e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
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o |
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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)
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Delaware
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87-0617894 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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118-29 Queens Boulevard, Forest Hills, New York
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11375 |
(Address of principal executive offices)
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(Zip Code) |
(718) 286-7900
(Registrants 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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No 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 þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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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). o Yes No þ
As of September 30, 2009, there were 290,305,387 shares of the registrants common stock, par value
$.01, outstanding.
JetBlue Airways Corporation
FORM 10-Q
INDEX
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
JETBLUE AIRWAYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
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September 30, |
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December 31, |
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2009 |
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2008 |
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(unaudited) |
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(as adjusted,
Note 3) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
951 |
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$ |
561 |
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Investment securities and derivative assets |
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214 |
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10 |
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Receivables, less allowance |
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82 |
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86 |
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Restricted cash |
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48 |
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78 |
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Prepaid expenses and other |
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227 |
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227 |
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Total current assets |
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1,522 |
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962 |
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PROPERTY AND EQUIPMENT |
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Flight equipment |
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4,164 |
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3,832 |
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Predelivery deposits for flight equipment |
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132 |
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163 |
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4,296 |
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3,995 |
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Less accumulated depreciation |
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506 |
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406 |
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3,790 |
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3,589 |
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Other property and equipment |
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503 |
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487 |
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Less accumulated depreciation |
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160 |
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134 |
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343 |
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353 |
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Assets constructed for others |
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544 |
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533 |
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Less accumulated depreciation |
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21 |
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5 |
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523 |
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528 |
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Total
property and equipment |
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4,656 |
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4,470 |
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OTHER ASSETS |
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Investment securities |
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5 |
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244 |
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Restricted cash |
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65 |
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69 |
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Other |
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285 |
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275 |
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Total other assets |
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355 |
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588 |
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TOTAL ASSETS |
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$ |
6,533 |
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$ |
6,020 |
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See
accompanying notes to condensed consolidated financial statements.
3
JETBLUE AIRWAYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
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September 30, |
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December 31, |
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2009 |
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2008 |
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(unaudited) |
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(as adjusted,
Note 3) |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
114 |
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$ |
144 |
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Air traffic liability |
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457 |
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445 |
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Accrued salaries, wages and benefits |
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131 |
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107 |
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Other accrued liabilities |
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109 |
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113 |
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Short-term borrowings |
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10 |
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120 |
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Current maturities of long-term debt and capital leases |
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380 |
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152 |
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Total current liabilities |
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1,201 |
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1,081 |
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LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS |
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2,972 |
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2,872 |
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CONSTRUCTION OBLIGATION |
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523 |
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512 |
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DEFERRED TAXES AND OTHER LIABILITIES |
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Deferred income taxes |
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229 |
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197 |
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Other |
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97 |
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92 |
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326 |
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289 |
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STOCKHOLDERS EQUITY |
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Preferred stock, $.01 par value; 25,000,000 shares authorized,
none issued |
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Common stock, $.01 par value; 500,000,000 shares authorized,
317,391,718 and 288,633,882 shares issued and 290,305,387
and 271,763,139 outstanding in 2009 and 2008, respectively |
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3 |
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3 |
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Treasury stock, at cost; 27,086,942 and 16,878,876 shares
in 2009 and 2008, respectively |
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(1 |
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Additional paid-in capital |
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1,412 |
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1,287 |
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Retained earnings |
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107 |
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60 |
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Accumulated other comprehensive income (loss) |
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(10 |
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(84 |
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Total stockholders equity |
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1,511 |
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1,266 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
6,533 |
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$ |
6,020 |
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See
accompanying notes to condensed consolidated financial statements.
4
JETBLUE AIRWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in millions, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(as adjusted, |
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(as adjusted, |
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Note 3) |
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Note 3) |
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OPERATING REVENUES |
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Passenger |
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$ |
764 |
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$ |
807 |
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$ |
2,191 |
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$ |
2,334 |
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Other |
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90 |
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95 |
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263 |
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243 |
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Total operating revenues |
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854 |
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902 |
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2,454 |
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2,577 |
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OPERATING EXPENSES |
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Aircraft fuel |
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246 |
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394 |
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687 |
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1,072 |
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Salaries, wages and benefits |
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199 |
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173 |
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576 |
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519 |
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Landing fees and other rents |
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56 |
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52 |
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160 |
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152 |
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Depreciation and amortization |
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59 |
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54 |
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170 |
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145 |
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Aircraft rent |
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31 |
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33 |
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95 |
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97 |
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Sales and marketing |
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38 |
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38 |
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113 |
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118 |
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Maintenance materials and repairs |
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40 |
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32 |
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111 |
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97 |
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Other operating expenses |
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119 |
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104 |
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327 |
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317 |
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Total operating expenses |
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788 |
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880 |
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2,239 |
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2,517 |
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OPERATING INCOME |
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66 |
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22 |
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215 |
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60 |
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OTHER INCOME (EXPENSE) |
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Interest expense |
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(50 |
) |
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(67 |
) |
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(148 |
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(182 |
) |
Capitalized interest |
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2 |
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15 |
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6 |
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43 |
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Interest income and other |
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5 |
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20 |
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6 |
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40 |
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Total other income (expense) |
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(43 |
) |
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(32 |
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(136 |
) |
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(99 |
) |
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INCOME (LOSS) BEFORE INCOME TAXES |
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23 |
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(10 |
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79 |
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(39 |
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Income tax (benefit) expense |
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8 |
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(2 |
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32 |
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(12 |
) |
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NET INCOME (LOSS) |
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$ |
15 |
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$ |
(8 |
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$ |
47 |
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$ |
(27 |
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INCOME (LOSS) PER COMMON SHARE: |
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Basic |
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$ |
0.05 |
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$ |
(0.03 |
) |
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$ |
0.18 |
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$ |
(0.12 |
) |
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Diluted |
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$ |
0.05 |
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$ |
(0.03 |
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$ |
0.16 |
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$ |
(0.12 |
) |
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See accompanying notes to condensed consolidated financial statements.
5
JETBLUE AIRWAYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
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Nine months ended |
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September 30, |
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2009 |
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2008 |
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(as adjusted,
Note 3) |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income (loss) |
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$ |
47 |
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$ |
(27 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by operating activities: |
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Deferred income taxes |
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32 |
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(12 |
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Depreciation |
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139 |
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134 |
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Amortization |
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35 |
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15 |
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Stock-based compensation |
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12 |
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13 |
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Collateral returned (deposits) for derivative instruments |
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130 |
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(30 |
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Changes in certain operating assets and liabilities |
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(59 |
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49 |
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Other, net |
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21 |
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(33 |
) |
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Net cash provided by operating activities |
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357 |
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109 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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(372 |
) |
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(498 |
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Predelivery deposits for flight equipment |
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(19 |
) |
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(45 |
) |
Proceeds from the sale of flight equipment |
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58 |
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164 |
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Assets constructed for others |
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(38 |
) |
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(108 |
) |
Sale of auction rate securities |
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54 |
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Purchase of available-for-sale securities |
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(69 |
) |
Sale of available-for-sale securities |
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|
391 |
|
Increases/decreases in security deposits and letters of credit |
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(4 |
) |
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(64 |
) |
Other, net |
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|
|
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2 |
|
|
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Net cash provided by investing activities |
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(321 |
) |
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(227 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from: |
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|
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Issuance of common stock |
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116 |
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|
317 |
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Issuance of long-term debt |
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|
446 |
|
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|
578 |
|
Aircraft sale and leaseback transactions |
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|
26 |
|
Short-term borrowings and lines of credit |
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13 |
|
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|
18 |
|
Construction obligation |
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|
42 |
|
|
|
104 |
|
Repayment of long-term debt and capital lease obligations |
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(130 |
) |
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(487 |
) |
Repayment of short-term borrowings and lines of credit |
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|
(120 |
) |
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(41 |
) |
Other, net |
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|
(13 |
) |
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|
(22 |
) |
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|
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Net cash provided by financing activities |
|
|
354 |
|
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|
493 |
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INCREASE IN CASH AND CASH EQUIVALENTS |
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|
390 |
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|
|
375 |
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|
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|
Cash and cash equivalents at beginning of period |
|
|
561 |
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|
|
190 |
|
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Cash and cash equivalents at end of period |
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$ |
951 |
|
|
$ |
565 |
|
|
|
|
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|
|
See accompanying notes to condensed consolidated financial statements.
6
JETBLUE AIRWAYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
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. These condensed consolidated
financial statements and related notes should be read in conjunction with our 2008 audited
financial statements included in our Current Reports on Form 8-K filed on June 1, 2009 and August
26, 2009, or collectively, our 2008 Annual Report.
These condensed consolidated financial statements are unaudited and have been prepared by us
in accordance with 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. Our revenues are recorded net of excise and
other related taxes in our condensed consolidated statements of operations.
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.
Property and Equipment: Effective January 1, 2009, we adjusted the estimated useful lives for
our in-flight entertainment systems from 12 years to 7 years, which we estimate will result in
approximately $4 million of additional depreciation expense and an estimated $0.01 reduction in
diluted earnings per share in 2009.
New Accounting Pronouncements: Effective January 1, 2009, we adopted the
provisions of
Accounting Standards Codification, or ASC, Subtopic 470-20, Debt with Conversion and other Options, or ASC 470-20, 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 ASC 470-20, the liability and equity components of convertible debt instruments
that may be settled wholly or partially in cash upon conversion must be accounted for separately in
a manner reflective of their issuers nonconvertible debt borrowing rate. Previous guidance
provided accounting for this type of convertible debt instrument entirely as debt. We have
retrospectively applied this change in accounting to affected accounts for all periods presented.
Refer to Note 3 for more information. Also refer to our Current Reports on Form 8-K filed on June
1, 2009 and August 26, 2009, which updated our financial information for 2008, 2007, and 2006 as a
result of our adoption.
In April 2009, the Financial Accounting Standards Board, or FASB, issued an update to ASC 825-10,
Financial Instruments, to require an entity to provide interim disclosures about
the fair value of all financial instruments and to
include disclosures related to the methods and significant assumptions used in estimating those
instruments. This was effective for interim and annual periods ending after June 15, 2009. We
have included these additional disclosures in Note 3.
7
In April 2009, the FASB issued an update to ASC 820, Fair Value Measurements and Disclosures, to provide 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.
Additionally, additional disclosures are required regarding fair value in interim and annual
reports. These provisions are effective for interim and annual periods ending after June 15, 2009.
We have included these additional disclosures in Note 9.
In May 2009, the FASB issued ASC 855, Subsequent Events, which provides guidance on events that occur after the balance sheet date but prior to the
issuance of the financial statements. ASC 855 distinguishes events requiring recognition in the
financial statements and those that may require disclosure in the financial statements.
Furthermore, this requires disclosure of the date through which subsequent events were evaluated.
These requirements are effective for interim and annual periods after June 15, 2009. We adopted
these requirements for the quarter ended June 30, 2009, and have evaluated subsequent events
through October 27, 2009.
