XNAS:JBLU JetBlue Airways Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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JBLU 2012.06.30 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
or

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission file number: 000-49728
JETBLUE AIRWAYS CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
Delaware
 
000-49728
 
87-0617894
(State of Other Jurisdiction of
Incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)
27-01 Queens Plaza North, Long Island City, New York 11101
(Address of principal executive offices)            (Zip Code)
(718) 286-7900
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o           No þ



As of June 30, 2012, there were 284,259,945 shares outstanding of the registrant’s common stock, par value $.01.
 



JetBlue Airways Corporation
FORM 10-Q
INDEX
 
Page #’s
 
 
 
 
 EX-10.3.aa
 
 EX-12.1
 
 EX-31.1
 
 EX-31.2
 
 EX-32
 
 EX-101 INSTANCE DOCUMENT
 
 EX-101 SCHEMA DOCUMENT
 
 EX-101 CALCULATION LINKBASE DOCUMENT
 
 EX-101 LABELS LINKBASE DOCUMENT
 
 EX-101 PRESENTATION LINKBASE DOCUMENT
 
 EX-101 DEFINITION LINKBASE DOCUMENT
 


2


PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

JETBLUE AIRWAYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
June 30, 2012
 
December 31, 2011
 
(unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
652

 
$
673

Investment securities
560

 
553

Receivables, less allowance
129
 
101

Prepaid expenses and other
284

 
301

Total current assets
1,625

 
1,628

PROPERTY AND EQUIPMENT
 
 
 
Flight equipment
4,972

 
4,719

Predelivery deposits for flight equipment
137

 
154

 
5,109

 
4,873

Less accumulated depreciation
909

 
827

 
4,200

 
4,046

Other property and equipment
577

 
531

Less accumulated depreciation
223

 
207

 
354

 
324

Assets constructed for others
561

 
561

Less accumulated depreciation
82

 
71

 
479

 
490

Total property and equipment
5,033

 
4,860

OTHER ASSETS
 
 
 
Investment securities

 
38

Restricted cash
55

 
67

Other
419

 
478

Total other assets
474

 
583

TOTAL ASSETS
$
7,132

 
$
7,071

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

3


JETBLUE AIRWAYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
June 30, 2012
 
December 31, 2011
 
(unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
174

 
$
148

Air traffic liability
773

 
627

Accrued salaries, wages and benefits
148

 
152

Other accrued liabilities
216

 
199

Short-term borrowings
2

 
88

Current maturities of long-term debt and capital leases
265

 
198

Total current liabilities
1,578

 
1,412

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
2,626

 
2,850

CONSTRUCTION OBLIGATION
520

 
526

DEFERRED TAXES AND OTHER LIABILITIES
 
 
 
Deferred income taxes
442

 
392

Other
125

 
134

 
567

 
526

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, $.01 par value; 25,000,000 shares authorized, none issued

 

Common stock, $.01 par value; 900,000,000 shares authorized, 329,721,937 and 326,589,018 shares issued and 284,259,945 and 281,777,919 outstanding in 2012 and 2011, respectively
3

 
3

Treasury stock, at cost; 45,462,603 and 44,811,710 shares in 2012 and 2011, respectively
(11
)
 
(8
)
Additional paid-in capital
1,485

 
1,472

Retained earnings
387

 
305

Accumulated other comprehensive loss
(23
)
 
(15
)
Total stockholders’ equity
1,841

 
1,757

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
7,132

 
$
7,071

See accompanying notes to condensed consolidated financial statements.


4


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
OPERATING REVENUES
 
 
 
 
 
 
 
Passenger
$
1,171

 
$
1,046

 
$
2,267

 
$
1,952

Other
106

 
105

 
213

 
211

Total operating revenues
1,277

 
1,151

 
2,480

 
2,163

OPERATING EXPENSES
 
 
 
 
 
 
 
Aircraft fuel and related taxes
450

 
439

 
883

 
792

Salaries, wages and benefits
265

 
235

 
520

 
470

Landing fees and other rents
72

 
63

 
138

 
120

Depreciation and amortization
63

 
58

 
124

 
114

Aircraft rent
33

 
36

 
66

 
70

Sales and marketing
54

 
51

 
101

 
96

Maintenance materials and repairs
85

 
54

 
173

 
106

Other operating expenses
125

 
129

 
256

 
264

Total operating expenses
1,147

 
1,065

 
2,261

 
2,032

OPERATING INCOME
130

 
86

 
219

 
131

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest expense
(44
)
 
