UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

or

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                   

Commission file number: 000-49728

JETBLUE AIRWAYS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware 87-0617894
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
Identification No.)
118-29 Queens Boulevard, Forest Hills, New York 11375
(Address of principal executive offices) (Zip Code)

(718) 286-7900

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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.    [X] Yes        [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act.    


Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    [ ] Yes         [X] No

As of September 30, 2006, there were 175,712,310 shares of the registrant's common stock, par value $0.01, outstanding.

    



JetBlue Airways Corporation

FORM 10-Q

INDEX


    Page   #'s
PART I.    FINANCIAL INFORMATION
Item 1. Financial Statements 1
  Condensed Consolidated Balance Sheets – September 30, 2006 and December 31, 2005 1
  Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2006 and 2005 2
  Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2006 and 2005 3
  Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II.    OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 23
Item 6. Exhibits 23


Table of Contents

PART 1.    FINANCIAL INFORMATION

Item 1.    Financial Statements

JETBLUE AIRWAYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)


  September 30,
2006		 December 31,
2005
  (unaudited)  
ASSETS  
 
CURRENT ASSETS  
 
Cash and cash equivalents $ 8
$ 6
Investment securities 448
478
Receivables, less allowance 81
94
Prepaid expenses and other 83
57
Total current assets 620
635
PROPERTY AND EQUIPMENT  
 
Flight equipment 3,000
2,567
Predelivery deposits for flight equipment 284
298
  3,284
2,865
Less accumulated depreciation 234
180
  3,050
2,685
Other property and equipment 421
352
Less accumulated depreciation 86
59
  335
293
Total property and equipment 3,385
2,978
OTHER ASSETS  
 
Purchased technology, net 35
43
Assets constructed for others 153
30
Other 236
206
Total other assets 424
279
TOTAL ASSETS $ 4,429
$ 3,892
LIABILITIES AND STOCKHOLDERS' EQUITY  
 
CURRENT LIABILITIES  
 
Accounts payable $ 127
$ 99
Air traffic liability 362
243
Accrued salaries, wages and benefits 73
58
Other accrued liabilities 83
53
Short-term borrowings 52
65
Current maturities of long-term debt and capital lease 170
158
Total current liabilities 867
676
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION 2,338
2,103
DEFERRED TAXES AND OTHER LIABILITIES  
 
Deferred taxes and other 184
172
Construction obligation 123
30
Total deferred taxes and other liabilities 307
202
STOCKHOLDERS' EQUITY  
 
Common stock, 175,712,310 and 172,621,972 shares issued  
 
and outstanding in 2006 and 2005, respectively 2
2
Additional paid-in capital 793
764
Retained earnings 127
145
Accumulated other comprehensive loss (5
)
 —
Total stockholders' equity 917
911
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,429
$ 3,892

See accompanying notes to condensed consolidated financial statements.    

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Table of Contents

JETBLUE AIRWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in millions, except per share amounts)


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
OPERATING REVENUES  
 
 
 
Passenger $ 589
$ 432
$ 1,631
$ 1,200
Other 39
21
99
55
Total operating revenues 628
453
1,730
1,255
OPERATING EXPENSES  
 
 
 
Salaries, wages and benefits 140
108
406
312
Aircraft fuel 212
138
564
336
Landing fees and other rents 42
27
117
80
Depreciation and amortization 32
30
103
81
Aircraft rent 27
18
74
54
Sales and marketing 27
22
77
61
Maintenance materials and repairs 22
19
66
47
Other operating expenses 85
77
260
205
Total operating expenses 587
439
1,667
1,176
OPERATING INCOME 41
14
63
79
OTHER INCOME (EXPENSE)  
 
 
 
Interest expense (45
)
 (28
)
 (124
)
 (74
)
Capitalized interest 7
3
19
11
Interest income and other (2
)
 7
21
15
Total other income (expense) (40
)
 (18
)
 (84
)
 (48
)
INCOME (LOSS) BEFORE INCOME TAXES 1
(4
)
 (21
)
 31
Income tax expense (benefit) 1
(7
)
 (3
)
 9
NET INCOME (LOSS) $ —
$ 3
$ (18
)
 $ 22
EARNINGS (LOSS) PER COMMON SHARE:  
 
 
 
Basic $ —
$ 0.02
$ (0.11
)
 $ 0.14
Diluted $ —
$ 0.02
$ (0.11
)
 $ 0.13

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

JETBLUE AIRWAYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)


  Nine Months Ended
September 30,
  2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income (loss) $ (18
)
 $ 22
Adjustments to reconcile net income (loss) to net cash  
 
provided by operating activities:  
 
Deferred income taxes (benefit) (3
)
 9
Depreciation 92
71
Amortization 14
11
Stock-based compensation 16
1
Changes in certain operating assets and liabilities 112
39
Other, net (4
)
 (7
)
Net cash provided by operating activities 209
146
CASH FLOWS FROM INVESTING ACTIVITIES  
 
Capital expenditures (793
)
 (654
)
Predelivery deposits for flight equipment (85
)
 (136
)
Proceeds from sale of flight equipment 62
—
Assets constructed for others (90
)
 —
Purchase of held-to-maturity investments (10
)
 (5
)
Proceeds from maturities of held-to-maturity investments 10
13
Purchase of available-for-sale securities (532
)
 (585
)
Sale of available-for-sale securities 560
535
Other, net (9
)
 (6
)
Net cash used in investing activities (887
)
 (838
)
CASH FLOWS FROM FINANCING ACTIVITIES  
 
