JetBlue Airlines 2013 Annual Report Download - page 54

JETBLUE AIRWAYS CORPORATION-2013Annual Report48
PART II
ITEM 8Financial Statements and Supplementary Data
Passenger Revenues
Passenger revenue is recognized when the transportation is provided or
after the ticket or customer credit (issued upon payment of a change fee)
expires. It is recognized net of the taxes that we are required to collect
from our customers, including federal transportation taxes, security taxes
and airport facility charges. Tickets sold but not yet recognized as revenue
and unexpired credits are included in air traffic liability.
Loyalty Program
We account for our customer loyalty program, TrueBlue, by recording a
liability 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 June 2013 we amended the program so points earned
by members never expire. As a result of these changes, our estimate for
the points that will remain unused, breakage, decreased resulting in a
$5 million reduction in revenue and a corresponding increase in air traffic
liability. In October 2013, we introduced the pooling of points between small
groups of people, branded as Family Pooling. We believe Family Pooling
has not had a material impact on the breakage calculation at year-end.
Points in TrueBlue can also be sold to participating companies, including
credit card and car rental companies. These sales are accounted for as
multiple-element arrangements, with one element representing the fair value
of the travel that will ultimately be provided when the points are redeemed
and the other consisting of marketing related activities that we conduct
with the participating company. The fair value of the transportation portion
of these point sales is deferred and recognized as passenger revenue
whentransportation is provided. The marketing portion, which is the excess
of the total sales proceeds over the estimated fair value of the transportation
to be provided, is recognized in other revenue when the points are sold.
TrueBlue points sold to participating companies which are not redeemed
are recognized as revenue when management determines the probability of
redemption is remote. We recorded $2 million, $5 million, and $3 million in
revenue related to point expirations during 2013, 2012 and 2011, respectively.
Our original co-branded credit card agreement, under which we sell
TrueBlue points as described above, provided for a minimum cash payment
guarantee, which was paid to us throughout the life of the agreement if
specified point sales and other ancillary activity payments were not achieved,
and was subject to refund in the event the cash payments exceeded future
minimums through April 2011. We recognized approximately $10 million
of other revenue during 2011 related to this guarantee.
Upon the re-launch of the TrueBlue program in November 2009, we
extended our co-branded credit card and membership rewards participation
agreements. In connection with these extensions, we received a one-time
payment of $37 million, which we deferred and are recognizing as other
revenue over the term of the agreement through 2015. We recognized
approximately $7 million, $7 million, and $6 million of revenue related to this
one-time payment during 2013, 2012 and 2011, respectively. In connection
with exclusive benefits to be introduced for our co-branded credit card,
we received a one-time payment of $6 million during 2012, which we have
deferred and will recognize as other revenue over the remaining term of
the agreement. As of December 31, 2013, we have recorded $1 million
of revenue related to this one-time payment.
LiveTV Commercial Agreements
LiveTV provides inflight entertainment solutions for various commercial
airlines. These solutions include equipment and related installation as well as
agreements for ongoing service and support, which extended through 2022
as of December 31, 2013. We account for the equipment agreements as
operating leases, with related revenue recognized ratably over the term of the
related customer agreement in accordance with the Revenue Recognition-
Multiple-Element Arrangements topic of the Codification. This determination
is principally as a result of the long term nature of these agreements and
the resulting uncertainties surrounding the total costs to provide ongoing
equipment maintenance and upkeep throughout the contractual term. We
account for payments for ongoing service and support ratably over the term of
the related customer contract. Customer advances to be applied in the next
12 months are included in other current liabilities on our consolidated
balance sheets while those beyond 12 months are included in other liabilities.
Airframe and Engine Maintenance and Repair
Regular airframe maintenance for owned and leased flight equipment is
charged to expense as incurred unless covered by a third-party long-term
flight hour services contract. We have separate service agreements in
place covering scheduled and unscheduled repairs of certain airframe line
replacement unit components as well as the engines on our fleet. These
agreements, who’s original terms generally range from ten to 15 years,
require monthly payments at rates based either on the number of cycles
each aircraft was operated during each month or the number of flight
hours each engine was operated during each month, subject to annual
escalations. These power by the hour contracts transfer certain risks,
including cost risks, to the third-party service providers. They generally
fix the amount we pay per flight hour or number of cycles in exchange for
maintenance and repairs under a predefined maintenance program, which
are representative of the time and materials that would be consumed. These
costs are expensed as the related flight hours or cycles are incurred. One
of our maintenance providers is a subsidiary of a large shareholder of ours
and during 2013, we recorded approximately $19 million in maintenance
expense provided by this related party.
Advertising Costs
Advertising costs, which are included in sales and marketing, are expensed
as incurred. Advertising expense was $61 million in 2013, $57 million in
2012 and $57 million in 2011.
Share-Based Compensation
We record compensation expense for share-based awards based on the
grant date fair value of those awards. Share-based compensation expense
includes an estimate for pre-vesting forfeitures and is recognized over the
requisite service periods of the awards on a straight-line basis.
Under the Compensation-Stock Compensation topic of the Codification,
the benefits associated with tax deductions in excess of recognized
compensation cost are required to be reported as a financing cash flow.
We recorded an immaterial amount in excess tax benefits generated from
option exercises in each of 2013, 2012 and 2011. Our policy is to issue
new shares for purchases under all of our stock based plans.
Income Taxes
We account for income taxes utilizing the liability method. Deferred income
taxes are recognized for the tax consequences of temporary differences
between the tax and financial statement reporting bases of assets and
liabilities. A valuation allowance for deferred tax assets is provided unless
realizability is judged by us to be more likely than not. Our policy is to
recognize interest and penalties accrued on any unrecognized tax benefits
as a component of income tax expense.
New Accounting Standards
New accounting rules and disclosure requirements can impact our financial
results and the comparability of our financial statements. Authoritative
literature has recently been issued which we believe will impact our