(44
)
 
(89
)
 
(88
)
Capitalized interest
2

 
1

 
4

 
2

Interest income and other
(2
)
 

 
1

 
4

Total other income (expense)
(44
)

(43
)

(84
)

(82
)
INCOME BEFORE INCOME TAXES
86

 
43

 
135

 
49

Income tax expense
34

 
18

 
53

 
21

NET INCOME
$
52

 
$
25

 
$
82

 
$
28

EARNINGS PER COMMON SHARE:
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.09

 
$
0.29

 
$
0.10

Diluted
$
0.16

 
$
0.08

 
$
0.25

 
$
0.10


See accompanying notes to condensed consolidated financial statements.

5



JETBLUE AIRWAYS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in millions)

Three Months Ended June 30,

Six Months Ended June 30,
 
2012

2011

2012

2011
Net income
$
52


$
25


$
82


$
28

Changes in fair value of derivative instruments, net of reclassifications into earnings
(20
)

(22
)

(8
)

(3
)
Total other comprehensive loss
(20
)

(22
)

(8
)

(3
)
Comprehensive income
$
32


$
3


$
74


$
25



6


JETBLUE AIRWAYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
 
Six Months Ended June 30,
 
2012

2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
82


$
28

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
Deferred income taxes
50


21

Depreciation
112


105

Amortization
18


16

Stock-based compensation
7


7

Gain on sale of assets, debt extinguishment, and customer contract termination
(20
)
 

Collateral (paid) returned for derivative instruments
(9
)

7

Changes in certain operating assets and liabilities
239


198

Other, net
11


24

Net cash provided by operating activities
490

 
406

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(314
)

(204
)
Predelivery deposits for flight equipment
(32
)

(24
)
Proceeds from the sale of assets
46

 

Purchase of available-for-sale securities
(210
)

(279
)
Sale of available-for-sale securities
243


114

Purchase of held-to-maturity investments
(207
)

(236
)
Proceeds from the maturities of held-to-maturity investments
200


291

Other, net
11


(1
)
Net cash used in investing activities
(263
)
 
(339
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from:
 
 
 
Issuance of common stock
6


5

Issuance of long-term debt
108


141

Repayment of long-term debt and capital lease obligations
(266
)

(92
)
Repayment of short-term borrowings and lines of credit
(88
)


Other, net
(8
)

(11
)
Net cash provided by (used in) financing activities
(248
)
 
43

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(21
)
 
110

Cash and cash equivalents at beginning of period
673


465

Cash and cash equivalents at end of period
$
652

 
$
575


See accompanying notes to condensed consolidated financial statements.

7


JETBLUE AIRWAYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 2012

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 2011 audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011, or our 2011 Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.
These condensed consolidated financial statements are unaudited and have been prepared by us following the rules and regulations of the Securities and Exchange Commission, or the SEC, and, in our opinion, reflect all adjustments including normal recurring items which are necessary to present fairly the results for interim periods. 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.
     Investment securities: Investment securities consist of available-for-sale investment securities and held-to-maturity investment securities. When sold, we use a specific identification method to determine the cost of the securities.
Held-to-maturity investment securities: The contractual maturities of the corporate bonds we held as of June 30, 2012 were no greater than 12 months. We did not record any significant gains or losses on these securities during the three or six months ended June 30, 2012 or 2011. The estimated fair value of these investments approximated their carrying value as of June 30, 2012 and December 31, 2011.
The carrying values of investment securities consisted of the following at June 30, 2012 and December 31, 2011 (in millions):

June 30,
2012
 
December 31,
2011
Available-for-sale securities

 
 
Certificates of deposit
$
80

 
$
70

Commercial paper
125

 
183

 
205

 
253

Held-to-maturity securities
 
 
 