Proceeds from:  
 
Issuance of common stock 13
11
Issuance of long-term debt 486
718
Aircraft sale and leaseback transactions 354
50
Short-term borrowings 41
40
Construction obligation 117
—
Repayment of long-term debt (273
)
 (75
)
Repayment of short-term borrowings (54
)
 (38
)
Other, net (4
)
 (8
)
Net cash provided by financing activities 680
698
INCREASE IN CASH AND CASH EQUIVALENTS 2
6
Cash and cash equivalents at beginning of period 6
19
Cash and cash equivalents at end of period $ 8
$ 25

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

JETBLUE AIRWAYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

Note 1 — Summary of Significant Accounting Policies

Basis of Presentation:    Our condensed consolidated financial statements include the accounts of JetBlue Airways Corporation and our subsidiaries, collectively ‘‘we’’ or the ‘‘Company’’, with all intercompany transactions and balances having been eliminated. Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. These condensed consolidated financial statements and related notes should be read in conjunction with our 2005 audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005.

These condensed consolidated financial statements are unaudited and have been prepared by us following the rules and regulations of the Securities and Exchange Commission, or the SEC, and, in our opinion, reflect all adjustments including normal recurring items which are necessary to present fairly the results for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations; however, we believe that the disclosures are adequate to make the information presented not misleading. Operating results for the periods presented herein are not necessarily indicative of the results that may be expected for the entire year.

Stock-Based Compensation:    Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, and related interpretations, or SFAS 123(R), to account for stock-based compensation using the modified prospective transition method and therefore will not restate our prior period results. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB No. 25, and revises guidance in SFAS 123, Accounting for Stock-Based Compensation. Among other things, SFAS 123(R) requires that compensation expense be recognized in the financial statements for share-based awards based on the grant date fair value of those awards. The modified prospective transition method applies to (a) unvested stock options under our 2002 Stock Incentive Plan, or 2002 Plan, and issuances under our Crewmember Stock Purchase Plan, or CSPP, outstanding as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123, and (b) any new share-based awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Additionally, stock-based compensation expense includes an estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the vesting term. We have recorded $5 million and $16 million of stock-based compensation expense, net of estimated forfeitures, during the three and nine months ended September 30, 2006, respectively, as a result of our adoption of SFAS 123(R). See Note 2 for information on the assumptions we used to calculate the fair value of stock-based compensation.

Prior to January 1, 2006, we accounted for these stock-based compensation plans in accordance with APB No. 25 and related interpretations. Accordingly, compensation expense for a stock option grant was recognized only if the exercise price was less than the market value of our common stock on the grant date. Compensation expense was not recognized under our CSPP as the purchase price of the stock issued thereunder was not less than 85% of the lower of the fair market value of our common stock at the beginning of each offering period or at the end of each purchase period under the plan. Prior to our adoption of SFAS 123(R), as required under the disclosure provisions of SFAS 123, as amended, we provided pro forma net income (loss) and earnings (loss) per common share for each period as if we had applied the fair value method to measure stock-based compensation expense.

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Table of Contents

SFAS 123(R) requires the benefits associated with tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow as previously required. For the three and nine months ended September 30, 2006, we did not record any excess tax benefit generated from option exercises.

The table below summarizes the impact on our results of operations for the three and nine months ended September 30, 2006 of outstanding stock options under our 2002 Plan and issuances under our CSPP recognized under the provisions of SFAS 123(R) (in millions, except per share data):


  Three Months Ended
September 30, 2006		 Nine Months Ended
September 30, 2006
Stock-based compensation expense:  
 
Issuances under crewmember stock purchase plan $ 3
$ 11
Employee stock options 2
5
Income tax benefit —
(2
)
Decrease in net income $ 5
$ 14
Decrease in earnings or increase in loss per common share:  
 
Basic $ 0.03
$ 0.08
Diluted $ 0.03
$ 0.08

Prior to our adoption of SFAS 123(R), we presented unearned compensation as a separate component of stockholders' equity. In accordance with the provisions of SFAS 123(R), on January 1, 2006, we reclassified unearned compensation as additional paid-in capital on our balance sheet.

The following table illustrates the effect on net income and earnings per common share for the three and nine months ended September 30, 2005 as if we had applied the fair value method to measure stock-based compensation, as required under the disclosure provisions of SFAS No. 123 (in millions, except per share amounts):


  Three Months Ended
September 30, 2005		 Nine Months Ended
September 30, 2005
Net income, as reported $ 3
$ 22
Add: Stock-based compensation expense included  
 
in reported net income, net of tax 1
1
Deduct: Stock-based compensation expense determined  
 
under the SFAS 123 fair value method, net of tax  
 
Crewmember stock purchase plan (3
)
 (7
)
Employee stock options (7
)
 (13
)
Pro forma net income (loss) $ (6
)
 $ 3
Earnings per common share:  
 
Basic – as reported $ 0.02
$ 0.14
Basic – pro forma $ (0.04
)
 $ 0.02
Diluted – as reported $ 0.02
$ 0.13
Diluted – pro forma $ (0.04
)
 $ 0.02

Note 2 — Stock-Based Compensation

We use a Black-Scholes-Merton option pricing model to estimate the fair value of share-based awards under SFAS 123(R), which is the same valuation technique we previously used for pro forma disclosures under SFAS 123. The Black-Scholes-Merton option pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility. We have reviewed our

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Table of Contents

historical pattern of option exercises 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 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 CSPP valuation is based on the length of each purchase period as measured at the beginning of the offering period.

