalty management system among others. The integrated system
has enabled us to increase our capabilities including growing
our current business, providing for more commercial partnerships
and allowing us to attract more business customers.
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. Our participation in
global distribution systems, or GDSs, supports our growth in the
corporate market, as business customers are more likely to book
through a travel agency or booking product that utilizes the GDS
platform. While the cost of sales through this channel is higher
than through our website, the average fare purchased through
this channel generally covers the increased distribution costs.
We currently participate in four major GDSs (Sabre, Galileo,
Worldspan and Amadeus) and four major online travel agents, or
OTAs (Expedia, Travelocity, Orbitz, and Priceline).
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 and 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
In November 2009, we launched an improved version of
JetBlues customer loyalty program, TrueBlue. TrueBlue is
an online program designed to reward and recognize our most
loyal customers. The program offers incentives to increase
members travel on JetBlue. TrueBlue members earn points
for each one-way flight flown based on the value paid for the
flight. Member accounts accumulate points, which do not expire
as long as new points are earned at least once in a
12 month period. Redemption of points for a one-way flight
can begin once a member attains as few as 5,000 points. There
are no black-out dates or seat restrictions in the improved
TrueBlue program and any JetBlue destination can be booked if
the member has enough points to exchange for the value of an
open seat. However, the number of points needed to acquire
travel is variable based on market conditions.
The number of travel segments flown during 2010 using TrueBlue
points was approximately 600,000, representing 3% 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. However, we expect redemptions
to grow as a result of the program enhancements rolled out in
2009.
We have an agreement with American Express under which it issues
co-branded credit cards allowing JetBlue cardmembers to earn
TrueBlue points. We also have an agreement with American Express
allowing its cardholders to convert their Membership Rewards
points into TrueBlue points. Additionally, we have agreements
with other loyalty partners which allow their customers to earn
TrueBlue points through participation in the partners
programs. We intend to pursue other loyalty partnerships in the
future.
7
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 qualified 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 Aeroman facilities in El
Salvador, Pemco in Tampa, Florida 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.
Aircraft
Fuel
In 2010, continuing a trend that began in 2005, fuel costs were
our largest operating expense. 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
as follows for the years ended December 31:
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2010
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2009
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2008
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Gallons consumed (millions)
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486
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455
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453
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Total cost (millions)
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$
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1,115
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$
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945
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$
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1,397
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Average price per gallon
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$
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2.29
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$
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2.08
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$
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3.08
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Percent of operating expenses
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32.4
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%
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31.4
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%
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42.6
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%
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Total cost and average price per gallon each include related
fuel taxes as well as effective fuel hedging gains and losses.
Our goal with fuel hedging is to provide protection against
increases in fuel prices by entering into a variety of crude and
heating oil call options and collar contracts, as well as jet
fuel swap agreements. At December 31, 2010, we had hedged
approximately 28% of our projected 2011 fuel requirements and 6%
of our projected 2012 fuel requirements. In January, 2011, we
hedged approximately an additional 4% of our expected 2011 fuel
requirements using crude oil collars. We had no collateral
posted related to margin calls on our outstanding fuel hedge
contracts as of December 31, 2010.
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, a network of approximately 100 ground stations
across the continental U.S., and rights to certain patents and
intellectual property. LiveTVs major competitors in the
in-flight entertainment systems market 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.
8
LiveTV has agreements with seven other domestic and
international commercial airlines for the sale and installation
of certain hardware, 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 and related product enhancements.
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 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
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 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.
In December 2009, the DOT issued a rule, which among other
things, requires carriers not to permit domestic flights to
remain on the tarmac for more than three hours. The rule became
effective in April 2010. Violators can be fined up to a maximum
of $27,500 per passenger. The new rule also introduces
requirements to disclose on-time performance and delay
statistics for certain flights. This new rule may have adverse
consequences on our business and our results of operations.
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 were able to schedule, without
9
restrictions, flights. As a result of over-scheduling beyond the
airports hourly capacity, congestion and delays increased
significantly in 2007.
JFK and its neighboring metropolitan area airports have
experienced significant Air Traffic Control, or ATC, related
delays as a result of increasing scheduled and general aviation
services since June 2006. The magnitude of delays not only
deteriorated air travel services in the New York area, but the
entire air traffic system in the United States. Consequently,
the FAA imposed slot restrictions and hourly operational caps at
JFK and Newarks Liberty International Airport with the
goal of reducing system congestion in 2008. Despite this action,
the summer of 2008 was one of the most challenging periods for
disruptive operations in the New York metropolitan area.
The delay level during this time actually surpassed the levels
during the same period of 2007 as ATC implemented daily ground
delay programs at JFK. While JFK delays in 2010 were much more
manageable, the delay reductions were primarily driven by
industry capacity reductions and a mild summer in the New York
area.
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. This settlement provides for a
priority allocation procedure should supplemental slots above
the 41 current slots become available. We have 30 slots
available for use and currently operate 30 weekday
roundtrip flights from Long Beach Municipal Airport to 13
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
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 launched a Jetting to Green program on
www.jetblue.com, which we use to educate our customers
and crewmembers about environmental issues and to inform the
public about our green initiatives. We also publish
a corporate sustainability report, which addresses our
environmental programs, including those aimed at curbing
greenhouse gas emissions, our conservation efforts and our
social responsibility initiatives.
In December 2009, we signed comprehensive memorandums of
understanding, along with 14 other airlines, with two different
producers for a future supply of alternative aviation fuel,
which would be more environmentally friendly than jet fuel
currently being used. One producer, AltAir Fuels, plans for the
production of approximately 75 million gallons per year of
jet fuel and diesel fuel derived from camelina oils
10
or comparable feedstock. The other producer, Rentech, plans for
the production of approximately 250 million gallons per
year of synthetic jet fuel derived principally from coal or
petroleum coke.
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, Mexico, Colombia,
Costa Rica, Jamaica, Barbados, and Saint Lucia. 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 availability of
fuel and subject to price volatility.
Our results of operations are heavily impacted by the price and
availability of fuel. Fuel costs comprise a substantial portion
of our total operating expenses and are our single largest
operating expense. 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 on 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
11
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.
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 a variety of option contracts and swap agreements for crude
oil, heating oil, and jet fuel to partially protect against
significant increases in fuel prices; however, such contracts
and agreements do not completely protect us against price
volatility, are limited in volume and duration, and can be less
effective during volatile market conditions and may carry
counterparty risk. Under the fuel hedge contracts we may enter
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,
at times we have not been able to adequately increase our fares
to offset the increases in fuel prices nor may we be able to do
so in the future. Future fuel price 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.
We have a significant amount of fixed obligations and we
will incur significantly more fixed obligations, which could
harm our ability to service our current or future fixed
obligations.
As of December 31, 2010, our debt of $3.03 billion
accounted for 65% 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, 2010, future minimum payments under
noncancelable leases and other financing obligations were
approximately $1.10 billion for 2011 through 2015 and an
aggregate of $1.59 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, 2010, we had commitments of
approximately $4.36 billion to purchase 109 additional
aircraft and other flight equipment through 2018, 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. As a result of the economic downturn,
in an effort to limit the incurrence of significant additional
debt, we may seek to defer some of our scheduled deliveries, or
sell or lease aircraft to others, to the extent necessary or
possible. The amount of our existing debt, and other fixed
obligations, and potential increases in the amount of our debt
and other fixed obligations could have important consequences to
investors and could require a substantial portion of cash flows
from operations for debt service payments, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes.
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
12
control. We are principally dependent upon our operating cash
flows and access to the capital markets 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 or from
capital market activities to pay our debt and other fixed
obligations as they become due; 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.
Our substantial indebtedness may limit our ability to
incur additional debt to obtain future financing needs.
We typically finance our aircraft through either secured debt or
lease financing. The impact on financial institutions from the
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. 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.
If we fail to successfully implement our modified growth
strategy, our business could be harmed.
We have grown, and expect to continue to grow our business
whenever practicable, by increasing the frequency of flights to
markets we currently serve, expanding the number of markets we
serve and increasing flight connection opportunities. We have
modified our growth plans several times over the past few years
due to higher fuel prices, the competitive pricing environment
and other cost increases, by deferring some of our scheduled
deliveries of new aircraft, selling some used aircraft,
terminating our leases for some of our aircraft, and leasing
aircraft to other operators. A continuation of the economic
downturn may cause us to further reduce our future growth plans
from previously announced levels.
To the extent we continue to grow our business, 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, 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 or be able to
adequately temper our growth in a cost effective manner through
additional deferrals or selling or leasing aircraft; if we fail
to do so, our business could be harmed.
There are risks associated with our presence in some of
our international emerging markets, including political or
economic instability and failure to adequately comply with
existing legal requirements.
Expansion to new international emerging markets may have risks
due to factors specific to those markets. Emerging markets are
countries which have less developed economies that are
vulnerable to economic and political problems, such as
significant fluctuations in gross domestic product, interest and
currency exchange rates, civil disturbances, government
instability, nationalization and expropriation of private assets
and the imposition of taxes or other charges by governments. The
occurrence of any of these events in markets served by us and
the resulting instability may adversely affect our business.
We have recently expanded our service to countries in the
Caribbean and Latin America, some of which have less developed
legal systems, financial markets, and business and political
environments than the United States, and therefore present
greater political, economic and operational risks. We emphasize
legal compliance and have implemented policies, procedures and
certain ongoing training of employees with regard to business
ethics and many key legal requirements; however, there can be no
assurance that our employees will adhere to our code of business
ethics, other Company policies, or other legal requirements. If
we fail to enforce our policies and procedures properly or
maintain adequate record-keeping and internal accounting
practices to accurately record our transactions, we may be
subject to sanctions. In the event that we believe or have
reason to believe that employees have or may have violated
applicable laws or regulations, we may be subject to
13
investigation costs, potential penalties and other related costs
which in turn could negatively affect our results of operations
and cash flow.
We may be subject to risks through the commitments and
business of LiveTV, our wholly-owned subsidiary.
LiveTV has agreements to provide in-flight entertainment
products and services with seven other airlines. At
December 31, 2010, LiveTV services were available on 518
aircraft under these agreements, with firm commitments for 143
additional aircraft through 2014 and with options for 91
additional installations through 2014. 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 may be subject to unionization, work stoppages,
slowdowns or increased labor costs; recent changes to the labor
laws may make unionization easier to achieve.
Our business is labor intensive and, unlike most other airlines,
we have a non-union workforce. The unionization of any of 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. Further, in 2010, the National Mediation
Board changed its election procedures to permit a majority of
those voting to elect to unionize (from a majority of those in
the craft or class). These rule changes fundamentally alter the
manner in which labor groups have been able to organize in our
industry since the inception of the Railway Labor Act.
Ultimately, if we and a newly elected 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 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 (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
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 55% 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.
14
We rely heavily on automated systems to operate our
business; 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. The performance and reliability of our automated systems
is critical to our ability to operate our business and compete
effectively. These systems include our computerized airline
reservation system, flight operations system, telecommunications
systems, website, maintenance systems, check-in kiosks and
in-flight entertainment systems. Our website and reservation
system 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. Our business may be
harmed if we fail to operate, replace or upgrade systems
successfully.
We rely on the providers of our current automated systems for
technical support. If the current provider were to fail to
adequately provide technical support for any one of our key
existing systems or if new or updated components were not
integrated smoothly, 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 do not currently have
reserves posted for our credit card processors. If circumstances
were to occur that would require us to deposit reserves, 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 5.4 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; 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 implement our growth plans.
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
15
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 fluctuate due to seasonality and
other factors.
We expect our quarterly operating results to fluctuate due to
seasonality including 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 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 significant 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 KVH Industries Inc, or KVH. If KVH 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, 2010, we had approximately
$519 million of estimated federal net operating loss
carryforwards for U.S. income tax purposes that begin to
expire in 2023. Section 382 of the Internal Revenue Code
imposes limitation on a corporations ability to use its
net operating loss carryforwards if it experiences 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.
Our business depends on our strong reputation and the
value of the JetBlue brand.
The JetBlue brand name symbolizes high-quality friendly customer
service, innovation, fun, and a pleasant travel experience.
JetBlue is a widely recognized and respected global brand; the
JetBlue brand is one of our most important and valuable assets.
The JetBlue brand name and our corporate reputation are powerful
16
sales and marketing tools and we devote significant resources to
promoting and protecting them. Adverse publicity (whether or not
justified) relating to activities by our employees, contractors
or agents could tarnish our reputation and reduce the value of
our brand. Damage to our reputation and loss of brand equity
could reduce demand for our services and thus have an adverse
effect on our financial condition, liquidity and results of
operations, as well as require additional resources to rebuild
our reputation and restore the value of our brand.
We may be subject to competitive risks due to the longer
term nature of our fleet order book.
At present, we have existing aircraft commitments through 2018.
As technological evolution occurs in our industry, through the
use of composites, next generation engine technologies and other
innovations, we may be competitively disadvantaged because we
have existing extensive fleet commitments that would prohibit us
from adopting new technologies on an expedited basis.
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. The
global economic recession and related 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 global
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.
Acts 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, whether or not successful, the industry would likely
experience increased security requirements and 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 air
travel demand
and/or
revenue and increasing costs. The FAA is currently drafting new
requirements, and depending on whether the final rules
incorporate significant changes to crew rest requirements, our
cost structure could be adversely affected. We cannot assure you
that these and other laws or regulations enacted in the future
will not harm our business.
17
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.
Compliance with future environmental regulations may harm
our business.
Many aspects of airlines operations are subject to
increasingly stringent environmental regulations, and growing
concerns about climate change may result in the imposition of
additional regulation. There is growing consensus that some form
of federal regulation will be forthcoming with respect to
greenhouse gas emissions (including carbon dioxide
(CO2))
and/or
cap and trade legislation, compliance with which
could result in the creation of substantial additional costs to
us. The U.S. Congress is considering climate change
legislation and the Environmental Protection Agency issued a
rule which regulates larger emitters of greenhouse gases. Since
the domestic airline industry is increasingly price sensitive,
we may not be able to recover the cost of compliance with new or
more stringent environmental laws and regulations from our
passengers, which could adversely affect our business. Although
it is not expected that the costs of complying with current
environmental regulations will have a material adverse effect on
our financial position, results of operations or cash flows, no
assurance can be made that the costs of complying with
environmental regulations in the future will not have such an
effect. The impact to us and our industry from such actions is
likely to be adverse and could be significant, particularly if
regulators were to conclude that emissions from commercial
aircraft cause significant harm to the upper atmosphere or have
a greater impact on climate change than other industries.
Compliance with recently adopted DOT passenger protections
rules may increase our costs and may ultimately negatively
impact our operations.
The DOTs passenger protection rules, which became
effective in April 2010, provide, among other things, that
airlines return aircraft to the gate for deplaning following
tarmac delays in certain circumstances. A significant portion of
our operations are focused in the northeast. Given the poor
operating performance of the air traffic control system in the
northeast during certain weather conditions, particularly during
the summer season, this rule may produce results more harmful to
customers than intended. The implementation of these rules may
negatively impact our operations and our business.
We could be adversely affected by an outbreak of a disease
or an environmental disaster that significantly affects travel
behavior.
In 2009, there was an outbreak of the H1N1 virus which had an
adverse impact throughout our network, including on our
operations to and from Mexico. Any outbreak of a disease
(including a worsening of the outbreak of the H1N1 virus) that
affects travel behavior could have a material adverse impact on
us. In addition, outbreaks of disease could result in
quarantines of our personnel or an inability to access
facilities or our aircraft, which could adversely affect our
operations. Similarly, if an environmental disaster were to
occur and adversely impact any of our destination cities, travel
behavior could be affected and in turn, could materially
adversely impact our business.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
18
Aircraft
As of December 31, 2010, we operated a fleet consisting of
115 Airbus A320 aircraft each powered by two IAE International
Aero Engines V2527-A5 engines and 45 EMBRAER 190 aircraft each
powered by two General Electric Engines CF-34-10 engines, as
follows:
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|
|
|
|
|
|
|
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|
Seating
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Capital
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Operating
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Average Age
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Aircraft
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Capacity
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Owned
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Leased
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Leased
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Total
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in Years
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Airbus A320
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|
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150
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|
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82
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|
4
|
|
|
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29
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|
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115
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6.1
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EMBRAER 190
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|
|
100
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|
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|
14
|
|
|
|
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|
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31
|
|
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45
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3.5
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|
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|
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Totals
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|
|
|
|
|
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96
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|
4
|
|
|
|
60
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|
160
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5.4
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We also leased one additional aircraft which we took delivery of
in December 2010 but which was not placed in service as of
December 31, 2010. Our aircraft leases have an average
remaining lease term of approximately 10.3 years at
December 31, 2010. The earliest of these terms ends in 2011
and the latest ends in 2026. 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 96
owned aircraft and all but two of our 30 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.
During 2010, we leased six used Airbus A320 aircraft from a
third party. As of December 31, 2010, five of the six had
been delivered and placed in service and the remaining aircraft
had been delivered in December 2010 and was placed in service in
January 2011. Operating leases were executed for each aircraft
upon delivery for six year terms.