In June 2009, the FASB issued an update of ASC 105, Generally accepted accounting principles,
changing the accounting for securitizations and
special-purpose entities. ASC 105 enhances disclosure requirements related to the transfers of
financial assets, including securitization transactions, and the continuing risk exposures related
to transferred financial assets. The concept of a qualifying special-purpose entity is
eliminated and the requirements for derecognizing financial assets have been modified. ASC 105
modifies the criteria which determine whether an entity should be
consolidated. ASC 105 enhances the disclosure requirements related to an entitys involvement
with variable interest entities and any changes to the related risk exposure.
ASC 105 will be effective for fiscal years beginning after November 15, 2009. We are currently
evaluating the impact this adoption will have on our financial statements and
related disclosures.
In June 2009, the FASB issued an update of ASC 105, Generally accepted accounting principles,
which establishes the FASB Accounting Standards
CodificationTM, or Codification, which supersedes all existing accounting standard
documents and will become the single source of authoritative non-governmental U.S. GAAP. All other
accounting literature not included in the Codification will be considered non-authoritative.
We have conformed our financial statements and related Notes to
the new Codification for the quarter ended September 30, 2009.
In June 2009, the Emerging Issues Task Force of the FASB, or EITF, reached final consensus on Issue
09-1, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance,
or Issue 09-1, which changes the accounting for equity share lending arrangements on an entitys
own shares when executed in contemplation of a convertible debt offering. Issue 09-1 requires the
share lending arrangement to be measured at fair value and recognized as an issuance cost. These
issuance costs should then be amortized as interest expense over the life of the financing
arrangement. Shares loaned under these arrangements should be excluded from computation of
earnings per share. Issue 09-1 is effective for fiscal years beginning after December 15, 2009 and
requires retrospective application for all arrangements outstanding as of the beginning of the
fiscal year. We are currently evaluating the impact this Issue will have on our financial
statements.
In September 2009, the Emerging Issues Task Force of the FASB, or EITF, reached final consensus on
Issue 08-1, Revenue Arrangements with Multiple Deliverables, or Issue 08-1, which will update ASC
605,
8
Revenue Recognition, and changes the accounting for certain revenue arrangements. The new
requirements change the allocation methods used in determining how to account for multiple payment
streams and will result in the ability to separately account for more deliverables, and potentially
less revenue deferrals. Additionally, Issue 08-1 requires enhanced disclosures in financial
statements. Issue 08-1 is effective for revenue arrangements enter into or materially modified in
fiscal years beginning after June 15, 2010 on a prospective basis, with early application
permitted. We are currently evaluating the impact this Issue will have on our financial
statements.
Note 2 Share-Based Compensation
During the nine months ended September 30, 2009, we granted approximately 2.2 million
restricted stock units under our Amended and Restated 2002 Stock Incentive Plan, at a weighted
average grant date fair value of $4.60 per share. We issued approximately 0.5 million shares of
our common stock in connection with the vesting of restricted stock units during the nine months
ended September 30, 2009. At September 30, 2009, 3.3 million restricted stock units were unvested
with a weighted average grant date fair value of $5.14 per share.
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 September
30, 2009, we have recorded an insignificant amount as a liability related to the outstanding awards
we expect to ultimately vest, including an estimate for pre-vesting forfeitures.
Note 3 Long-term Debt, Short-term Borrowings, and Capital Lease Obligations
6.75% $201 million Convertible Debentures due 2039
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 Debentures, and approximately $86
million aggregate principal amount of 6.75% Series B convertible debentures due 2039, or the Series
B Debentures, and collectively with the Series A Debentures, the Debentures. The 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 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 Debentures is payable semi-annually on April 15 and October 15.
The first interest payment on the Debentures was paid October 15, 2009.
Holders of either the Series A or Series B 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
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 Debentures in
connection with a fundamental corporate change that occurs prior to October 15, 2014 for the Series
A Debentures or October 15, 2016 for the Series B Debentures, the applicable conversion rate may be
increased depending on our then current common stock price. The maximum number of shares into which
all Debentures are
9
convertible, including pursuant to this make-whole fundamental change provision,
is 235.2941 shares per $1,000 principal amount of the Debentures outstanding, as adjusted.
We may redeem any of the Debentures for cash at a redemption price of 100% of their principal
amount, plus accrued and unpaid interest at any time on or after October 15, 2014 for the Series A
Debentures and October 15, 2016 for the Series B Debentures. Holders may require us to repurchase
the Debentures for cash at a repurchase price equal to 100% of their principal amount plus accrued
and unpaid interest, if any, on October 15, 2014, 2019, 2024, 2029 and 2034 for the Series A
Debentures and October 15, 2016, 2021, 2026, 2031 and 2036 for the Series B 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 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 concluded these embedded derivatives were either (i) excluded from
bifurcation as a result of being clearly and closely related to the Debentures or are indexed to
our common stock and would be classified in stockholders equity if freestanding or (ii) are
immaterial embedded derivatives.
$250 million 3.75% Convertible Debt due 2035
Effective January 1, 2009, we adopted the newest provisions of ASC 470-20,
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 new 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% convertible unsecured debentures due 2035, or 3.75% Debentures,
have an option to be settled in cash, they qualify for treatment under this new accounting
standard.
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 attributable to equity.
We are amortizing 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 |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Principal amount |
|
$ |
156 |
|
|
$ |
177 |
|
Unamortized discount |
|
|
(3 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
153 |
|
|
$ |
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital, net |
|
$ |
29 |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
The following table illustrates the effect on our consolidated statement of operations for the
three and nine months ended September 30, 2008 (in millions, except per share amounts):
10
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2008 |
|
Interest expense |
|
$ |
(3 |
) |
|
$ |
(9 |
) |
Interest income and other |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(6 |
) |
|
$ |
(12 |
) |
Income tax (benefit) expense |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4 |
) |
|
$ |
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
Interest expense related to these debentures consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
3.75% contractual rate |
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
7 |
|
Discount amortization |
|
|
2 |
|
|
|
3 |
|
|
|
6 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
4 |
|
|
$ |
5 |
|
|
$ |
11 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest rate |
|
|
9 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
9 |
% |
During the nine months ended September 30, 2009, we voluntarily purchased 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.
Citigroup Global Markets, Inc. Line of Credit
In April 2009, we refinanced our Citigroup Global Markets, Inc. line of credit, extending the
maturity to April 2010. During the nine months ended September 30, 2009, we repaid approximately
$110 million on this line of credit. As of September 30, 2009, we had no balance outstanding and
$60 million available to us under the line of credit. In October 2009, we entered into
an agreement with Citigroup Global Markets, Inc. whereby we sold the auction rate
securities which secured this line of credit.
In conjunction with this transaction, we terminated the line of credit we had with Citigroup.
See Note 9 for further information.
5.5% $201 million Convertible Debentures due 2038
During the nine months ended September 30, 2009, approximately $3 million aggregate principal
amount of these debentures were voluntarily converted by holders into approximately 0.6 million
shares of our common stock. Borrowed shares equivalent to the number of shares issued upon
conversions were returned to us on September 1, 2009 pursuant to the terms and conditions of the
share lending agreement.
11
Other Indebtedness
During the nine months ended September 30, 2009, we issued $143 million in non-public fixed
rate equipment notes due through 2024 and $102 million in non-public floating rate equipment notes
due through 2019, all of which were previously committed and which are secured by three Airbus A320
aircraft and six EMBRAER 190 aircraft.
Scheduled principal payments on our outstanding debt and
capital leases for the nine months ended September 30, 2009 totaled $110 million. At September 30,
2009, the weighted average interest rate of all of our long-term debt was 4.6% and scheduled
maturities were $49 million for the remainder of 2009, $384 million in 2010, $175 million in 2011,
$176 million in 2012, $375 million in 2013 and $2.19 billion thereafter. The weighted average
interest rate of our outstanding short-term borrowings at September 30, 2009 and December 31, 2008
was 2.3% and 5.6%, respectively.
The carrying amounts and estimated fair values of our long-term debt at September 30, 2009
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Estimated |
|
|
|
Value |
|
|
Fair Value |
|
Public Debt |
|
|
|
|
|
|
|
|
Floating rate enhanced equipment notes |
|
|
|
|
|
|
|
|
Class G-1, due through 2016 |
|
$ |
275 |
|
|
$ |
206 |
|
Class G-2, due 2014 and 2016 |
|
|
373 |
|
|
|
239 |
|
Class B-1, due 2014 |
|
|
49 |
|
|
|
33 |
|
Fixed rate special facility bonds, due through 2036 |
|
|
87 |
|
|
|
72 |
|
6 3/4% convertible debentures due in 2039 |
|
|
201 |
|
|
|
296 |
|
3 3/4% convertible debentures due in 2035 |
|
|
153 |
|
|
|
152 |
|
5 1/2% convertible debentures due in 2038 |
|
|
123 |
|
|
|
186 |
|
3 1/2% convertible notes due in 2033 |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Non-Public Debt |
|
|
|
|
|
|
|
|
Floating rate equipment notes, due through 2020 |
|
|
717 |
|
|
|
609 |
|
Fixed rate equipment notes, due through 2024 |
|
|
1,178 |
|
|
|
1,040 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,157 |
|
|
$ |
2,834 |
|
|
|
|
|
|
|
|
The estimated fair value of our publicly held long-term debt is based on quoted market prices.
The fair value of our non-public debt was estimated using discounted cash flow analysis based on
our current borrowing rates for instruments with similar terms. The fair values of our other
financial instruments approximate their carrying values.
We 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.).
