JetBlue Airlines 2007 Annual Report Download - page 68

Note 7—Stock-Based Compensation
Fair Value Assumptions: We use a Black-Scholes-Merton option pricing model to estimate the
fair value of share-based awards under SFAS 123(R) for issuances under our CSPP and our 2002 Plan.
This is the same valuation technique we previously used for pro forma disclosures under SFAS 123.
The Black-Scholes-Merton option pricing model incorporates various and highly subjective
assumptions, including expected term and expected volatility. We have reviewed our historical pattern
of option exercises and have determined that meaningful differences in option exercise activity existed
among employee job categories. Therefore, for all stock options granted after January 1, 2006, we
have categorized these awards into three groups of employees for valuation purposes. We have
determined there were no meaningful differences in employee activity under our CSPP due to the
broad-based nature of the plan.
We estimate the expected term of options granted using an implied life derived from the results
of a lattice model, which incorporates our historical exercise and post-vesting employment termination
patterns, which we believe are representative of future behavior. The expected term for our CSPP
valuation is based on the length of each purchase period as measured at the beginning of the offering
period.
We estimate the expected volatility of our common stock at the grant date using a blend of
75%historical volatility of our common stock and 25%implied volatility of two-year publicly traded
options on our common stock as of the option grant date. Our decision to use a blend of historical
and implied volatility was based upon the volume of actively traded options on our common stock and
our belief that historical volatility alone may not be completely representative of future stock price
trends.
Our risk-free interest rate assumption is determined using the Federal Reserve nominal rates for
U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award
being valued. We have never paid any cash dividends on our common stock and we do not anticipate
paying any cash dividends in the foreseeable future. Therefore, we assumed an expected dividend
yield of zero.
Additionally, SFAS 123(R) requires us to estimate pre-vesting option forfeitures at the time of
grant and periodically revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. We record stock-based compensation expense only for those awards expected to vest
using an estimated forfeiture rate based on our historical pre-vesting forfeiture data. Previously, we
accounted for forfeitures as they occurred under the pro forma disclosure provisions of SFAS 123 for
periods prior to 2006.
The following table shows our assumptions used to compute the stock-based compensation
expense and pro forma information for stock option grants and purchase rights under our CSPP
issued for the years ended December 31.
Stock Options
2007 2006 2005
Expected term (years) ............................ 4.1-6.8 4.1-7.0 2.5-5.9
Volatility ........................................ 42.5%44.1%38.0%
Risk-free interest rate............................. 4.6%4.8%4.0%
Weighted average fair value of stock options ........ $ 4.91 $ 5.32 $ 5.18
CSPP
2006 2005
Expected term (years) ................................. 0.5-2.0 0.5-2.0
Volatility ............................................. 44.5%38.0%
Risk-free interest rate ................................. 5.0%3.9%
Weighted average fair value of purchase rights............ $ 3.75 $ 4.33
Unrecognized stock-based compensation expense was approximately $26 million as of
December 31, 2007, relating to a total of eight million unvested stock options and restricted stock
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