In February 2010, we amended our Airbus purchase agreement,
deferring delivery of six aircraft previously scheduled for
delivery in 2011 and 2012 to 2015. In October 2010, we again
amended our Airbus A320 purchase agreement, deferring delivery
of ten aircraft previously scheduled for delivery in 2012 and
2013 to 2016. In August 2010, we cancelled the orders of two
EMBRAER 190 aircraft originally scheduled for delivery in 2012.
As of December 31, 2010, including the effects of the
various 2010 amendments, we had on order 109 aircraft, which are
scheduled for delivery through 2018 , with options to acquire an
additional 73 aircraft. As of December 31, 2010, we also
have the right to cancel three firm EMBRAER 190 deliveries in
2012 or later, provided no more than two deliveries are canceled
in any one year. Our aircraft delivery schedule is as follows:
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Firm
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Option
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Airbus
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EMBRAER
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|
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Airbus
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EMBRAER
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Year
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A320
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|
190
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Total
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A320
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|
190
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Total
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2011
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|
4
|
|
|
|
5
|
|
|
|
9
|
|
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|
|
|
|
|
|
|
|
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2012
|
|
|
7
|
|
|
|
4
|
|
|
|
11
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
2013
|
|
|
7
|
|
|
|
7
|
|
|
|
14
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
2014
|
|
|
12
|
|
|
|
7
|
|
|
|
19
|
|
|
|
4
|
|
|
|
10
|
|
|
|
14
|
|
2015
|
|
|
15
|
|
|
|
7
|
|
|
|
22
|
|
|
|
4
|
|
|
|
10
|
|
|
|
14
|
|
2016
|
|
|
10
|
|
|
|
8
|
|
|
|
18
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
2017
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
10
|
|
|
|
10
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|
2018
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
54
|
|
|
|
109
|
|
|
|
8
|
|
|
|
65
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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
year to five years, and contain provisions for periodic
adjustments of rental rates, landing fees and other charges
applicable under the type of lease. We also are responsible for
maintenance, insurance, utilities and
19
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.
Our primary focus cities include New Yorks JFK, Boston,
Fort Lauderdale, Long Beach, California, and Orlando. We
also have a significant presence in San Juan, Puerto Rico.
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 it 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. In December 2010, we executed a supplement to this
lease agreement for the Terminal 6 property adjacent to our
operations at Terminal 5 for a term of five years.
Our operations at Bostons Logan International Airport are
based at Terminal C where we operate 13 gates and 28 ticket
counter positions.
Our West Coast operations are based at Long Beach Municipal
Airport, or Long Beach, which serves the Los Angeles area. We
operate five gates at Long Beach. In 2010, the Long Beach
Airport began work on redevelopment efforts, including a new
parking structure and new terminal, which is expected to open in
2013.
In Florida, our primary operations are at Orlando International
Airport, or Orlando, and
Fort Lauderdale-Hollywood
International Airport, or Fort Lauderdale. We operate from
Terminal A in Orlando with seven domestic and one international
gate. In Fort Lauderdale, we operate from Terminal 3 with
six domestic gates.
Our operations in San Juan, Puerto Rico are based at Luis
Muñoz Marin International Airport, or San Juan, where
we primarily use two gates and have access to two additional
gates.
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 is equipped with six full flight simulators, two
cabin trainers, a training pool, classrooms and support areas.
This facility 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 also expires in 2012.
We have executed a 12 year lease for our new corporate
offices in Long Island City, New York, which we plan to take
occupancy of beginning in 2012. 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.
At most other locations, our passenger and baggage handling
space is leased directly from the airport authority on varying
terms dependent on prevailing practice at each airport. We also
maintain administrative offices, terminal, and other airport
facilities, training facilities, maintenance facilities, and
other facilities, in each case as necessary to support our
operations in the cities we serve.
|
|
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
20
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.
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 53, is our President and Chief
Executive Officer. He has served in the capacity of Chief
Executive Officer since May 2007 and in the capacity of
President since June 2009. He is also a member of our Board of
Directors. He previously 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.
Edward Barnes, age 46, 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 Senior 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.
Rob Maruster, age 39, is our Executive Vice
President and Chief Operating Officer and has served in this
capacity since June 2009. Mr. Maruster joined JetBlue in
2005 as Vice President, Operations Planning, after a
12-year
career with Delta Air Lines in a variety of increasingly
responsible leadership positions in the carriers Marketing
and Customer Service departments, culminating in being
responsible for all operations at Deltas largest hub in
Atlanta as Vice President, Airport Customer Service at
Hartsfield-Jackson Atlanta International Airport. In 2006,
Mr. Maruster was promoted to Senior Vice President,
Airports and Operational Planning and in 2008,
Mr. Marusters responsibilities expanded to include
the Customer Services group which included Airports, Inflight
Services, Reservations, and System Operations.
Robin Hayes, age 44, 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 40, 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. Mr. Hnat is a member of
the bar of New York and Massachusetts.
Don Daniels, age 43, is our Vice President and Chief
Accounting Officer, a position he has held since May 2009. He
served as our Vice President and Corporate Controller since
October 2007. He previously served as our Assistant Controller
since July 2006 and Director of Financial Reporting since
October 2002.
21
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
|
|
2009 Quarter Ended
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
7.74
|
|
|
$
|
2.81
|
|
June 30
|
|
|
6.40
|
|
|
|
3.44
|
|
September 30
|
|
|
6.87
|
|
|
|
4.08
|
|
December 31
|
|
|
6.39
|
|
|
|
4.74
|
|
2010 Quarter Ended
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
6.03
|
|
|
$
|
4.64
|
|
June 30
|
|
|
6.95
|
|
|
|
5.14
|
|
September 30
|
|
|
6.75
|
|
|
|
5.21
|
|
December 31
|
|
|
7.60
|
|
|
|
6.31
|
|
As of January 31, 2011, there were approximately 655
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.
22
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, 2005 to
December 31, 2010. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
|
12/31/08
|
|
12/31/09
|
|
12/31/10
|
|
JetBlue Airways Corporation
|
|
$
|
100
|
|
|
$
|
92
|
|
|
$
|
38
|
|
|
$
|
46
|
|
|
$
|
35
|
|
|
$
|
43
|
|
S&P 500 Stock Index
|
|
|
100
|
|
|
|
116
|
|
|
|
122
|
|
|
|
77
|
|
|
|
97
|
|
|
|
112
|
|
AMEX Airline Index(1)
|
|
|
100
|
|
|
|
106
|
|
|
|
61
|
|
|
|
43
|
|
|
|
59
|
|
|
|
82
|
|
(1) As of December 31, 2010, the AMEX Airline Index
consisted of Alaska Air Group Inc., AMR Corporation, Delta Air
Lines, Inc., Gol Linhas Aereas Inteligentes, JetBlue Airways
Corporation, US Airways Group, Inc., Lan Airlines SA, Southwest
Airlines Company, Ryanair Holdings plc., SkyWest, Inc, Tam S.A.,
and United Continental Holdings.
23
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following financial information for the five years ended
December 31, 2010 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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions, except per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
3,779
|
|
|
$
|
3,292
|
|
|
$
|
3,392
|
|
|
$
|
2,843
|
|
|
$
|
2,364
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel and related taxes
|
|
|
1,115
|
|
|
|
945
|
|
|
|
1,397
|
|
|
|
968
|
|
|
|
786
|
|
Salaries, wages and benefits (1)
|
|
|
891
|
|
|
|
776
|
|
|
|
694
|
|
|
|
648
|
|
|
|
553
|
|
Landing fees and other rents
|
|
|
228
|
|
|
|
213
|
|
|
|
199
|
|
|
|
180
|
|
|
|
158
|
|
Depreciation and amortization (2)
|
|
|
220
|
|
|
|
228
|
|
|
|
205
|
|
|
|
176
|
|
|
|
151
|
|
Aircraft rent
|
|
|
126
|
|
|
|
126
|
|
|
|
129
|
|
|
|
124
|
|
|
|
103
|
|
Sales and marketing
|
|
|
179
|
|
|
|
151
|
|
|
|
151
|
|
|
|
121
|
|
|
|
104
|
|
Maintenance materials and repairs
|
|
|
172
|
|
|
|
149
|
|
|
|
127
|
|
|
|
106
|
|
|
|
87
|
|
Other operating expenses (3)
|
|
|
515
|
|
|
|
419
|
|
|
|
377
|
|
|
|
350
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,446
|
|
|
|
3,007
|
|
|
|
3,279
|
|
|
|
2,673
|
|
|
|
2,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
333
|
|
|
|
285
|
|
|
|
113
|
|
|
|
170
|
|
|
|
128
|
|
Other income (expense) (4)
|
|
|
(172
|
)
|
|
|
(181
|
)
|
|
|
(202
|
)
|
|
|
(139
|
)
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
161
|
|
|
|
104
|
|
|
|
(89
|
)
|
|
|
31
|
|
|
|
(1
|
)
|
Income tax expense (benefit)
|
|
|
64
|
|
|
|
43
|
|
|
|
(5
|
)
|
|
|
19
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
97
|
|
|
$
|
61
|
|
|
$
|
(84
|
)
|
|
$
|
12
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
|
$
|
0.24
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.04
|
)
|
Diluted
|
|
$
|
0.31
|
|
|
$
|
0.21
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
8.8
|
%
|
|
|
8.6
|
%
|
|
|
3.3
|
%
|
|
|
6.0
|
%
|
|
|
5.4
|
%
|
Pre-tax margin
|
|
|
4.3
|
%
|
|
|
3.2
|
%
|
|
|
(2.6
|
)%
|
|
|
1.1
|
%
|
|
|
(0.1
|
)%
|
Ratio of earnings to fixed charges (5)
|
|
|
1.59
|
x
|
|
|
1.33
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
523
|
|
|
$
|
486
|
|
|
$
|
(17
|
)
|
|
$
|
358
|
|
|
$
|
274
|
|
Net cash used in investing activities
|
|
|
(696
|
)
|
|
|
(457
|
)
|
|
|
(247
|
)
|
|
|
(734
|
)
|
|
|
(1,307
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(258
|
)
|
|
|
306
|
|
|
|
635
|
|
|
|
556
|
|
|
|
1,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2010, we incurred approximately $9 million in one-time
implementation expenses related to our new customer service
system. |
|
(2) |
|
In 2008, we wrote-off $8 million related to our temporary
terminal facility at JFK. |
|
(3) |
|
In 2009, 2008, 2007, and 2006, we sold two, nine, three, and
five aircraft, respectively, which resulted in gains of
$1 million, $23 million, $7 million, and
$12 million, respectively. In 2010, we recorded an
impairment loss of $6 million related to the spectrum
license held by our LiveTV subsidiary. In 2010, we also incurred
approximately $13 million in one-time implementation
expenses related to our new customer service system. |
|
(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 a $14 million gain on
extinguishment of debt. In December 2008, we recorded a holding
loss of $53 million related to the valuation of our auction
rate securities. |
24
|
|
|
(5) |
|
Earnings were inadequate to cover fixed charges by
$135 million, $11 million, and $27 million for
the years ended December 31, 2008, 2007, and 2006,
respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
465
|
|
|
$
|
896
|
|
|
$
|
561
|
|
|
$
|
190
|
|
|
$
|
10
|
|
Investment securities
|
|
|
628
|
|
|
|
246
|
|
|
|
244
|
|
|
|
611
|
|
|
|
689
|
|
Total assets
|
|
|
6,593
|
|
|
|
6,549
|
|
|
|
6,018
|
|
|
|
5,592
|
|
|
|
4,839
|
|
Total debt
|
|
|
3,033
|
|
|
|
3,304
|
|
|
|
3,144
|
|
|
|
3,022
|
|
|
|
2,804
|
|
Common stockholders equity
|
|
|
1,654
|
|
|
|
1,546
|
|
|
|
1,270
|
|
|
|
1,050
|
|
|
|
972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating Statistics (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers (thousands)
|
|
|
24,254
|
|
|
|
22,450
|
|
|
|
21,920
|
|
|
|
21,387
|
|
|
|
18,565
|
|
Revenue passenger miles (millions)
|
|
|
28,279
|
|
|
|
25,955
|
|
|
|
26,071
|
|
|
|
25,737
|
|
|
|
23,320
|
|
Available seat miles (ASMs)(millions)
|
|
|
34,744
|
|
|
|
32,558
|
|
|
|
32,442
|
|
|
|
31,904
|
|
|
|
28,594
|
|
Load factor
|
|
|
81.4
|
%
|
|
|
79.7
|
%
|
|
|
80.4
|
%
|
|
|
80.7
|
%
|
|
|
81.6
|
%
|
Aircraft utilization (hours per day)
|
|
|
11.6
|
|
|
|
11.5
|
|
|
|
12.1
|
|
|
|
12.8
|
|
|
|
12.7
|
|
Average fare
|
|
$
|
140.69
|
|
|
$
|
130.67
|
|
|
$
|
139.56
|
|
|
$
|
123.28
|
|
|
$
|
119.75
|
|
Yield per passenger mile (cents)
|
|
|
12.07
|
|
|
|
11.30
|
|
|
|
11.73
|
|
|
|
10.24
|
|
|
|
9.53
|
|
Passenger revenue per ASM (cents)
|
|
|
9.82
|
|
|
|
9.01
|
|
|
|
9.43
|
|
|
|
8.26
|
|
|
|
7.77
|
|
Operating revenue per ASM (cents)
|
|
|
10.88
|
|
|
|
10.11
|
|
|
|
10.45
|
|
|
|
8.91
|
|
|
|
8.27
|
|
Operating expense per ASM (cents)
|
|
|
9.92
|
|
|
|
9.24
|
|
|
|
10.11
|
|
|
|
8.38
|
|
|
|
7.82
|
|
Operating expense per ASM, excluding fuel (cents)
|
|
|
6.71
|
|
|
|
6.33
|
|
|
|
5.80
|
|
|
|
5.34
|
|
|
|
5.07
|
|
Airline operating expense per ASM (cents) (5)
|
|
|
9.71
|
|
|
|
8.99
|
|
|
|
9.87
|
|
|
|
8.27
|
|
|
|
7.76
|
|
Departures
|
|
|
225,501
|
|
|
|
215,526
|
|
|
|
205,389
|
|
|
|
196,594
|
|
|
|
159,152
|
|
Average stage length (miles)
|
|
|
1,100
|
|
|
|
1,076
|
|
|
|
1,120
|
|
|
|
1,129
|
|
|
|
1,186
|
|
Average number of operating aircraft during period
|
|
|
153.5
|
|
|
|
148.0
|
|
|
|
139.5
|
|
|
|
127.8
|
|
|
|
106.5
|
|
Average fuel cost per gallon, including fuel taxes
|
|
$
|
2.29
|
|
|
$
|
2.08
|
|
|
$
|
3.08
|
|
|
$
|
2.18
|
|
|
$
|
2.08
|
|
Fuel gallons consumed (millions)
|
|
|
486
|
|
|
|
455
|
|
|
|
453
|
|
|
|
444
|
|
|
|
377
|
|
Full-time equivalent employees at period end (5)
|
|
|
11,121
|
|
|
|
10,704
|
|
|
|
9,895
|
|
|
|
9,909
|
|
|
|
9,265
|
|
|
|
|
(5) |
|
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).
Aircraft utilization represents the average
number of block hours operated per day per aircraft for the
total fleet of aircraft.
25
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, including fuel taxes and effective portion
of fuel hedging, divided by the total number of fuel gallons
consumed.
26
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are an award winning airline with a differentiated product
and a commitment to customer service that offers competitive
fares primarily on
point-to-point
routes. 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, 2010, we served 63 destinations in
21 states, Puerto Rico, and eleven countries in the
Caribbean and Latin America and operated over 650 flights a day
with a fleet of 115 Airbus A320 aircraft and 45 EMBRAER 190
aircraft.
In 2010, we reported net income of $97 million and an
operating margin of 8.8%, as compared to net income of
$61 million and an operating margin of 8.6% in 2009. The
year-over-year
improvement in our financial performance was primarily a result
of an 8% increase in our average fares and 7% increase in
capacity, offset by a 10% increase in our realized fuel price.
Our goal is to become the Americas Favorite
Airline for our employees (whom we refer to as
crewmembers), customers and shareholders. Our achieving this
goal is dependent upon continuing to provide superior customer
service and delivering the JetBlue Experience. Our financial
strategy currently includes a commitment to attaining positive
free cash flow and long-term sustainable growth while also
maintaining an adequate liquidity position. Our commitment to
these goals drives a focus on controlling costs, maximizing unit
revenues, managing capital expenditures, and disciplined growth.
Our disciplined growth begins with managing the growth, size and
age of our fleet. In 2010, we continued to carefully manage the
size of our fleet in order to support a sustainable growth rate.
As a result, aircraft capital expenditures were significantly
reduced from previous years. We modified our Airbus A320
purchase agreement in February and October 2010 resulting in the
deferral of 16 aircraft previously scheduled for delivery in
2011 through 2013 to 2015 and 2016. We also modified our EMBRAER
190 purchase agreement in August 2010, canceling two EMBRAER 190
aircraft previously scheduled for delivery in 2012. With new
opportunities, including the coveted slots at Washingtons
Reagan National we acquired via a slot swap during 2010 and
further growth opportunities particularly in Boston and the
Caribbean, we leased six used Airbus A320 aircraft under
individual six year operating leases, which were in addition to
our purchase commitments with Airbus. During the year, in
addition to the six leased A320s, we also increased the size of
our EMBRAER 190 operating fleet by four aircraft. We may further
modify our fleet growth through additional aircraft sales,
leasing of aircraft, returns of leased aircraft
and/or
deferral of aircraft deliveries.
