Summary of JETBLUE AIRWAYS CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Outlook
While the global economy appeared to show signs of improvement during the third quarter of 2009, weakened demand for domestic leisure and business air travel continued. The industry has continued to be aggressive with fare sales, which added to an already challenging pricing environment. Continued volatility and continued economic uncertainty may have a negative impact on our business, and therefore we continue to monitor closely consumer demand in order to promptly respond to changes in the demand environment. In an effort to increase demand during low travel periods and attract new customers, we launched our All-You-Can-Jet Pass promotion in September 2009, offering unlimited travel for one month at a fixed fee. Earlier this year, the Federal Aviation Administration, or FAA, released projections that in 2009, domestic airlines would see a 9% reduction in passengers. Furthermore, the International Airline Transportation Association, or IATA, recently predicted that 2009 global revenues would see dramatic decreases, and that industry recovery is not imminent. Domestic airlines have largely responded to the economic environment and softening demand by cutting capacity. In response to the uncertain economic conditions, we continue to focus on cost discipline, careful management of our fleet and capacity, and maintaining a strong liquidity position.
Lower fuel prices throughout most of 2009, when compared to 2008, have helped to offset the weaker demand environment. In the fourth quarter of 2008, we began revising our fuel hedge program and effectively exited a majority of our 2009 fuel hedges outstanding at that time and prepaid a portion of our liability, limiting our exposure to additional cash collateral requirements. As a result, we benefited from the lower fuel prices throughout the first nine months of the year. In the second and third quarters of 2009, fuel prices began to rise, although they remain much lower than the record high prices of last year. In response, we entered into a variety of fuel hedge contracts covering approximately 61% of our forecasted consumption for the fourth quarter of 2009, 30% of our forecasted consumption for the full year 2010, and minimal amounts of our forecasted consumption for 2011. We will continue to monitor fuel prices closely, and adjust our approach to fuel hedging as we believe it is advisable.
We continued our focus on maintaining a strong liquidity position. In October 2009, we entered into an agreement with Citigroup Global Markets, Inc. under which they agreed to purchase our auction rate securities, or ARS, which had a par value of approximately $158 million, for approximately $120 million. In June 2009, we successfully accessed the capital markets raising net proceeds of approximately $300 million through a $201 million convertible debt financing and a $112 million common stock offering. In July 2009, we deferred delivery of three A320 aircraft previously scheduled for delivery in 2010. As a result, we currently are not obligated to take delivery of any aircraft during 2010. During the first quarter, we sold two of our aircraft immediately after their delivery to us from their manufacturer. We currently expect our year end operating fleet to consist of the 110 Airbus A320 aircraft and 41 EMBRAER 190 aircraft that are currently in service. We have one of the youngest and most fuel efficient fleets in the industry, with an average age of 4.1 years, which we believe gives us a competitive advantage.
In 2009, we have been growing our route network primarily through adding new destinations in the Caribbean and Latin America, markets which, in general, generate higher revenues and have historically matured more quickly than mainland flights of a comparable distance. We have approximately 20% of our capacity in the Caribbean and Latin America, and we expect this number to grow by the end of 2009. We commenced service to Bogotá, Colombia in January 2009, San Jose, Costa Rica in March 2009, Montego Bay, Jamaica in May 2009, and Bridgetown, Barbados and Vieux Fort, St. Lucia in October 2009. We have also announced plans to begin service to Kingston, Jamaica beginning in October 2009. In addition, we commenced service to Los Angeles, CA in June 2009 and from Boston, MA to Baltimore, MD in September 2009. The addition of this service has helped to strengthen our position as the largest carrier at Boston's Logan International Airport in terms of destinations served.

