JetBlue Airlines 2003 Annual Report Download - page 51

instruments was $11.0 million. As the majority of our financial derivative instruments are not traded on
a market exchange, we estimate their fair values with the assistance of third parties determined by the
use of present value methods or standard option value models, with assumptions about commodity
prices based on those observed in underlying markets. In addition, as there is not a reliable forward
market for jet fuel, we must estimate the future prices of jet fuel in order to measure the effectiveness
of the hedging instruments in offsetting changes to those prices, as required by SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. Forward jet fuel prices are estimated
through the observation of similar commodity futures prices (such as crude oil) and adjusted based on
variations to those like commodities. As the majority of our hedges settle within 22 months, the
variation between estimates and actuals are recognized in a short period of time.
Frequent flyer accounting. We utilize a number of estimates in accounting for our TrueBlue
customer loyalty program, which are consistent with industry practices. We record a liability, which was
$0.6 million as of December 31, 2003, for the estimated incremental cost of providing free travel
awards, including an estimate for partially earned awards. The estimated cost includes incremental fuel,
insurance, passenger food and supplies, and reservation fees. In estimating the liability, we currently
assume that 100% of earned awards will be redeemed and that 35% of our outstanding points, based
on our limited experience since the inception of the program, will ultimately result in awards.
Periodically, we evaluate our assumptions for appropriateness, including comparison of the cost
estimates to actual costs incurred and the redemption assumptions to actual redemption experience.
Changes in the minimum award levels or in the lives of the awards would also require us to reevaluate
the liability, potentially resulting in a significant impact in the year of change as well as in future years.
Outlook for 2004
We expect our operating capacity to increase approximately 35% to 37% over 2003 with the
addition of 16 new Airbus A320 aircraft in 2004. Average stage length is expected to increase to
approximately 1,400 miles in 2004 and, together with the current competitive revenue environment, is
expected to result in lower passenger revenues per available seat mile. Further actions by our
competitors could also impact our revenues. Unit costs, on a fuel neutral basis, are expected to be
slightly higher than 2003. Higher maintenance costs are expected to be partially offset by our fixed
costs being spread over higher projected available seat miles. Operating margin on a fuel neutral basis
is expected to be between 13% to 15% for 2004. Our effective tax rate is not expected to change
significantly from 2003.
Fuel costs have risen sharply since early December 2003 and may increase further. Although we
have hedged approximately 45% of our fuel requirements for the first quarter of 2004 and 40% for the
full year, we expect to incur higher fuel costs in the first quarter of 2004 than we have recently.
We continue to add service, as indicated by our new daily non-stop service between New York and
Sacramento, CA scheduled to begin in March 2004 and the recent announcement of our intention to
begin service out of New York’s LaGuardia Airport this spring. We believe that we are well-positioned
to continue to grow and be successful in this environment, absent factors outside of our control.
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