Our disciplined growth also includes the optimization of our
route network by focusing on key regions, including Boston, New
York, the Caribbean and Latin America, continuing our focus on
attracting business customers while also building upon our
leisure markets, strong visiting friends and relatives, or VFR,
travel, and continued expansion of our portfolio of strategic
commercial partnerships. We added three new destinations in
2010, compared to eight new destinations that were added in 2009
and two that were added in 2008. We commenced service to Punta
Cana, Dominican Republic in May 2010, Ronald Reagan National
Airport in Washington, DC and Hartford, CT in November 2010. We
began service to Providenciales, Turks and Caicos Islands in
February 2011 and have announced plans to commence service to
Anchorage, Alaska and Marthas Vineyard, MA in May 2011.
During 2010, we strengthened our position as the largest carrier
in Boston by adding six new destinations from Boston and we
announced plans to increase our presence in San Juan,
Puerto Rico by adding new service and increased frequencies. We
also continue to build upon our presence in the Caribbean and
Latin America where we have approximately 23% of our capacity,
and we expect this number to continue to grow in 2011. We
believe that optimizing our schedule across our network has both
increased our relevance to the business traveler, particularly
in Boston, as well as to the leisure and VFR travelers in the
Caribbean and Latin America. We expect that we will continue to
diversify our network in order to further grow and strengthen
our network. In 2011, we plan to continue our focus on Boston
and Caribbean expansion.
27
During 2010, we also focused on building our portfolio of
strategic commercial partnerships with several international
carriers. We believe these agreements provide additional revenue
opportunities for us and increased travel benefits and
opportunities to our customers by allowing access to diverse
international markets and a seamless check-in process. Our
current partnerships are structured with gateways at either JFK,
Boston or Washington DC, allowing access for international
travelers on many of our key domestic and Caribbean routes. Our
partners currently include Deutsche Lufthansa AG, one of the
worlds preeminent airlines and our largest shareholder;
Cape Air, an airline that services destinations out of Boston
and San Juan, Puerto Rico; Aer Lingus, an airline based in
Dublin, Ireland; American Airlines; South African Airways,
Africas most awarded airline; El Al Israel Airlines,
Israels national airline; and Emirates, one of the
worlds largest international carriers.
In November 2009, we launched an improved version of our
customer loyalty program, TrueBlue. The program was re-designed
based on customer feedback, and is aimed at making our frequent
flyer benefits more robust, rewarding, and flexible. TrueBlue
points are earned based on the value paid for a flight as
opposed to the length of travel. Under the enhanced program,
there are no blackout dates for award flights and points
expirations can be extended. Based on extensive customer
surveys, we believe this enhanced program will make our product
more appealing to the business customer.
In addition to our new TrueBlue loyalty program, our new
integrated customer service system, which includes a
reservations system, revenue management system and revenue
accounting system, was implemented in January 2010. We believe
transitioning to this new platform has enabled us to enhance our
product and has positioned us well for our long term growth.
Benefits from this new system include added flexibility in the
complex environments in which we operate, increased
participation in global distribution systems, or GDS, which in
turn contributes to higher yielding traffic, enhanced
opportunities with respect to commercial partnerships,
additional ancillary revenue opportunities, improved
functionality of our website, and improved revenue management
capabilities.
During 2010, we also invested substantially in other IT
infrastructure improvements and upgrades. In addition to the
increased functionality, we believe these improvements have
enabled us to better serve our customers and handle our day to
day operations, whereas our previous infrastructure might not
have been able to continue to sustain our operations, especially
in times of severe irregular operations.
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, 2010.
Revenues generated from international routes, excluding Puerto
Rico, accounted for 16% of our total passenger revenues in 2010.
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.
Passenger revenue also includes revenue from our Even More
Legroom, or EML, ancillary product enhancement.
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, revenues associated
with transporting mail and cargo, rental income and revenues
earned by our subsidiary, LiveTV, LLC, for the sale of, and
on-going services provided for, in-flight entertainment systems
on other airlines.
28
We maintain one of the lowest cost structures in the industry
relative to the product we offer due to the young average age of
our fleet, a productive non-union workforce, and cost
discipline. In 2011, 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 related taxes and salaries, wages and benefits
provided to our crewmembers. Unlike most airlines, we have a
policy of not furloughing crewmembers during economic downturns,
and a non-union workforce, which we believe provides us with
more flexibility and allows us to be more productive. 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, fees paid to credit card companies, and commissions
paid for our participation in GDSs and OTAs. We believe 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. Maintenance
materials and repairs are expensed when incurred unless covered
by a third party services contract. Because the average age of
our aircraft is 5.4 years, all of our aircraft currently
require less maintenance 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 and fuel taxes.
During 2010 fuel prices remained volatile, increasing 10% over
average 2009 prices. We actively manage our fuel hedge portfolio
by entering into a variety of fuel hedge contracts in order to
provide some protection against volatility and further increases
in fuel prices. In total, we effectively hedged 51% of our total
2010 fuel consumption. As of December 31, 2010, we had
outstanding fuel hedge contracts covering approximately 37% of
our forecasted consumption for the first quarter of 2011, 28%
for the full year 2011, and 6% for the full year 2012. We will
continue to monitor fuel prices closely and intend to take
advantage of fuel hedging opportunities as they become available.
The airline industry is one of the most heavily taxed in the
U.S., with taxes and fees accounting for approximately 16% 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,
leading to significant consolidation, bankruptcies and
liquidation. In 2010, industry consolidation activities
continued and further impacted the competitive landscape, most
notably with the merger of United Airlines and Continental
Airlines, which created the worlds largest airline and
became effective in October 2010, on the heels of the Delta Air
Lines and Northwest Airlines merger in 2009. Additionally, in
September 2010, low cost carrier Southwest Airlines announced
plans to acquire AirTran Airways.
We continue to focus on maintaining an adequate liquidity level.
Our goal is to continue to be diligent with our liquidity,
thereby managing our capital expenditures to accommodate a
sustainable growth plan. We have manageable scheduled debt
maturities in 2011 totaling approximately $185 million,
which we believe will enable us to achieve our liquidity goals.
Our ability to be profitable in this competitive environment
depends on, among other things, continuing to provide high
quality customer service, operating at costs equal to or lower
than those of our competitors and maintaining adequate liquidity
levels. Although we have been able to raise capital and continue
to grow in recent years, the highly competitive nature of the
airline industry and the impact of economic conditions 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. Our VFR markets continue to complement our
leisure-driven markets from both a seasonal and day of week
perspective. 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 customers.
29
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. As such, we are
currently focused on trying to reduce the seasonal impact of our
operations and increase demand and travel during the trough
periods.
Outlook
for 2011
We anticipate that our continued focus in 2011 will be on our
long-term sustainable growth goals and positioning our airline
for the future. We intend to do so by actively managing capital
expenditures, maintaining a rigorous focus on cost control and
optimizing unit revenues while continuing to manage risk in an
uncertain and volatile economic and industry environment. We
will continue to rationalize capacity to take advantage of
market opportunities and seek to balance the peaks and trough
periods of the travel markets. In addition, we continuously look
to expand our other ancillary revenue opportunities and enhance
the JetBlue Experience for all of our customers, leisure and
business travelers alike.
For the full year, we expect our operating capacity to increase
approximately 7% to 9% over 2010 with the net addition of four
Airbus A320 aircraft and four EMBRAER 190 aircraft to our
operating fleet, most of which will be deployed in our Boston
and Caribbean markets. Assuming fuel prices of $2.89 per gallon,
including fuel taxes and net of effective hedges, our cost per
available seat mile for 2011 is expected to increase by 8% to
10% over 2010. This expected increase is a result of higher
maintenance costs due to the aging of our fleet, expected
increase in fuel prices, and higher salaries and wages due to
pay scale adjustments, additional headcount and higher cost of
healthcare benefits.
Results
of Operations
During 2010, overall economic conditions strengthened and the
demand for domestic leisure and business air travel improved
significantly from 2009 conditions. Improving yields and
capacity reductions by our competitors have enhanced our ability
to grow in regions and on routes where we see the most
opportunity. Average fares for the year increased 8% over 2009
to $140.69 and load factor increased 1.7 points to 81.4% from
the full year 2009. Throughout 2010, we made efforts to improve
revenue performance during off-peak travel periods by attracting
new customers, continuing to refine our product and the JetBlue
experience, and offering fare sales and promotions when the
markets allowed.
Our on-time performance, defined by the DOT as arrivals within
14 minutes of schedule, was 75.7% in 2010 compared to 77.5% in
2009. Our on-time performance throughout the year and on a
year-over-year
basis remained challenged 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.
Year
2010 Compared to Year 2009
We reported net income of $97 million in 2010 compared to
net income of $61 million in 2009. In 2010, we had
operating income of $333 million, an increase of
$48 million over 2009, and an operating margin of 8.8%, up
0.2 points from 2009. Diluted earnings per share were $0.31 for
2010 compared to diluted earnings per share of $0.21 for 2009.
Operating Revenues. Operating revenues
increased 15%, or $487 million, primarily due to a 16%
increase in passenger revenues. The $478 million increase
in passenger revenues was attributable to a 7% increase in
capacity with a 7% increase in yield and a 1.7 point increase in
load factor over 2009, amounts which include capacity reductions
during the initial cutover period to our new customer service
system in the first quarter of 2010. Included in this amount is
a $14 million increase in Even More Legroom revenue as a
result of increased capacity and revised pricing.
Other revenues increased 3%, or $9 million, primarily due
to a $10 million increase in marketing related revenues,
higher excess baggage revenue of $4 million and increased
rates for certain ancillary services during 2010. Other revenue
also increased $3 million due to higher inflight food and
beverage sales, but was offset by a $10 million reduction
in change fees and reservation fees as a result of high levels
of change fee waivers during the first half of 2010 in
conjunction with our new system migration.
30
Operating Expenses. Operating expenses
increased 15%, or $439 million, primarily due to higher
fuel prices and an increase in other operating expenses,
including the one time implementation related expenses of our
new customer service system, overall higher technology
infrastructure costs, and a one-time impairment charge.
Additionally, operating expenses increased due to higher
salaries, wages and benefits related to pilot pay increases
implemented in mid 2009, increased sales and marketing expenses
due to higher fares and increased GDS participation, and
increased maintenance and variable costs. We had on average five
additional average aircraft in service in 2010 and operating
capacity increased approximately 7% to 34.74 billion
available seat miles in 2010. Operating expenses per available
seat mile increased 7% to 9.92 cents. Excluding fuel, our cost
per available seat mile increased 6% in 2010. In detail,
operating costs per available seat mile were (percent changes
are based on unrounded numbers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Percent
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(in cents)
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel and related taxes
|
|
|
3.21
|
|
|
|
2.91
|
|
|
|
10.6
|
%
|
Salaries, wages and benefits
|
|
|
2.57
|
|
|
|
2.38
|
|
|
|
7.6
|
|
Landing fees and other rents
|
|
|
.65
|
|
|
|
.65
|
|
|
|
(0.1
|
)
|
Depreciation and amortization
|
|
|
.63
|
|
|
|
.70
|
|
|
|
(9.8
|
)
|
Aircraft rent
|
|
|
.36
|
|
|
|
.39
|
|
|
|
(6.0
|
)
|
Sales and marketing
|
|
|
.52
|
|
|
|
.46
|
|
|
|
11.5
|
|
Maintenance materials and repairs
|
|
|
.50
|
|
|
|
.46
|
|
|
|
8.2
|
|
Other operating expenses
|
|
|
1.48
|
|
|
|
1.29
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9.92
|
|
|
|
9.24
|
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As part of our IT investments during 2010, we have had a shift
in costs from depreciation expense to other operating expenses.
Additionally, the severe winter weather during 2010, both in
February and December, created unexpected cost pressures.
Aircraft fuel expense increased 18%, or $170 million, due
to a 10% increase in average fuel cost per gallon, or
$104 million after the impact of fuel hedging and
31 million more gallons of aircraft fuel consumed,
resulting in $66 million of higher fuel expense. We
recorded $3 million in effective fuel hedge losses during
2010 versus $120 million during 2009. Our average fuel cost
per gallon was $2.29 for the year ended December 31, 2010
compared to $2.08 for the year ended December 31, 2009. Our
fuel costs represented 32% and 31% of our operating expenses in
2010 and 2009, respectively. Based on our expected fuel volume
for 2011, a 10% per gallon increase in the cost of aircraft fuel
would increase our annual fuel expense by approximately
$130 million. Cost per available seat mile increased 11%
primarily due to the increase in fuel prices.
Salaries, wages and benefits increased 15%, or
$115 million, due to an increase in average full-time
equivalent employees, increased wages and related benefits for
several of our large workgroups implemented between June 2009
and throughout 2010. We also had higher salaries, wages and
benefits as a result of premium time related to the severe
winter storms in the Northeast both in early and late 2010. The
increase in average full-time equivalent employees is partially
driven by additional staffing levels in preparation for our new
customer service system implementation in January 2010, which
resulted in an additional $9 million of expense, as well as
our policy of not furloughing employees. Cost per available seat
mile increased 8% primarily due to an increase in full-time
equivalent employees.
Landing fees and other rents increased 7%, or $15 million,
due to a 5% increase in departures over 2009, which includes the
effects of expanded operations in certain markets and the
opening of three new cities in 2010 as well as an increase in
average landing fee and airport rental rates. Cost per available
seat mile remained relatively unchanged.
Depreciation and amortization decreased 4%, or $8 million.
Purchased technology related to our LiveTV acquisition became
fully amortized in late 2009, resulting in reduced amortization
expense in 2010. The
31
reduced amortization expense was offset by an increase in
depreciation expense as we had an average of 97 owned and
capital leased aircraft in 2010 compared to 93 in 2009.
Additionally, we had increased software amortization in 2010
related to our new customer service system. Cost per available
seat mile decreased 10% due to purchased technology becoming
fully amortized and less owned computer hardware resulting from
changes to our IT infrastructure.
Sales and marketing expense increased 19%, or $28 million,
due to $14 million in higher credit card fees resulting
from increased average fares, $12 million in higher
commissions in 2010 related to our increased participation in
GDSs and OTAs and $2 million in higher advertising costs.
Cost per available seat mile increased 12% due to increased
fares and shift in distribution channels as a result of our
increased capabilities from our new customer service system.
Maintenance materials and repairs increased 15%, or
$23 million, due to five additional average operating
aircraft in 2010 compared to 2009 and the gradual aging of our
fleet. The average age of our fleet increased to 5.4 years
as of December 31, 2010 compared to 4.3 years as of
December 31, 2009. Maintenance expense is expected to
increase significantly as our fleet ages, resulting in the need
for additional, more expensive repairs over time. Cost per
available seat mile increased 8% primarily due to the gradual
aging of our fleet.
Other operating expenses increased 23%, or $96 million, due
to an increase in variable costs associated with 5% more
departures versus 2009, operating out of three additional cities
in 2010 in addition to the full year of operations at the eight
cities opened throughout 2009, and a severe winter storm season
in early 2010. We also incurred approximately $13 million
in one time implementation expenses related to our new customer
service system, as well as overall higher technology
infrastructure related costs. Additionally, we incurred a
$6 million one time impairment expense related to the
intangible assets and other costs associated with developing an
air to ground connectivity capability by our LiveTV subsidiary.
In 2010, we also paid a $5 million rescheduling fee in
connection with the deferral of aircraft. In 2009, other
operating expenses were offset by $11 million for certain
tax incentives and $1 million in gains on sales of
aircraft. Cost per available seat mile increased 15% due
primarily to the implementation costs associated with our new
customer service system, changes in our IT infrastructure and
the 2009 tax incentive credits.
Other Income (Expense). Interest expense
decreased 9%, or $18 million, primarily due to lower debt
balances and changes in interest rates, totaling approximately
$14 million, and retirements of debt which resulted in
approximately $14 million less interest expense. These
decreases in interest expense were offset by additional
financing including four new aircraft and the issuance in June
2009 of our 6.75% convertible debentures, resulting in
$11 million of additional interest expense. Capitalized
interest decreased due to lower average outstanding pre-delivery
deposits and lower interest rates.
Interest income and other decreased 62%, or $6 million,
primarily due to lower interest rates earned on investments.
Interest income and other included $2 million in gains on
the extinguishment of debt in 2009. Derivative instruments not
qualifying as cash flow hedges in 2010 resulted in an
insignificant loss, compared to losses of $1 million in
2009. Accounting ineffectiveness on crude, heating oil and jet
fuel derivatives classified as cash flow hedges resulted in
losses of $2 million in 2010 and gains of $1 million
in 2009. We are unable to predict what the amount of
ineffectiveness will be related to these instruments, or the
potential loss of hedge accounting which is determined on a
derivative-by-derivative
basis, due to the volatility in the forward markets for these
commodities.
Our effective tax rate was 40% in 2010 compared to 41% in 2009.
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
income of $161 million in 2010 and pre-tax income of
$104 million in 2009.