Corporate bonds
355

 
313

Government bonds

 
25

 
355

 
338

Total
$
560

 
$
591


Asset Sales: During the three months ended June 30, 2012, we sold two EMBRAER 190 aircraft, which we had been leasing to another airline, and six spare aircraft engines. We recorded net gains of approximately $10 million, which are included in other operating expenses in our consolidated statement of operations. As a result of these aircraft sales, we will no longer be receiving lease payments, which had been approximately $6 million per year.
New Accounting Pronouncements: On January 1, 2012, Accounting Standards Update 2011-05, or ASU 2011-05, amending the Comprehensive Income topic of the Codification, became effective. This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other things. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We have included a separate statement of comprehensive income in the accompanying condensed

8


consolidated financial statements for the three and six months ended June 30, 2012 and 2011. In December 2011, the FASB issued ASU 2011-12, delaying the effective date of only the portion of ASU 2011-05 related to the presentation of reclassification adjustments out of accumulated other comprehensive income.
On January 1, 2012, ASU 2011-04, which amended the Fair Value Measurement topic of the Codification, became effective. The amendments in this update were intended to result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards, or IFRS. ASU 2011-04 expands and enhances current disclosures about fair value measurements and clarifies the FASB’s intent about the application of existing fair value measurement requirements in certain circumstances. We adopted these amendments prospectively on January 1, 2012.
In December 2011, the FASB issued ASU 2011-11, amending the Balance Sheet topic of the Codification. This update enhances the disclosure requirements regarding offsetting assets and liabilities. ASU 2011-11 requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. These amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013 and should be applied retrospectively. We will evaluate any instruments and transactions, including derivative instruments, which are eligible for offset but we do not expect the adoption of this standard will have a material impact on our consolidated financial statements or notes thereto.

Note 2 — Share-Based Compensation
    2011 Incentive Compensation Plan: During the six months ended June 30, 2012, we granted approximately 2.5 million restricted stock units under the 2011 Incentive Compensation Plan at a weighted average grant date fair value of $5.80 per share. At June 30, 2012, 2.5 million restricted stock units were unvested with a weighted average grant date fair value of $5.78 per share.
     Amended and Restated 2002 Stock Incentive Plan: As of June 30, 2012, 2.2 million restricted stock units were unvested with a weighted average grant date fair value of $5.84 per share.
     
Note 3 — Long-term Debt, Short-term Borrowings, and Capital Lease Obligations
Unsecured Revolving Credit Facility
During the six months ended June 30, 2012, we made payments of $88 million on our corporate purchasing line with American Express, which may only be used for the purchase of jet fuel. In March 2012, we amended this corporate purchasing line, updating certain terms and limitations and extending the term through January 5, 2015. As of June 30, 2012, we did not have a balance outstanding under this revolving credit facility.
Morgan Stanley Line of Credit
In July 2012, we entered into a revolving line of credit with Morgan Stanley for up to approximately $100 million, which is secured by a portion of our investment securities held by them and the amount available to us under this line of credit may vary accordingly. This line of credit bears interest at a floating rate based upon LIBOR plus 100 basis points. We have not yet made any borrowings under this line of credit.
Other Indebtedness
During the six months ended June 30, 2012, we issued $108 million, net of discount, in non-public floating rate equipment notes due through 2024, which are secured by two new Airbus A320 aircraft and two new EMBRAER 190 aircraft.
Our outstanding long-term debt and capital lease obligations were reduced by $265 million as a result of principal payments made during the six months ended June 30, 2012. This total debt reduction includes the repayment in full of approximately $134 million in principal balances previously outstanding on debt secured by five Airbus A320 aircraft. We also paid $35 million in outstanding principal on debt secured by two EMBRAER 190 aircraft, which we sold during the three months ended June 30, 2012 as discussed in Note 1. We recognized a gain of approximately $2 million in interest income and other in our consolidated statement of operations related to these extinguishments of debt.
Aircraft, engines and other equipment and facilities having a net book value of $3.59 billion at June 30, 2012 have been pledged as security under various loan agreements. As of June 30, 2012, including the repayments described above, we owned seven unencumbered Airbus A320 aircraft.
At June 30, 2012, the weighted average interest rate of all of our long-term debt was 4.5% and scheduled maturities were $98 million for the remainder of 2012, $390 million in 2013, $568 million in 2014, $254 million in 2015, $452 million in 2016

9


and $1.13 billion thereafter.
The carrying amounts and estimated fair values of our long-term debt at June 30, 2012 and December 31, 2011 were as follows (in millions):



