JetBlue Airlines 2008 Annual Report Download - page 66

to us (or identical shares or, in certain circumstances, the cash value thereof), the borrowed shares are not
considered outstanding for the purpose of computing and reporting basic or diluted earnings (loss) per share.
A total of 38.3 million shares for the year ended December 31, 2008 and a total of 20.8 million shares
for each of the years ended December 31, 2007 and 2006, which are issuable upon conversion of our
convertible debt were excluded from the diluted earnings per share calculation since the assumed conversions
would be anti-dilutive. We also excluded 27.2 million, 24.7 million and 31.1 million shares issuable upon
exercise of outstanding stock options for the years ended December 31, 2008, 2007 and 2006, respectively,
from the diluted earnings (loss) per share computation since their exercise price was greater than the average
market price of our common stock or they were otherwise anti-dilutive.
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 stock options under our 2002
Plan. 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
under our 2002 Plan, 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 restricted stock units is
based on the associated service period. 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 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.
2008 2007 2006
Stock Options
Expected term (years) .................................... 6.0 4.1-6.8 4.1-7.0
Volatility ............................................. 47.7% 42.5% 44.1%
Risk-free interest rate .................................... 3.0% 4.6% 4.8%
Weighted average fair value of stock options ................... $3.45 $ 4.91 $ 5.32
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