Year
2009 Compared to Year 2008
We reported net income of $61 million in 2009 compared to a
net loss of $84 million in 2008. In 2009, we had operating
income of $285 million, an increase of $172 million
over 2008, and an operating margin of 8.6% up 5.3 points from
2008. Diluted earnings per share were $0.21 for 2009 compared to
diluted loss per share of $0.37 for 2008.
32
Operating Revenues. Operating revenues
decreased 3%, or $100 million, primarily due to a 4%
decrease in passenger revenues. The $126 million decrease
in passenger revenues was attributable to a 4% decrease in yield
over 2008 and a 0.7 point decrease in load factor on relatively
flat capacity, offset by increases in fees from our Even More
Legroom optional upgrade product, which we introduced in
mid-2008.
Other revenues increased 8%, or $26 million, primarily due
to higher excess baggage revenue of $18 million resulting
from the introduction of the second checked bag fee in June 2008
and increased rates for these and other ancillary services
during 2009. Other revenue also increased due to additional
LiveTV third-party revenues as a result of additional third
party aircraft installations, and higher concession revenues
from our new terminal at JFK, partially offset by a reduction in
charter revenue.
Operating Expenses. Operating expenses
decreased 8%, or $272 million, primarily due to lower fuel
prices, partially offset by increased salaries, wages and
benefits, depreciation and amortization, maintenance and
variable costs. In 2009, operating expenses were offset by
$1 million in gains on the sale of aircraft compared to
$23 million in gains on the sale of aircraft in 2008. While
we had on average eight additional average aircraft in service
in 2009, operating capacity increased less than 1% to
32.56 billion available seat miles in 2009 due to shorter
stage lengths as a result of shifting capacity from
transcontinental flying to shorter haul. Operating expenses per
available seat mile decreased 9% to 9.24 cents. Excluding fuel,
our cost per available seat mile increased 9% in 2009. In
detail, operating costs per available seat mile were (percent
changes are based on unrounded numbers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Percent
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
(in cents)
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel and related taxes
|
|
|
2.91
|
|
|
|
4.31
|
|
|
|
(32.6
|
)%
|
Salaries, wages and benefits
|
|
|
2.38
|
|
|
|
2.14
|
|
|
|
11.4
|
|
Landing fees and other rents
|
|
|
.65
|
|
|
|
.62
|
|
|
|
6.4
|
|
Depreciation and amortization
|
|
|
.70
|
|
|
|
.63
|
|
|
|
11.0
|
|
Aircraft rent
|
|
|
.39
|
|
|
|
.40
|
|
|
|
(2.5
|
)
|
Sales and marketing
|
|
|
.46
|
|
|
|
.47
|
|
|
|
(0.8
|
)
|
Maintenance materials and repairs
|
|
|
.46
|
|
|
|
.39
|
|
|
|
17.2
|
|
Other operating expenses
|
|
|
1.29
|
|
|
|
1.15
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9.24
|
|
|
|
10.11
|
|
|
|
(8.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2009, our average aircraft utilization declined 5% to
11.5 hours per day. A lower aircraft utilization results in
fewer available seat miles and, therefore, higher unit costs. We
estimate that a significant portion of the
year-over-year
increase in our total cost per available seat mile, excluding
fuel, was attributable to the decrease in our aircraft
utilization and also was a significant factor of the increase in
each component.
Aircraft fuel expense decreased 32%, or $452 million, due
to a 33% decrease in average fuel cost per gallon, or
$457 million after the impact of fuel hedging, offset by
two million more gallons of aircraft fuel consumed, resulting in
$6 million of higher fuel expense. We recorded
$120 million in fuel hedge losses during 2009 versus
$47 million in fuel hedge gains during 2008. Our average
fuel cost per gallon was $2.08 for the year ended
December 31, 2009 compared to $3.08 for the year ended
December 31, 2008. Our fuel costs represented 31% and 43%
of our operating expenses in 2009 and 2008, respectively. Cost
per available seat mile decreased 33% primarily due to the
decrease in fuel prices.
Salaries, wages and benefits increased 12%, or $82 million,
due primarily to increases in pilot pay and related benefits and
a 5% increase in average full-time equivalent employees. The
increase in average full-time equivalent employees was partially
driven by our policy of not furloughing employees and additional
staffing levels in preparation for our new customer service
system implementation in January 2010. Cost per available seat
mile increased 11% primarily due to increased average wages.
Landing fees and other rents increased 7%, or $14 million,
due to a 5% increase in departures over 2008, and increased
landing fees associated with increased rates in existing markets
as well as the opening of eight
33
new cities in 2009, offset by a $12 million reduction in
airport rents at JFK following our terminal move. Cost per
available seat mile increased 6% due to increased departures.
Depreciation and amortization increased 11%, or
$23 million, primarily due to $21 million in
amortization associated with Terminal 5, which we began
operating from in October 2008, and $13 million related to
an average of 93 owned and capital leased aircraft in 2009
compared to 85 in 2008. This increase was offset by an
$8 million asset write-off related to a temporary terminal
facility at JFK in 2008. Cost per available seat mile was 11%
higher due to the amortization associated with Terminal 5 and
having on average eight additional owned operating aircraft.
Aircraft rent decreased 2%, or $3 million, primarily due to
lower rates in effect on our aircraft under operating leases in
2009 compared to 2008. Cost per available seat mile decreased 2%
due to these lower rates.
Sales and marketing expense remained relatively flat. Credit
card fees were $3 million lower as a result of decreased
passenger revenues, offset by $1 million in higher
advertising costs and $2 million in higher commissions in
2009 related to our participation in GDSs and OTAs.
Maintenance materials and repairs increased 18%, or
$22 million, due to eight more average operating aircraft
in 2009 compared to 2008 and the gradual aging of our fleet. The
average age of our fleet increased to 4.3 years as of
December 31, 2009 compared to 3.6 years as of
December 31, 2008. Maintenance expense is expected to
increase significantly as our fleet ages, resulting in the need
for additional repairs over time. Cost per available seat mile
increased 17% primarily due to the gradual aging of our fleet.
Other operating expenses increased 11%, or $42 million,
primarily due to an increase in variable costs associated with
5% more departures versus 2008, operating out of eight
additional cities in 2009, and increased costs due to
preparations for our implementation of our new customer service
system in January 2010. Other operating expenses include
the impact of $1 million and $23 million in gains on
sales of aircraft in 2009 and 2008, respectively. Other
operating expenses were further offset in 2009 by
$11 million for certain tax incentives compared to
$7 million in 2008. Cost per available seat mile increased
11% due primarily to increased departures and new stations.
Other Income (Expense). Interest expense
decreased 19%, or $47 million, primarily due to lower
interest rates and debt repayments, totaling approximately
$59 million, offset by additional financing including nine
new aircraft and the issuance in 2009 of our 6.75% convertible
Debentures, resulting in $32 million of additional interest
expense. Interest expense in 2008 included the impact of
$11 million of make whole payments from escrow in
connection with the partial conversion of a portion of our 5.5%
convertible Debentures due 2038. We incurred $30 million of
interest expense in 2009 related to T5, compared to
$38 million in 2008. Prior to the completion of the project
in October 2008, we had capitalized $32 million of the 2008
interest expense. The remainder of the decrease in capitalized
interest was due to lower average outstanding pre-delivery
deposits and lower interest rates.
Interest income and other increased 287%, or $15 million,
primarily due to a $53 million loss related to our auction
rate securities in 2008. Additionally, interest rates earned on
investments were much lower in 2009, resulting in
$23 million lower interest income. Interest income and
other included $2 million and $14 million in gains on
the extinguishment of debt in 2009 and 2008, respectively.
Derivative instruments not qualifying for cash flow hedges in
2009 resulted in a loss of $1 million, compared to a
$3 million gain in 2008. Additionally, accounting
ineffectiveness on crude, heating oil, and jet fuel derivatives
classified as cash flow hedges resulted in a gain of
$1 million in both 2009 and 2008. We are unable to predict
what the amount of ineffectiveness will be related to these
instruments, or the potential loss of hedge accounting which is
determined on a
derivative-by-derivative
basis, due to the volatility in the forward markets for these
commodities.
Our effective tax rate was 41% in 2009 compared to 6% in 2008,
mainly due to the nondeductibility of $21 million related
to our ARS impairment in 2008. 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 $104 million in 2009 and
pre-tax loss of $89 million in 2008.
34
Quarterly
Results of Operations
The following table sets forth selected financial data and
operating statistics for the four quarters ended
December 31, 2010. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
Statements of Operations Data (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues (1)
|
|
$
|
871
|
|
|
$
|
940
|
|
|
$
|
1,030
|
|
|
$
|
938
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel and related taxes
|
|
|
254
|
|
|
|
279
|
|
|
|
292
|
|
|
|
290
|
|
Salaries, wages and benefits (2)
|
|
|
219
|
|
|
|
218
|
|
|
|
227
|
|
|
|
227
|
|
Landing fees and other rents
|
|
|
54
|
|
|
|
58
|
|
|
|
61
|
|
|
|
55
|
|
Depreciation and amortization
|
|
|
57
|
|
|
|
54
|
|
|
|
54
|
|
|
|
55
|
|
Aircraft rent
|
|
|
31
|
|
|
|
31
|
|
|
|
31
|
|
|
|
33
|
|
Sales and marketing
|
|
|
40
|
|
|
|
43
|
|
|
|
47
|
|
|
|
49
|
|
Maintenance materials and repairs
|
|
|
39
|
|
|
|
41
|
|
|
|
44
|
|
|
|
48
|
|
Other operating expenses (3)
|
|
|
134
|
|
|
|
121
|
|
|
|
134
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
828
|
|
|
|
845
|
|
|
|
890
|
|
|
|
883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
43
|
|
|
|
95
|
|
|
|
140
|
|
|
|
55
|
|
Other income (expense)
|
|
|
(44
|
)
|
|
|
(43
|
)
|
|
|
(43
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1
|
)
|
|
|
52
|
|
|
|
97
|
|
|
|
13
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
21
|
|
|
|
38
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1
|
)
|
|
$
|
31
|
|
|
$
|
59
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
4.9
|
%
|
|
|
10.2
|
%
|
|
|
13.6
|
%
|
|
|
6.0
|
%
|
Pre-tax margin
|
|
|
(0.2
|
)%
|
|
|
5.6
|
%
|
|
|
9.4
|
%
|
|
|
1.5
|
%
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers (thousands)
|
|
|
5,528
|
|
|
|
6,114
|
|
|
|
6,573
|
|
|
|
6,039
|
|
Revenue passenger miles (millions)
|
|
|
6,470
|
|
|
|
7,126
|
|
|
|
7,699
|
|
|
|
6,984
|
|
Available seat miles ASM (millions)
|
|
|
8,424
|
|
|
|
8,688
|
|
|
|
9,102
|
|
|
|
8,530
|
|
Load factor
|
|
|
76.8
|
%
|
|
|
82.0
|
%
|
|
|
84.6
|
%
|
|
|
81.9
|
%
|
Aircraft utilization (hours per day)
|
|
|
11.8
|
|
|
|
11.8
|
|
|
|
12.0
|
|
|
|
11.0
|
|
Average fare
|
|
$
|
142.16
|
|
|
$
|
139.20
|
|
|
$
|
141.79
|
|
|
$
|
139.67
|
|
Yield per passenger mile (cents)
|
|
|
12.15
|
|
|
|
11.94
|
|
|
|
12.10
|
|
|
|
12.08
|
|
Passenger revenue per ASM (cents)
|
|
|
9.33
|
|
|
|
9.79
|
|
|
|
10.24
|
|
|
|
9.89
|
|
Operating revenue per ASM (cents)
|
|
|
10.33
|
|
|
|
10.83
|
|
|
|
11.32
|
|
|
|
11.00
|
|
Operating expense per ASM (cents)
|
|
|
9.83
|
|
|
|
9.72
|
|
|
|
9.78
|
|
|
|
10.34
|
|
Operating expense per ASM, excluding fuel (cents)
|
|
|
6.81
|
|
|
|
6.51
|
|
|
|
6.57
|
|
|
|
6.95
|
|
Airline operating expense per ASM (cents) (4)
|
|
|
9.62
|
|
|
|
9.55
|
|
|
|
9.53
|
|
|
|
10.15
|
|
Departures
|
|
|
54,367
|
|
|
|
56,202
|
|
|
|
58,935
|
|
|
|
55,997
|
|
Average stage length (miles)
|
|
|
1,102
|
|
|
|
1,102
|
|
|
|
1,103
|
|
|
|
1,093
|
|
Average number of operating aircraft during period
|
|
|
151.0
|
|
|
|
151.0
|
|
|
|
153.4
|
|
|
|
158.4
|
|
Average fuel cost per gallon, including fuel taxes
|
|
$
|
2.19
|
|
|
$
|
2.30
|
|
|
$
|
2.26
|
|
|
$
|
2.42
|
|
Fuel gallons consumed (millions)
|
|
|
116
|
|
|
|
121
|
|
|
|
130
|
|
|
|
119
|
|
Full-time equivalent employees at period end (4)
|
|
|
11,084
|
|
|
|
10,906
|
|
|
|
10,669
|
|
|
|
11,121
|
|
|
|
|
(1) |
|
During the first quarter of 2010, we recorded $4 million of
revenue related to our co-branded credit card agreement
guarantee. |
35
|
|
|
(2) |
|
During 2010, we incurred approximately $9 million in
salaries, wages and benefits related to the one time
implementation of our new customer service system,
$6 million of which was incurred in the first quarter of
2010. |
|
(3) |
|
During 2010, we incurred approximately $13 million in
one-time, non-recurring implementation related expenses for our
new customer service system, $10 million of which was
incurred in the first quarter of 2010. During the third quarter
of 2010, we recorded a $6 million impairment loss related
to a spectrum license held by our LiveTV subsidiary. |
|
(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 experienced significant revenue growth in 2010, 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, 2010, we had cash and cash equivalents of
$465 million and short term investments of
$495 million, as compared to cash and cash equivalents of
$896 million and short term investments of
$240 million at December 31, 2009. We also had
$133 million of long-term investments at December 31,
2010 compared to $6 million at December 31, 2009. Cash
flows provided by operating activities totaled $523 million
in 2010 compared to $486 million in 2009 and cash flows
used in operating activities of $17 million in 2008. The
$37 million increase in cash flows from operations in 2010
compared to 2009 was primarily as a result of the 8% increase in
average fares, 7% increase in capacity, and 1.7 point increase
in load factor, offset by 10% higher price of fuel in 2010
compared to 2009. The $503 million increase in cash flows
from operations in 2009 compared to 2008 was primarily a result
of a 33% lower price of fuel in 2009 compared to 2008 and the
$149 million in collateral we posted for margin calls
related to our outstanding fuel hedge and interest rate swap
contracts in 2008, most of which was returned to us during 2009.
We also posted $70 million in restricted cash that
collateralized letters of credit issued to certain of our
business partners in 2008, including $55 million for our
primary credit card processor. In 2009, $65 million of the
restricted cash was returned to us. We rely primarily on cash
flows from operations to provide working capital for current and
future operations.
Investing Activities. During 2010, capital
expenditures related to our purchase of flight equipment
included $142 million for four aircraft and five spare
engines, $50 million for flight equipment deposits and
$14 million for spare part purchases. Capital expenditures
for other property and equipment, including ground equipment
purchases, facilities improvements and LiveTV inventory, were
$93 million. Investing activities in 2010 also included the
net purchase of $384 million in investment securities.
During 2009, capital expenditures related to our purchase of
flight equipment included $313 million for 11 aircraft and
two spare engines, $27 million for flight equipment
deposits and $13 million for spare part purchases. Capital
expenditures for other property and equipment, including ground
equipment purchases and facilities improvements, were
$108 million. Proceeds from the sale of certain auction
rate securities were $175 million. Expenditures related to
the construction of our terminal at JFK totaled
$47 million. Investing activities in 2009 also included the
net purchase of $172 million in investment securities.
Other investing activities included the receipt of
$58 million in proceeds from the sale of two EMBRAER 190
aircraft.
Financing Activities. Financing activities
during 2010 consisted primarily of (1) the required
repurchase of $156 million of our 3.75% convertible
debentures due 2035, (2) the net repayment of
$56 million on our line of credit collateralized by our
auction rate securities, or ARS, (3) scheduled maturities
of $177 million of debt and capital lease obligations,
(4) our issuance of $47 million in fixed rate
equipment notes and $69 million in non-public floating rate
equipment notes secured by four EMBRAER 190 aircraft and five
36
spare engines, (5) the reimbursement of construction costs
incurred for Terminal 5 of $15 million and (6) the
repayment of $5 million in principal related to our
construction obligation for Terminal 5.
Financing activities during 2009 consisted primarily of
(1) our issuance of $201 million of 6.75% convertible
debentures, raising net proceeds of approximately
$197 million, (2) our public offering of approximately
26.5 million shares of common stock for approximately
$109 million in net proceeds, (3) our issuance of
$143 million in fixed rate equipment notes to banks and
$102 million in floating rate equipment notes to banks
secured by three Airbus A320 and six EMBRAER 190 aircraft,
(4) paying down a net of $107 million on our lines of
credit collateralized by our ARS, (5) scheduled maturities
of $160 million of debt and capital lease obligations,
(6) the repurchase of $20 million principal amount of
3.75% convertible debentures due 2035 for $20 million, and
(7) the reimbursement of construction costs incurred for
Terminal 5 of $49 million.
