JetBlue Airlines 2006 Annual Report Download - page 51

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Although there was no impact to our overall cash flows, the adoption of SFAS 123(R) did have a
significant impact on our results of operations. Most of the stock-based compensation expense
recorded in 2006 related to our stock purchase plan and stock options granted in 2006, as we
accelerated the vesting of 20 million outstanding stock options in December 2005.
Lease accounting. We operate airport facilities, offices buildings and aircraft under operating
leases with minimum lease payments associated with these agreements recognized as rent expense on
a straight-line basis over the expected lease term. Within the provisions of certain leases there are
minimum escalations in payments over the base lease term, as well as renewal periods. The effects of
the escalations have been reflected in rent expense on a straight-line basis over the lease term, which
includes renewal periods when it is deemed to be reasonably assured that we would incur an
economic penalty for not renewing. The amortization period for leasehold improvements is the term
used in calculating straight-line rent expense or their estimated economic life, whichever is shorter.
Had different conclusions been reached with respect to the lease term and related renewal periods,
different amounts of amortization and rent expense would have been reported.
Derivative instruments used for aircraft fuel. We utilize financial derivative instruments to
manage the risk of changing aircraft fuel prices. We do not purchase or hold any derivative instrument
for trading purposes. At December 31, 2006, we had a $15 million liability related to the net fair value
of our derivative instruments. Since the majority of our financial derivative instruments are not traded
on a market exchange, their fair values are estimated, with the assistance of third parties, through the
use of present value methods or standard option value models, with assumptions about commodity
prices based on those observed in underlying markets. When possible, we designate these instruments
as cash flow hedges for accounting purposes, as defined by Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133, which
permits the deferral of the effective portions of gains or losses until contract settlement.
SFAS 133 is a complex accounting standard, requiring that we develop and maintain a significant
amount of documentation related to (1) our fuel hedging program and strategy, (2) statistical analysis
supporting a highly correlated relationship between the underlying commodity in the derivative
financial instrument and the risk being hedged (i.e. aircraft fuel) on both a historical and prospective
basis and (3) cash flow designation for each hedging transaction executed, to be developed
concurrently with the hedging transaction. This documentation requires that we estimate forward
aircraft fuel prices since there is no reliable forward market for aircraft fuel. These prices are
developed through the observation of similar commodity futures prices, such as crude oil and/or
heating oil, and adjusted based on variations to those like commodities. Historically, our hedges have
settled within 24 months; therefore, the deferred effective portions of gains and losses have been
recognized into earnings over a relatively 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 $4 million as of December 31, 2006, 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 costs. In estimating the liability, we
currently assume that 90%of earned awards will be redeemed and that 30%of our outstanding points
will ultimately result in awards. Periodically, we evaluate our assumptions for appropriateness,
including comparison of the cost estimates to actual costs incurred as well as the expiration and
redemption assumptions to actual experience. Changes in the minimum award levels or in the lives of
the awards would also require us to reevaluate the liability, potentially resulting in a significant impact
in the year of change as well as in future years.
We also sell TrueBlue points to participating partners. Revenue from these sales is allocated
between passenger revenues and other revenues. The amount attributable to passenger revenue is
determined based on the fair value of transportation expected to be provided when awards are
redeemed and is recognized when travel is provided. Total sales proceeds in excess of the estimated
transportation fair value is recognized at the time of sale. Deferred revenue was $19 million at
December 31, 2006.
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