Note 4 Comprehensive Income (Loss)
Comprehensive income (loss) includes changes in fair value of our aircraft fuel derivatives
and interest rate swap agreements, which qualify for hedge accounting, and unrealized losses on our
auction rate securities, or ARS, which were classified as available for sale securities at
September 30, 2008. The
12
differences between net income (loss) and comprehensive income (loss) for
the three and nine months ended September 30, 2009 and 2008 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
15 |
|
|
$ |
(8 |
) |
|
Unrealized gain (loss) on derivative instruments
(net of $6 and $65 of taxes) |
|
|
9 |
|
|
|
(101 |
) |
Unrealized gain (loss) on investment securities classified as
available for sale (net of $0 and $0 of taxes) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
9 |
|
|
|
(100 |
) |
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
24 |
|
|
$ |
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
47 |
|
|
$ |
(27 |
) |
|
Unrealized gain (loss) on derivative instruments
(net of $48 and $32 of taxes) |
|
|
74 |
|
|
|
(49 |
) |
Unrealized gain (loss) on investment securities classified as
available for sale (net of $0 and $5 of taxes) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
74 |
|
|
|
(57 |
) |
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
121 |
|
|
$ |
(84 |
) |
|
|
|
|
|
|
|
A rollforward of the amounts included in
accumulated other comprehensive income (loss), net of taxes for the
three and nine months ended September 30, 2009 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel |
|
|
Interest Rate |
|
|
|
|
|
|
Derivatives |
|
|
Swaps |
|
|
Total |
|
Beginning accumulated gains (losses), at June 30, 2009 |
|
$ |
(16 |
) |
|
$ |
(3 |
) |
|
$ |
(19 |
) |
Reclassifications into earnings |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
Change in fair value |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Ending accumulated gains (losses), at September 30, 2009 |
|
$ |
(3 |
) |
|
$ |
(7 |
) |
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel |
|
|
Interest Rate |
|
|
|
|
|
|
Derivatives |
|
|
Swaps |
|
|
Total |
|
Beginning accumulated gains (losses), at December 31, 2008 |
|
$ |
(78 |
) |
|
$ |
(6 |
) |
|
$ |
(84 |
) |
Reclassifications into earnings |
|
|
74 |
|
|
|
|
|
|
|
74 |
|
Change in fair value |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending accumulated gains (losses), at September 30, 2009 |
|
$ |
(3 |
) |
|
$ |
(7 |
) |
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
13
Note 5 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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
15 |
|
|
$ |
(8 |
) |
|
$ |
47 |
|
|
$ |
(27 |
) |
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible debt, net of income taxes |
|
|
3 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common
stockholders after assumed conversion for
diluted earnings per share |
|
$ |
18 |
|
|
$ |
(8 |
) |
|
$ |
53 |
|
|
$ |
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for
basic earnings (loss) per share |
|
|
272,218 |
|
|
|
225,927 |
|
|
|
256,229 |
|
|
|
221,875 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
3,346 |
|
|
|
|
|
|
|
2,967 |
|
|
|
|
|
Convertible debt |
|
|
68,605 |
|
|
|
|
|
|
|
68,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares outstanding
and assumed conversions for diluted earnings
(loss) per share |
|
|
344,169 |
|
|
|
225,927 |
|
|
|
327,801 |
|
|
|
221,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded from EPS calculation (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of our convertible
debt since assumed conversion would be antidilutive |
|
|
9.2 |
|
|
|
56.4 |
|
|
|
9.2 |
|
|
|
56.4 |
|
Shares issuable upon exercise of outstanding stock options
since assumed exercise would be antidilutive |
|
|
23.0 |
|
|
|
27.9 |
|
|
|
24.2 |
|
|
|
27.9 |
|
As of September 30, 2009, 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 to our 2008 Annual Report, were issued and outstanding for corporate law
purposes, and holders of the borrowed shares have all the rights of a holder of our common stock.
However, because the share borrower must return all borrowed shares to us (or identical shares or,
in certain circumstances, the cash value thereof), the borrowed shares are not considered
outstanding for the purpose of computing and reporting basic or diluted earnings (loss) per share.
Note 6 Employee Retirement Plan
We sponsor a retirement savings 401(k) defined contribution plan, or the Plan, a component of
which is a profit sharing plan. All employees are eligible to participate in the Plan. Our
contributions expensed for the Plan for the three months ended September 30, 2009 and 2008 were $13 million and $10 million,
14
respectively, and contributions expensed for
the Plan for the nine months ended September 30, 2009 and 2008 were $36 million and $32 million
respectively.
Note 7 Commitments and Contingencies
In July 2009, we amended our Airbus purchase agreement, deferring delivery of three aircraft
previously scheduled for delivery in 2010 to 2011. Additionally, we cancelled six options
previously scheduled for delivery in 2011 and 2012. In July 2009, we also extended the lease on
two of our aircraft, one of which was previously scheduled to expire in December 2009 and the other
in March 2010. These extensions resulted in an additional $11 million of lease commitments through
2012. In February 2009, we amended our EMBRAER purchase agreement, canceling two options
originally scheduled for delivery in 2015. In March 2009, we elected to defer delivery of three
aircraft originally scheduled for delivery in 2010 to 2012.
In January 2009, we sold two new EMBRAER 190 aircraft immediately after such aircraft were
received by us. We understand these two EMBRAER 190 aircraft are now being operated by Azul Linhas
Aéreas Brasileiras, SA, or Azul, an airline founded by David Neeleman, our former Chairman of the
Board, in addition to two aircraft previously leased to Azul in 2008.
As of September 30, 2009, our firm aircraft orders consisted of 55 Airbus A320 aircraft, 60
EMBRAER 190 aircraft and 19 spare engines scheduled for delivery through 2016. Committed
expenditures for these aircraft and related flight equipment, including estimated amounts for
contractual price escalations and predelivery deposits, will be approximately $5 million for the
remainder of 2009, $130 million in 2010, $570 million in 2011, $1.01 billion in 2012, $955 million
in 2013 and $1.90 billion thereafter.
We have entered into sale-leaseback arrangements with a third party lender for 45 of our
operating aircraft. 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 consists 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 ASC 810, Consolidations. 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 are approximately $1.19 billion as
of September 30, 2009. Our only interest in these entities is a fixed price option to acquire the
aircraft at the end of the lease term that were not deemed to be bargain purchase options at lease
inception. 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.
We utilize several credit card processors to process our ticket sales. Our agreements with
these processors do not contain covenants, but do generally allow the processors to withhold cash
reserves to protect the processor for potential liability for tickets purchased, but not yet used
for travel. The letter of credit established for our primary credit card processor in 2008 was
reduced by $5 million in June 2009 and further reduced by $20 million in August 2009, resulting in
a balance of $30 million as of September 30, 2009. While we have experienced reductions in our
collateral requirements recently, we may be required to issue additional collateral to our credit
card processors, or other key vendors, in the future.
Note 8
Financial Derivative Instruments and Risk Management
Effective January 1, 2009, we adopted provisions of ASC 815, Derivatives and Hedging,
15
which enhances the disclosure requirements related to derivative instruments and
hedging activity to improve the transparency of financial reporting.
As part of our risk management strategy, we periodically purchase crude or heating oil option
contracts or swap agreements in order to manage our exposure to the effect of changes in the price
and availability of aircraft fuel. Prices for these commodities are normally highly correlated to
aircraft fuel, making derivatives of them effective at providing short-term protection against
sharp increases in average fuel prices. We also periodically enter into basis swaps for the
differential between heating oil and jet fuel, as well as jet fuel swaps, to further limit the
variability in fuel prices at various locations. To manage the variability of the cash flows
associated with our variable rate debt, we have also entered into interest rate swaps. We do not
hold or issue any derivative financial instruments for trading purposes.
Aircraft fuel derivatives: We attempt to obtain cash flow hedge accounting treatment for each
aircraft fuel derivative that we enter into. This treatment is provided for under the Derivatives
and Hedging topic of the Codification, ASC 815, which allows for gains and losses on the effective portion of
qualifying hedges to be deferred until the underlying planned jet fuel consumption occurs, rather
than recognizing the gains and losses on these instruments into earnings for each period that they
are outstanding. The effective portion of realized aircraft fuel hedging derivative gains and
losses is recognized in fuel expense, while ineffective gains and losses are recognized in interest
income and other. All cash flows related to our fuel hedging derivatives are classified as
operating cash flows.
Ineffectiveness results when the change in the total fair value of the derivative instrument
does not exactly equal the change in the value of our expected future cash outlays for the purchase
of aircraft fuel. To the extent that the periodic changes in the fair value of the hedging
instruments are not effective, the ineffectiveness is recognized in other income (expense)
immediately. Likewise, if a hedge does not qualify for hedge accounting, the periodic changes in
its fair value are recognized in other income (expense). When aircraft fuel is consumed and the
related derivative contract settles, any gain or loss previously deferred in other comprehensive
income is recognized in aircraft fuel expense.
As a result of the rapid decline in fuel prices experienced during the fourth quarter of 2008,
we sold swap contracts to the original fuel counterparties covering all of our 2009 swap contracts,
effectively capping our losses related to further oil price declines. At December 31, 2008, we had
effectively exited all of our open swap contracts by entering into reverse swap sales with the same
counterparties for the same quantity and duration of our existing swap contracts. The forecasted
fuel consumption, for which these transactions were designated as cash flow hedges, occurred as
originally expected; therefore, amounts deferred in other comprehensive income related to these
contracts remained deferred until the forecasted fuel consumption occurred. At December 31, 2008,
we had deferred $93 million, or $56 million net of taxes, of these losses in other comprehensive
income associated with these contracts. We recognized all of these losses into fuel expense during
the nine months ended September 30, 2009.
Since exiting our contracts at the end of 2008, we have been revising our fuel hedging
approach. During the second and third quarters of 2009, we entered into a variety of crude oil cap
agreements, heating oil collars, and jet fuel swap agreements, most of which are designated as cash
flow hedges for accounting purposes. The following table illustrates the approximate hedged
percentages of our projected fuel usage by quarter as of September 30, 2009, related to our
outstanding fuel hedging contracts that were designated as cash flow hedges for accounting
purposes.
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil cap |
|
Heating oil |
|
Jet fuel swap |
|
|
|
|
agreements |
|
collars |
|
agreements |
|
Total |
Fourth Quarter 2009
|
|
|
10 |
% |
|
|
11 |
% |
|
|
37 |
% |
|
|
58 |
% |
|
First Quarter 2010
|
|
|
15 |
% |
|
|
5 |
% |
|
|
29 |
% |
|
|
49 |
% |
|
Second Quarter 2010
|
|
|
19 |
% |
|
|
5 |
% |
|
|
0 |
% |
|
|
24 |
% |
|
Third Quarter 2010
|
|
|
18 |
% |
|
|
5 |
% |
|
|
0 |
% |
|
|
23 |
% |
|
Fourth Quarter 2010
|
|
|
20 |
% |
|
|
5 |
% |
|
|
0 |
% |
|
|
25 |
% |
|
First Quarter 2011
|
|
|
3 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
3 |
% |
During the three months ended September 30, 2009, we also entered into additional jet fuel
swap agreements covering approximately 3% of our projected fuel usage for the fourth quarter of
2009, which we have not designated as cash flow hedges for accounting purposes and as a result we
mark to market in earnings each period based on their current fair value. During the nine months
ended September 30, 2009, we also entered into basis swaps, which we have not designated as cash
flow hedges for accounting purposes and as a result we mark to market in earnings each period based
on their current fair value.
Interest rate swaps: The interest rate hedges we had outstanding as of September 30, 2009
effectively swap floating rate debt for fixed rate debt, taking advantage of lower borrowing rates
in existence since our original debt instruments were executed. As of September 30, 2009, we had
$404 million in notional amount of debt outstanding related to these swaps, which cover certain
interest payments through August 2016. The notional amount decreases over time to match scheduled
repayments of the related debt.
All of our outstanding interest rate swap contracts qualify as cash flow hedges in accordance
with the derivative and hedging topic of the Codification, ASC 815. Since all of the critical
terms of our swap agreements match the debt to which they pertain, there was no ineffectiveness
relating to these interest rate swaps in 2008 or 2009 and all related unrealized losses were
deferred in accumulated other comprehensive income. We recognized approximately $3 million in
additional interest expense related to hedge effectiveness losses on our interest rate hedges
during the nine months ended September 30, 2009.
Any outstanding derivative instruments expose us to credit loss in the event of nonperformance
by the counterparties to the agreements, but we do not expect that any of our three counterparties
will fail to meet their obligations. The amount of such credit exposure is generally the fair value
of our outstanding contracts. To manage credit risks, we select counterparties based on credit
assessments, limit our overall exposure to any single counterparty and monitor the market position
of each counterparty. Some of our agreements require cash deposits if market risk exposure exceeds
a specified threshold amount.