In October 2009, 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 in or near airports. Through
December 31, 2010, we had not issued any securities under
this registration statement. At this time, we have no plans to
sell securities under this registration statement.
None of our lenders or lessors are affiliated with us.
Capital Resources. We have been able to
generate sufficient funds from operations to meet our working
capital requirements. Substantially all of our property and
equipment is encumbered. We typically finance our aircraft
through either secured debt or lease financing. At
December 31, 2010, we operated a fleet of 160 aircraft, of
which 60 were financed under operating leases, four were
financed under capital leases and all but one of the remaining
96 were financed by secured debt. We also leased one additional
aircraft which we took delivery of in December 2010 but which
was not yet placed in service. We have received committed
financing for the nine aircraft scheduled for delivery in 2011.
Although we believe that debt
and/or lease
financing should be available for our remaining aircraft
deliveries, we cannot give assurance 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 pay in cash, further modify our aircraft acquisition
plans or incur higher than anticipated financing costs.
Working Capital. We had working capital of
$275 million at December 31, 2010, compared to
$377 million at December 31, 2009. Our working capital
includes the fair value of our short term fuel hedge
derivatives, which was an asset of $19 million and
$25 million at December 31, 2010 and December 31,
2009, respectively.
At December 31, 2008, we had $244 million invested in
ARS, which were included in long-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. Auction
failures continued for some time and there was a general lack of
liquidity in the market. As a result, we participated in
settlement agreements with UBS, whereby they repurchased all of
the ARS brokered by them beginning in June 2010 at par value.
Additionally, in October 2009, we entered into an agreement with
Citigroup Global Markets, Inc, whereby they repurchased all of
our then outstanding ARS issued by them for approximately
$120 million. As of December 31, 2010, we no longer
hold any ARS.
We expect to meet our obligations as they become due through
available cash, investment securities and internally generated
funds, supplemented as necessary by financing activities, as
they may be available to us. We expect to continue 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 volatile fuel
prices, economic conditions, weather-related disruptions, the
impact of airline bankruptcies
and/or
consolidations, U.S. military actions or acts of
37
terrorism. 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,
2010 include (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due in
|
|
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Long-term debt and capital lease obligations (1)
|
|
$
|
3,788
|
|
|
$
|
308
|
|
|
$
|
303
|
|
|
$
|
493
|
|
|
$
|
695
|
|
|
$
|
322
|
|
|
$
|
1,667
|
|
Lease commitments
|
|
|
1,755
|
|
|
|
214
|
|
|
|
191
|
|
|
|
164
|
|
|
|
165
|
|
|
|
170
|
|
|
|
851
|
|
Flight equipment obligations
|
|
|
4,360
|
|
|
|
375
|
|
|
|
475
|
|
|
|
585
|
|
|
|
805
|
|
|
|
925
|
|
|
|
1,195
|
|
Financing obligations and other (2)
|
|
|
3,216
|
|
|
|
222
|
|
|
|
292
|
|
|
|
245
|
|
|
|
209
|
|
|
|
244
|
|
|
|
2,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,119
|
|
|
$
|
1,119
|
|
|
$
|
1,261
|
|
|
$
|
1,487
|
|
|
$
|
1,874
|
|
|
$
|
1,661
|
|
|
$
|
5,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes actual interest and estimated interest for
floating-rate debt based on December 31, 2010 rates. |
|
(2) |
|
Amounts include noncancelable commitments for the purchase of
goods and services. |
The interest rates are fixed for $1.61 billion of our debt
and capital lease obligations, with the remaining
$1.42 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 seven years at December 31,
2010. We are not subject to any financial covenants in any of
our debt obligations. 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. During 2010, we posted
$1 million in cash collateral in order to maintain the
required ratios for the spare parts pass-through certificates.
At December 31, 2010, we were in compliance with all
covenants of our debt and lease agreements and 75% of our owned
property and equipment was collateralized.
We have operating lease obligations for 61 aircraft with lease
terms that expire between 2011 and 2026. One of the aircraft
under operating lease was not yet in service at
December 31, 2010. 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 approximately $31 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 2010 amendments to our Airbus and
EMBRAER purchase agreements, our firm aircraft orders at
December 31, 2010 consisted of 55 Airbus A320 aircraft and
54 EMBRAER 190 aircraft scheduled for delivery as follows: 9 in
2011, 11 in 2012, 14 in 2013, 19 in 2014, 22 in 2015, 18 in
2016, 8 in 2017, and 8 in 2018. We have the right to cancel
three firm EMBRAER 190 deliveries in 2012 or later, provided no
more than two deliveries are canceled in any one year. 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 eight additional Airbus A320
aircraft for delivery from 2014 through 2015 and 65 additional
EMBRAER 190 aircraft for delivery from 2012 through 2018. 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
38
PANYNJ has reimbursed us for costs of this project in accordance
with the terms of the lease, except for approximately
$78 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 $1.21 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 2011 are projected to be
approximately $125 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 the employee is terminated for cause or
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. 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.
Off-Balance
Sheet Arrangements
None of our operating lease obligations are reflected on our
balance sheet. Although some of our aircraft lease arrangements
are with variable interest entities, as defined by the
Consolidations topic of the Financial Accounting
Standards Boards, or FASB, Accounting Standards
Codificationtm,
or Codification, 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 additional 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 use 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
39
prepare our financial 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
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.
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 operating cash flows, we have not identified
any significant impairments related to our long-lived assets at
this time.
Share-based compensation. Under the
Compensation-Stock Compensation topic of the
Codification, stock-based compensation expense is required to be
recorded for issuances under our stock purchase plan and stock
incentive plan over their requisite service period using a fair
value approach. We use a Black-Scholes-Merton option pricing
model to estimate the fair value of share-based awards. 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. 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 and periodic adjustments of lease rates, landing
fees, and other charges applicable under such agreements, as
well as renewal periods. The effects of the escalations and
other adjustments 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
40
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, 2010, we had a $23 million asset
related to the net fair value of these derivative instruments;
the majority of which 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 the Derivatives and Hedging topic of the
Codification which permits the deferral of the effective
portions of gains or losses until contract settlement.
The Derivatives and Hedging topic is a complex accounting
standard and requires 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 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 the
Fair Value Measurements and Disclosures topic of the
Codification which establishes a framework for measuring fair
value and requires enhanced disclosures about fair value
measurements, on January 1, 2008. The Fair Value
Measurements and Disclosures topic 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. The Fair Value
Measurements and Disclosures topic 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.
We elected to apply the fair value option under the Financial
Instruments topic of the Codification to an agreement with
one of our ARS broker, to repurchase in 2010, at par. The
fair value of the put was determined by comparing the fair value
of the related ARS, as described above, to their par values and
also considered the credit risk associated with the broker. This
put option was adjusted on each balance sheet date based on its
then fair value. The fair value of the put option was based on
unobservable inputs and was therefore classified as level 3
in the hierarchy. This put option was fully exercised in 2010
upon its expiration.
In February 2008 and February 2009, we entered into various
interest rate swaps, which qualify as cash flow hedges in
accordance with the Derivatives and Hedging topic. 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 2009 since all critical terms continued
to match the underlying debt, 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, or TrueBlue. We record a liability, which was
$6 million as of December 31, 2010, for the estimated
incremental cost of outstanding points earned from JetBlue
purchases that we expect to be redeemed. The estimated cost
includes incremental fuel, insurance, passenger food and
supplies, and reservation costs. We adjust this liability, which
is included in air traffic liability, based on points earned and
redeemed, changes in the estimated incremental costs associated
with providing travel and changes in the TrueBlue program. In
November 2009, we launched an improved version of TrueBlue,
which allows customers to earn points based on the value paid
for a trip rather than the length of the trip. In addition,
unlike
41
our original program, the improved version does not result in
the automatic generation of a travel award once minimum award
levels are reached, but instead the points are maintained in the
account until used by the member or until they expire
12 months after the last account activity. As a result of
these changes we expect breakage, or the points that ultimately
expire unused, to be substantially reduced. Estimates of
breakage for the improved version of TrueBlue have been made
based on a simulation of the improved program rules using our
historical data. As more data is collected by us on our members
behaviors in the program, these estimates may change.
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.
Points in TrueBlue can also be sold to participating companies,
including credit card and car rental companies. These sales are
accounted for as multiple-element arrangements, with one element
representing the fair value of the travel that will ultimately
be provided when the points are redeemed and the other
consisting of marketing related activities that we conduct with
the participating company. The fair value of the transportation
portion of these point sales is deferred and recognized as
passenger revenue when transportation is provided. The marketing
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 when the points are sold.
Deferred revenue for points sold and not redeemed is recognized
as revenue when the underlying points expire. Deferred revenue
was $57 million at December 31, 2010.
The terms of expiration of all points under our original loyalty
program were modified with the launch of a new version of
TrueBlue in 2009. We recorded $15 million and
$13 million in revenue for point expirations in 2009 and
2010, respectively.
Our co-branded credit card agreement, under which we sell
TrueBlue points as described above, provides for a minimum cash
payment guarantee, which is to be paid to us throughout the life
of the agreement if specified point sales and other ancillary
activity payments have not been achieved. Through
December 31, 2010, we had received $21 million in
connection with this guarantee, which is subject to refund in
the event that cash payments exceed future minimums through
April 2011. We record revenue related to this guarantee when the
likelihood of us providing any future service is remote. During
2010, we recognized approximately $5 million related to
this guarantee, leaving $11 million deferred and included
in our air traffic liability.
|
|
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 jet fuel swap agreements. Market risk is
estimated as a hypothetical 10% increase in the
December 31, 2010 cost per gallon of fuel. Based on
projected 2011 fuel consumption, such an increase would result
in an increase to aircraft fuel expense of approximately
$130 million in 2011, compared to an estimated
$101 million for 2010 measured as of December 31,
2009. As of December 31, 2010, we had hedged approximately
28% of our projected 2011 fuel requirements. All hedge contracts
existing at December 31, 2010 settle by December 31,
2012. We expect to realize approximately $3 million in
gains during 2011 currently in other comprehensive income
related to our outstanding fuel hedge contracts.
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 $1.61 billion of our debt
and capital lease obligations, with the remaining
$1.42 billion having floating interest rates. If interest
rates average 10% higher in 2011 than
42
they did during 2010, our interest expense would increase by
approximately $1 million, compared to an estimated
$1 million for 2010 measured as of December 31, 2009.
If interest rates average 10% lower in 2011 than they did during
2010, our interest income from cash and investment balances
would remain relatively constant, compared to a $1 million
decrease for 2010 measured as of December 31, 2009. 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, 2010 and 2009.
Fixed Rate Debt. On December 31, 2010,
our $324 million aggregate principal amount of convertible
debt had a total estimated fair value of $531 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 $566 million as of December 31, 2010.
43
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
JETBLUE
AIRWAYS CORPORATION
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
465
|
|
|
$
|
896
|
|
Investment securities
|
|
|
495
|
|
|
|
240
|
|
Receivables, less allowance (2010-$6; 2009-$6;)
|
|
|
84
|
|
|
|
81
|
|
Inventories, less allowance (2010-$4; 2009-$3)
|
|
|
49
|
|
|
|
40
|
|
Restricted cash
|
|
|
3
|
|
|
|
13
|
|
Prepaid expenses
|
|
|
148
|
|
|
|
147
|
|
Other
|
|
|
27
|
|
|
|
43
|
|
Deferred income taxes
|
|
|
89
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,360
|
|
|
|
1,534
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
4,320
|
|
|
|
4,170
|
|
Predelivery deposits for flight equipment
|
|
|
178
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,498
|
|
|
|
4,309
|
|
Less accumulated depreciation
|
|
|
679
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,819
|
|
|
|
3,769
|
|
Other property and equipment
|
|
|
491
|
|
|
|
515
|
|
Less accumulated depreciation
|
|
|
178
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313
|
|
|
|
346
|
|
Assets constructed for others
|
|
|
558
|
|
|
|
549
|
|
Less accumulated amortization
|
|
|
49
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
4,641
|
|
|
|
4,638
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
133
|
|
|
|
6
|
|
Restricted cash
|
|
|
65
|
|
|
|
64
|
|
Other
|
|
|
394
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
592
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
6,593
|
|
|
$
|
6,549
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
44
JETBLUE
AIRWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
104
|
|
|
$
|
93
|
|
Air traffic liability
|
|
|
514
|
|
|
|
443
|
|
Accrued salaries, wages and benefits
|
|
|
147
|
|
|
|
121
|
|
Other accrued liabilities
|
|
|
137
|
|
|
|
116
|
|
Current maturities of long-term debt and capital leases
|
|
|
183
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,085
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
|
|
|
2,850
|
|
|
|
2,920
|
|
|
|
|
|
|
|
|
|
|
CONSTRUCTION OBLIGATION
|
|
|
533
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
DEFERRED TAXES AND OTHER LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
327
|
|
|
|
259
|
|
Other
|
|
|
144
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
471
|
|
|
|
397
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 25,000,000 shares
authorized, none issued
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 900,000,000 and
500,000,000 shares authorized, 322,272,207 and
318,592,283 shares issued and 294,687,308 and
291,490,758 shares outstanding in 2010 and 2009,
respectively
|
|
|
3
|
|
|
|
3
|
|
Treasury stock, at cost; 27,585,367 and 27,102,136 shares
in 2010 and 2009, respectively
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Additional paid-in capital
|
|
|
1,446
|
|
|
|
1,422
|
|
Retained earnings
|
|
|
219
|
|
|
|
122
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
(10
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,654
|
|
|
|
1,546
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
6,593
|
|
|
$
|
6,549
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
JETBLUE
AIRWAYS CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$
|
3,412
|
|
|
$
|
2,934
|
|
|
$
|
3,060
|
|
Other
|
|
|
367
|
|
|
|
358
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
3,779
|
|
|
|
3,292
|
|
|
|
3,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel and related taxes ($39, $34, and $45 in 2010,
2009, and 2008, respectively)
|
|
|
1,115
|
|
|
|
945
|
|
|
|
1,397
|
|
Salaries, wages and benefits
|
|
|
891
|
|
|
|
776
|
|
|
|
694
|
|
Landing fees and other rents
|
|
|
228
|
|
|
|
213
|
|
|
|
199
|
|
Depreciation and amortization
|
|
|
220
|
|
|
|
228
|
|
|
|
205
|
|
Aircraft rent
|
|
|
126
|
|
|
|
126
|
|
|
|
129
|
|
Sales and marketing
|
|
|
179
|
|
|
|
151
|
|
|
|
151
|
|
Maintenance materials and repairs
|
|
|
172
|
|
|
|
149
|
|
|
|
127
|
|
Other operating expenses
|
|
|
515
|
|
|
|
419
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,446
|
|
|
|
3,007
|
|
|
|
3,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
333
|
|
|
|
285
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(180
|
)
|
|
|
(198
|
)
|
|
|
(245
|
)
|
Capitalized interest
|
|
|
4
|
|
|
|
7
|
|
|
|
48
|
|
Interest income and other
|
|
|
4
|
|
|
|
10
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(172
|
)
|
|
|
(181
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
161
|
|
|
|
104
|
|
|
|
(89
|
)
|
Income tax expense (benefit)
|
|
|
64
|
|
|
|
43
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
97
|
|
|
$
|
61
|
|
|
$
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
|
$
|
0.24
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.31
|
|
|
$
|
0.21
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
JETBLUE
AIRWAYS CORPORATION
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
97
|
|
|
$
|
61
|
|
|
$
|
(84
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
62
|
|
|
|
42
|
|
|
|
(6
|
)
|
Depreciation
|
|
|
194
|
|
|
|
190
|
|
|
|
189
|
|
Amortization
|
|
|
36
|
|
|
|
44
|
|
|
|
21
|
|
Stock-based compensation
|
|
|
17
|
|
|
|
16
|
|
|
|
16
|
|
Gains on sale of flight equipment and extinguishment of debt
|
|
|
|
|
|
|
(3
|
)
|
|
|
(45
|
)
|
Collateral returned (deposits) for derivative instruments
|
|
|
(13
|
)
|
|
|
132
|
|
|
|
(149
|
)
|
Auction rate securities impairment, net
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Restricted cash returned by (paid for) business partners
|
|
|
5
|
|
|
|
65
|
|
|
|
(70
|
)
|
Changes in certain operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (Increase) in receivables
|
|
|
(4
|
)
|
|
|
3
|
|
|
|
4
|
|
Decrease (Increase) in inventories, prepaid and other
|
|
|
(4
|
)
|
|
|
(43
|
)
|
|
|
(10
|
)
|
Increase in air traffic liability
|
|
|
70
|
|
|
|
4
|
|
|
|
15
|
|
Increase (Decrease) in accounts payable and other accrued
liabilities
|
|
|
27
|
|
|
|
(66
|
)
|
|
|
15
|
|
Other, net
|
|
|
36
|
|
|
|
41
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
523
|
|
|
|
486
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(249
|
)
|
|
|
(434
|
)
|
|
|
(654
|
)
|
Predelivery deposits for flight equipment
|
|
|
(50
|
)
|
|
|
(32
|
)
|
|
|
(49
|
)
|
Refund of predelivery deposits for flight equipment
|
|
|
|
|
|
|
5
|
|
|
|
|
|
Proceeds from sale of flight equipment
|
|
|
|
|
|
|
58
|
|
|
|
299
|
|
Assets constructed for others
|
|
|
(14
|
)
|
|
|
(47
|
)
|
|
|
(142
|
)
|
Purchase of
held-to-maturity
investments
|
|
|
(866
|
)
|
|
|
(22
|
)
|
|
|
|
|
Proceeds from maturities of
held-to-maturity
investments
|
|
|
414
|
|
|
|
|
|
|
|
|
|
Purchase of
available-for-sale
securities
|
|
|
(1,069
|
)
|
|
|
(636
|
)
|
|
|
(69
|
)
|
Sale of
available-for-sale
securities
|
|
|
1,052
|
|
|
|
486
|
|
|
|
|
|
Sale of auction rate securities
|
|
|
85
|
|
|
|
175
|
|
|
|
397
|
|
Return of (deposits for) security deposits
|
|
|
1
|
|
|
|
(10
|
)
|
|
|
1
|
|
Increase in restricted cash and other assets, net
|
|
|
|
|
|
|
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(696
|
)
|
|
|
(457
|
)
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
9
|
|
|
|
120
|
|
|
|
320
|
|
Issuance of long-term debt
|
|
|
116
|
|
|
|
446
|
|
|
|
716
|
|
Aircraft sale and leaseback transactions
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Short-term borrowings
|
|
|
|
|
|
|
10
|
|
|
|
17
|
|
Borrowings collateralized by ARS
|
|
|
20
|
|
|
|
3
|
|
|
|
163
|
|
Construction obligation
|
|
|
15
|
|
|
|
49
|
|
|
|
138
|
|
Repayment of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
|
(333
|
)
|
|
|
(180
|
)
|
|
|
(673
|
)
|
Short-term borrowings
|
|
|
|
|
|
|
(20
|
)
|
|
|
(52
|
)
|
Borrowings collateralized by ARS
|
|
|
(76
|
)
|
|
|
(110
|
)
|
|
|
|
|
Construction obligation
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(4
|
)
|
|
|
(12
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(258
|
)
|
|
|
306
|
|
|
|
635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(431
|
)
|
|
|
335
|
|
|
|
371
|
|
Cash and cash equivalents at beginning of period
|
|
|
896
|
|
|
|
561
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
465
|
|
|
$
|
896
|
|
|
$
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at December 31, 2007
|
|
|
182
|
|
|
$
|
2
|
|
|
|
|
|
|
$
|
|
|
|
$
|
884
|
|
|
$
|
145
|
|
|
$
|
19
|
|
|
$
|
1,050
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
(84
|
)
|
Changes in comprehensive loss (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(187
|
)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
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
|
|
|
|
|
|
|
|
1,290
|
|
|
|
61
|
|
|
|
(84
|
)
|
|
|
1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
61
|
|
Changes in comprehensive income (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146
|
|
Vesting of restricted stock units
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Stock issued under crewmember stock purchase plan
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Proceeds from secondary offering, net of offering expenses
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
Other
|
|
|
2
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
319
|
|
|
|
3
|
|
|
|
27
|
|
|
|
(2
|
)
|
|
|
1,422
|
|
|
|
122
|
|
|
|
1
|
|
|
|
1,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
97
|
|
Changes in comprehensive income (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
Vesting of restricted stock units
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Stock issued under crewmember stock purchase plan
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
322
|
|
|
$
|
3
|
|
|
|
28
|
|
|
$
|
(4
|
)
|
|
$
|
1,446
|
|
|
$
|
219
|
|
|
$
|
(10
|
)
|
|
$
|
1,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
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, 2010, we served 63 destinations in
21 states, Puerto Rico, Mexico, and ten countries in the
Caribbean and Latin America. Our wholly owned subsidiary,
LiveTV, LLC, or LiveTV, 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 2010, 2009 and 2008. 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: The Fair Value Measurements
and Disclosures topic of the Financial Accounting Standards
Boards, or FASB, Accounting Standards
Codificationtm,
or Codification, establishes a framework for measuring fair
value and requires enhanced disclosures about fair value
measurements. Additionally, this topic 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. The Fair Value
Measurements and Disclosures topic 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 14 for more information.