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In September 2009, we received Department of Transportation, or DOT, approval to launch a commercial codeshare agreement with Deutsche Lufthansa AG, providing our customers with convenient connections at 12 of our domestic locations to Deutsche Lufthansa AG's network of over 400 locations overseas. This new partnership with one of the world's preeminent airlines, and our largest shareholder will allow us to leverage our positions at JFK and Boston. We have begun to sell connections under the new agreement and expect sales to increase as more people learn about our partnership and we add additional domestic and international connections in the future.
We expect our full-year 2009 operating capacity to remain relatively flat, with growth between negative 1% to positive 1% over 2008 with the net addition of three Airbus A320 aircraft and six EMBRAER 190 aircraft to our operating fleet. We expect that the EMBRAER 190 aircraft will represent approximately 14% of our total 2009 operating capacity. Assuming fuel prices of $2.01 per gallon, net of effective hedges, our cost per available seat mile for 2009 is expected to decrease between 7% and 9% over 2008. We expect our full year operating margin to be between 7% and 9% and our pre-tax margin to be between 2% and 4%. Results of Operations
Our operating revenue per available seat mile for the quarter decreased 8% over the same period in 2008. Our average fares for the quarter decreased 11% over 2008 to $127.04, while our load factor declined 0.3 points to 83.7% from a year ago. Our on-time performance, defined by the DOT as arrival within 14 minutes of schedule, was 78.7% in the third quarter of 2009 compared to 69.3% for the same period in 2008, while our completion factor was 98.8% and 97.4% in 2009 and 2008, respectively.
Three Months Ended September 30, 2009 and 2008 We reported net income of $15 million for the three months ended September 30, 2009, compared to a net loss of $8 million for the three months ended September 30, 2008. Diluted earnings per share were $0.05 for the third quarter of 2009 compared to diluted loss per share of $0.03 for 2008. Our operating income for the three months ended September 30, 2009 was $66 million compared to $22 million for the same period last year, and our pre-tax margin increased 3.8 points from 2008, to 2.7%.
Operating Revenues. Operating revenues decreased 5%, or $48 million, over the same period in 2008 primarily due to a 5%, or $43 million, decrease in passenger revenues. The decrease in passenger revenues was attributable to a 0.3 point decrease in load factor on 3% more capacity and an 8% decrease in yield over the third quarter of 2008.
Other revenue decreased 5%, or $5 million, primarily due to lower change fees. Other revenue also decreased due to lower marketing revenues, offset by an increase in excess baggage revenue and higher concession revenues from our new terminal at JFK.
Operating Expenses. Operating expenses decreased 10%, or $92 million, over the same period in 2008, primarily due to lower fuel prices, partially offset by increased salaries, wages and benefits and maintenance expense. Operating capacity increased 3% to 8.4 billion available seat miles. Operating expenses per available seat mile decreased 13% to 9.40 cents for the three months ended September 30, 2009. Excluding fuel, our cost per available seat mile for the three months ended September 30, 2009 was 9% higher compared to the same period in 2008. Our operating expenses on a unit basis have increased due to a shift in capacity from transcontinental flying to shorter haul, which resulted in a 5% decrease in our average stage length year over year. In detail, operating costs per available seat mile were as follows (percent changes are based on unrounded numbers):

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                                                Three Months Ended
                                                  September 30,          Percent
                                                 2009         2008        Change
                                                    (in cents)
         Operating expenses:
         Aircraft fuel                            2.93         4.84       (39.6 )%
         Salaries, wages and benefits             2.36         2.13        11.1 %
         Landing fees and other rents              .68          .64         5.9 %
         Depreciation and amortization             .70          .66         5.5 %
         Aircraft rent                             .37          .40        (6.1 )%
         Sales and marketing                       .45          .45        (1.4 )%
         Maintenance materials and repairs         .48          .40        21.7 %
         Other operating expenses                 1.43         1.28        11.0 %

         Total operating expenses                 9.40        10.80       (13.0 )%

Aircraft fuel expense decreased 38%, or $148 million, due to a 40% decrease in average fuel cost per gallon, or $160 million after the impact of fuel hedging, offset by an increase of 4 million gallons of aircraft fuel consumed, resulting in $12 million more in fuel expense. We recorded $23 million in effective fuel hedge losses during the third quarter of 2009 versus $22 million in effective fuel hedge gains during the third quarter of 2008. Our average fuel cost per gallon was $2.07 for the third quarter of 2009 compared to $3.42 for the third quarter of 2008.
Salaries, wages and benefits increased 14%, or $26 million, primarily due to increases in pilot wages and related benefits under our new pilot employment agreements and a 7% increase in average full-time equivalent employees. The increase in full-time equivalent employees is partially driven by our policy of not furloughing employees during economic downturns and additional hirings related to training as we prepare for our new reservations system cutover in early 2010.
Landing fees and other rents increased 9%, or $4 million, due primarily to higher landing fee rates and an 8% increase in departures over 2008, offset by $4 million reduction in airport rents at JFK from 2008 due to our terminal move.
Depreciation and amortization increased 9%, or $5 million, primarily due to $5 million in amortization associated with Terminal 5, which we began operating from in October 2008, and $6 million related to having on average nine more owned aircraft in 2009. Depreciation and amortization in 2008 included an $8 million asset write-off related to our temporary terminal building at JFK.
Sales and marketing expense remained relatively flat, due to $1 million in lower credit card fees resulting from decreased passenger revenues offset by $1 million in higher advertising costs.
Maintenance, materials, and repairs increased 25%, or $8 million, due to an average of nine additional average operating aircraft in 2009, compared to the same period in 2008 and the age of our fleet. The average age of our fleet increased to 4.1 years compared to 3.5 years in the year ago period. Maintenance expense is expected to increase significantly as our fleet ages, which results in the need for additional repairs over time.