The financial derivative instrument agreements we have with our counterparties may require us
to fund all, or a portion of, outstanding loss positions related to these contracts prior to their
scheduled maturities. The amount of collateral posted, if any, is periodically adjusted based on
the fair value of the hedge contracts. Our policy is to offset the liabilities represented by
these contracts with any cash collateral paid to the counterparties. The table below reflects a
summary of our collateral balances as of September 30, 2009 and December 31, 2008 (in millions):
17
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
September 30, |
|
December 31, |
|
|
2009 |
|
2008 |
Fuel derivatives |
|
|
|
|
|
|
|
|
Cash collateral posted to counterparty offsetting
hedge liability in other current liabilities |
|
$ |
4 |
|
|
$ |
117 |
|
Cash collateral posted for settled fuel contracts in
current liabilities |
|
|
4 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
|
|
|
|
|
|
|
|
Cash collateral posted to counterparty offsetting
hedge liability in other current liabilities |
|
$ |
12 |
|
|
$ |
11 |
|
The table below reflects quantitative information related to our derivative instruments and
where these amounts are recorded in our financial statements. The fair value of those contracts
not designated as cash flow hedges was not material at either December 31, 2008 or
September 30, 2009 (dollar amounts in millions).
18
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
September 30, |
|
December 31, |
|
|
2009 |
|
2008 |
Fuel derivatives |
|
|
|
|
|
|
|
|
Asset fair
value recorded in current investment securities and derivative assets |
|
$ |
11 |
|
|
$ |
|
|
Asset fair value recorded in long term investment securities |
|
|
5 |
|
|
|
|
|
Liability fair value recorded in other current liabilities (1) |
|
|
6 |
|
|
|
35 |
|
Liability fair value of de-designated hedges recorded in other
current liabilities (1) (2) |
|
|
|
|
|
|
93 |
|
Longest remaining term (months) |
|
|
18 |
|
|
|
12 |
|
Hedged volume (barrels, in thousands) |
|
|
5,160 |
|
|
|
870 |
|
Estimated amount of existing gains (losses) expected to be
reclassified into earnings in the next 12 months |
|
|
(4 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
|
|
|
|
|
|
|
|
Liability fair value recorded in other long term liabilities (1) |
|
|
12 |
|
|
|
11 |
|
Estimated
amount of existing gains (losses) expected to be reclassified into earnings in the next 12 months |
|
|
(7 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
September 30, |
|
September 30, |
|
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
Fuel derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge
effectiveness gains (losses) recognized in aircraft fuel expense |
|
$ |
(23 |
) |
|
$ |
22 |
|
|
$ |
(121 |
) |
|
$ |
105 |
|
Hedge
ineffectiveness gains (losses) recognized in other income (expense) |
|
|
* |
|
|
|
(1 |
) |
|
|
* |
|
|
|
* |
|
Gains
(losses) of derivatives not qualifying for hedge accounting recognized in other income (expense) |
|
|
(2 |
) |
|
|
4 |
|
|
|
(2 |
) |
|
|
4 |
|
Hedge gains
(losses) of derivatives recognized in comprehensive income, (see Note 4) |
|
|
(1 |
) |
|
|
(132 |
) |
|
|
2 |
|
|
|
18 |
|
Percentage of actual consumption economically hedged |
|
|
8 |
% |
|
|
42 |
% |
|
|
9 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge gains
(losses) of derivatives recognized in comprehensive income, (see Note 4) |
|
|
(7 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
* |
|
|
|
|
(1) |
|
Gross liability, prior to impact of collateral posted |
|
(2) |
|
Includes the fair value of our reverse swap sales contracts that were entered into in order to effectively exit our original
swap contracts. The value of these contracts was $44 million as of December 31, 2008, all of which settled by
September 30, 2009.
|
|
* |
|
Amount considered not material |
Note 9
Fair Value of Financial Instruments
Under the Fair Value Measurements and Disclosures topic of the Codification, ASC 820, disclosures are required about how fair value is determined for
assets and liabilities and hierarchy for which these assets and liabilities must be grouped is
established, based on significant levels of inputs as follows:
Level 1 quoted prices in active markets for identical assets or liabilities;
19
Level 2 quoted prices in active markets for similar assets and liabilities and inputs that
are observable for the asset or liability; or
Level 3 unobservable inputs, such as discounted cash flow models or valuations.
The determination of where assets and liabilities fall within this hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. The following is a
listing of our assets and liabilities required to be measured at fair value on a recurring basis
and where they are classified within the hierarchy as of September 30, 2009 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
939 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
939 |
|
Restricted cash |
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
109 |
|
Short term investments |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Auction rate securities (ARS) |
|
|
|
|
|
|
|
|
|
|
194 |
|
|
|
194 |
|
Put option related to ARS |
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
11 |
|
Aircraft fuel derivatives |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,055 |
|
|
$ |
16 |
|
|
$ |
205 |
|
|
$ |
1,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel derivatives |
|
$ |
|
|
|
$ |
6 |
|
|
$ |
|
|
|
$ |
6 |
|
Interest rate swap |
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
6 |
|
|
$ |
12 |
|
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 3 for fair value information related to our outstanding debt obligations as of
September 30, 2009. The following tables reflect the activity for the major classes of our assets
and liabilities measured at fair value using level 3 inputs (in millions) for the three and nine
months ended September 30, 2009:
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction Rate |
|
|
Put Option |
|
|
Interest Rate |
|
|
|
|
|
|
Securities |
|
|
related to ARS |
|
|
Swaps |
|
|
Total |
|
Balance as of June 30, 2009 |
|
$ |
215 |
|
|
$ |
12 |
|
|
$ |
(5 |
) |
|
$ |
222 |
|
Transfers in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or (losses), realized or unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
4 |
|
|
|
(1 |
) |
|
|
|
|
|
|
3 |
|
Included in comprehensive income |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
(7 |
) |
Purchases, issuances and settlements, net |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009 |
|
$ |
194 |
|
|
$ |
11 |
|
|
$ |
(12 |
) |
|
$ |
193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
$ |
244 |
|
|
$ |
14 |
|
|
$ |
(10 |
) |
|
$ |
248 |
|
Transfers in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or (losses), realized or unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
4 |
|
|
|
(3 |
) |
|
|
|
|
|
|
1 |
|
Included in comprehensive income |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
Purchases, issuances and settlements, net |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009 |
|
$ |
194 |
|
|
$ |
11 |
|
|
$ |
(12 |
) |
|
$ |
193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: Our cash and cash equivalents include money market securities and
trade deposits which are readily convertible into cash with maturities of three months or less when
purchased, both of which are considered to be highly liquid and easily tradable. These securities
are valued using inputs observable in active markets for identical securities and are therefore
classified as level 1 within our fair value hierarchy.
Short-term investments: Our short term investments include short-term, highly liquid
investments with maturities greater than three months when purchased. These securities are valued
using inputs observable in active markets for identical securities and are therefore classified as
level 1 within our fair value hierarchy.
Auction rate securities: At September 30, 2009, the fair values of our ARS, all of which are
collateralized by student loan portfolios (substantially all of which are guaranteed by the United
States Government), were estimated through discounted cash flow models. Since these inputs were
not observable, they are classified as level 3 inputs. For the three months ended September 30,
2009, we recorded an unrealized holding gain on our ARS of $4 million, based on the current fair
value. We classify our ARS as trading securities and therefore measure at each reporting period
with the resulting gain (loss) recognized in other income
(expense). Our classification as trading securities is
based on our intent to trade the securities when market opportunities arise in order to increase
our liquid investments due to the current economic uncertainty and the specific disposition
agreement we have with one of our broker dealers. Our discounted cash flow analysis considered,
among other things, the quality of the underlying collateral, the credit rating of the issuers, an
estimate of when these securities are either expected to have a successful auction or otherwise
return to par value, expected interest income to be received over this period, and the estimated
required rate of return for investors. Because of the inherent subjectivity in valuing these
securities, we also considered independent valuations obtained for each of our ARS as of September
30, 2009 in estimating their fair values. In February 2009, we sold certain ARS for $29 million,
an amount which approximated their fair value as of December 31, 2008. The proceeds of these sales
were used to reduce our line(s) of credit. In August 2009, we sold certain ARS for $25 million, an
amount which approximated their fair value as of June 30, 2009.
21
In October 2009, we entered into
an agreement with Citigroup Global
Markets, Inc., under which they have agreed to purchase our auction rate securities
which had a par value of approximately $158 million. The $120
million in cash proceeds from these sales are not included in our
September 30, 2009 cash balance, and did not result in significant
gains or losses. In conjunction with this transaction, we terminated the line of credit we had with Citigroup.
Put option related to ARS: We have elected to apply the fair value option under the Financial
Instruments topic of the Codification, ASC 825, to UBSs agreement to repurchase, at par, ARS brokered by them.
As of September 30, 2009, the $11 million fair value of this put option is included in other
current assets in our consolidated balance sheets with the resultant loss included in other income
(expense). The change in fair value during the three and nine months ended September 30, 2009 was
a loss of approximately $1 million and $3 million, respectively. The fair value of the put is
determined by comparing the fair value of the related ARS, as described above, to their par values
and also considers the credit risk associated with UBS. This put option will be adjusted on each
balance sheet date based on its then fair value. The fair value of the put option is based on
unobservable inputs and is therefore classified as level 3 in the hierarchy.
Interest Rate Swaps: The fair values of our interest rate swaps are 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. Since some of these inputs were not observable, they are classified as level 3
inputs in the hierarchy.
Aircraft fuel derivatives: Our heating oil and jet fuel swaps, heating oil collars, and crude
oil caps are not traded on public exchanges. Their fair values are determined based on inputs that
are readily available from public markets; therefore, they are classified as level 2 inputs.
Note 10 Stockholders Equity
On June 9, 2009, in conjunction with the public offering of the Debentures described in Note
3, 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.
Note 11 Income Taxes
The effective tax rate on our income (loss) before taxes can differ from the statutory rates
for various reasons from period to period, including but not limited to permanent differences,
share-based compensation, non-deductible meals and other permanent differences, and changes in the valuation
allowance.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Outlook
While the global economy appeared to show signs of improvement during the third quarter of
2009, weakened demand for domestic leisure and business air travel continued. The industry has
continued to be aggressive with fare sales, which added to an already challenging pricing
environment. Continued volatility and continued economic uncertainty may have a negative impact on
our business, and therefore we continue to monitor closely consumer demand in order to promptly
respond to changes in the demand environment. In an effort to increase demand during low travel
periods and attract new customers, we launched our All-You-Can-Jet Pass promotion in September
2009, offering unlimited travel for one month at a fixed fee. Earlier this year, the Federal
Aviation Administration, or FAA, released projections that in 2009, domestic airlines would see a
9% reduction in passengers. Furthermore, the International Airline Transportation Association, or
IATA, recently predicted that 2009 global revenues would see dramatic decreases, and that industry
recovery is not imminent. Domestic airlines have largely responded to the economic environment and
softening demand by cutting capacity. In response to the uncertain economic conditions, we
continue to focus on cost discipline, careful management of our fleet and capacity, and maintaining
a strong liquidity position.