June 30, 2012

December 31, 2011


Carrying Value

Estimated Fair Value

Carrying Value

Estimated Fair Value
Public Debt








Floating rate enhanced equipment notes








    Class G-1, due through 2016

$
190


$
175


$
202


$
185

    Class G-2, due 2014 and 2016

373


344


373


316

    Class B-1, due 2014

49


47


49


47

Fixed rate special facility bonds, due through 2036

82


80


83


76

6.75% convertible debentures due in 2039

162


214


162


214

5.5% convertible debentures due in 2038

123


162


123


162










Non-Public Debt








Floating rate equipment notes, due through 2025

748


718


743


712

Fixed rate equipment notes, due through 2026

1,047


1,152


1,192


1,293










Total

$
2,774

 
$
2,892

 
$
2,927

 
$
3,005

The estimated fair values of our publicly held long-term debt are classified as Level 2 in the fair value hierarchy. The fair values of our enhanced equipment notes and our special facility bonds were based on quoted market prices in markets that are traded with low volumes. The fair value of our convertible debentures was based upon other observable market inputs since they are not actively traded. The fair value of our non-public debt was estimated using a discounted cash flow analysis based on our borrowing rates for instruments with similar terms and therefore classified as Level 3 in the fair value hierarchy.
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 — Accumulated Other 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. A rollforward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and six months ended June 30, 2012 is as follows (in millions):

Aircraft Fuel
Derivatives

Interest Rate
Swaps

Total
Beginning accumulated gains (losses), at March 31, 2012
$
9


$
(12
)

$
(3
)
Reclassifications into earnings


2


2

Change in fair value
(22
)



(22
)
Ending accumulated gains (losses), at June 30, 2012
$
(13
)

$
(10
)

$
(23
)


10



Aircraft Fuel
Derivatives

Interest Rate
Swaps

Total
Beginning accumulated gains (losses), at December 31, 2011
$
(3
)

$
(12
)

$
(15
)
Reclassifications into earnings
(6
)

3


(3
)
Change in fair value
(4
)

(1
)

(5
)
Ending accumulated gains (losses), at June 30, 2012
$
(13
)

$
(10
)

$
(23
)



Note 5 — Earnings Per Share
The following table shows how we computed basic and diluted earnings per common share (dollars in millions; share data in thousands):

Three Months Ended June 30,

Six Months Ended June 30,
 
2012

2011

2012

2011
Numerator:
 

 

 

 
Net income
$
52


$
25


$
82


$
28

Effect of dilutive securities:
 

 

 

 
Interest on convertible debt, net of income taxes and profit sharing
3


3


5


2

Net income applicable to common stockholders after assumed conversions for diluted earnings per share
$
55


$
28


$
87


$
30

Denominator:
 

 

 

 
Weighted average shares outstanding for basic earnings per share
282,494


278,459


281,850


277,863

Effect of dilutive securities:


 



 
Employee stock options
717


1,795


880


1,937

Convertible debt
60,575


68,605


60,575


27,429

Adjusted weighted average shares outstanding and assumed conversions for diluted earnings per share
343,786


348,859


343,305


307,229


Shares excluded from EPS calculation (in millions):
 

 

 

 
Shares issuable upon conversion of our convertible debt as assumed conversion would be antidilutive






41.2

Shares issuable upon exercise of outstanding stock options or vesting of restricted stock units as assumed exercise would be antidilutive
20.5


22.3


22.0


23.1

As of June 30, 2012, a total of approximately 1.4 million shares of our common stock, which were lent to our share borrower pursuant to the terms of our share lending agreement, as described more fully in Note 2 to our 2011 Form 10-K, were issued and outstanding for corporate law purposes. Holders of the borrowed shares have all the rights of a holder of our common stock. However, because the share borrower must return all borrowed shares to us (or identical shares or, in certain circumstances of default by the counterparty, the cash value thereof), the borrowed shares are not considered outstanding for the purpose of computing and reporting basic or diluted earnings per share. The fair value of similar common shares not subject to our share lending arrangement, based upon our closing stock price at June 30, 2012, was approximately $7 million.

