JetBlue Airlines 2013 Annual Report Download - page 21

JETBLUE AIRWAYS CORPORATION-2013Annual Report 15
PART I
ITEM1ARisk Factors
in new and existing markets and could impede our profitable growth
strategy, which would harm our business. Furthermore, there have been
numerous mergers and acquisitions within the airline industry including,
for example, the recent combinations of Delta Air Lines and Northwest
Airlines, United Airlines and Continental Airlines, and Southwest Airlines
and AirTran Airways. In the future, there may be additional mergers and
acquisitions in our industry. Any business combination could significantly
alter industry conditions and competition within the airline industry and
could cause fares of our competitors to be reduced. Additionally, if a
traditional network airline were to fully develop a low cost structure, or if
we were to experience increased competition from low cost carriers, our
business could be materially adversely affected.
Our business is highly dependent on the availability of fuel and fuel is
subject to price volatility.
Our results of operations are heavily impacted by the price and availability
of fuel. Fuel costs comprise a substantial portion of our total operating
expenses and are our single largest operating expense. Historically, fuel
costs have been subject to wide price fluctuations based on geopolitical
factors as well as supply and demand. The availability of fuel is not only
dependent on crude oil but also on refining capacity. When even a small
amount of the domestic or global oil refining capacity becomes unavailable,
supply shortages can result for extended periods of time. The availability
of fuel is also affected by demand for home heating oil, gasoline and other
petroleum products, as well as crude oil reserves, dependence on foreign
imports of crude oil and potential hostilities in oil producing areas of the
world. Because of the effects of these factors on the price and availability
of fuel, the cost and future availability of fuel cannot be predicted with
any degree of certainty.
Our aircraft fuel purchase agreements do not protect us against price
increases or guarantee the availability of fuel. Additionally, some of our
competitors may have more leverage than we do in obtaining fuel. We
have and may continue to enter into a variety of option contracts and swap
agreements for crude oil, heating oil, and jet fuel to partially protect against
significant increases in fuel prices; however, such contracts and agreements
do not completely protect us against price volatility, are limited in volume
and duration, and can be less effective during volatile market conditions
and may carry counterparty risk. Under the fuel hedge contracts we may
enter from time to time, counterparties to those contracts may require
us to fund the margin associated with any loss position on the contracts
if the price of crude oils falls below specified benchmarks. Meeting our
obligations to fund these margin calls could adversely affect our liquidity.
Due to the competitive nature of the domestic airline industry, at times we
have not been able to adequately increase our fares to offset the increases
in fuel prices nor may we be able to do so in the future. Future fuel price
increases, continued high fuel price volatility or fuel supply shortages may
result in a curtailment of scheduled services and could have a material
adverse effect on our financial condition and results of operations.
We have a significant amount of fixed obligations and we will incur
significantly more fixed obligations, which could harm our ability to
service our current or satisfy future fixed obligations.
As of December 31, 2013, our debt of $2.59 billion accounted for 55% of
our total capitalization. In addition to long-term debt, we have a significant
amount of other fixed obligations under operating leases related to our
aircraft, airport terminal space, other airport facilities and office space. As
of December 31, 2013, future minimum payments under noncancelable
leases and other financing obligations were approximately $2.11 billion
for 2014 through 2018 and an aggregate of $1.62 billion for the years
thereafter. Terminal 5 at JFK is under a 30-year lease with the Port Authority
of New York and New Jersey, or PANYNJ. The minimum payments under
this lease are being accounted for as a financing obligation and have been
included in the future minimum payment totals above.
As of December 31, 2013, we had commitments of approximately $6.87 billion
to purchase 146 additional aircraft and other flight equipment through 2022,
including estimated amounts for contractual price escalations. We may incur
additional debt and other fixed obligations as we take delivery of new aircraft
and other equipment and continue to expand into new markets. In an effort to
limit the incurrence of significant additional debt, we may seek to defer some
of our scheduled deliveries, sell or lease aircraft to others, or pay cash for new
aircraft, to the extent necessary or possible. The amount of our existing debt,
and other fixed obligations, and potential increases in the amount of our debt
and other fixed obligations could have important consequences to investors
and could require a substantial portion of cash flows from operations for debt
service payments, thereby reducing the availability of our cash flow to fund
working capital, capital expenditures and other general corporate purposes.
Our high level of debt and other fixed obligations could:
• impact our ability to obtain additional financing to support capital expansion
plans and for working capital and other purposes on acceptable terms
or at all;
• divert substantial cash flow from our operations and expansion plans in
order to service our fixed obligations;
• require us to incur significantly more interest expense than we currently
do if rates were to increase, since approximately 43% of our debt has
floating interest rates; and
• place us at a possible competitive disadvantage compared to less
leveraged competitors and competitors with better access to capital
resources or more favorable terms.
Our ability to make scheduled payments on our debt and other fixed
obligations will depend on our future operating performance and cash flows,
which in turn will depend on prevailing economic and political conditions
and financial, competitive, regulatory, business and other factors, many
of which are beyond our control. We are principally dependent upon
our operating cash flows and access to the capital markets to fund our
operations and to make scheduled payments on debt and other fixed
obligations. We cannot assure you we will be able to generate sufficient
cash flows from our operations or from capital market activities to pay
our debt and other fixed obligations as they become due; if we fail to do
so our business could be harmed. If we are unable to make payments on
our debt and other fixed obligations, we could be forced to renegotiate
those obligations or seek to obtain additional equity or other forms of
additional financing.
Our substantial indebtedness may limit our ability to incur additional
debt to obtain future financing needs.
We typically finance our aircraft through either secured debt or lease
financing. The impact on financial institutions from the continuing economic
malaise may adversely affect the availability and cost of credit to JetBlue
as well as to prospective purchasers of our aircraft we undertake to sell
in the future, including financing commitments we have already obtained
for purchases of new aircraft. To the extent we finance our activities with
additional debt, we may become subject to financial and other covenants
that may restrict our ability to pursue our strategy or otherwise constrain
our operations.
Our maintenance costs will increase as our fleet ages.
Our maintenance costs will increase as our fleet ages. In the past, we have
incurred lower maintenance expenses because most of the parts on our
aircraft were under multi-year warranties; many of these warranties have
expired. If any maintenance provider with whom we have a flight hours
agreement fails to perform or honor such agreements, we will incur higher
interim maintenance costs until we negotiate new agreements.
Furthermore, as our fleet ages, we expect to implement various fleet
modifications over the next several years to ensure our aircrafts’ continued
efficiency, modernization, brand consistency and safety. Our plans to
equip our Airbus A320 aircraft with Sharklets®, for example, may require
significant modification time. These fleet modifications may require significant
investment over several years, including taking aircraft out of service for
several weeks at a time.