Lower fuel prices throughout most of 2009, when compared to 2008, have helped to offset the
weaker demand environment. In the fourth quarter of 2008, we began revising our fuel hedge program
and effectively exited a majority of our 2009 fuel hedges outstanding at that time and prepaid a
portion of our liability, limiting our exposure to additional cash collateral requirements. As a
result, we benefited from the lower fuel prices throughout the first nine months of the year. In
the second and third quarters of 2009, fuel prices began to rise, although they remain much lower
than the record high prices of last year. In response, we entered into a variety of fuel hedge
contracts covering approximately 61% of our forecasted consumption for the fourth quarter of 2009,
30% of our forecasted consumption for the full year 2010, and minimal amounts of our forecasted
consumption for 2011. We will continue to monitor fuel prices closely, and adjust our approach to
fuel hedging as we believe it is advisable.
We continued our focus on maintaining a strong liquidity position. In October 2009, we
entered into an agreement with Citigroup Global Markets, Inc. under which they agreed to purchase our
auction rate securities, or ARS, which had a par value of approximately $158 million, for approximately $120 million. In June 2009, we
successfully accessed the capital markets raising net proceeds of approximately $300 million
through a $201 million convertible debt financing and a $112 million common stock offering. In
July 2009, we deferred delivery of three A320 aircraft previously scheduled for delivery in 2010. As a
result, we currently are not obligated to take delivery of any aircraft during 2010. During the
first quarter, we sold two of our aircraft immediately after their delivery to us from their
manufacturer. We currently expect our year end operating fleet to consist of the 110 Airbus A320
aircraft and 41 EMBRAER 190 aircraft that are currently in service. We have one of the youngest and
most fuel efficient fleets in the industry, with an average age of 4.1 years, which we believe
gives us a competitive advantage.
In 2009, we have been growing our route network primarily through adding new destinations in
the Caribbean and Latin America, markets which, in general, generate
higher revenues and have historically matured more quickly than mainland flights of a comparable distance. We have approximately 20% of our
capacity in the Caribbean and Latin America, and we expect this number to grow by the end of 2009.
We commenced service to Bogotá, Colombia in January 2009, San Jose, Costa Rica in March 2009,
Montego Bay, Jamaica in May 2009, and Bridgetown, Barbados and Vieux Fort, St. Lucia in October
2009. We have also announced plans to begin service to Kingston, Jamaica beginning in October
2009. In addition, we commenced service to Los Angeles, CA in June 2009 and from Boston, MA to
Baltimore, MD in September 2009. The addition of this service has helped to strengthen our
position as the largest carrier at Bostons Logan International Airport in terms of destinations
served.
23
In September 2009, we received Department of Transportation, or DOT, approval to launch a
commercial codeshare agreement with Deutsche Lufthansa AG, providing our customers with convenient connections
at 12 of our domestic locations to Deutsche Lufthansa AGs network of over 400 locations overseas.
This new
partnership with one of the worlds preeminent airlines, and our largest shareholder will allow us
to leverage our positions at JFK and Boston. We have begun to sell connections under the new
agreement and expect sales to increase as more people learn about our partnership and we add
additional domestic and international connections in the future.
We expect our full-year
2009 operating capacity to remain relatively flat, with growth between
negative 1% to positive 1% over 2008 with the net addition of three Airbus A320 aircraft and six
EMBRAER 190 aircraft to our operating fleet. We expect that the EMBRAER 190 aircraft will
represent approximately 14% of our total 2009 operating capacity. Assuming fuel prices of $2.01
per gallon, net of effective hedges, our cost per available seat mile for 2009 is expected to
decrease between 7% and 9% over 2008. We expect our full year operating margin to be between 7% and 9% and
our pre-tax margin to be between 2% and 4%.
Results of Operations
Our operating revenue per available seat mile for the quarter decreased 8% over the same
period in 2008. Our average fares for the quarter decreased 11% over 2008 to $127.04, while our
load factor declined 0.3 points to 83.7% from a year ago. Our on-time performance, defined by the
DOT as arrival within 14 minutes of schedule, was 78.7% in the third quarter of 2009 compared to
69.3% for the same period in 2008, while our completion factor was 98.8% and 97.4% in 2009 and
2008, respectively.
Three Months Ended September 30, 2009 and 2008
We reported net income of $15 million for the three months ended September 30, 2009, compared
to a net loss of $8 million for the three months ended September 30, 2008. Diluted earnings per
share were $0.05 for the third quarter of 2009 compared to diluted loss per share of $0.03 for
2008. Our operating income for the three months ended September 30, 2009 was $66 million compared
to $22 million for the same period last year, and our pre-tax margin increased 3.8 points from
2008, to 2.7%.
Operating Revenues. Operating revenues decreased 5%, or $48 million, over the same period in
2008 primarily due to a 5%, or $43 million, decrease in passenger revenues. The decrease in
passenger revenues was attributable to a 0.3 point decrease in load factor on 3% more capacity and
an 8% decrease in yield over the third quarter of 2008.
Other revenue decreased 5%, or $5 million, primarily due to lower change fees.
Other revenue also decreased due to lower marketing
revenues, offset by an increase in excess baggage revenue and higher concession revenues from our
new terminal at JFK.
Operating Expenses. Operating expenses decreased 10%, or $92 million, over the same period in
2008, primarily due to lower fuel prices, partially offset by increased salaries, wages and
benefits and maintenance expense. Operating capacity increased 3% to 8.4 billion available seat
miles. Operating expenses per available seat mile decreased 13% to 9.40 cents for the three months
ended September 30, 2009. Excluding fuel, our cost per available seat mile for the three months
ended September 30, 2009 was 9% higher compared to the same period in 2008. Our operating expenses
on a unit basis have increased due to a shift in capacity from transcontinental flying to shorter
haul, which resulted in a 5% decrease in our average stage length year over year. In detail,
operating costs per available seat mile were as follows (percent changes are based on unrounded
numbers):
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
September 30, |
|
Percent |
|
|
2009 |
|
2008 |
|
Change |
|
|
(in cents) |
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel |
|
|
2.93 |
|
|
|
4.84 |
|
|
|
(39.6 |
)% |
Salaries, wages and
benefits |
|
|
2.36 |
|
|
|
2.13 |
|
|
|
11.1 |
% |
Landing fees and other
rents |
|
|
.68 |
|
|
|
.64 |
|
|
|
5.9 |
% |
Depreciation and
amortization |
|
|
.70 |
|
|
|
.66 |
|
|
|
5.5 |
% |
Aircraft rent |
|
|
.37 |
|
|
|
.40 |
|
|
|
(6.1 |
)% |
Sales and marketing |
|
|
.45 |
|
|
|
.45 |
|
|
|
(1.4 |
)% |
Maintenance materials
and repairs |
|
|
.48 |
|
|
|
.40 |
|
|
|
21.7 |
% |
Other operating expenses |
|
|
1.43 |
|
|
|
1.28 |
|
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
9.40 |
|
|
|
10.80 |
|
|
|
(13.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel expense decreased 38%, or $148 million, due to a 40% decrease in average fuel
cost per gallon, or $160 million after the impact of fuel hedging, offset by an increase of 4
million gallons of aircraft fuel consumed, resulting in $12 million more in fuel expense. We
recorded $23 million in effective fuel hedge losses during the third quarter of 2009 versus $22 million in
effective fuel hedge gains during the third quarter of 2008. Our average fuel cost per gallon was $2.07 for
the third quarter of 2009 compared to $3.42 for the third quarter of 2008.
Salaries, wages and benefits increased 14%, or $26 million, primarily due to increases in
pilot wages and related benefits under our new pilot employment agreements and a 7% increase in
average full-time equivalent employees. The increase in full-time equivalent employees is
partially driven by our policy of not furloughing employees during economic downturns and
additional hirings related to training as we prepare for our new reservations system cutover in
early 2010.
Landing fees and other rents increased 9%, or $4 million, due primarily to higher landing fee
rates and an 8% increase in departures over 2008, offset by $4 million reduction in airport rents
at JFK from 2008 due to our terminal move.
Depreciation and amortization increased 9%, or
$5 million, primarily due to $5 million in
amortization associated with Terminal 5, which we began operating from in October 2008, and $6
million related to having on average nine more owned aircraft in 2009. Depreciation and amortization
in 2008 included an $8 million asset write-off related to our temporary terminal building at JFK.
Sales and marketing expense remained relatively flat, due to $1 million in lower credit card
fees resulting from decreased passenger revenues offset by $1 million in higher advertising costs.
Maintenance, materials, and repairs increased 25%, or $8 million, due to an average of nine
additional average operating aircraft in 2009, compared to the same
period in 2008 and the age of our fleet. The average age
of our fleet increased to 4.1 years compared to 3.5 years in the year ago period. Maintenance
expense is expected to increase significantly as our fleet ages, which results in the need for
additional repairs over time.
25
Other operating expenses increased 14%, or $15 million, due to an increase in variable costs
associated with 8% more departures versus 2008. Other operating expenses in 2008 were offset by $6
million for certain tax incentives and included $2 million in gains on sales of aircraft.
Other Income (Expense). Interest expense decreased 25%, or $17 million, primarily due to
lower interest rates and extinguishments of debt, totaling approximately $15 million, offset by
the financing of six net additional aircraft and our 2009 6.75% convertible Debentures, which
resulted in $8 million of additional interest expense. Interest expense in 2008 was also higher due
to $5 million make whole payments from escrow in connection with the partial conversion of a
portion of our 5.5% convertible debentures due 2038. Capitalized interest in 2008 included $13
million associated with the construction of our new terminal at JFK, which ceased being
capitalized following the opening of the terminal in October 2008.
Interest income and other decreased 75%, or $15 million, primarily due to lower interest rates
earned on investments, and lower average cash and investment balances, resulting in $6 million
lower interest income. This decrease was offset by a $3 million gain to reflect the fair value
adjustment of our ARS, including the related put option in 2009.
Our derivative instruments not qualifying for cash flow hedges in 2009
resulted in a loss of $2 million, compared to a $4 million gain in 2008.
Additionally, in 2008, accounting ineffectiveness on crude and heating oil
derivatives classified as cash flow hedges resulted in a $1 million loss.
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.
Nine Months Ended September 30, 2009 and 2008
We reported net income of $47 million for the nine months ended September 30, 2009 compared to
a $27 million net loss for the nine months ended September 30, 2008. Diluted earnings per share
were $0.16 for the nine months ended September 30, 2009 compared to a loss per share of $0.12 for
the same period in 2008. Our operating income for the nine months ended September 30, 2009 was $215
million compared to $60 million for the same period in 2008, and our pre-tax margin increased 4.7
points from 2008 to 3.2%.
Operating Revenues. Operating revenues decreased 5%, or $123 million, over the same period in
2008 primarily due to a 6%, or $143 million, decrease in passenger revenues. The decrease in
passenger revenues was attributable to a 1.1 point decrease in load factor on 1% less capacity and
a 3% decrease in yield over 2008, offset by the addition of our Even More Legroom
optional upgrade product, which we introduced in mid-2008.