Note 6 — Employee Retirement Plan

11


We sponsor a retirement savings 401(k) defined contribution plan, or the Plan, covering all of our employees. Another component of the Plan is a profit sharing contribution for eligible non-management employees. Our contributions expensed for the Plan for the three months ended June 30, 2012 and 2011 were $23 million and $15 million, respectively, and contributions expenses for the Plan for the six months ended June 30, 2012 and 2011 were $40 million and $31 million, respectively.

Note 7 — Commitments and Contingencies
As of June 30, 2012, our firm aircraft orders consisted of 18 Airbus A320 aircraft, 30 Airbus A321 aircraft, 40 Airbus A320 new engine option, or A320neo aircraft, 32 EMBRAER E190 aircraft and 12 spare engines scheduled for delivery through 2021. Committed expenditures for these aircraft, including the related flight equipment and estimated amounts for contractual price escalations and predelivery deposits, were approximately $195 million for the remainder of 2012, $470 million in 2013, $530 million in 2014, $760 million in 2015, $755 million in 2016 and $2.73 billion thereafter.
In July 2012, we amended our EMBRAER purchase agreement accelerating the delivery of one aircraft to 2013, which was previously scheduled for delivery in 2014. Additionally, we extended the date for which we may elect not to further amend our purchase agreement to order a new EMBRAER 190 variant, if developed, to July 31, 2013. If not elected, seven EMBRAER 190 aircraft we previously deferred may either be returned to their previously committed to delivery dates in 2013 and 2014 or canceled and subject to cancellation fees.
In July 2012, we extended the leases on three Airbus A320 aircraft, leases which were previously set to expire in 2013. These extensions resulted in an additional $24 million of lease commitments through 2018.
As of June 30, 2012, we had approximately $31 million of restricted assets pledged under standby letters of credit related to certain of our leases which will expire at the end of the related lease terms. Additionally, we had $18 million pledged related to our workers compensation insurance policies and other business partner agreements, which will expire according to the terms of the related policies or agreements.
Legal Matters
Occasionally, we are involved in various claims, lawsuits, regulatory examinations, investigations and other legal matters arising, for the most part, in the ordinary course of business.  An increasing number of claims are being made as we have become a more mature company.  The outcome of litigation and other legal matters is always uncertain.  The Company believes that it has valid defenses to the legal matters currently pending against it, is defending itself vigorously and has recorded accruals determined in accordance with GAAP, where appropriate.  In making a determination regarding accruals, using available information, we evaluate the likelihood of an unfavorable outcome in legal or regulatory proceedings to which we are a party to and record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These judgments are subjective, based on the status of such legal or regulatory proceedings, the merits of our defenses and consultation with legal counsel. Actual outcomes of these legal and regulatory proceedings may materially differ from our current estimates. It is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to our consolidated results of operations, liquidity or financial condition.
To date, none of these types of litigation matters, most of which are typically covered by insurance, has had a material impact on our operations or financial condition. We have insured and continue to insure against most of these types of claims. A judgment on any claim not covered by, or in excess of, our insurance coverage could materially adversely affect our financial condition or results of operations.
DOT tarmac delay. As described more fully in our 2011 Form 10-K, the Department of Transportation, or DOT, is currently investigating our diversion of five flights to Hartford, CT's Bradley International Airport, or Bradley, in October 2011 due to winter weather and the failure of major navigational equipment at New York City, or NYC, area airports.  Once on the ground, these five aircraft were each held on the tarmac in excess of three hours with customers and crew on board, a time limit which is beyond the limits proscribed by the DOT's Tarmac Delay Rule. As a result, the FAA has the statutory authority in this matter to assess monetary penalties against JetBlue of approximately $15 million.  Due to the circumstances surrounding the October 2011 day in question, including the unexpected weather conditions, the condition of NYC area airports as well as of Bradley, and the overall air traffic conditions on that day, as well as the discretion granted to the DOT by the regulation, we are unable to determine whether a fine will be assessed, and if so, the amount of such fine. We have issued compensation to the impacted customers in accordance with our Customer Bill of Rights, and are fully complying with all requests made by the DOT in the course of the investigation. We do not know when a final determination by the DOT will be made.
Call center litigation. In January 2011, JetBlue was served with a complaint in Los Angeles Superior Court alleging invasion of privacy and violation of the California Penal Code Section 630 by plaintiff Lee Cheifer and “other similarly situated individuals.”  This claim, which sought certification of a California state-wide class of plaintiffs, alleged that JetBlue violated customer rights to privacy by not informing individuals who dialed certain JetBlue customer service numbers that such

