JetBlue Airlines 2014 Annual Report Download - page 66

JETBLUE AIRWAYS CORPORATION-2014Annual Report60
PART II
ITEM 8Financial Statements and Supplementary Data
accruals, using available information, we evaluate the likelihood of an
unfavorable outcome in legal or regulatory proceedings to which we are
a party to and record a loss contingency when it is probable a liability has
been incurred and the amount of the loss can be reasonably estimated.
These subjective determinations are based on the status of such legal or
regulatory proceedings, the merits of our defenses and consultation with
legal counsel. Actual outcomes of these legal and regulatory proceedings
may materially differ from our current estimates. It is possible that resolution
of one or more of the legal matters currently pending or threatened could
result in losses material to our consolidated results of operations, liquidity
or financial condition.
To date, none of these types of litigation matters, most of which are typically
covered by insurance, has had a material impact on our operations or
financial condition. We have insured and continue to insure against most of
these types of claims. A judgment on any claim not covered by, or in excess
of, our insurance coverage could materially adversely affect our financial
condition or results of operations.
Employment Agreement Dispute. In or around March 2010, attorneys
representing a group of current and former pilots (the “Claimants”) filed a
Request for Mediation with the American Arbitration Association (the “AAA”)
concerning a dispute over the interpretation of a provision of their individual
JetBlue Airways Corporation Employment Agreement for Pilots (“Employment
Agreement”). In their Fourth Amended Arbitration Demand, dated June 8,
2012, the Claimants (972 pilots) alleged that JetBlue breached the base
salary provision of the Employment Agreement and sought back pay and
related damages for pay adjustments that occurred in each of 2002, 2007
and 2009. The Claimants also asserted that JetBlue had violated numerous
New York state labor laws. In July 2012, in response to JetBlue’s partial
motion to dismiss, the Claimants withdrew the 2002 claims. Following an
arbitration hearing on the remaining claims, in May 2013, the arbitrator
issued an interim decision on the contractual provisions of the Employment
Agreement. The arbitrator determined that a 26.7% base pay rate increase
provided to certain pilots during 2007 triggered the base salary provision of
the Employment Agreement. The 2009 claims and all New York state labor
law claims were dismissed. In early July 2014, the AAA issued the arbitrator’s
Final Award, awarding 318 of the 972 Claimants a total of approximately
$4.4 million, including interest, from which applicable tax withholdings must
be further deducted. In January 2015, the New York State Supreme Court
justice confirmed the arbitrator’s Final Award and denied Claimants’ motion
to vacate the award.
As the amount of damages awarded to the Claimants in the Final Award
has been confirmed by the Court, we have accrued an amount that we
believe is probable. Our estimate of reasonably possible losses in excess
of the probable loss is not material. However, the outcome of any litigation
is inherently uncertain and any final judgment may differ materially.
WestJet Complaint. In December 2013, WestJet, a customer of LiveTV,
filed a complaint against LiveTV alleging breach of contract. WestJet has
alleged $15 million in damages plus unspecified damages for removing the
inflight entertainment systems from its aircraft. In January 2014, LiveTV filed
a response to this Complaint and a series of Counterclaims. In its pleadings,
LiveTV disputes the accuracy and validity of the WestJet claims and to the
extent WestJet is able to establish any liability on the part of LiveTV, LiveTV
contends that the as-yet unliquidated damages sought by LiveTV in its
Counterclaims are likely to exceed any actual damages awarded to WestJet
on its Complaint. We believe the Complaint to be without merit. At the present
time it is not possible to assess the likelihood of loss. As part of the sale of
LiveTV, JetBlue agreed to indemnify Thales for certain losses and retained
certain rights to potential recovery received as a result of the Counterclaims
asserted against WestJet, refer to Note 8 for additional information.
ALPA. In April 2014, JetBlue pilots elected to be solely represented by
the Air Line Pilots Association, or ALPA. The National Mediation Board, or
NMB, certified ALPA as the representative body for JetBlue pilots and we
plan to work with ALPA to reach our first collective bargaining agreement.
We do not believe that the result of the election will have a material impact
on our financial statements.
Litigation Recovery. During December 2014, JetBlue reached an agreement
with respect to the settlement of a commercial dispute. JetBlue recorded
a benefit of $7.5 million related to this matter.
NOTE 13 Financial Derivative Instruments and Risk Management
As part of our risk management techniques, we periodically purchase over
the counter energy derivative instruments and enter into fixed forward price
agreements, or FFPs, to manage our exposure to the effect of changes
in the price of aircraft fuel. Prices for the underlying commodities have
historically been highly correlated to aircraft fuel, making derivatives of them
effective at providing short-term protection against volatility in average
fuel prices. We also periodically enter into jet fuel basis swaps for the
differential between heating oil and jet fuel 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. It 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
during each period they are outstanding. The effective portion of realized
aircraft fuel hedging derivative gains and losses is recognized in aircraft
fuel expense in the period the underlying fuel is consumed.
Ineffectiveness can occur in certain circumstances, when the change in the
total fair value of the derivative instrument differs from the change in the
value of our expected future cash outlays for the purchase of aircraft fuel
and is recognized immediately in interest income and other. Likewise, if a
hedge does not qualify for hedge accounting, the periodic changes in its
fair value are recognized in the period of the change in interest income and
other. When aircraft fuel is consumed and the related derivative contract
settles, any gain or loss previously recorded in other comprehensive income
is recognized in aircraft fuel expense. All cash flows related to our fuel
hedging derivatives are classified as operating cash flows.
Our current approach to fuel hedging is to enter into hedges on a
discretionary basis without a specific target of hedge percentage needs.
We view our hedge portfolio as a form of insurance to help mitigate the
impact of price volatility and protect us against severe spikes in oil prices,
when possible.
The following table illustrates the approximate hedged percentages of our
projected fuel usage by quarter as of December 31, 2014, related to our
outstanding fuel hedging contracts that were designated as cash flow
hedges for accounting purposes.
Jet fuel
swap
agreements
Jet fuel
collar
agreements
Heating
oil collar
agreements Total
First Quarter 2015 10% 10% —% 20%
Second Quarter 2015 10% 10% —% 20%
Third Quarter 2015 5% —% 9% 14%
Fourth Quarter 2015 5% —% 10% 15%