Other revenues increased 8%, or $20 million, primarily due to higher excess baggage revenue
resulting from new bag fees introduced in 2008 and increased rates for these and other ancillary services in 2009. Other revenue also increased due to additional
LiveTV third party revenues and higher concession revenues from our new terminal at JFK, partially
offset by a reduction in charter revenue.
Operating Expenses. Operating expenses decreased 11%, or $278 million, over the same period in
2008, primarily due to lower fuel prices and decreased capacity, partially offset by increased
salaries, wages and benefits and depreciation and amortization. Operating capacity decreased 1% to
24.6 billion available seat miles. Operating expenses per available seat mile decreased 10% to 9.11
cents for the nine months ended September 30, 2009. Excluding fuel, our cost per available seat
mile for the nine months ended September 30, 2009 was 9% higher than the same period in 2008. Our
operating expenses, excluding fuel, on a unit basis have increased due to a shift in capacity from transcontinental
flying to shorter haul, which resulted in
a 6% decrease in our average stage length year over year. In detail, operating costs per
available seat mile were as follows (percent changes are based on unrounded numbers):
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Percent |
|
|
2009 |
|
2008 |
|
Change |
|
|
(in cents) |
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel |
|
|
2.80 |
|
|
|
4.30 |
|
|
|
(35.0 |
)% |
Salaries, wages and
benefits |
|
|
2.34 |
|
|
|
2.08 |
|
|
|
12.5 |
% |
Landing fees and other
rents |
|
|
.65 |
|
|
|
.61 |
|
|
|
6.8 |
% |
Depreciation and
amortization |
|
|
.69 |
|
|
|
.58 |
|
|
|
19.1 |
% |
Aircraft rent |
|
|
.39 |
|
|
|
.39 |
|
|
|
(0.2 |
)% |
Sales and marketing |
|
|
.46 |
|
|
|
.47 |
|
|
|
(2.6 |
)% |
Maintenance materials
and repairs |
|
|
.45 |
|
|
|
.39 |
|
|
|
16.3 |
% |
Other operating expenses |
|
|
1.33 |
|
|
|
1.28 |
|
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
9.11 |
|
|
|
10.10 |
|
|
|
(9.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel expense decreased 36%, or $385 million, due to a 35% decrease in average fuel
cost per gallon, or $370 million after the impact of fuel hedging, and 5 million less gallons of
aircraft fuel consumed, resulting in $15 million less fuel expense. We recorded $121 million in
fuel hedge losses during the first three quarters of 2009 versus $105 million in fuel hedge gains
during the first three quarters of 2008. Our average fuel cost per gallon was $2.00 for the nine
months ended September 30, 2009 compared to $3.08 for the same period in 2008. Cost per available
seat mile decreased 35% primarily due to the decrease in fuel price.
Salaries, wages and benefits increased 11%, or $57 million, due primarily to increases in
pilot pay and related benefits under our new pilot employment agreements and a 3% increase
in average full-time equivalent employees. The increase in full-time equivalent employees is
partially driven by our policy of not furloughing employees during economic downturns and
additional hirings related to training as we prepare for our new reservations system cutover in
early 2010. Cost per available seat mile increased 13% primarily due to increased average wages
per average full-time equivalent employee, as well as certain inefficiencies associated with
reductions in capacity.
Landing fees and other rents increased 5%, or $8 million, due to a 5% increase in departures
over 2008, offset by an $11 million reduction in airport rents at JFK following our terminal move.
Cost per available seat mile increased 7% due to increased departures and reduced capacity.
Depreciation and amortization increased 17%, or $25 million, primarily due to $16 million in
amortization associated with Terminal 5, which we began operating from in October 2008, and $14
million
related to having on average eight more owned aircraft in 2009. Depreciation and amortization in
2008 included an $8 million asset write-off related to our temporary terminal building at JFK.
Sales and marketing expense decreased 4%, or $5 million, due to $4 million in lower credit
card fees resulting from decreased passenger revenues as well as $2 million in lower advertising
costs, offset by $1 million in higher commissions in 2009.
On a cost per available seat mile basis, sales and marketing expense decreased 3%
due to lower advertising and credit card fees.
Maintenance, materials, and repairs increased 15%, or $14 million, due to eight additional average
operating aircraft in 2009 compared to the same period in 2008 and the age of our fleet.
The average age of our
27
fleet increased to 4.1 years compared to 3.5 years in the year ago period.
Maintenance expense is expected to increase significantly as our fleet ages, which will result in the
need for additional repairs over time. Cost per available seat mile
increased 16% primarily due to the gradual aging of our fleet which results in additional repairs.
Other operating expenses increased 3%, or $10 million, primarily due to an increase in
variable costs associated with 5% more departures versus 2008. Other operating expenses were reduced by
$11 million for certain tax incentives and $1 million in gains on sales of aircraft in 2009,
compared to $15 million in gains on sales of aircraft and $6 million for certain tax incentives in
2008. Cost per available seat mile increased 5% primarily due to decreases in capacity and the
effect of lower fuel taxes.
Other Income (Expense). Interest expense decreased 18%, or $34 million, primarily due to lower
interest rates and extinguishment of debt, totaling approximately $39 million, offset by the
financing of additional aircraft and our 2009 6.75% convertible Debentures, which resulted in $21
million of additional interest expense. Interest expense in 2008 included the impact of $5 million
of make whole payments from escrow in connection with the partial conversion of a portion of our
5.5% convertible debentures due 2038. Capitalized interest in 2008 included $32 million associated
with the construction of our new terminal at JFK, which is no longer being capitalized.
Interest income and other decreased 84%, or $34 million, primarily due to lower interest rates
earned on investments, and lower average cash and investment balances, resulting in $20 million
lower interest income. Interest income and other also decreased due to a net $1 million
loss related to our auction rate securities and related put option.
Our derivative instruments not qualifying for
cash flow hedges in 2009 resulted in a loss of $2 million,
compared to a $4 million gain in 2008. Additionally, in 2008,
accounting ineffectiveness on crude and heating oil
derivatives classified as cash flow hedges resulted in a $1 million gain.
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. Interest income and other included $2 million and $9
million in gains on the extinguishment of debt in 2009 and 2008, respectively.
The following table sets forth our operating statistics for the three and nine months ended
September 30, 2009 and 2008:
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Percent |
|
September 30, |
|
Percent |
|
|
2009 |
|
2008 |
|
Change |
|
2009 |
|
2008 |
|
Change |
Operating Statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers (thousands) |
|
|
6,011 |
|
|
|
5,657 |
|
|
|
6.3 |
|
|
|
16,993 |
|
|
|
16,812 |
|
|
|
1.1 |
|
Revenue passenger miles (millions) |
|
|
7,027 |
|
|
|
6,848 |
|
|
|
2.6 |
|
|
|
19,612 |
|
|
|
20,167 |
|
|
|
(2.8 |
) |
Available seat miles (ASMs) (millions) |
|
|
8,391 |
|
|
|
8,154 |
|
|
|
2.9 |
|
|
|
24,570 |
|
|
|
24,932 |
|
|
|
(1.4 |
) |
Load factor |
|
|
83.7 |
% |
|
|
84.0 |
% |
|
|
(0.3 |
) pts. |
|
|
79.8 |
% |
|
|
80.9 |
% |
|
|
(1.1 |
) pts. |
Aircraft utilization (hours per day) |
|
|
11.5 |
|
|
|
11.7 |
|
|
|
(3.3 |
) |
|
|
11.8 |
|
|
|
12.4 |
|
|
|
(5.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average fare |
|
$ |
127.04 |
|
|
$ |
142.55 |
|
|
|
(10.9 |
) |
|
$ |
128.92 |
|
|
$ |
138.80 |
|
|
|
(7.1 |
) |
Yield per passenger mile (cents) |
|
|
10.87 |
|
|
|
11.78 |
|
|
|
(7.7 |
) |
|
|
11.17 |
|
|
|
11.57 |
|
|
|
(3.5 |
) |
Passenger revenue per ASM (cents) |
|
|
9.10 |
|
|
|
9.89 |
|
|
|
(8.0 |
) |
|
|
8.92 |
|
|
|
9.36 |
|
|
|
(4.7 |
) |
Operating revenue per ASM (cents) |
|
|
10.19 |
|
|
|
11.07 |
|
|
|
(8.0 |
) |
|
|
9.99 |
|
|
|
10.34 |
|
|
|
(3.4 |
) |
Operating expense per ASM (cents) |
|
|
9.40 |
|
|
|
10.80 |
|
|
|
(13.0 |
) |
|
|
9.11 |
|
|
|
10.10 |
|
|
|
(9.7 |
) |
Operating expense per ASM, excluding fuel (cents) |
|
|
6.47 |
|
|
|
5.96 |
|
|
|
8.5 |
|
|
|
6.32 |
|
|
|
5.80 |
|
|
|
9.0 |
|
Airline operating expense per ASM (cents) (1) |
|
|
9.13 |
|
|
|
10.56 |
|
|
|
(13.5 |
) |
|
|
8.87 |
|
|
|
9.87 |
|
|
|
(10.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Departures |
|
|
55,420 |
|
|
|
51,125 |
|
|
|
8.4 |
|
|
|
163,319 |
|
|
|
155,626 |
|
|
|
4.9 |
|
Average stage length (miles) |
|
|
1,081 |
|
|
|
1,132 |
|
|
|
(4.6 |
) |
|
|
1,071 |
|
|
|
1,134 |
|
|
|
(5.6 |
) |
Average number of operating aircraft during period |
|
|
151.0 |
|
|
|
142.2 |
|
|
|
6.2 |
|
|
|
146.9 |
|
|
|
139.4 |
|
|
|
5.4 |
|
Average fuel cost per gallon |
|
$ |
2.07 |
|
|
$ |
3.42 |
|
|
|
(39.7 |
) |
|
$ |
2.00 |
|
|
$ |
3.08 |
|
|
|
(35.0 |
) |
Fuel gallons consumed (millions) |
|
|
119 |
|
|
|
115 |
|
|
|
3.1 |
|
|
|
343 |
|
|
|
348 |
|
|
|
(1.4 |
) |
Full-time equivalent employees at period end (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,246 |
|
|
|
9,398 |
|
|
|
9.0 |
|
|
|
|
(1) |
|
Excludes operating expenses and employees of LiveTV, LLC, which are unrelated to our airline
operations. |
Liquidity and Capital Resources
At September 30, 2009, we had unrestricted cash and cash equivalents of $951 million compared
to $561 million at December 31, 2008. Cash flows from operating activities were $357 million for
the nine months ended September 30, 2009 compared to $109 million for the nine months ended
September 30, 2008. The increase in operating cash flows includes the impact of the 35% lower price
of fuel in 2009 compared to 2008 and the return of $25 million in restricted cash that
collateralizes letters of credit issued to our primary credit card processor. We rely primarily on
operating cash flows to provide working capital.
