JetBlue Airlines 2008 Annual Report Download - page 50

In February 2008, we entered into interest rate swaps, which qualify as cash flow hedges in accordance
with SFAS 133. The fair values of our interest rate swaps were 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. There was no ineffectiveness
relating to these interest rate swaps in 2008, with all of the unrealized losses being deferred in accumulated
other comprehensive income.
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 $5 million as
of December 31, 2008, 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 $54 million at December 31, 2008.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from
adverse changes to the price of fuel and interest rates as discussed below. The sensitivity analyses presented
do not consider the effects that such adverse changes may have on the overall economic activity, nor do they
consider additional actions we may take to mitigate our exposure to such changes. Variable-rate leases are not
considered market sensitive financial instruments and, therefore, are not included in the interest rate sensitivity
analysis below. Actual results may differ. See Notes 1, 2 and 13 to our consolidated financial statements for
accounting policies and additional information.
Aircraft fuel. Our results of operations are affected by changes in the price and availability of aircraft fuel.
To manage the price risk, we use crude or heating oil option contracts or swap agreements. Market risk is
estimated as a hypothetical 10% increase in the December 31, 2008 cost per gallon of fuel. Based on projected
2009 fuel consumption, such an increase would result in an increase to aircraft fuel expense of approximately
$75 million in 2009, compared to an estimated $128 million for 2008 measured as of December 31, 2007. As of
December 31, 2008, we had hedged approximately 8% of our projected 2009 fuel requirements. All hedge
contracts existing at December 31, 2008 settle by the end of 2009. We expect to realize approximately $93 million
in losses during 2009 which was deferred in other comprehensive income as of December 31, 2008 related to our
outstanding fuel hedge swaps.
Interest. Our earnings are affected by changes in interest rates due to the impact those changes have on
interest expense from variable-rate debt instruments and on interest income generated from our cash and
investment balances. The interest rate is fixed for $1.58 billion of our debt and capital lease obligations, with
the remaining $1.45 billion having floating interest rates. If interest rates average 10% higher in 2009 than
they did during 2008, our interest expense would increase by approximately $4 million, compared to an
estimated $10 million for 2008 measured as of December 31, 2007. If interest rates average 10% lower in
2009 than they did during 2008, our interest income from cash and investment balances would decrease by
approximately $1 million, compared to $5 million for 2008 measured as of December 31, 2007. These
amounts are determined by considering the impact of the hypothetical interest rates on our variable-rate debt,
cash equivalents and investment securities balances at December 31, 2008 and 2007.
Fixed Rate Debt. On December 31, 2008, our $303 million aggregate principal amount of convertible debt
had a total estimated fair value of $359 million, based on quoted market prices. If interest rates were 10% higher
than the stated rate, the fair value of this debt would have been $379 million as of December 31, 2008.
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