We estimate the expected volatility of our common stock at the grant date using a blend of 75% historical volatility of our common stock and 25% implied volatility of two-year publicly traded options on our common stock as of the option grant date. Our decision to use a blend of historical and implied volatility was based upon the volume of actively traded options on our common stock and our belief that historical volatility alone may not be completely representative of future stock price trends.

Our risk-free interest rate assumption is determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Therefore, we assumed an expected dividend yield of zero.

Additionally, SFAS 123(R) requires us to estimate pre-vesting option forfeitures at the time of grant and periodically revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We record stock-based compensation expense only for those awards expected to vest using an estimated forfeiture rate based on our historical pre-vesting forfeiture data. Previously, we accounted for forfeitures as they occurred under the pro forma disclosure provisions of SFAS 123 for periods prior to 2006.

The following table shows our assumptions used to compute the stock-based compensation expense and pro forma information for stock option grants and purchase rights under our CSPP issued during the three and nine months ended September 30, 2006 and 2005.


  Stock Options
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Expected term (years) 4.1-6.8
2.5-5.9
4.1-6.8
2.5-5.9
Volatility 44.9
%
 38.0
%
 44.4
%
 38.0
%
Risk-free interest rate 4.8
%
 4.2
%
 4.8
%
 3.9
%

  CSPP
  Nine Months Ended
September 30,
  2006 2005
Expected term (years) 0.5-2.0
0.5-2.0
Volatility 44.6
%
 38.0
%
Risk-free interest rate 5.0
%
 3.4
%

The weighted average grant date fair value of options granted during the three and nine months ended September 30, 2006 was $4.88 and $5.02 per option, respectively. The weighted average grant date fair value of options granted during the three and nine months ended September 30, 2005 was $5.30 and $5.09 per option, respectively. Unrecognized stock-based compensation expense was approximately $36 million as of September 30, 2006, relating to a total of ten million unvested stock options under our 2002 Plan and purchase rights under our CSPP. We expect to recognize this

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stock-based compensation expense over a weighted average period of approximately three years. The total fair value of options vested during the nine months ended September 30, 2006 was approximately $2 million.

Stock Incentive Plan:    Prior to December 31, 2005, options issued under our 2002 Plan had vesting terms ranging from three to seven years. For issuances under the 2002 Plan beginning in 2006, vesting terms were revised so that options granted will now vest in equal installments over a period of three or five years. All options issued under the 2002 Plan expire 10 years from the date of grant.

The following is a summary of stock option activity for the three and nine months ended September 30, 2006:


  Three Months Ended
September 30, 2006		 Nine Months Ended
September 30, 2006
    Weighted Average
Exercise Price		   Weighted Average
Exercise Price
  Shares Shares
Outstanding at beginning of period 32,208,768
$ 11.96
31,086,422
$ 11.52
Granted 470,050
10.44
3,699,499
10.76
Exercised (238,765
)
 2.33
(2,079,913
)
 1.91
Forfeited (664,625
)
 13.98
(930,580
)
 14.45
Outstanding at September 30, 2006 31,775,428
$ 11.97
31,775,428
$ 11.97

As of September 30, 2006, we had 6,268,546 shares available for future grants. The following is a summary of outstanding stock options at September 30, 2006:


  Options Outstanding Options Vested
Range of
exercise prices		 Shares Weighted
Average
Remaining
Contractual
Life (years)		 Weighted
Average
Exercise
Price		 Aggregate
Intrinsic
Value
(millions)		 Shares Weighted
Average
Weighted
Remaining
Contractual
Life (years)		 Weighted
Average
Exercise
Price		 Aggregate
Intrinsic
Value
(millions)
$0.33 to $8.00 6,417,840
4.4
$ 1.95
$ 47.5
6,379,970
4.4
$ 1.93
$ 47.3
$9.69 to $29.71 25,357,588
7.6
14.50
—
19,674,953
7.3
14.95
—
  31,775,428
7.0
$ 11.97
$ 47.5
26,054,923
6.6
$ 11.76
$ 47.3

The total intrinsic value, determined as of the date of exercise, of options exercised during the three months and nine months ended September 30, 2006 was $2 million and $20 million, respectively. The total intrinsic value of options exercised during the three months and nine months ended September 30, 2005 was $4 million and $13 million, respectively. We received $1 million and $4 million in cash from option exercises for the three and nine months ended September 30, 2006, respectively.

Stock Purchase Plan:    The following is a summary of CSPP share reserve activity for the nine months ended September 30, 2006:


  Shares
Available for future purchases, January 1, 2006 13,706,245
Shares reserved for issuance 5,178,659
Common stock purchased (1,010,456
)
Available for future purchases, September 30, 2006 17,874,448

We received $9 million for shares issued under our CSPP during the nine months ended September 30, 2006.