Investing Activities. During the nine months ended September 30, 2009, capital expenditures
related to our purchase of flight equipment included expenditures of $303 million for 11 aircraft
and two spare engines, $19 million for flight equipment deposits and $8 million for spare part
purchases. Capital expenditures for other property and equipment, including ground equipment
purchases and facilities improvements, were $61 million. Proceeds from the sale of two aircraft
were $58 million. Investing activities also included $54 million in proceeds from the sale of
certain auction rate securities.
During the nine months ended September 30, 2008, capital expenditures related to our purchase
of flight equipment included expenditures of $442 million for 13 aircraft and two spare engines,
$45 million for flight equipment deposits and $6 million for spare part purchases. Capital
expenditures for other property and equipment, including ground equipment purchases and facilities
improvements, were $50 million. Net cash provided by the purchase and sale of available-for-sale
securities was $322 million and proceeds from the sale of five aircraft were $164 million. We
posted $52 million in restricted cash that
29
collateralizes letters of credit issued to certain of
our business partners, including $35 million for one of our primary credit card processors.
Financing Activities. Financing activities for the nine months ended September 30, 2009
consisted 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 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 $110 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) reimbursement of construction costs incurred for
Terminal 5 of $42 million.
Financing activities for the nine months ended September 30, 2008 consisted of (1) the
issuance of approximately 42.6 million shares of common stock to Deutsche Lufthansa AG for
approximately $301 million, net of transaction costs, (2) our public offering of $201 million
aggregate principal amount of 5.5% convertible debentures due 2038, raising net proceeds of
approximately $165 million after depositing approximately $32 million to related interest escrow
accounts and paying issuance costs, (3) our issuance of $317 million in fixed equipment notes to
banks and $92 million in floating rate equipments notes to banks secured by nine Airbus A320
aircraft, four EMBRAER 190 aircraft, and one spare engine, (4) repayment of $175 million principal
amount of 3.5% convertible debt issued in 2003, (5) repayment of $104 million of debt in connection
with the sale of five aircraft, (6) repurchase of $53 million principal amount of 3.75% convertible
debentures due 2035 for $40 million, (7) scheduled maturities of $169 million of debt and capital
lease obligations, (8) reimbursement of construction costs incurred for our new terminal at JFK of
$104 million, and (9) the sale-leaseback over 18 years of one EMBRAER 190 aircraft for $26 million
by a U.S. leasing institution.
Working Capital. We had working capital of $321 million at September 30, 2009, compared to a
working capital deficit of $119 million at December 31, 2008. Our working capital includes the fair
value of our fuel hedge derivatives, which was an asset of $10 million and a liability of $128
million at September 30, 2009 and December 31, 2008, respectively. We also had approximately $205
million in ARS, including the related put option, classified as short term at September 30, 2009. Our ARS held at
December 31, 2008 were classified as long term.
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 generate positive working capital through our operations
in 2009. Including the proceeds of approximately $120 million from
Citigroups repurchase of ARS and assuming our exercise of a put
option for an additional $85 million in ARS held by UBS, we believe that our working capital will be sufficient to meet our cash requirements for
at least the next 12 months. 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, the economic recession, the global credit and liquidity
crisis, weather-related disruptions, the impact of airline bankruptcies or consolidations, U.S.
military actions or acts of terrorism.
Contractual Obligations
Our noncancelable contractual obligations at September 30, 2009 include the following (in
millions):
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due in |
|
|
|
Total |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
Long-term debt and
capital lease obligations (1) |
|
$ |
4,306 |
|
|
$ |
93 |
|
|
$ |
530 |
|
|
$ |
310 |
|
|
$ |
303 |
|
|
$ |
493 |
|
|
$ |
2,577 |
|
Lease commitments |
|
|
1,852 |
|
|
|
55 |
|
|
|
207 |
|
|
|
191 |
|
|
|
168 |
|
|
|
139 |
|
|
|
1,092 |
|
Flight equipment obligations |
|
|
4,570 |
|
|
|
5 |
|
|
|
130 |
|
|
|
570 |
|
|
|
1,010 |
|
|
|
955 |
|
|
|
1,900 |
|
Short-term borrowings |
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing obligations and
other (2) |
|
|
3,845 |
|
|
|
71 |
|
|
|
191 |
|
|
|
194 |
|
|
|
229 |
|
|
|
243 |
|
|
|
2,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,583 |
|
|
$ |
224 |
|
|
$ |
1,068 |
|
|
$ |
1,265 |
|
|
$ |
1,710 |
|
|
$ |
1,830 |
|
|
$ |
8,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes actual interest and estimated interest for floating-rate debt based on September 30,
2009 rates. |
|
(2) |
|
Amounts include noncancelable commitments for the purchase of goods and services. |
There have been no material changes in the terms of our debt instruments from the information
provided in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources included in our our 2008 Form 10-K, as updated in our
Current Reports on Form 8-K as filed on June 1, 2009 and August 26, 2009, or collectively, our 2008
Annual Report. We have $84 million of restricted cash pledged under standby letters of credit
related to certain of our leases, credit card processors and other business partners.
As of September 30, 2009, we operated a fleet of 110 Airbus A320 aircraft and 41 EMBRAER 190
aircraft, of which 92 were owned, 55 were leased under operating leases and 4 were leased under
capital leases. The average age of our operating fleet was 4.1 years at September 30, 2009. In
February 2009, we amended our EMBRAER purchase agreement, canceling the exercise of two options
originally scheduled for delivery in 2015. Additionally, in March 2009, we deferred delivery of 3
aircraft originally scheduled for delivery in 2010 to 2012. In July 2009, we amended our Airbus
purchase agreement, deferring delivery of three aircraft previously scheduled for delivery in 2010
to 2011 and canceling the exercise of six options to purchase aircraft at a future date.
Additionally, in July 2009, we extended the lease on two of our aircraft, one of which previously
expired in December 2009 and the other in March 2010. Including our July purchase amendment, we
had on order 55 Airbus A320 aircraft and 60 EMBRAER 190 aircraft; with options to acquire 15
additional Airbus A320 aircraft and 77 additional EMBRAER 190 aircraft as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm |
|
Option |
|
|
Airbus |
|
EMBRAER |
|
|
|
|
|
Airbus |
|
EMBRAER |
|
|
Year |
|
A320 |
|
190 |
|
Total |
|
A320 |
|
190 |
|
Total |
Remainder of 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
8 |
|
|
|
4 |
|
|
|
12 |
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
2012 |
|
|
13 |
|
|
|
13 |
|
|
|
26 |
|
|
|
|
|
|
|
12 |
|
|
|
12 |
|
2013 |
|
|
13 |
|
|
|
12 |
|
|
|
25 |
|
|
|
7 |
|
|
|
14 |
|
|
|
21 |
|
2014 |
|
|
12 |
|
|
|
12 |
|
|
|
24 |
|
|
|
4 |
|
|
|
21 |
|
|
|
25 |
|
2015 |
|
|
9 |
|
|
|
9 |
|
|
|
18 |
|
|
|
4 |
|
|
|
20 |
|
|
|
24 |
|
2016 |
|
|
|
|
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
60 |
|
|
|
115 |
|
|
|
15 |
|
|
|
77 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Committed expenditures for our 115 firm aircraft and 19 spare engines include estimated
amounts for contractual price escalations and predelivery deposits. 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, which may
require us to modify our aircraft acquisition plans. Capital expenditures for facility
improvements, spare parts, and ground purchases are expected to be approximately $45 million for
the remainder of 2009.
In November 2005, we executed a 30-year 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 JFK, which
we began to operate in October 2008. For financial reporting purposes only, this lease is being
accounted for as a financing obligation because we do not believe we qualify for sale-leaseback
accounting due to our continuing involvement in the property following the construction period.
JetBlue has committed to rental payments under the lease, including ground rents for the new
terminal site, which began on lease execution and are included as part of lease commitments in the
contractual obligations table above. Facility rents commenced upon the date of our beneficial
occupancy of the new terminal and are included as part of financing obligations and other in the
contractual obligations table above.
JetBlue utilizes several credit card companies to process ticket sales. Although our credit
card processing agreements do not contain any financial covenants, they do allow for the processors
to maintain cash reserves or other collateral until air travel is provided. We currently maintain
$30 million in reserves with one of our primary processors in the form of a letter of credit.
Should our credit card processors require additional reserves, the negative impact on our
liquidity, depending on the amount of required additional reserves, could be significant, which
could adversely affect our business.
Off-Balance Sheet Arrangements
None of our operating lease obligations are reflected on our balance sheet. Although some of
our aircraft lease arrangements are variable interest entities, as defined in the Consolidations
topic of the Codification, ASC 810, Consolidations none of them require consolidation in our financial statements. The decision
to finance these aircraft through operating leases rather than through debt was based on an
analysis of the cash flows and tax consequences of each option and a consideration of our liquidity
requirements. We are responsible for all maintenance, insurance and other costs associated with
operating these aircraft; however, we have not made any residual value or other guarantees to our
lessors.
We have determined that we hold a variable interest in, but are not the primary beneficiary
of, certain pass-through trusts which are the purchasers of equipment notes issued by us to finance
the acquisition of new aircraft and are 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 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 certificates are Landesbank Baden-Württemberg and Citibank, N.A.
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.). 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.
32
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.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates from the
information provided in Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations Critical Accounting Policies and Estimates included in our 2008 Annual
Report.
New Accounting Standards
Effective January 1, 2009, we
adopted the provisions of
Accounting Standards Codification, or ASC, subtopic 470-20, Debt with Conversion and other options, ASC 470-20, or ASC 470-20,
which applies to all convertible debt instruments that have a net
settlement feature; that is, by their terms, they may be settled either wholly or partially in
cash upon conversion. ASC 470-20 requires issuers of convertible debt instruments that may be
settled wholly or partially in cash upon conversion to separately account for the liability and
equity components in a manner reflective of the issuers nonconvertible debt borrowing rate.
Previous guidance provided accounting for this type of convertible debt instrument entirely as
debt. ASC 470-20 is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. We have retrospectively applied
this change in accounting to affected accounts for all periods presented.
Since our 3.75% convertible unsecured debentures due 2035, or 3.75% Debentures, have an option
to be settled in cash, they qualify for treatment under this new accounting standard. 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 attributable to equity. This
treatment resulted in $10 million and $11 million higher interest expense in 2008 and 2007,
respectively. As of December 31, 2008, $10 million of the initial $52 million debt discount
remained unamortized. We recognized $5 million of additional interest expense during the nine
months ended September 30, 2009 and $9 million of additional interest expense and $3 million in
capital losses in the nine months ended September 30, 2008.
In June 2009, the EITF reached final consensus on Issue 09-1, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance, or Issue 09-1, which changes the
accounting for equity share lending arrangements on an entitys own shares when executed in
contemplation of a convertible debt offering. Issue 09-1 requires the share lending arrangement to
be measured at fair value and recognized as an issuance cost. These issuance costs should then be
amortized as interest expense over the life of the financing arrangement. Shares loaned under
these arrangements should be excluded from computation of earnings per share. Issue 09-1 is
effective for fiscal years beginning after December 15, 2009 and requires retrospective application
for all arrangements outstanding as of the beginning of the fiscal year. We are currently
evaluating the impact this Issue will have on our financial statements.
