JetBlue Airlines 2009 Annual Report Download - page 79

term of the related service agreements of up to 12 years. Expenses for warranty repairs are recognized as they
occur. In addition, LiveTV has provided indemnities against any claims which may be brought against its
customers related to allegations of patent, trademark, copyright or license infringement as a result of the use
of the LiveTV system. LiveTV customers include other airlines, which may be susceptible to the inherent risks
of operating in the airline industry and/or economic downturns, which may in turn have a negative impact on
our business.
Many aspects of airlines’ operations are subject to increasingly stringent federal, state, local, and foreign
laws protecting the environment. There is growing consensus that some form of regulation will be forthcoming
at the federal level with respect to greenhouse gas emissions (including carbon dioxide (CO2)) and such
regulation could result in the creation of substantial additional costs in the form of taxes or emission
allowances. Since the domestic airline industry is increasingly price sensitive, we may not be able to recover
the cost of compliance with new or more stringent environmental laws and regulations from our passengers,
which could adversely affect our business. Although it is not expected that the costs of complying with current
environmental regulations will have a material adverse effect on our financial position, results of operations or
cash flows, no assurance can be made that the costs of complying with environmental regulations in the future
will not have such an effect. The impact to us and our industry from such actions is likely to be adverse and
could be significant, particularly if regulators were to conclude that emissions from commercial aircraft cause
significant harm to the upper atmosphere or have a greater impact on climate change than other industries.
In December 2009, the DOT issued a series of passenger protection rules which, among other things,
impose tarmac delay limits for U.S. airline domestic flights. The rules become effective in April 2010, and
will require U.S. airlines to allow passengers to deplane after three hours on the tarmac, with certain safety
and security exceptions. Violators can face fines up to a maximum of $27,500 per passenger. The new rules
also introduce requirements to disclose on-time performance and delay statistics for certain flights. These new
rules may have adverse consequences on our business and our results of operations.
We are unable to estimate the potential amount of future payments under the foregoing indemnities and
agreements.
Note 13—Financial Derivative Instruments and Risk Management
As part of our risk management strategy, we periodically purchase crude or heating oil option contracts or
swap agreements to manage our exposure to the effect of changes in the price and availability of aircraft fuel.
Prices for these commodities are normally highly correlated to aircraft fuel, making derivatives of them
effective at providing short-term protection against sharp increases in average fuel prices. We also periodically
enter into basis swaps for the differential between heating oil and jet fuel, as well as jet fuel swaps, to further
limit the variability in fuel prices at various locations. To manage the variability of the cash flows associated
with our variable rate debt, we have also entered into interest rate swaps. We do not hold or issue any
derivative financial instruments for trading purposes.
Aircraft fuel derivatives: We attempt to obtain cash flow hedge accounting treatment for each aircraft
fuel derivative that we enter into. This treatment is provided for under the Derivatives and Hedging topic of
the Codification, ASC 815, which allows for gains and losses on the effective portion of qualifying hedges to
be deferred until the underlying planned jet fuel consumption occurs, rather than recognizing the gains and
losses on these instruments into earnings for each period that they are outstanding. The effective portion of
realized aircraft fuel hedging derivative gains and losses is recognized in fuel expense, while ineffective gains
and losses are recognized in interest income and other. All cash flows related to our fuel hedging derivatives
are classified as operating cash flows.
Ineffectiveness results when the change in the total fair value of the derivative instrument does not
exactly equal the change in the value of our expected future cash outlays for the purchase of aircraft fuel. To
the extent that the periodic changes in the fair value of the hedging instruments are not effectively hedged, the
ineffectiveness is recognized in other income (expense) immediately. Likewise, if a hedge does not qualify for
hedge accounting, the periodic changes in its fair value are recognized in other income (expense) in the period
of the change. When aircraft fuel is consumed and the related derivative contract settles, any gain or loss
previously deferred in other comprehensive income is recognized in aircraft fuel expense.
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