Note 3 — Long-term Debt and Capital Lease Obligation

During the nine months ended September 30, 2006, we issued $294 million in fixed rate equipment notes due through 2018, which are secured by eight Airbus A320 aircraft and one

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Table of Contents

EMBRAER 190 aircraft and $69 million in floating rate equipment notes, which are secured by two Airbus A320 aircraft. We also entered into a capital lease agreement for one Airbus A320 aircraft and recorded $37 million in non-cash financing, which is payable through 2020. At September 30, 2006, the weighted average interest rate of all of our long-term debt and capital lease obligation was 6.3%, and scheduled maturities are $43 million for the remainder of 2006, $178 million in 2007, $213 million in 2008, $128 million in each of 2009 and 2010 and $1.82 billion thereafter. The weighted average interest rate of our outstanding short-term borrowings at September 30, 2006 and December 31, 2005 was 7.1% and 6.1%, respectively.

Through September 2006, we refinanced $123 million of debt associated with five owned Airbus A320 aircraft, which eliminated all financial covenants associated with our debt instruments. In September 2006, we sold two Airbus A320 aircraft for $62 million and repaid $32 million in associated debt, which resulted in a gain of $7 million that is reflected as a reduction to depreciation and amortization expense. We have an agreement to sell three additional Airbus A320 aircraft during the fourth quarter of 2006.

In June 2006, we filed an automatic shelf registration statement on Form S-3 with the SEC relating to our sale in one or more public offerings of debt securities, pass through certificates, common stock, preferred stock and/or other securities. Through September 30, 2006, we had not issued any securities under this registration statement.

Note 4 — Income Taxes

Our effective tax rate differs from the federal statutory rate primarily due to non-deductible expenses, and is offset somewhat by state tax credits.

Note 5 — Assets Constructed for Others

In November 2005, we executed a lease agreement with the Port Authority of New York and New Jersey, or the PANYNJ, for the construction and operation of a new terminal at New York's John F. Kennedy International Airport, or JFK, which the PANYNJ will own. We have evaluated this lease and have concluded that we bear substantially all of the construction period risk, as defined in Emerging Issues Task Force Issue 97-10, The Effect of Lessee Involvement in Asset Construction. As a result, we are considered the owner of the project for financial reporting purposes only and are required to reflect an asset and liability for in-process construction related to this project on our balance sheet. In 2006, we have expended $124 million in project costs, which are reflected as Assets Constructed for Others in the accompanying condensed consolidated balance sheets. The PANYNJ is reimbursing us for the costs of constructing the project in accordance with the lease. These reimbursements totaled $117 million through September 30, 2006 and are reflected as Construction Obligation in other long-term liabilities in our condensed consolidated balance sheets.

Following the construction period, we currently do not anticipate that we will have satisfied the sale and leaseback accounting criteria outlined in SFAS No. 98, Accounting for Leases, due to our continuing involvement in the property; therefore the completed project and related liability will remain on our balance sheet and be accounted for as a financing.

Note 6 — Comprehensive Income (Loss)

Comprehensive income (loss) includes changes in the fair value and reclassifications into earnings of amounts previously deferred related to our crude oil and heating oil financial derivative instruments, which qualify for hedge accounting in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Comprehensive loss was $7 million and $23 million for the three months and nine months ended September 30, 2006, respectively. Comprehensive loss was $1 million for the three months ended September 30, 2005 and comprehensive income was $18 million for the nine months ended September 30, 2005.

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Note 7 — Earnings (Loss) Per Share

The following table shows how we computed basic and diluted earnings (loss) per common share (dollars in millions; share data in thousands):


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Numerator:  
 
 
 
Net income (loss) $ —
$ 3
$ (18
)
 $ 22
Denominator:  
 
 
 
Weighted average shares outstanding for basic earnings (loss) per share 175,569
158,041
174,538
157,313
Effect of dilutive securities:  
 
 
 
Employee stock options —
8,153
—
8,497
Unvested common stock —
45
—
46
Adjusted weighted average shares outstanding and assumed conversions for diluted earnings (loss) per share 175,569
166,239
174,538
165,856

For the three and nine months ended September 30, 2006, a total of 20.8 million shares issuable upon conversion of our convertible debt were excluded from the diluted earnings (loss) per share computation since the assumed conversion would be anti-dilutive. For the three and nine months ended September 30, 2005, 20.8 million and 16.8 million shares, respectively, were excluded.

We also excluded 31.8 million and 31.7 million shares issuable upon exercise of outstanding stock options for the three and nine months ended September 30, 2006, respectively, from the diluted earnings (loss) per share computation since either their exercise price was greater than the average market price of our common stock or they were otherwise anti-dilutive. For the three and nine months ended September 30, 2005, 13.0 million and 12.3 million shares, respectively, were excluded.

Note 8 — Employee Retirement Plan

We sponsor a retirement savings 401(k) defined contribution plan and a profit sharing retirement plan, or the Plan, covering all of our employees. Our contributions expensed for the Plan for the three months ended September 30, 2006 and 2005 were $2 million and $1 million, respectively, and contributions expensed for the Plan for the nine months ended September 30, 2006 and 2005 were $7 million and $11 million, respectively.