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 and commercial paper with
maturities of three months or less when purchased.
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) highly liquid
investments, such as certificates of deposits, with maturities
greater than three months when purchased, stated at fair value;
(b) auction rate securities, or ARS, stated at fair value;
(c) variable rate demand notes with stated maturities
generally greater than ten years with interest reset dates often
every 30 days or less, stated at fair value;
(d) commercial paper with maturities between six and twelve
months, stated at fair value; and (e) investment-
49
grade interest bearing instruments classified as
held-to-maturity
investments and stated at amortized cost. When sold, we use a
specific identification method to determine the cost of the
securities.
Investment securities consisted of the following at
December 31, 2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
|
|
Asset-back securities
|
|
$
|
10
|
|
|
$
|
109
|
|
Time deposits
|
|
|
19
|
|
|
|
36
|
|
Commercial paper
|
|
|
125
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154
|
|
|
|
150
|
|
Held-to-maturity
securities
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
474
|
|
|
|
22
|
|
Trading securities
|
|
|
|
|
|
|
|
|
Student loan bonds
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
628
|
|
|
$
|
246
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
investment securities: During 2009 and 2010,
we held various corporate bonds. Those with original maturities
less than twelve months are included in short-term investments
on our consolidated balance sheets, and those with original
maturities in excess of twelve months but less than two years
are included in long-term investments on our consolidated
balance sheets. We did not record any significant gains or
losses on these securities during the twelve months ended
December 31, 2010 or 2009.
Derivative Instruments: Derivative
instruments, including fuel hedge contracts and interest rate
swap agreements, are stated at fair value, net of any collateral
postings. Derivative instruments are included in other assets on
our consolidated balance sheets.
Inventories: Inventories consist of
expendable aircraft spare parts and supplies, which are stated
at average cost, and aircraft fuel, which is stated on a
first-in,
first-out basis. These items are charged to expense when used.
An allowance for obsolescence on aircraft spare parts is
provided over the remaining useful life of the related aircraft
fleet.
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.
Effective January 1, 2009, we adjusted the estimated useful
lives for our in-flight entertainment systems from 12 years
to 7 years, which resulted in approximately $4 million
of additional depreciation expense and an estimated $0.01
reduction in diluted earnings per share in 2009.
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
|
|
7 years
|
|
|
0
|
%
|
Aircraft parts
|
|
Fleet life
|
|
|
10
|
%
|
Flight equipment leasehold improvements
|
|
Lower of lease term or economic life
|
|
|
0
|
%
|
Ground property and equipment
|
|
3-10 years
|
|
|
0
|
%
|
Leasehold improvements other
|
|
Lower of lease term or economic life
|
|
|
0
|
%
|
Buildings on leased land
|
|
Lease term
|
|
|
0
|
%
|
Property under capital leases is initially 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.
50
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 the 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 of our
temporary terminal facility at JFK.
In 2009, we sold two aircraft, which resulted in gains totaling
$1 million. In 2008, we sold nine aircraft, which resulted
in gains totaling $23 million. The gains on our sales of
aircraft are included in other operating expenses.
Software: We capitalize certain costs
related to the acquisition and development of computer software.
We amortize these costs using the straight-line method over the
estimated useful life of the software, which is generally
between five and ten years. The net book value of computer
software, which is included in other assets on our consolidated
balance sheets, was $46 million and $30 million at
December 31, 2010 and 2009, respectively. Amortization
expense related to computer software was $13 million,
$14 million and $8 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
Amortization expense related to computer software is expected to
be approximately $9 million in 2011, $8 million in
2012, $7 million in 2013, $6 million in 2014, and
$5 million in 2015.
Intangible Assets: Intangible assets
consist of acquired take-off and landing slots at certain
domestic slot-controlled airports. We record these assets at
cost and amortize them on a straight-line basis over their
expected useful lives. As of December 31, 2010, the cost
and accumulated amortization of intangible assets recorded was
not material, and are included in other long term assets in our
consolidated balance sheet. We periodically evaluate these
intangible assets for impairment; however we have not recorded
any impairment losses to date through December 31, 2010.
Intangible assets also include an indefinite lived asset related
to an
air-to-ground
spectrum license acquired by LiveTV in 2006 at a public auction
from the Federal Communications Commission for approximately
$7 million. In September 2010, we determined this spectrum
license had been impaired as further discussed in Note 14,
which resulted in a loss of approximately $5 million being
recorded in other operating expenses during 2010, with
approximately $2 million remaining in other long term
assets related to this license as of December 31, 2010.
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.
Loyalty Program: We account for our
customer loyalty program, TrueBlue, by recording a liability for
the estimated incremental cost of providing transportation for
outstanding points earned from JetBlue purchases that we expect
to be redeemed. We adjust this liability, which is included in
air traffic liability, based on points earned and redeemed,
changes in the estimated incremental costs associated with
providing travel and changes in the TrueBlue program.
Points in TrueBlue are also sold to participating companies,
including credit card and car rental companies. These sales are
accounted for as multiple-element arrangements, with one element
representing the travel that will ultimately be provided when
the points are redeemed and the other consisting of marketing
related activities that we conduct with the participating
company. The fair value of the transportation portion of these
point sales is deferred and recognized as passenger revenue when
transportation is provided. The marketing 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 when the points are sold.
TrueBlue points not redeemed are recognized as revenue when they
expire. The terms of expiration of points under our original
loyalty program were modified with the launch of a new version
of TrueBlue in 2009. We recorded $15 million and
$13 million in revenue for point expirations in 2009 and
2010, respectively.
51
Our co-branded credit card agreement, under which we sell
TrueBlue points as described above, provides for a minimum cash
payment guarantee, which is to be paid to us throughout the life
of the agreement if specified point sales and other ancillary
activity payments have not been achieved. Through
December 31, 2010, we had received $21 million in
connection with this guarantee, which is subject to refund in
the event that cash payments exceed future minimums through
April 2011. We record revenue related to this guarantee when it
is remote that any future service will be provided by us. We
recognized approximately $5 million of other revenue during
each of 2010 and 2009 related to this guarantee, leaving
$11 million deferred and included in our air traffic
liability as of December 31, 2010.
Upon launch of the new TrueBlue program in November 2009, we
extended our co-branded credit card and membership rewards
participation agreements. In connection with these extensions,
we received a one-time payment of $37 million, which we
deferred and are recognizing as other revenue over the term of
the agreement through 2015.
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 the
Revenue Recognition-Multiple-Element Arrangements topic
of the Codification because we lack objective and reliable
evidence of fair value of the undelivered items. Revenues and
expenses related to these components are recognized ratably over
the service periods, which extend through 2018 as of
December 31, 2010. 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. We
have separate service agreements covering certain of our
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
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 power by the hour contracts
transfer certain risks to the third-party service providers and
fix the amounts we pay per flight hour or number of cycles in
exchange for maintenance and repairs under a predefined
maintenance program. 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 2010, 2009 and 2008 was
$55 million, $53 million and $52 million,
respectively.
Share-Based Compensation: We record
compensation expense in the financial statements for share-based
awards based on the grant date fair value of those awards.
Share-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.
Under the Compensation-Stock Compensation topic of the
Codification, the benefits associated with tax deductions in
excess of recognized compensation cost are required to be
reported as a financing cash flow. We recorded an insignificant
amount in excess tax benefits generated from option exercises in
each of 2010, 2009 and 2008.
Our policy is to issue new shares for purchases under our
Crewmember Stock Purchase Plan, or CSPP, and issuances under our
Amended and Restated 2002 Stock Incentive Plan, or 2002 Plan.
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 deferred tax
assets is provided unless realizability is judged by us to be
more likely than not. Our policy is to recognize interest and
penalties accrued on any unrecognized tax benefits as a
component of income tax expense.
New Accounting Standards: Our financial
statements are prepared in accordance with the Codification
which was established in 2009 and superseded all then existing
accounting standard documents and has become the single source
of authoritative non-governmental U.S. GAAP. New accounting
rules and disclosure
52
requirements can impact our financial results and the
comparability of our financial statements. Authoritative
literature that has recently been issued which we believe will
impact our consolidated financial statements is described below.
There are also several new proposals under development, if and
when enacted, may have a significant impact on our financial
statements.
Effective July 1, 2009, we adopted the updated Fair
Value Measurements and Disclosures topic of the
Codification, which provides additional guidance on estimating
fair value when the volume and level of transaction activity for
an asset or liability have significantly decreased in relation
to normal market activity for the asset or liability. Additional
disclosures are required regarding fair value in interim and
annual reports. We have included these additional disclosures in
Note 14.
Effective January 1, 2010, we adopted the latest provisions
in the Codification related to the accounting for an
entitys involvement with variable interest entities, or
VIEs. Under these rules, the quantitative based method of
determining if an entity is the primary beneficiary was replaced
with a qualitative assessment on an ongoing basis of which
entity has the power to direct activities of the VIE and the
obligation to absorb the losses or the right to receive the
benefits from the VIE. Adoption of these new rules had no impact
on our consolidated financial statements.
Effective January 1, 2010, we adopted the guidance for
Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance, under the debt
topic of the Codification, which changed the accounting for
equity share lending arrangements on an entitys own shares
when executed in contemplation of a convertible debt offering.
This new guidance requires share lending arrangements be
measured at fair value and recognized as an issuance cost. These
issuance costs are then amortized and recognized as interest
expense over the life of the financing arrangement. Shares
loaned under these arrangements are excluded from computation of
earnings per share. Retrospective application was required for
all arrangements outstanding as of the beginning of the fiscal
year. Refer to Note 2 for details of the 44.9 million
shares of our common stock lent in conjunction with our
2008 million convertible debt issuance.
Our share lending agreement requires that the shares borrowed be
returned upon the maturity of the related debt, October 2038, or
earlier, if the debentures are no longer outstanding. We
determined the fair value of the share lending arrangement was
approximately $5 million at the date of the issuance based
on the value of the estimated fees the shares loaned would have
generated over the term of the share lending arrangement. We
have retrospectively applied this change in accounting to
affected accounts for all periods presented. The $5 million
fair value was recognized as a debt issuance cost and is being
amortized to interest expense through the earliest put date of
the related debt, October 2013 and October 2015 for
Series A and Series B, respectively. As of
December 31, 2010, approximately $2 million of net
debt issuance costs remain outstanding related to the share
lending arrangement and will continue to be amortized through
the earliest put date of the related debt. We estimate that the
$2 million value of the shares remaining outstanding under
the share lending arrangement approximates their fair value as
of December 31, 2010. As of December 31, 2010, there
were approximately 18.0 million shares outstanding under
the share lending arrangement. The fair value of similar common
shares not subject to our share lending arrangement, based upon
our closing stock price, was approximately $119 million.
In September 2009, the EITF reached final consensus on updates
to the Codifications Revenue Recognition rules,
which change the accounting for certain revenue arrangements.
The new requirements change the allocation methods used in
determining how to account for multiple element arrangements and
will result in the ability to separately account for more
deliverables, and potentially less revenue deferrals.
Additionally, this new accounting treatment will require
enhanced disclosures in financial statements. The new rule is
effective for revenue arrangements entered into or materially
modified in fiscal years beginning after June 15, 2010, on
a prospective basis, with early application permitted. This new
accounting treatment will impact any new contracts entered into
by LiveTV, as well as any loyalty program or commercial
partnership arrangements we may enter into or materially modify.
We will apply these new provisions to any new contracts or
modifications entered into subsequent to January 1, 2011.
53
|
|
Note 2
|
Long-term
Debt, Short-term Borrowings and Capital Lease
Obligations
|
Long-term debt and capital lease obligations and the related
weighted average interest rate at December 31, 2010 and
2009 consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Secured Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate equipment notes, due through 2025 (1)
|
|
$
|
696
|
|
|
|
2.5
|
%
|
|
$
|
697
|
|
|
|
2.4
|
%
|
Floating rate enhanced equipment notes (2) (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class G-1,
due through 2016
|
|
|
234
|
|
|
|
2.9
|
%
|
|
|
265
|
|
|
|
2.7
|
%
|
Class G-2,
due 2014 and 2016
|
|
|
373
|
|
|
|
1.9
|
%
|
|
|
373
|
|
|
|
1.5
|
%
|
Class B-1,
due 2014
|
|
|
49
|
|
|
|
5.4
|
%
|
|
|
49
|
|
|
|
4.6
|
%
|
Fixed rate equipment notes, due through 2025
|
|
|
1,144
|
|
|
|
6.3
|
%
|
|
|
1,163
|
|
|
|
6.3
|
%
|
Fixed rate special facility bonds, due through 2036 (4)
|
|
|
84
|
|
|
|
6.0
|
%
|
|
|
85
|
|
|
|
6.0
|
%
|
UBS line of credit (5)
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75% convertible debentures due in 2039 (6)
|
|
|
201
|
|
|
|
|
|
|
|
201
|
|
|
|
|
|
3.75% convertible debentures due in 2035 (7)
|
|
|
|
|
|
|
|
|
|
|
154
|
|
|
|
|
|
5.5% convertible debentures due in 2038 (8)
|
|
|
123
|
|
|
|
|
|
|
|
123
|
|
|
|
|
|
3.5% convertible notes due in 2033
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Leases (9)
|
|
|
129
|
|
|
|
3.8
|
%
|
|
|
137
|
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and capital lease obligations
|
|
|
3,033
|
|
|
|
|
|
|
|
3,304
|
|
|
|
|
|
Less: current maturities
|
|
|
(183
|
)
|
|
|
|
|
|
|
(384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
$
|
2,850
|
|
|
|
|
|
|
$
|
2,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. In April 2009, we entered into
interest rate swap agreements that have effectively fixed the
interest rate increases for the remaining term of half of the
Class G-1
certificates and all of the
Class B-1
certificates for the November 2006 offering. The swapped portion
of the
Class G-1
and
Class B-1
certificates had a balance of $37 million and
$49 million, respectively, at December 31, 2010, and
the effective interest rates included in the above table. The
interest rate for the remaining half of the
Class G-1
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 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 the Class G-1 certificates for the
November 2004 offering. These certificates had a balance of
$107 million at December 31, 2010 and an effective
interest rate of 4.6%. In February 2009, we entered into
interest rate swap agreements that have effectively fixed the
interest rate for the remaining term of the
Class G-2
certificates for the November 2004 offering. These certificates
had a balance of $185 million at |
54
|
|
|
|
|
December 31, 2010 and the effective interest rate is
included in the above table. 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) |
|
In 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 provided us with a
no net cost loan in the principal amount of $56 million.