12


calls and interactions with customer service representatives may be recorded. The claim further states that affected callers may be entitled to statutory penalties of the greater of $5,000 or three times provable damages per violation.
In May 2012, the parties held a mediation and agreed to a settlement for an amount substantially less than originally sought. We do not believe the agreed upon settlement will have a significant impact on our results of operations or financial condition, and we expect the settlement and legal fees will be fully covered by our existing insurance policies.
Employment Agreement Dispute.   In or around March 2010, attorneys representing a group of current and former pilots, or the Claimants', filed a Request for Mediation with the American Arbitration Association concerning a dispute over the interpretation of a provision of their individual JetBlue Airways Corporation Employment Agreements for Pilots, or Employment Agreements.  The matter was not resolved in mediation.  Claimants' counsel thereafter demanded arbitration on June 4, 2010 and in early 2012 the arbitrator ruled that the Claimants could proceed on a collective basis.  In their Fourth Amended Arbitration Demand, dated June 8, 2012, Claimants (approximately 944 current pilots and 26 former pilots) allege that a component of the Base Salary provision of the Employment Agreements has been breached and seek back pay and related damages, for each of the years in which a violation of this section is alleged:  2002, 2007 and 2009.  In July 2012, in response to JetBlue's partial Motion to Dismiss, the Claimants elected to withdraw the 2002 claims. A discovery schedule has been set, dispositive motions are due in Fall 2012, and a hearing, if necessary, is set for January 2013.  In this arbitration, management of the Company intends to continue to vigorously defend its interpretation of the Employment Agreements at issue.  While the outcome of any arbitration is uncertain, management believes the claims are without merit.
  
Note 8 —Financial Derivative Instruments and Risk Management
As part of our risk management strategy, we periodically purchase crude or heating oil option contracts 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 jet fuel swaps as well as basis swaps for the differential between heating oil and jet fuel, 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 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 during each period they are outstanding. The effective portion of realized aircraft fuel hedging derivative gains and losses is recognized in aircraft fuel expense in the period the underlying fuel is consumed.
Ineffectiveness results, in certain circumstances, when the change in the total fair value of the derivative instrument differs from the change in the value of our expected future cash outlays for the purchase of aircraft fuel and is recognized immediately in interest income and other. Likewise, if a hedge does not qualify for hedge accounting, the periodic changes in its fair value are recognized in the period of the change in interest income and other. When aircraft fuel is consumed and the related derivative contract settles, any gain or loss previously recorded in other comprehensive income is recognized in aircraft fuel expense. All cash flows related to our fuel hedging derivatives are classified as operating cash flows.
Our current approach to fuel hedging is to enter into hedges on a discretionary basis without a specific target of hedge percentage needs in order to provide a form of insurance against significant and severe volatility in fuel prices.
The following table illustrates the approximate hedged percentages of our projected fuel usage by quarter as of June 30, 2012 related to our outstanding fuel hedging contracts that were designated as cash flow hedges for accounting purposes.