Note 9 — Commitments

As of September 30, 2006, our firm aircraft orders consisted of 87 Airbus A320 aircraft, 80 EMBRAER 190 aircraft and 32 spare engines scheduled for delivery through 2012. Committed expenditures for these aircraft and related flight equipment, including estimated amounts for contractual price escalations and predelivery deposits, will be approximately $315 million for the remainder of 2006, $1.00 billion in 2007, $1.05 billion in 2008, $1.19 billion in 2009, $1.24 billion in 2010 and $1.04 billion thereafter.

During the nine months ended September 30, 2006, we entered into sale and leaseback transactions for 14 EMBRAER 190 aircraft as well as leases for certain other facilities and equipment. We deferred $9 million in gains related to these sale and leaseback transactions, which are being recognized on a straight-line basis over their 18-year lease terms as a reduction to aircraft rent expense. Future minimum lease payments associated with these operating leases totaled $531 million at September 30, 2006. These amounts are in addition to the minimum lease payments described in Note 3 to our audited financial statements included in our 2005 Form 10-K.

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Note 10 — Financial Instruments and Risk Management

The fair value of our $425 million aggregate principal amount of fixed rate convertible debt, based on quoted market prices, was $377 million and $438 million at September 30, 2006 and December 31, 2005, respectively. The fair value of our other long-term debt, which approximated its carrying value, was estimated using other fixed rate debt discounted cash flow analysis based on our current incremental borrowing rates for instruments with similar terms. The carrying values of all other financial instruments approximated their fair values.

The Company is exposed to the effect of changes in the price and availability of aircraft fuel. To manage this risk, we periodically purchase crude or heating oil option and swap contracts. The following is a summary of our derivative contracts (in millions, except as otherwise indicated):


  2006 2005
At September 30:  
 
Fair value of derivative instruments $ (10
)
 $ 15
Longest remaining term (months) 12
3
Hedged volume (barrels, in thousands) 3,125
895

  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2006 2005 2006 2005
Hedge effectiveness net gains recognized in aircraft fuel expense $ 1
$ 14
$ 5
$ 31
Hedge ineffectiveness net gains recognized in other income (expense) —
2
1
2
Other fuel derivative net losses recognized in other income (expense) (11
)
 —
(3
)
 —
Percentage of actual consumption hedged 57
%
 44
%
 63
%
 35
%

Note 11 — LiveTV

During the three and nine months ended September 30, 2006, LiveTV installed in-flight entertainment systems for other airlines on seven and 33 aircraft, respectively, bringing total installations of these systems for other airlines to 226 aircraft. Deferred profit on hardware sales and advance deposits for future hardware sales included in non-current liabilities in the accompanying condensed balance sheets was $25 million and $21 million at September 30, 2006 and December 31, 2005, respectively. Deferred profit to be recognized as income on installations completed through September 30, 2006 will be approximately $1 million for the remainder of 2006, $4 million for each of the next three years and $6 million thereafter.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Outlook

We will continue to focus on a combination of right-sizing capacity, optimizing revenue sources, introducing new revenue initiatives and reducing our costs. Thus far in 2006, we have added 13 new cities and have introduced connecting service between many of the cities we already served. Through the remainder of 2006 and into 2007 we expect to continue to diversify our route structure, with the focus remaining on short- and medium-haul markets. Right-sizing our capacity also includes the sale of five of our Airbus A320 aircraft in 2006, two of which were sold in September and the remaining three scheduled for sale in the fourth quarter. We plan to further reduce our rate of growth over the next three years through a combination of additional aircraft sales, leases, assignments and/or delivery deferrals.

Through our recent efforts to optimize our fare structure and utilize global distribution systems that attract more business travelers, we expect the year-over-year upward trend in our average fares to continue through the remainder of the year, despite the anticipated decrease in our average stage length. In addition, we are continuously looking to expand our ancillary revenue opportunities, including cargo and charter services. We are also continuing to focus on several cost-reduction initiatives. The cornerstone of these initiatives is institutionalizing a commitment to low-cost spending practices in all areas of our operations; including improving fuel efficiency, increasing the use of supply chain management and reducing the number of full-time equivalent employees per aircraft.

We expect our full-year operating capacity to increase approximately 19% to 21% over 2005 with the net addition of two new Airbus A320 aircraft and two new EMBRAER 190 aircraft to our operating fleet during the remainder of 2006. The impact of the shorter range EMBRAER 190 aircraft, which is expected to represent 5% of our total estimated 2006 operating capacity, combined with the shifting of some of our Airbus A320 aircraft away from East-West flying, will result in an expected 13% decrease in 2006 average stage length. While the shorter average stage length will result in higher unit costs, we expect the increase in unit revenues to be higher than the increase in unit costs.

Fuel costs continue to remain at high levels, even though we experienced a decrease in prices beginning in late August. We expect to incur higher fuel costs compared to the fourth quarter of 2005 as a result of higher underlying fuel prices and less price protection from hedging instruments. Assuming fuel prices of $2.00 per gallon, net of effective hedges, our cost per available seat mile for 2006 is expected to increase by 13% to 15% over 2005 and our pre-tax margin is expected to be between (1)% and 1%.