However, this credit line agreement called for all interest
income earned on the ARS being held by UBS to be automatically
transferred to UBS. This line of credit was secured by our ARS
being held by UBS. The term of the credit line was through at
least June 30, 2010 or when the underlying ARS were sold.
In January 2010, the issuers redeemed at par $12 million of
the ARS securing this line of credit and proceeds were applied
directly to the outstanding loan balance. In March 2010, this
line of credit was increased by approximately $20 million
due to a lending increase from 75% to 100% of the mark to market
value of the ARS. During 2010, all of the remaining ARS securing
this line of credit were either sold back to UBS or redeemed by
their issuers and the proceeds were used to terminate the line
of credit. |
|
(6) |
|
On June 9, 2009, we completed a public offering of
$115 million aggregate principal amount of 6.75%
Series A convertible debentures due 2039, or the
Series A 6.75% Debentures, and $86 million
aggregate principal amount of 6.75% Series B convertible
debentures due 2039, or the Series B 6.75% Debentures,
and collectively with the Series A 6.75% Debentures,
the 6.75% Debentures. The 6.75% Debentures are general
obligations and rank equal in right of payment with all of our
existing and future senior unsecured debt, effectively junior in
right of payment to our existing and future secured debt,
including our secured equipment debentures, to the extent of the
value of the assets securing such debt, and senior in right of
payment to any subordinated debt. In addition, the
6.75% Debentures are structurally subordinated to all
existing and future liabilities of our subsidiaries. The net
proceeds were approximately $197 million after deducting
underwriting fees and other transaction related expenses.
Interest on the 6.75% Debentures is payable semi-annually
on April 15 and October 15. The first interest payment on
the 6.75% Debentures was paid October 15, 2009. |
|
|
|
Holders of either the Series A or Series B
6.75% Debentures may convert them into shares of our common
stock at any time at a conversion rate of 204.6036 shares
per $1,000 principal amount of the 6.75% Debentures. 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
6.75% Debentures in connection with a fundamental change
that occurs prior to October 15, 2014 for the Series A
6.75% Debentures or October 15, 2016 for the
Series B 6.75% Debentures, the applicable conversion
rate may be increased depending on our then current common stock
price. The maximum number of shares into which all of the
6.75% Debentures are convertible, including pursuant to
this make-whole fundamental change provision, is
235.2941 shares per $1,000 principal amount of the
6.75% Debentures outstanding, as adjusted. |
|
|
|
We may redeem any of the 6.75% 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,
2014 for the Series A 6.75% Debentures and
October 15, 2016 for the Series B
6.75% Debentures. Holders may require us to repurchase the
6.75% Debentures for cash at a repurchase price equal to
100% of their principal amount plus accrued and unpaid interest,
if any, on October 15, 2014, 2019, 2024, 2029 and 2034 for
the Series A 6.75% Debentures and October 15,
2016, 2021, 2026, 2031 and 2036 for the Series B
6.75% Debentures; or at any time prior to their maturity
upon the occurrence of a certain designated event. |
|
|
|
We evaluated the various embedded derivatives within the
supplemental indenture for bifurcation from the
6.75% Debentures under the applicable provisions, including
the basic conversion feature, the fundamental change make-whole
provision and the put and call options. Based upon our detailed
assessment, we |
55
|
|
|
|
|
concluded these embedded derivatives were either
(i) excluded from bifurcation as a result of being clearly
and closely related to the 6.75% Debentures or are indexed
to our common stock and would be classified in
stockholders equity if freestanding or (ii) are
immaterial embedded derivatives. |
|
(7) |
|
In March 2005, we completed a public offering of
$250 million aggregate principal amount of 3.75%
convertible unsecured debentures due 2035, or
3.75% Debentures. |
|
|
|
In 2008, we repurchased approximately $73 million principal
amount of our 3.75% Debentures for $54 million. The
$14 million net gain from these transactions is recorded in
interest income and other in the accompanying consolidated
statements of operations. |
|
|
|
During 2009, we repurchased approximately $20 million
principal amount of our 3.75% Debentures at a slight
discount to par. Of the total consideration paid,
$2 million was allocated to the reacquisition of the equity
component, resulting in a $2 million gain on the
extinguishment of debt after writing off unamortized debt
discount and issuance costs. |
|
|
|
In March 2010, holders of these 3.75% Debentures required
us to repurchase approximately $155 million aggregate
principal amount of Debentures for cash on the first repurchase
date at the repurchase price equal to 100% of their principal
amount plus accrued and unpaid interest. In August 2010, we
redeemed the remaining $1 million principal amount of the
3.75% Debentures at par, plus accrued interest. |
|
|
|
Prior to the repurchase of these Debentures, we accounted for
this convertible debt under the provisions of the Codification
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 these provisions, 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. Since our
3.75% Debentures had an option to be settled in cash, they
were within the scope of this accounting guidance. |
|
|
|
Our effective borrowing rate for nonconvertible debt at the time
of issuance of the 3.75% Debentures was estimated to be 9%,
which resulted in $52 million of the $250 million
aggregate principal amount of debentures issued, or
$31 million after taxes, being attributed to equity. We
amortized the debt discount through March 2010, the first
repurchase date of the debentures. The principal amount,
unamortized discount and net carrying amount of the debt and
equity components are presented below (in millions): |
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Principal amount
|
|
$
|
156
|
|
Unamortized discount
|
|
|
(2
|
)
|
|
|
|
|
|
Net carrying amount
|
|
$
|
154
|
|
|
|
|
|
|
Additional paid-in capital, net
|
|
$
|
29
|
|
|
|
|
|
|
Interest expense related to these debentures consisted of the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
3.75% contractual rate
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
9
|
|
Discount amortization
|
|
|
2
|
|
|
|
8
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
3
|
|
|
$
|
14
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest rate
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
|
(8) |
|
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 5.5% Debentures, and $100.6 million
aggregate principal amount of 5.5% Series B convertible
debentures due 2038, or the Series B 5.5% Debentures,
and collectively with the Series A 5.5% Debentures,
the 5.5% Debentures. The 5.5% 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 5.5% Debentures, into
escrow accounts for the exclusive benefit of the holders of each |
56
|
|
|
|
|
series of the 5.5% 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 5.5% Debentures is payable semi-annually on
April 15 and October 15. |
|
|
|
Holders of the Series A 5.5% 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 5.5% Debenture. Holders of the Series B
5.5% 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 5.5% 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
5.5% Debentures in connection with any fundamental
corporate change that occurs prior to October 15, 2013 for
the Series A 5.5% Debentures or October 15, 2015
for the Series B 5.5% Debentures, the applicable
conversion rate may be increased depending upon our then current
common stock price. The maximum number of shares of common stock
into which all of the 5.5% Debentures are convertible,
including pursuant to this make-whole fundamental change
provision, is 54.4 million shares. Holders who convert
their 5.5% 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 the 5.5% 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 5.5% Debentures. |
|
|
|
We may redeem any of the 5.5% 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 5.5% Debentures and
October 15, 2015 for the Series B
5.5% Debentures. Holders may require us to repurchase the
5.5% 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 5.5% Debentures and October 15,
2015, 2020, 2025, 2030, and 2035 for the Series B
5.5% 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 5.5% 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 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
5.5% Debentures under the applicable provisions of the
Codification. 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 5.5% 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
5.5% 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. |
|
|
|
During 2008, approximately $76 million principal amount of
the 5.5% 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. During 2009, approximately
$3 million principal amount of the 5.5% Debentures
were voluntarily converted by holders into approximately
0.6 million shares of our common stock. The borrower
returned 10.0 million shares to us in September 2009,
almost all of which were voluntarily returned shares in excess
of converted shares, pursuant to the share lending agreement. At
December 31, 2010, the remaining principal balance was
$123 million, which is currently convertible into |
57
|
|
|
|
|
27.4 million shares of our common stock. At
December 31, 2010, the amount remaining in the escrow
accounts was $3 million, which is reflected as restricted
cash on our consolidated balance sheets. |
|
(9) |
|
At December 31, 2010 and 2009, four capital leased Airbus
A320 aircraft are included in property and equipment at a cost
of $152 million with accumulated amortization of
$18 million and $13 million, respectively. The future
minimum lease payments under these noncancelable leases are
$15 million in 2011, $14 million per year in each of
2012 through 2015 and $110 million in the years thereafter.
Included in the future minimum lease payments is
$53 million representing interest, resulting in a present
value of capital leases of $128 million with a current
portion of $7 million and a long-term portion of
$121 million. |
Maturities of long-term debt and capital leases, including the
assumption that our convertible debt will be redeemed upon the
first put date, for the next five years are as follows (in
millions):
|
|
|
|
|
2011
|
|
$
|
183
|
|
2012
|
|
|
185
|
|
2013
|
|
|
383
|
|
2014
|
|
|
603
|
|
2015
|
|
|
246
|
|
We had utilized a funding facility to finance aircraft
predelivery deposits, which allowed for borrowings of up to
$30 million. In October 2009, we fully repaid the
$10 million balance and terminated the funding facility.
In July 2008, we obtained a line of credit with Citigroup Global
Markets, Inc. which allowed for borrowings of up to
$110 million through July 20, 2009 and was originally
secured our ARS which were then held by Citigroup. We repaid the
entire $110 million on this line of credit in October 2009
when we sold the ARS which secured it, and concurrently
terminated the facility. See Note 14 for further
information.
We do not have any financial covenants associated with our debt
agreements other than 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
are required to provide additional collateral or redeem some or
all of the equipment notes so that the ratios return to
compliance. During 2010, we posted $1 million in cash
collateral in order to maintain the required ratios for the
spare parts pass-through certificates.
Aircraft, engines, and other equipment and facilities having a
net book value of $3.51 billion at December 31, 2010
were pledged as security under various loan agreements. Cash
payments for interest related to debt and capital lease
obligations, net of capitalized interest, aggregated
$138 million, $143 million and $166 million in
2010, 2009 and 2008, respectively.
58
The carrying amounts and estimated fair values of our long-term
debt at December 31, 2010 and 2009 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
Public Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate enhanced equipment notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class G-1,
due through 2016
|
|
$
|
234
|
|
|
$
|
210
|
|
|
$
|
265
|
|
|
$
|
205
|
|
Class G-2,
due 2014 and 2016
|
|
|
373
|
|
|
|
312
|
|
|
|
373
|
|
|
|
261
|
|
Class B-1,
due 2014
|
|
|
49
|
|
|
|
46
|
|
|
|
49
|
|
|
|
35
|
|
Fixed rate special facility bonds, due through 2036
|
|
|
84
|
|
|
|
75
|
|
|
|
85
|
|
|
|
70
|
|
6.75% convertible debentures due in 2039
|
|
|
201
|
|
|
|
293
|
|
|
|
201
|
|
|
|
250
|
|
3.75% convertible debentures due in 2035
|
|
|
|
|
|
|
|
|
|
|
154
|
|
|
|
156
|
|
5.5% convertible debentures due in 2038
|
|
|
123
|
|
|
|
194
|
|
|
|
123
|
|
|
|
166
|
|
3.5% convertible notes due in 2033
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Public Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate equipment notes, due through 2020
|
|
|
696
|
|
|
|
654
|
|
|
|
697
|
|
|
|
592
|
|
Fixed rate equipment notes, due through 2024
|
|
|
1,144
|
|
|
|
1,132
|
|
|
|
1,163
|
|
|
|
985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,904
|
|
|
$
|
2,916
|
|
|
$
|
3,111
|
|
|
$
|
2,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair values of our publicly held long-term debt
were based on quoted market prices or other observable market
inputs when instruments are not actively traded. The fair value
of our non-public debt was estimated using discounted cash flow
analysis based on our borrowing rates for instruments with
similar terms. The fair values of our other financial
instruments approximate their carrying values.
We utilize a policy provider to provide credit support on the
Class G-1
and
Class G-2
certificates. 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.).
We have determined that each of the trusts related to our
aircraft EETCs meet the definition of a variable interest entity
as defined in the Consolidations topic of the
Codification and must be considered for consolidation in our
financial statements. Our assessment of the EETCs considers both
quantitative and qualitative factors, including whether we have
the power to direct the activities and to what extent we
participate in the sharing of benefits and losses. We evaluated
the purpose for which these trusts were established and nature
of risks in each. These trusts were not designed to pass along
variability to us. We concluded that we are not the primary
beneficiary in these trusts due to our involvement in them being
limited to principal and interest payments on the related notes
and the variability created by credit risk related to us and the
likelihood of our defaulting on the notes. Therefore, we have
not consolidated these trusts in our financial statements.
Note 3Operating
Leases
We lease aircraft, as well as airport terminal space, other
airport facilities, office space and other equipment, under
leases which expire in various years through 2035. Total rental
expense for all operating leases in 2010, 2009 and 2008 was
$245 million, $236 million and $243 million,
respectively. We have $31 million in assets that serve as
collateral for letters of credit related to certain of our
leases, which are included in restricted cash.
During 2010, we leased six used Airbus A320 aircraft from a
third party. As of December 31, 2010, five of the six had
been delivered and placed in service and the remaining aircraft
was delivered in December 2010 and placed in service in January
2011. Operating leases were executed for each aircraft upon
delivery for six year terms.
59
At December 31, 2010, 60 of the 160 aircraft we operated
were leased under operating leases, with remaining lease term
expiration dates ranging from 2011 to 2026. We had one
additional aircraft under an operating lease at
December 31, 2010, which was not yet placed in service. As
of December 31, 2010, five of our aircraft lease terms were
scheduled to expire within 18 months, including one EMBRAER
190 aircraft in 2011 and four Airbus A320 in 2012. Five of the
61 aircraft operating leases have variable rate rent payments
based on LIBOR. Leases for 53 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 fixed
amounts that were expected to approximate fair market value at
lease inception.
We executed a supplement to our Terminal 5 lease with the Port
Authority of New York and New Jersey, or PANYNJ, which was
effective in December 2010. Under this supplement, we will lease
the 19.35 acre portion of JFK known as Terminal 6, which is
adjacent to our current facility at Terminal 5. We are
responsible for the demolishing, and related activities, of the
existing Terminal 6 passenger terminal buildings, the costs of
which will be reimbursed by the PANYNJ. We intend to use
Terminal 6 primarily for maintaining, deicing, and parking
aircraft during the term. As part of the lease supplement, we
have committed to ground rental payments for Terminal 6 over the
five year term, which are non-cancelable and included in the
table below.
In March 2010, we announced we will be combining our Darien, CT
and Forest Hills, NY corporate offices and relocating to a new
corporate headquarters in Long Island City, NY. In September
2010, we executed a lease for our new corporate headquarters in
Long Island City for a 12 year term. Rental payments begin
in 2012 and are included in the table below.
Future minimum lease payments under noncancelable operating
leases, including those described above, with initial or
remaining terms in excess of one year at December 31, 2010,
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
|
|
|
Other
|
|
|
Total
|
|
|
2011
|
|
$
|
160
|
|
|
$
|
54
|
|
|
$
|
214
|
|
2012
|
|
|
141
|
|
|
|
50
|
|
|
|
191
|
|
2013
|
|
|
119
|
|
|
|
45
|
|
|
|
164
|
|
2014
|
|
|
128
|
|
|
|
37
|
|
|
|
165
|
|
2015
|
|
|
137
|
|
|
|
33
|
|
|
|
170
|
|
Thereafter
|
|
|
473
|
|
|
|
378
|
|
|
|
851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum operating lease payments
|
|
$
|
1,158
|
|
|
$
|
597
|
|
|
$
|
1,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have entered into sale-leaseback arrangements with a third
party lender for 45 of our operating aircraft, including one
executed in 2008, in which there were no material deferred gains
recorded. The sale-leasebacks occurred simultaneously with the
delivery of the related aircraft to us from their manufacturers.
