JetBlue Airlines 2010 Annual Report Download - page 50

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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, 2010, we had a $23 million asset related to the net fair value of these derivative
instruments; the majority of which are not traded on a public exchange. Fair values are assigned based on
commodity prices that are provided to us by independent third parties. When possible, we designate these
instruments as cash flow hedges for accounting purposes, as defined by the Derivatives and Hedging topic of
the Codification which permits the deferral of the effective portions of gains or losses until contract
settlement.
The Derivatives and Hedging topic is a complex accounting standard and requires 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 gains and losses
have been recognized into earnings over a relatively short period of time.
Fair value measurements. We adopted the Fair Value Measurements and Disclosures topic of the
Codification which establishes a framework for measuring fair value and requires enhanced disclosures about
fair value measurements, on January 1, 2008. The Fair Value Measurements and Disclosures topic clarifies
that fair value is an exit price, representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. The Fair Value Measurements and
Disclosures topic also requires disclosure about how fair value is determined for assets and liabilities and
establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of
inputs. We rely on unobservable (level 3) inputs, which are highly subjective, in determining the fair value of
certain assets and liabilities, including ARS and our interest rate swaps.
We elected to apply the fair value option under the Financial Instruments topic of the Codification to an
agreement with one of our ARS’ broker, to repurchase in 2010, at par. The fair value of the put was
determined by comparing the fair value of the related ARS, as described above, to their par values and also
considered the credit risk associated with the broker. This put option was adjusted on each balance sheet date
based on its then fair value. The fair value of the put option was based on unobservable inputs and was
therefore classified as level 3 in the hierarchy. This put option was fully exercised in 2010 upon its expiration.
In February 2008 and February 2009, we entered into various interest rate swaps, which qualify as cash
flow hedges in accordance with the Derivatives and Hedging topic. 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 2009 since all critical terms
continued to match the underlying debt, 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, or TrueBlue. We record a liability, which was $6 million as of December 31, 2010, for the
estimated incremental cost of outstanding points earned from JetBlue purchases that we expect to be
redeemed. The estimated cost includes incremental fuel, insurance, passenger food and supplies, and
reservation costs. We adjust this liability, which is included in air traffic liability, based on points earned and
redeemed, changes in the estimated incremental costs associated with providing travel and changes in the
TrueBlue program. In November 2009, we launched an improved version of TrueBlue, which allows
customers to earn points based on the value paid for a trip rather than the length of the trip. In addition, unlike
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