Results of Operations

The U.S. domestic airline environment continues to be extremely challenging primarily due to a weak revenue environment caused by sustained price competition and high aircraft fuel prices. Our third quarter results were further impacted by the effects of overall lower demand for domestic air travel, security concerns related to the August terrorist threat in London and Tropical Storm Ernesto. Average fares for the quarter increased 8% over 2005 to $123.41 and load factor declined 6.2 points to 80.4% from the same period of 2005.

Our on-time performance, defined by the U.S. Department of Transportation as arrivals within 14 minutes of schedule, was 74.6% in the third quarter of 2006 compared to 72.2% for the same period in 2005. Our on-time performance was affected by our commitment to operate our scheduled flights whenever possible, as reflected by our 99.6% and 99.4% completion factors in the third quarters of 2006 and 2005, respectively. The reliability of the EMBRAER 190 has improved as we gain additional experience with this new aircraft type. As a result, we plan to increase average daily utilization by maintaining fewer spare aircraft in the fourth quarter.

Three Months Ended September 30, 2006 and 2005

We reported a slight net loss, which rounded to zero, for the three months ended September 30, 2006 as compared to net income of $3 million for the three months ended

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September 30, 2005. Diluted earnings per share was zero for the third quarter of 2006 and $0.02 for 2005. Our operating income for the three months ended September 30, 2006 was $41 million compared to operating income of $14 million for the same period in 2005 and our pre-tax margin was 0.2%, an increase of 1.0 point from the same period in 2005.

Our third quarter 2006 and 2005 effective tax rates differ from the statutory rate due to the non-deductibility of certain items for tax purposes and the relationship of these items to our operating results for the quarter. The impact of these non-deductible items on our full-year operating results could result in our full year 2006 effective tax rate differing significantly from that of our third quarter rate.

Operating Revenues.    Operating revenues increased 39%, or $175 million, primarily due to an increase in passenger revenues. Increased passengers resulting from a 51% increase in departures, or $45 million, and a 24% increase in yield, or $112 million, drove the increase in passenger revenues of $157 million for the three months ended September 30, 2006. Although our load factor was 6.2 points lower than that of last year, the increase in our yields has compensated for this decrease and we expect that yields for the full year will also be higher than 2005.

In August 2006, we entered into agreements with two global distribution systems, which allow our flights to be available on their online travel reservation systems. In October 2006, we entered into an agreement with an additional provider. We expect bookings through these global distribution systems to result in higher average fares, which will more than offset the increased distribution costs.

Other revenue increased 83%, or $18 million, primarily due to increased change fees of $7 million resulting from more passengers and increased adherence to related company policies, increases in the marketing component of TrueBlue point sales of $4 million, which includes $2 million of revenue recognized from an expanded co-branding agreement with American Express, LiveTV third party revenues of $2 million and charter revenues of $1 million.

Operating Expenses.    Operating expenses increased 34%, or $148 million, due primarily to an average of 33 additional aircraft in service in 2006 and a 24% increase in fuel cost per gallon. Operating capacity increased 19% to 7.54 billion available seat miles due to having 41% more average aircraft in service offset partly by the EMBRAER 190 in 2006, which has lower utilization than the Airbus A320. Average stage length decreased 18% due to shifting our capacity growth away from our East-West markets and operation of the shorter-range EMBRAER 190. Operating expenses per available seat mile increased 12% to 7.79 cents for the three months ended September 30, 2006. Had fuel prices remained at the 2005 levels, our cost per available seat mile, or CASM, would have increased by 6% to 7.32 cents. In detail, operating costs per available seat mile were (percent changes are based on unrounded numbers):


  Three Months Ended
September 30,		  
  Percent
Change		  
  2006 2005
  (in cents)  
Operating expenses:  
 
 
Salaries, wages and benefits 1.85
1.69
8.6
%
Aircraft fuel 2.81
2.18
29.0
%
Landing fees and other rents .55
.43
29.2
%
Depreciation and amortization .43
.47
(8.6
)%
Aircraft rent .36
.29
25.6
%
Sales and marketing .36
.35
3.4
%
Maintenance materials and repairs .30
.31
(6.3
)%
Other operating expenses 1.13
1.21
(6.4
)%
Total operating expenses 7.79
6.93
12.3
%

Salaries, wages and benefits increased 29%, or $32 million, due primarily to a 25% increase in average full-time equivalent employees and $4 million in non-cash stock-based compensation expense. Cost per available seat mile increased 9% as a result of increased stock-based compensation expense and lower average stage length.

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Aircraft fuel expense increased 54%, or $74 million, due to 19 million more gallons of aircraft fuel consumed resulting in $33 million of additional fuel expense and, after the impact of fuel hedging, a 24% increase in average fuel cost per gallon, or $41 million. Aircraft fuel prices remain near historically high levels, with our average fuel cost per gallon at $2.12 for the third quarter of 2006 compared to $1.70 for the third quarter of 2005. Our fuel consumption per block hour decreased 6% due to utilization of the smaller EMBRAER 190 aircraft and various fuel conservation initiatives. Had fuel consumption per block hour remained constant, our fuel expense would have been higher by $14 million. Cost per available seat mile increased 29% due to the increase in fuel prices.

Landing fees and other rents increased 54%, or $15 million, due to a 51% increase in departures. Cost per available seat mile increased 29% due primarily to departures growing at a much higher rate than available seat mile and ground rents associated with our new terminal under construction at New York's John F. Kennedy International Airport, or JFK.