Each sale-leaseback transaction was structured with a separate
trust set up by the third party lender, the assets of which
consist of the one aircraft initially transferred to it
following the sale by us and the subsequent lease arrangement
with us. Because of their limited capitalization and the
potential need for additional financial support, these trusts
are variable interest entities as defined in the
Consolidations topic of the Codification and must be
considered for consolidation in our financial statements. Our
assessment of each trust considers both quantitative and
qualitative factors, including whether we have the power to
direct the activities and to what extent we participate in the
sharing of benefits and losses of the trusts. JetBlue does not
retain any equity interests in any of these trusts and our
obligations to them are limited to the fixed rental payments we
are required to make to them, which were approximately
$1.10 billion as of December 31, 2010 and are
reflected in the future minimum lease payments in the table
above. Our only interest in these entities are the purchase
options to acquire the aircraft as specified above. Since there
are no other arrangements (either implicit or explicit) between
us and the individual trusts that would result in our absorbing
additional variability from the trusts, we concluded that we are
not the primary beneficiary of these trusts. We account for
these leases as operating leases, following the appropriate
lease guidance as required by the Leases topic in the
Codification.
60
Operating Leases as Lessor: In 2008, we leased
two of our owned EMBRAER 190 aircraft, each with a lease term of
12 years. The net book value of these two aircraft was
approximately $48 million and $50 million as of
December 31, 2010 and 2009, respectively, and is included
in other assets on our consolidated balance sheet. Under the
terms of these leases, we recorded approximately
$6 million, $6 million, and $2 million in rental
income during 2010, 2009 and 2008, respectively. Future lease
payments due to us under these leases are approximately
$6 million per year through 2020.
In October 2008, we began operating out of our new Terminal 5 at
JFK, or Terminal 5. The construction and operation of this
facility is governed by various lease agreements with the
PANYNJ. Under the terms of the facility 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. 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 are
reflected in the future minimum lease payments table in
Note 3, and facility rents which commenced in 2008 when we
took beneficial occupancy of Terminal 5, and are included below.
The facility rents are based on the number of passengers
enplaned out of the new terminal, subject to annual minimums.
The lease terms end in 2038 and we have a one-time early
termination option in 2033.
We are considered the owner of the Project for financial
reporting purposes only and have been required to reflect an
asset and liability for the Project on our consolidated balance
sheets since construction commenced in 2005. Since certain
elements of the Project, including the parking garage and
AirTrain Connector, are not subject to the underlying ground
lease, following their delivery to and acceptance by the PANYNJ
in October 2008, we removed them from our consolidated balance
sheets. 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 consolidated balance sheets
and be accounted for as a financing.
Through December 31, 2010, total costs incurred for the
elements of the Project which are subject to the underlying
ground lease were $636 million, $558 million of which
is reflected as Assets Constructed for Others and
$78 million of which are leasehold improvements included in
ground property and equipment in our consolidated balance
sheets. These amounts reflect a non-cash $133 million
reduction in 2008 for costs incurred for the elements that were
not subject to the underlying ground lease. Assets Constructed
for Others are being amortized over the shorter of the
25 year non-cancelable lease term or their economic life.
We recorded $22 million, $21 million and
$5 million in amortization expense during 2010, 2009 and
2008, respectively.
The PANYNJ has reimbursed us for the amounts currently included
in Assets Constructed for Others, exclusive of capitalized
interest of $68 million. These reimbursements and the
capitalized interest are reflected as Construction Obligation in
our consolidated balance sheets. As facility rents are paid,
they are treated as debt service on the Construction Obligation,
with the portion not relating to interest reducing the principal
balance. Minimum estimated facility payments, including
escalations, associated with the facility lease are estimated to
be $38 million in 2011, $39 million in 2012,
$40 million in each of 2013 through 2015 and
$737 million thereafter. The portion of these scheduled
payments serving to reduce the principal balance of the
Construction Obligation is $10 million in 2011,
$12 million in 2012, $13 million in 2013,
$14 million in 2014 and $14 million in 2015. Payments
could exceed these amounts depending on future enplanement
levels at JFK. Scheduled facility payments representative of
interest totaled $27 million, $32 million and
$6 million in 2010, 2009 and 2008, respectively.
We have subleased a portion of Terminal 5, primarily space for
concessionaires. Minimum lease payments due to us are subject to
various escalation amounts through 2019 and also include a
percentage of gross receipts, which may vary from month to
month. Future minimum lease payments due to us are estimated to
be $10 million per year over each of the next five years.
61
|
|
Note 5
|
Stockholders
Equity
|
In May 2010, at our annual meeting of stockholders, shareholders
approved an amendment to our Amended and Restated Certificate of
Incorporation to increase the Companys authorized capital
from 500 million common shares to 900 million common
shares. Our authorized shares of capital stock also consist of
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.
On June 9, 2009, in conjunction with the public offering of
the 6.75% Debentures described in Note 2, we also
completed a public offering of 26,450,000 shares of our
common stock at a price of $4.25 per share, raising net proceeds
of approximately $109 million, after deducting discounts
and commissions paid to the underwriters and other expenses
incurred in connection with the offering. Approximately 15.6% of
this offering was reserved for and purchased by Deutsche
Lufthansa AG, to allow them to maintain their pre-offering
ownership percentage.
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, 2010, we had a total of
186.9 million shares of our common stock reserved for
issuance related to our CSPP, our 2002 Plan, our convertible
debt, and our share lending facility. As of December 31,
2010, we had a total of 27.6 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 share-based compensation.
62
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
97
|
|
|
$
|
61
|
|
|
$
|
(84
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible debt, net of income taxes and
discretionary profit sharing
|
|
|
11
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders after
assumed conversion for diluted earnings per share
|
|
$
|
108
|
|
|
$
|
70
|
|
|
$
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic earnings (loss)
per share
|
|
|
275,364
|
|
|
|
260,486
|
|
|
|
226,262
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
2,611
|
|
|
|
2,972
|
|
|
|
|
|
Convertible debt
|
|
|
68,605
|
|
|
|
68,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding and assumed
conversions for diluted earnings (loss) per share
|
|
|
346,580
|
|
|
|
332,063
|
|
|
|
226,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded from EPS calculation (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of our convertible debt since
assumed conversion would be antidilutive
|
|
|
|
|
|
|
9.2
|
|
|
|
38.3
|
|
Shares issuable upon exercise of outstanding stock options since
assumed exercise would be antidilutive
|
|
|
24.0
|
|
|
|
23.9
|
|
|
|
27.2
|
|
As of December 31, 2010, a total of approximately
18.0 million shares of our common stock, which were lent 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. 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 to us (or identical shares or, in certain circumstances
of default by the counterparty, 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.
|
|
Note 7
|
Share-Based
Compensation
|
Fair Value Assumptions: We use a
Black-Scholes-Merton option pricing model to estimate the fair
value of share-based awards in accordance with the
Compensation-Stock Compensation topic of the Codification, 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.
63
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, the Compensation topic of the Codification
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.
The following table shows our assumptions used to compute the
stock-based compensation expense for stock option grants for the
year ended December 31, 2008. We did not grant any stock
options in 2009 or 2010.
|
|
|
|
|
|
|
2008
|
|
Expected term (years)
|
|
|
6.0
|
|
Volatility
|
|
|
47.7
|
%
|
Risk-free interest rate
|
|
|
3.0
|
%
|
Weighted average fair value of stock options
|
|
$
|
3.45
|
|
Unrecognized stock-based compensation expense was approximately
$14 million as of December 31, 2010, relating to a
total of 3.7 million unvested restricted stock units and
1.1 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 year was
approximately $9 million in each of the years ended
December 31, 2010, 2009 and 2008.
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 vest in annual installments over three
years or could be accelerated 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at beginning of year
|
|
|
3,310,374
|
|
|
$
|
5.13
|
|
|
|
1,735,671
|
|
|
$
|
6.22
|
|
|
|
71,418
|
|
|
$
|
10.42
|
|
Granted
|
|
|
2,086,973
|
|
|
|
5.36
|
|
|
|
2,294,240
|
|
|
|
4.61
|
|
|
|
1,799,849
|
|
|
|
6.12
|
|
Vested
|
|
|
(1,262,459
|
)
|
|
|
5.32
|
|
|
|
(595,105
|
)
|
|
|
6.28
|
|
|
|
(23,805
|
)
|
|
|
10.42
|
|
Forfeited
|
|
|
(453,875
|
)
|
|
|
5.21
|
|
|
|
(124,432
|
)
|
|
|
5.36
|
|
|
|
(111,791
|
)
|
|
|
6.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of year
|
|
|
3,681,013
|
|
|
$
|
5.18
|
|
|
|
3,310,374
|
|
|
$
|
5.13
|
|
|
|
1,735,671
|
|
|
$
|
6.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The total intrinsic value, determined as of the date of vesting,
of restricted stock units vested and converted to shares of
common stock during the twelve months ended December 31,
2010 and 2009 was $7 million and $3 million,
respectively.
During 2008, we also began issuing deferred stock units under
the 2002 Plan. These awards vest immediately upon being granted
to members of the Board of Directors and shares are issued six
months and one day following the Directors departure from
the Board. During the year ended December 31, 2010, we
granted 51,975 deferred stock units at a weighted average grant
date fair value of $6.06, all of which remain outstanding at
December 31, 2010.
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.
The following is a summary of stock option activity for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
25,592,883
|
|
|
$
|
12.88
|
|
|
|
27,242,115
|
|
|
$
|
12.47
|
|
|
|
29,731,932
|
|
|
$
|
12.30
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,000
|
|
|
|
7.03
|
|
Exercised
|
|
|
(1,158,187
|
)
|
|
|
1.61
|
|
|
|
(960,626
|
)
|
|
|
0.78
|
|
|
|
(718,226
|
)
|
|
|
1.12
|
|
Forfeited
|
|
|
(27,605
|
)
|
|
|
11.32
|
|
|
|
(93,062
|
)
|
|
|
11.00
|
|
|
|
(461,316
|
)
|
|
|
11.79
|
|
Expired
|
|
|
(806,597
|
)
|
|
|
13.40
|
|
|
|
(595,544
|
)
|
|
|
13.99
|
|
|
|
(1,364,275
|
)
|
|
|
14.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
23,600,494
|
|
|
|
13.42
|
|
|
|
25,592,883
|
|
|
|
12.88
|
|
|
|
27,242,115
|
|
|
|
12.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at end of year
|
|
|
22,504,450
|
|
|
|
13.47
|
|
|
|
23,101,559
|
|
|
|
12.86
|
|
|
|
22,464,451
|
|
|
|
12.38
|
|
Available for future grants (1)
|
|
|
39,997,981
|
|
|
|
|
|
|
|
29,189,222
|
|
|
|
|
|
|
|
19,867,014
|
|
|
|
|
|
|
|
|
(1) |
|
On January 1, 2011, the number of shares reserved for
issuance was increased by 11,787,492 shares. |
The following is a summary of outstanding stock options at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,471,926
|
|
|
|
0.8
|
|
|
$
|
2.76
|
|
|
$
|
6
|
|
|
|
1,471,926
|
|
|
|
0.8
|
|
|
$
|
2.76
|
|
|
$
|
6
|
|
$7.03 to $29.71
|
|
|
22,128,568
|
|
|
|
3.6
|
|
|
|
14.13
|
|
|
|
|
|
|
|
21,032,524
|
|
|
|
3.5
|
|
|
|
14.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,600,494
|
|
|
|
3.4
|
|
|
|
13.42
|
|
|
$
|
6
|
|
|
|
22,504,450
|
|
|
|
3.3
|
|
|
|
13.47
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value, determined as of the date of
exercise, of options exercised during the twelve months ended
December 31, 2010, 2009 and 2008 was $5 million,
$4 million and $3 million, respectively. We received
$2 million, $1 million and $1 million in cash
from option exercises for the years ended December 31,
2010, 2009 and 2008, 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, by its terms,
terminates no later than December 31, 2011.
65
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,
by its terms, terminates no later than the last business day of
April 2012.
The CSPP has a series of successive overlapping
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. 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.
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
|
Available for future purchases, beginning of year
|
|
|
22,169,558
|
|
|
|
|
|
|
|
23,550,382
|
|
|
|
|
|
|
|
20,076,845
|
|
|
|
|
|
Shares reserved for issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,447,803
|
|
|
|
|
|
Common stock purchased
|
|
|
(1,245,599
|
)
|
|
$
|
5.96
|
|
|
|
(1,380,824
|
)
|
|
$
|
4.82
|
|
|
|
(1,974,266
|
)
|
|
$
|
4.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future purchases, end of year
|
|
|
20,923,959
|
|
|
|
|
|
|
|
22,169,558
|
|
|
|
|
|
|
|
23,550,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The compensation topic of the Codification 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.
LiveTV Management Incentive Plan. In April
2009, our Board of Directors approved the LiveTV Management
Incentive Plan, or MIP, an equity based incentive plan for
certain members of leadership at our wholly-owned subsidiary,
LiveTV. Notional equity units are available under the MIP,
representing up to 12% of the notional equity interest of
LiveTV, with the award value based on the increase in the value
of the LiveTV entity over time subject to certain adjustments.
Awards are payable in cash upon the achievement of certain
events, or in February 2013, whichever is first. Compensation
cost will be recorded ratably over the service period ending in
2012. As of December 31, 2010, we have recorded
approximately $2 million as a liability related to the
outstanding awards we expect to ultimately vest, including an
estimate for pre-vesting forfeitures. During 2010, approximately
$2 million of previously accrued awards under the MIP were
settled in cash.
66
Purchased technology, which is an intangible asset related to
our September 2002 acquisition of the membership interests of
LiveTV, was 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 became fully amortized
in 2009.
Through December 31, 2010, LiveTV had installed in-flight
entertainment systems for other airlines on 518 aircraft and had
firm commitments for installations on 143 additional aircraft
scheduled to be installed through 2014, with options for 91
additional installations through 2014. Revenues in 2010, 2009
and 2008 were $72 million, $65 million and
$58 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 and was $35 million and $29 million at
December 31, 2010 and 2009, respectively. Deferred profit
to be recognized on installations completed through
December 31, 2010 will be approximately $3 million per
year from 2011 through 2013, $2 million per year in 2014
and 2015 and $9 million thereafter. The net book value of
equipment installed for other airlines was approximately
$114 million and $64 million as of December 31,
2010 and 2009, respectively.
The provision (benefit) for income taxes consisted of the
following for the years ended December 31 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
55
|
|
|
$
|
35
|
|
|
$
|
(6
|
)
|
State
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit)
|
|
$
|
62
|
|
|
$
|
42
|
|
|
$
|
(6
|
)
|
Current income tax expense
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
64
|
|
|
$
|
43
|
|
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income tax expense (benefit) at statutory rate
|
|
$
|
57
|
|
|
$
|
36
|
|
|
$
|
(31
|
)
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax, net of federal benefit
|
|
|
6
|
|
|
|
4
|
|
|
|
(4
|
)
|
Non-deductible meals
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
Non-deductible costs
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Valuation allowance
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
23
|
|
Other, net
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
64
|
|
|
$
|
43
|
|
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were cash payments for income taxes of $1 million in
2010 and none in 2009 or 2008.
The net deferred taxes below include a current net deferred tax
asset of $89 million and a long-term net deferred tax
liability of $327 million at December 31, 2010, and a
current net deferred tax asset of $74 million and a
long-term net deferred tax liability of $259 million at
December 31, 2009.
67
The components of our deferred tax assets and liabilities as of
December 31 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
186
|
|
|
$
|
203
|
|
Employee benefits
|
|
|
35
|
|
|
|
26
|
|
Deferred revenue/gains
|
|
|
86
|
|
|
|
82
|
|
Derivative instruments
|
|
|
6
|
|
|
|
4
|
|
Investment securities
|
|
|
|
|
|
|
15
|
|
Capital loss carryforwards
|
|
|
20
|
|
|
|
5
|
|
Other
|
|
|
26
|
|
|
|
21
|
|
Valuation allowance
|
|
|
(21
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
338
|
|
|
|
331
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
|
(576
|
)
|
|
|
(512
|
)
|
Derivative instruments
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(576
|
)
|
|
|
(516
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(238
|
)
|
|
$
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, we had U.S. Federal regular and
alternative minimum tax net operating loss (NOL)
carryforwards of $519 million and $484 million,
respectively, which begin to expire in 2023. In addition, at
December 31, 2010, we had deferred tax assets associated
with state NOL and credit carryforwards of $17 million and
$3 million, respectively. The state NOLs begin to expire in
2011, while the credits carryforward indefinitely. Our NOL
carryforwards at December 31, 2010 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, 2010, 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 periods in which the related temporary
differences will become deductible. At December 31, 2010,
we provided a $21 million valuation allowance to reduce the
deferred tax assets to an amount that we consider is more likely
than not to be realized. Our valuation allowance at
December 31, 2010 includes $20 million related to a
capital loss carryforward which expires in 2015 and 2016.
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 period
|
|
|
6
|
|
|
|
|
|
|
Unrecognized tax benefits December 31, 2008
|
|
$
|
8
|
|
Increases for tax positions taken during the period
|
|
|
1
|
|
|
|
|
|
|
Unrecognized tax benefits December 31, 2009
|
|
$
|
9
|
|
Increases for tax positions taken during the period
|
|
|
2
|
|
Unrecognized tax benefits December 31, 2010
|
|
$
|
11
|
|
|
|
|
|
|