In September 2009, the Emerging Issues Task Force of the FASB, or EITF,
reached final consensus on Issue 08-1, Revenue Arrangements with Multiple Deliverables,
or Issue 08-1, which will update ASC 605, Revenue Recognition, and changes the accounting
for certain revenue arrangements. The new requirements change the allocation methods used in
determining how to account for multiple payment streams and will result in the ability to
separately account for more deliverables, and potentially less revenue deferrals.
Additionally, Issue 08-1 requires enhanced disclosures in financial statements.
Issue 08-1 is effective for revenue arrangements enter into or materially modified
in fiscal years beginning after June 15, 2010 on a prospective basis, with early
application permitted. We are currently evaluating the impact this Issue will have on our financial statements.
Other Information
Forward-Looking Information. This report contains forward-looking statements relating to
future events and our future performance, including, without limitation, statements regarding
financial forecasts or projections, our expectations, beliefs, intentions or future strategies,
that are signified by the words expects, anticipates, intends, believes, plans
or similar language. Our actual results and the timing of certain events could differ materially
from those expressed in the forward-looking statements. All
33
forward-looking statements included in
this report are based on information available to us on the date of this report. 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.
Forward-looking statements involve risks, uncertainties and assumptions and are based on
information currently available to us. Actual results may differ materially from those expressed in
the forward-looking statements due to many factors, including without limitation, our extremely
competitive industry; volatility in financial and credit markets which could affect our ability to
obtain debt and/or lease financing or to raise funds through debt or equity issuances; increases in
fuel prices, maintenance costs and interest rates; our ability to profitably implement our growth
strategy, including the ability to operate reliably the EMBRAER 190 aircraft and our new terminal
at JFK; our significant fixed obligations; our ability to attract and retain qualified personnel
and maintain our culture as we grow; our reliance on high daily aircraft utilization; our
dependence on the New York metropolitan market; our reliance on automated systems and technology;
our subjectivity to potential unionization; our reliance on a limited number of suppliers; changes
in or additional government regulation; changes in our industry due to other airlines financial
condition; a continuance of the economic recessionary conditions in the U.S. or a further economic
downturn leading to a continuing or accelerated decrease in demand for domestic and business air
travel; and external geopolitical events and conditions.
Additional information concerning these and other factors is contained in our SEC filings,
including but not limited to our 2008 Annual Report and part II of
this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in market risks from the information provided in Item 7A.
Quantitative and Qualitative Disclosures About Market Risk included in our 2008 Annual Report,
except as follows:
Aircraft Fuel. As of September 30, 2009, we had hedged approximately 61% of our expected
remaining 2009 fuel requirements and approximately 30% of our expected 2010 fuel requirements using
heating oil collars, crude oil caps, and jet fuel swaps, and a minimal amount of our expected 2011
fuel requirements using crude oil caps. Our results of operations are affected by changes in the
price and availability of aircraft fuel. Market risk is estimated as a hypothetical 10% increase in
the September 30, 2009 cost per gallon of fuel, including the effects of our fuel hedges. Based on
our projected twelve month fuel consumption, such an increase would result in an increase to
aircraft fuel expense of approximately $90 million, compared to an estimated $147 million for 2008
measured as of September 30, 2008. See Note 8 to our unaudited condensed consolidated financial
statements for additional information.
Fixed Rate Debt. On September 30, 2009, our $478 million aggregate principal amount of
convertible debt had an estimated fair value of $637 million, based on quoted market prices.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that
information required to be disclosed by us in reports that we file under the Exchange Act is
recorded, processed, summarized and reported as specified in the SECs rules and forms and that
such information required to be disclosed by us in reports that we file under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and
our Chief Financial Officer, or CFO, to allow timely decisions regarding required disclosure.
Management, with the participation of our CEO and
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CFO, performed an evaluation of the effectiveness
of our disclosure controls and procedures as of September 30, 2009. Based on that evaluation, our
CEO and CFO concluded that our disclosure controls and procedures were effective as of September
30, 2009.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in
connection with the evaluation of our controls performed during the quarter ended September 30,
2009 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In the ordinary course of our business, we are party to various legal proceedings and claims
which we believe are incidental to the operation of our business. We believe that the ultimate
outcome of these proceedings to which we are currently a party will not have a material adverse
effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors.
The following is an update to Item 1A Risk Factors contained in our 2008 Form 10-K, as
updated in our Current Reports on Form 8-K as filed on June 1, 2009 and August 26, 2009, or
collectively, our 2008 Annual Report. For additional risk factors that could cause actual results
to differ materially from those anticipated, please refer to our 2008 Annual Report.
Our business is highly dependent on the New York metropolitan market and increases in
competition or congestion or a reduction in demand for air travel in this market, or our inability
to operate reliably out of our new terminal at JFK, or governmental reduction of our operating
capacity at JFK, would harm our business.
We are highly dependent on the New York metropolitan market where we maintain a large presence
with approximately two-thirds 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.
In an effort to try to reduce delays and modernize the airport, the FAA and the Port Authority
of New York and New Jersey, or PANYNJ, will be undertaking major construction work at JFK. Their
plans include the creation of new taxiways and holding pads, runway widening and rehabilitation, as
well as the installation of new ground radar, lighting and other navigation equipment. Most
significantly, the project will include two major runway closures, one which occurred in April 2009
and one from March through June 2010. While we believe the results of this project may ultimately
help to alleviate some of the challenges of operating at JFK, our operations may be adversely
impacted during these runway closures.
Any non-performance of the buildings critical systems at Terminal 5, such as baggage
sortation, information technology, or customer notification systems, could negatively affect our
operations and harm our business.
Changes in government regulations imposing additional requirements and restrictions on our
operations or the U.S. Government ceasing to provide adequate war risk insurance could increase our
operating costs and result in service delays and disruptions.
Airlines are subject to extensive regulatory and legal requirements, both domestically and
internationally, that involve significant compliance costs. In the last several years, Congress has
passed laws, and the DOT, FAA and the TSA have issued regulations relating to the operation of
airlines that have required significant expenditures. We expect to continue to incur expenses in
connection with complying with government regulations. Additional laws, regulations, taxes and
airport rates and charges have been proposed from time to time that could significantly increase
the cost of airline operations or reduce the demand for air travel. If adopted, these measures
could have the effect of raising ticket prices, reducing revenue and increasing costs. The FAA has
convened an Aviation Rulemaking Committee, or ARC, to examine crew rest requirements. Depending on
the outcome of the ARC, if there are significant changes to
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crew rest requirements, our business
could be adversely affected. We cannot assure you that these and other laws or regulations enacted
in the future will not harm our business.
The U.S. Government currently provides insurance coverage for certain claims resulting from
acts of terrorism, war or similar events. Should this coverage no longer be offered, the coverage
that would be available to us through commercial aviation insurers may have substantially less
desirable terms, result in higher costs and not be adequate to protect our risk, any of which could
harm our business.
Many aspects of airlines operations also are subject to increasingly stringent federal,
state, local and foreign laws protecting the environment. There is growing consensus that some
form of regulation will be forthcoming at the federal level with respect to greenhouse gas
emissions (including carbon dioxide (CO2)) and such regulation could result in the
creation of substantial additional costs in the form of taxes or emission allowances. 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.
We rely heavily on automated systems to operate our business and any failure of these systems
could harm our business.
We are dependent on automated systems and technology to operate our business, enhance customer
service and achieve low operating costs. 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. Since we now
only issue electronic tickets, our website and reservation system, the latter of which we have
recently decided to replace, must be able to accommodate a high volume of traffic and deliver
important flight information. These systems require upgrades or replacement periodically, which
involve implementation and other operational risks, and our business may be harmed if we fail
to replace or upgrade systems successfully. We are in the process of transitioning to a new
customer service system, which includes a reservations system, revenue management system, revenue
accounting system, and customer loyalty management system, and which we anticipate will be
implemented in 2010. If we encounter issues in successfully implementing this system on a timely
basis, our business may be harmed.
We rely on the providers of our current automated systems for technical support, even in the
event we select new systems and service providers to meet our future needs. If the current provider
were to fail to adequately provide technical support for any one of our key existing systems, we
could experience service disruptions, which, if they were to occur, could result in the loss of
important data, increase our expenses, decrease our revenues and generally harm our business and
reputation. Furthermore, our automated systems cannot be completely protected against events that
are beyond our control, including natural disasters, computer viruses or telecommunications
failures. Substantial or sustained system failures could impact customer service and result in our
customers purchasing tickets from other airlines. We have implemented security measures and change
control procedures and have disaster recovery plans; however, we cannot assure you that these
measures are adequate to prevent disruptions, which, if they were to occur, could result in the
loss of important data, increase our expenses, decrease our revenues and generally harm our
business and reputation.
We could be adversely affected by an outbreak of a disease that affects travel behavior.
In the second quarter of 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.
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A substantial portion of our short-term marketable securities are highly rated auction rate
securities, and failures in these auctions have and may continue to adversely impact our liquidity
and results of operations.
As of September 30, 2009, a substantial percentage of our marketable securities portfolio
continued to be invested in highly rated auction rate securities. Auction rate securities are
securities that are structured to allow for short-term interest rate resets; however contractual
maturities are often well in excess of ten years. At the end of each reset period, investors can
sell or continue to hold the securities at par. Beginning in February 2008 and continuing through
2009, the auction process for all of our auction rate securities failed, which resulted in the
interest rates on these investments resetting to predetermined rates that were, in some instances,
lower than current market rates. Accordingly, we continue to hold the underlying securities. We
have negotiated agreements with the issuers of our auction rate securities whereby we intend to
exit our position in the auction rate securities by the end of the second quarter of 2010.
However, should we be unable to complete this process, we would not be able to liquidate our
investments in these securities until a future auction were successful, the issuer were to redeem
the securities, a buyer were found outside the auction process, the securities were to mature, or
there were an
event of default requiring immediate repayment by the issuer. The inability to liquidate our
auction rate securities holding could adversely impact our liquidity.
Item 6. Exhibits.
Exhibits: See accompanying Exhibit Index included after the signature page of this report for
a list of the exhibits filed or furnished with this report.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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JETBLUE AIRWAYS CORPORATION |
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(Registrant)
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Date: October 27, 2009 |
By: |
/s/ DONALD DANIELS
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Vice President, Controller and Chief Accounting Officer |
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(Principal Accounting Officer) |
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EXHIBIT INDEX
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Exhibit |
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Number |
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Exhibit |
10.1(v)*
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Amendment No. 33 to Airbus A320 Purchase Agreement between
AVSA, S.A.R.L. and JetBlue Airways Corporation, dated July 1,
2009. |
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12.1
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Computation of Ratio of Earnings to Fixed Charges. |
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31.1
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13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer, furnished herewith. |
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31.2
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13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer, furnished herewith. |
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Certification Pursuant to Section 1350, furnished herewith. |
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* |
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Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has been filed
separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Request
filed with the
SEC. |
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