Depreciation and amortization increased 9%, or $2 million, due primarily to having 15 more average owned aircraft, in addition to our new seven gate temporary facility at JFK during the three months ended September 30, 2006 compared to the same period in 2005, offset by $7 million in gains on the sale of two Airbus A320 aircraft. Cost per available seat mile decreased 9% primarily due to the gain on aircraft sales.

Aircraft rent increased 50%, or $9 million, due to leasing 20 new EMBRAER 190 aircraft. Cost per available seat mile increased 26% due to a higher percentage of our aircraft fleet being leased.

Sales and marketing expense increased 23%, or $5 million, due to $4 million in higher credit card fees resulting from increased passenger revenues and $1 million in increased advertising expenses. On a cost per available seat mile basis, sales and marketing expense increased 3% primarily due to more advertising related to opening seven new cities. We currently book the majority of our reservations through a combination of our website and our own agents (79% and 20% in 2006, respectively).

Maintenance materials and repairs increased 12%, or $3 million, due to an average of 33 additional operating aircraft in 2006 compared to the same period in 2005 and a gradual aging of our fleet. Cost per available seat mile decreased 6% due primarily to fewer heavy maintenance airframe checks. Maintenance expense is expected to increase significantly as our fleet ages.

Other operating expenses increased 12%, or $8 million, primarily due to higher variable costs associated with increased capacity and number of passengers served. Cost per available seat mile decreased 6%, due primarily to our cost saving initiatives.

Other Income (Expense).    Interest expense increased 58%, or $17 million, due primarily to the debt financing of 16 additional aircraft, six flight simulators and our Orlando hangar and training facility, which resulted in $9 million in additional interest expense, and higher interest rates. Interest expense also includes the accretion in interest of $2 million related to our construction obligation for the new terminal at JFK, which was also capitalized and contributed to the $4 million increase in capitalized interest. Interest income and other decreased 131%, or $9 million through the combined effects of having a $11 million fuel hedging net loss in 2006 compared to a net gain of $2 million in 2005, which was offset by $3 million in higher interest income.

Nine Months Ended September 30, 2006 and 2005

We had a net loss of $18 million for the nine months ended September 30, 2006 compared to net income of $22 million for the nine months ended September 30, 2005. Diluted loss per share was $0.11 for the nine months ended September 30, 2006 compared to diluted earnings per share of $0.13 for the same period in 2005. Our operating income for the nine months ended September 30, 2006 was $63 million compared to $79 million for the same period in 2005 and our pre-tax margin was (1.2)%, a decrease of 3.7 points from the same period in 2005.

Operating Revenues.    Operating revenues increased 38%, or $475 million, primarily due to an increase in passenger revenues. Increased passengers resulting from a 41% increase in departures, or $198 million, and a 17% increase in yield, or $233 million, drove the increase in passenger revenues of

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$431 million for the nine months ended September 30, 2006. Other revenues increased 78%, or $44 million, primarily due to increased change fees of $15 million resulting from more passengers and increased adherence to related company policies, increases in the marketing component of TrueBlue point sales of $9 million and LiveTV third party revenues of $8 million.

Operating Expenses.    Operating expenses increased 42%, or $491 million, due to an average of 29 additional aircraft in service in 2006 and a 33% increase in fuel cost per gallon. Operating capacity increased 23% to 21.32 billion available seat miles. Average stage length decreased 11% due to capacity reductions in our East-West markets and operation of the shorter-range EMBRAER 190 in 2006. Operating expenses per available seat mile increased 15% to 7.82 cents for the nine months ended September 30, 2006. Had fuel prices remained at the 2005 levels, our cost per available seat mile would have increased 7% to 7.24 cents. In detail, operating costs per available seat mile were (percent changes are based on unrounded numbers):


  Nine Months Ended
September 30,		 Percent
Change
  2006 2005
  (in cents)  
Operating expenses:  
 
 
Salaries, wages and benefits 1.90
1.80
5.9
%
Aircraft fuel 2.65
1.94
36.7
%
Landing fees and other rents .54
.46
18.6
%
Depreciation and amortization .49
.46
4.6
%
Aircraft rent .35
.31
11.3
%
Sales and marketing .36
.36
1.6
%
Maintenance materials and repairs .31
.27
14.0
%
Other operating expenses 1.22
1.18
3.1
%
Total operating expenses 7.82
6.78
15.3
%

Salaries, wages and benefits increased 30%, or $94 million, due to an increase in average full-time equivalent employees of 30% and $15 million in non-cash stock-based compensation expense offset in part by recording $6 million less profit sharing in 2006 compared to 2005. Cost per available seat mile increased 6% principally as a result of stock-based compensation expense.

Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, which requires us to record the fair value of stock options granted under our 2002 Stock Incentive Plan and purchase rights issued under our stock purchase plan. Because we elected to use the modified prospective transition method, results for prior periods have not been restated. At September 30, 2006, there was $36 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of our equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over the remaining vesting period of five years. See Notes 1 and 2 to our condensed consolidated financial statements for more information regarding the adoption of this standard.