Brent crude oil collars

Heating oil collars

Jet fuel
collars

Jet fuel swap
agreements

Total
Third Quarter 2012
8
%

6
%

3
%

6
%

23
%
Fourth Quarter 2012
8
%

7
%

1
%

7
%

23
%
First Quarter 2013
8
%

%

%

%

8
%
Second Quarter 2013
8
%

%

%

%

8
%
Third Quarter 2013
4
%

%

%

%

4
%


13


During 2012, we also entered into basis swaps to be settled later in 2012, which we did not designate as cash flow hedges for accounting purposes and as a result we adjust their fair value through earnings each period based on their current fair value.
As of December 31, 2011, we determined that the correlation between West Texas Intermediate, or WTI, crude oil and jet fuel had significantly deteriorated and the requirements for continuing hedge accounting treatment were no longer satisfied. As such, we prospectively discontinued hedge accounting treatment on all of our then outstanding WTI crude oil cap agreements and WTI crude oil collars, which then represented approximately 6% of our total 2012 forecasted fuel consumption. The forecasted fuel consumption, for which these transactions were designated as cash flow hedges, has or is still expected to occur; therefore, the $3 million of losses deferred in accumulated other comprehensive income as of December 31, 2011 related to these contracts will remain deferred until the forecasted fuel consumption occurs. Any incremental increase or decrease in the value of these contracts is being recognized in interest income and other in each period during 2012 until the contracts settle. As of June 30, 2012, approximately $2 million in losses remained deferred in accumulated other comprehensive income related to these contracts.
     Interest rate swaps: The interest rate hedges we had outstanding as of June 30, 2012 effectively swap floating rate for fixed rate, taking advantage of lower borrowing rates in existence at the time of the hedge transaction as compared to the date our original debt instruments were executed. As of June 30, 2012, we had $359 million in notional 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 Derivatives and Hedging topic of the Codification. 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 2012 or 2011, and all related unrealized losses were deferred in accumulated other comprehensive income. We recognized approximately $5 million in additional interest expense as the related interest payments were made in each of the six months ended June 30, 2012 and 2011.
Any outstanding derivative instrument exposes us to credit loss in connection with our fuel contracts in the event of nonperformance by the counterparties to the agreements, but we do not expect that any of our six counterparties will fail to meet their obligations. The amount of such credit exposure is generally the fair value of our outstanding contracts for which we are in a receivable position. To manage credit risks, we select counterparties based on credit assessments, limit our overall exposure to any single counterparty and monitor the market position with each counterparty. Some of our agreements require cash deposits from either counterparty 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 (in millions):
 
As of

June 30,
2012

December 31, 2011
Collateral Balances:
 

 
Fuel Derivatives
$
12


$

Interest Rate Derivatives
17


20


The table below reflects quantitative information related to our derivative instruments and where these amounts are recorded in our financial statements (dollar amounts in millions):

14


 
As of

June 30,
2012

December 31, 2011
Fuel derivatives
 

 
Asset fair value recorded in prepaid expenses and other (1)
$
1


$
6

Liability fair value recorded in other accrued liabilities (1)
22


10

Liability fair value recorded in other long term liabilities (1)
1



Longest remaining term (months)
15


12

Hedged volume (barrels, in thousands)
2,535


3,540

Estimated amount of existing gains (losses) expected to be reclassified into earnings in the next 12 months
(19
)

(6
)
Interest rate derivatives


 
Liability fair value recorded in other long term liabilities (2)
17


20

Estimated amount of existing gains (losses) expected to be reclassified into earnings in the next 12 months
(11
)

(10
)


Three Months Ended June 30,

Six Months Ended June 30,
 
2012

2011

2012

2011
Fuel derivatives






 

 
Hedge effectiveness gains (losses) recognized in aircraft fuel expense
$
(1
)

$
5


$
8


$
7

Gains (losses) on derivatives not qualifying for hedge accounting recognized in other income (expense)
(4
)

(1
)

(3
)

1

Hedge gains (losses) on derivatives recognized in comprehensive income, (see Note 4)
(35
)

(29
)

(6
)

3

Percentage of actual consumption economically hedged
27
%

43
%

34
%

40
%
Interest rate derivatives




 

 
Hedge gains (losses) on derivatives recognized in comprehensive income, (see Note 4)
(1
)

(5
)

(2
)

(5
)
Hedge gains (losses) on derivatives recognized in interest expense
(3
)

(3
)

(5
)

(5
)
____________________________
(1)
Gross asset or liability of each contract prior to consideration of offsetting positions with each counterparty.
(2)
Gross liability, prior to impact of collateral posted.

Note 9 —Fair Value of Financial Instruments
Under the Fair Value Measurements and Disclosures topic of the Codification, disclosures are required about how fair value is determined for assets and liabilities and a 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;
Level 2 quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
Level 3 unobservable inputs for the asset or liability, such as discounted cash flow models or valuations.
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. 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 fair value hierarchy as of June 30, 2012 and December 31, 2011 (in millions).


15


 
As of June 30, 2012
 
Level 1

Level 2

Level 3

Total
Assets
 

 

 

 
Cash and cash equivalents
$
532


$


$


$
532

Restricted cash
4






4

Available-for-sale investment securities

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