Aircraft fuel expense increased 68%, or $228 million, due to 57 million more gallons of aircraft fuel consumed resulting in $87 million of additional fuel expense and, after the impact of fuel hedging, a 33% increase in average fuel cost per gallon, or $141 million. Aircraft fuel prices remain at historically high levels, with our average fuel price per gallon at $2.02 compared to $1.52 for the nine months ended September 30, 2005. Our fuel consumption per block hour decreased 4% due to utilization of the more fuel efficient EMBRAER 190 aircraft and various fuel conservation initiatives. Had fuel consumption per block hour remained constant, our fuel expense would have been higher by $23 million. Cost per available seat mile increased 37% primarily due to the increase in average fuel cost per gallon.

Landing fees and other rents increased 46%, or $37 million, due to a 41% increase in departures over 2005 and higher average landing fee rates. Cost per available seat mile increased 19% primarily due to ground rents associated with our new terminal under construction at JFK.

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Depreciation and amortization increased 29%, or $22 million, due primarily to having 16 more average owned aircraft during the nine months ended September 30, 2006 compared to the same period in 2005, offset by $7 million in gains on the sale of two Airbus A320 aircraft. Cost per available seat mile increased 5% as a result of our new seven gate temporary facility at JFK, hangars, training center and flight simulators.

Aircraft rent increased 37%, or $20 million, due to 20 new EMBRAER 190 aircraft leases. Cost per available seat mile increased 11% due to a higher percentage of our aircraft fleet being leased.

Sales and marketing expense increased 25%, or $16 million, due to $11 million in higher credit card fees resulting from increased passenger revenues and $4 million in increased advertising expenses. On a cost per available seat mile basis, sales and marketing expense increased by 2% due to higher credit card fees. We currently book the majority of our reservations through a combination of our website and our own agents (80% and 19% in 2006, respectively).

Maintenance materials and repairs increased 40%, or $19 million, due to 29 more average operating aircraft in 2006 compared to the same period in 2005 and a gradual aging of our fleet. Cost per available seat mile increased 14% due primarily to operating under engine and airframe parts maintenance third-party contracts in 2006, compared to expensing these repairs on a time and materials basis in the first six months of 2005 when we also benefited from one-time warranty coverage on our engines.

Other operating expenses increased 27%, or $55 million, due to higher variable costs associated with increased capacity and number of passengers served. Cost per available seat mile increased 3% due to an 11% decrease in average stage length, higher personnel costs, fuel related taxes and maintenance related to our new facilities; and as a result of more LiveTV third-party installations.

Other Income (Expense).    Interest expense increased 67%, or $50 million, due to the debt financing of 16 additional aircraft, six flight simulators and our Orlando hangar and training facility, and interest on our 3¾ % convertible debentures resulting in $26 million of additional interest expense, and higher rates, which resulted in $20 million in additional interest expense. Interest expense also includes the accretion of interest of $4 million related to our construction obligation for the new terminal at JFK, which was also capitalized and contributed to the $8 million increase in capitalized interest, along with higher interest rates.

Interest income and other increased 40%, or $6 million, primarily due higher interest rates in 2006, offset by fuel hedge losses of $2 million.

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The following table sets forth our operating statistics for the three and nine months ended September 30, 2006 and 2005:


  Three Months Ended
September 30,		 Percent
Change		 Nine Months Ended
September 30,		  
  2006 2005 2006 2005 Percent
Change
Operating Statistics:  
 
 
 
 
 
Revenue passengers (thousands) 4,773
3,783
26.2
13,633
10,879
25.3
Revenue passenger miles (millions) 6,062
5,484
10.5
17,522
15,043
16.5
Available seat miles (ASMs) (millions) 7,537
6,332
19.0
21,316
17,347
22.9
Load factor 80.4
%
 86.6
%
 (6.2
) pts.
 82.2
%
 86.7
%
 (4.5
) pts.
Breakeven load factor(1) 79.7
%
 87.4
%
 (7.7
) pts.
 83.3
%
 84.2
%
 (0.9
) pts.
Aircraft utilization (hours per day) 12.7
13.7
(6.9
)
 12.9
13.6
(5.2
)
Average fare $   123.41
$   114.08
8.2
$ 119.63
$   110.28
8.5
Yield per passenger mile (cents) 9.72
7.87
23.5
9.31
7.97
16.7
Passenger revenue per ASM (cents) 7.82
6.82
14.7
7.65
6.92
10.6
Operating revenue per ASM (cents) 8.33
7.15
16.5
8.11
7.24
12.1
Operating expense per ASM (cents) 7.79
6.93
12.3
7.82
6.78
15.3
Operating expense per ASM, excluding fuel (cents) 4.98
4.75
4.7
5.17
4.84
6.8
Airline operating expense per ASM (cents)(1) 7.74
6.87
12.6
7.76
6.72
15.5
Departures 42,311
28,104
50.6
114,416
81,123
41.0
Average stage length (miles) 1,181
1,444
(18.2
)
 1,224
1,371
(10.7
)
Average number of operating aircraft during period 112.0
79.2
41.5
103.4
74.8
38.2
Average fuel cost per gallon $ 2.12
$ 1.70
24.3
$ 2.02
$ 1.52
33.3
Fuel gallons consumed (millions) 100
81
23.5
279
222
26.0
Percent of sales through jetblue.com during period 78.7
%
 77.7
%
 1.0
 pts.
 80.1
%