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Other operating expenses increased 14%, or $15 million, due to an increase in variable costs associated with 8% more departures versus 2008. Other operating expenses in 2008 were offset by $6 million for certain tax incentives and included $2 million in gains on sales of aircraft.
Other Income (Expense). Interest expense decreased 25%, or $17 million, primarily due to lower interest rates and extinguishments of debt, totaling approximately $15 million, offset by the financing of six net additional aircraft and our 2009 6.75% convertible Debentures, which resulted in $8 million of additional interest expense. Interest expense in 2008 was also higher due to $5 million make whole payments from escrow in connection with the partial conversion of a portion of our 5.5% convertible debentures due 2038. Capitalized interest in 2008 included $13 million associated with the construction of our new terminal at JFK, which ceased being capitalized following the opening of the terminal in October 2008.
Interest income and other decreased 75%, or $15 million, primarily due to lower interest rates earned on investments, and lower average cash and investment balances, resulting in $6 million lower interest income. This decrease was offset by a $3 million gain to reflect the fair value adjustment of our ARS, including the related put option in 2009. Our derivative instruments not qualifying for cash flow hedges in 2009 resulted in a loss of $2 million, compared to a $4 million gain in 2008. Additionally, in 2008, accounting ineffectiveness on crude and heating oil derivatives classified as cash flow hedges resulted in a $1 million loss. We are unable to predict what the amount of ineffectiveness will be related to these instruments, or the potential loss of hedge accounting, which is determined on a derivative-by-derivative basis, due to the volatility in the forward markets for these commodities. Nine Months Ended September 30, 2009 and 2008 We reported net income of $47 million for the nine months ended September 30, 2009 compared to a $27 million net loss for the nine months ended September 30, 2008. Diluted earnings per share were $0.16 for the nine months ended September 30, 2009 compared to a loss per share of $0.12 for the same period in 2008. Our operating income for the nine months ended September 30, 2009 was $215 million compared to $60 million for the same period in 2008, and our pre-tax margin increased 4.7 points from 2008 to 3.2%.
Operating Revenues. Operating revenues decreased 5%, or $123 million, over the same period in 2008 primarily due to a 6%, or $143 million, decrease in passenger revenues. The decrease in passenger revenues was attributable to a 1.1 point decrease in load factor on 1% less capacity and a 3% decrease in yield over 2008, offset by the addition of our Even More Legroom optional upgrade product, which we introduced in mid-2008.
Other revenues increased 8%, or $20 million, primarily due to higher excess baggage revenue resulting from new bag fees introduced in 2008 and increased rates for these and other ancillary services in 2009. Other revenue also increased due to additional LiveTV third party revenues and higher concession revenues from our new terminal at JFK, partially offset by a reduction in charter revenue.
Operating Expenses. Operating expenses decreased 11%, or $278 million, over the same period in 2008, primarily due to lower fuel prices and decreased capacity, partially offset by increased salaries, wages and benefits and depreciation and amortization. Operating capacity decreased 1% to 24.6 billion available seat miles. Operating expenses per available seat mile decreased 10% to 9.11 cents for the nine months ended September 30, 2009. Excluding fuel, our cost per available seat mile for the nine months ended September 30, 2009 was 9% higher than the same period in 2008. Our operating expenses, excluding fuel, on a unit basis have increased due to a shift in capacity from transcontinental flying to shorter haul, which resulted in a 6% decrease in our average stage length year over year. In detail, operating costs per available seat mile were as follows (percent changes are based on unrounded numbers):

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                                                 Nine Months Ended
                                                   September 30,         Percent
                                                 2009         2008        Change
                                                    (in cents)
          Operating expenses:
          Aircraft fuel                           2.80         4.30       (35.0 )%
          Salaries, wages and benefits            2.34         2.08        12.5 %
          Landing fees and other rents             .65          .61         6.8 %
          Depreciation and amortization            .69          .58        19.1 %
          Aircraft rent                            .39          .39        (0.2 )%
          Sales and marketing                      .46          .47        (2.6 )%
          Maintenance materials and repairs        .45          .39        16.3 %
          Other operating expenses                1.33         1.28         4.6 %

          Total operating expenses                9.11        10.10        (9.7 )%

Aircraft fuel expense decreased 36%, or $385 million, due to a 35% decrease in average fuel cost per gallon, or $370 million after the impact of fuel hedging, and 5 million less gallons of aircraft fuel consumed, resulting in $15 million less fuel expense. We recorded $121 million in fuel hedge losses during the first three quarters of 2009 versus $105 million in fuel hedge gains during the first three quarters of 2008. Our average fuel cost per gallon was $2.00 for the nine months ended September 30, 2009 compared to $3.08 for the same period in 2008. Cost per available seat mile decreased 35% primarily due to the decrease in fuel price.
Salaries, wages and benefits increased 11%, or $57 million, due primarily to increases in pilot pay and related benefits under our new pilot employment agreements and a 3% increase in average full-time equivalent employees. The increase in full-time equivalent employees is partially driven by our policy of not furloughing employees during economic downturns and additional hirings related to training as we prepare for our new reservations system cutover in early 2010. Cost per available seat mile increased 13% primarily due to increased average wages per average full-time equivalent employee, as well as certain inefficiencies associated with reductions in capacity.
Landing fees and other rents increased 5%, or $8 million, due to a 5% increase in departures over 2008, offset by an $11 million reduction in airport rents at JFK following our terminal move. Cost per available seat mile increased 7% due to increased departures and reduced capacity.
Depreciation and amortization increased 17%, or $25 million, primarily due to $16 million in amortization associated with Terminal 5, which we began operating from in October 2008, and $14 million related to having on average eight more owned aircraft in 2009. Depreciation and amortization in 2008 included an $8 million asset write-off related to our temporary terminal building at JFK.
Sales and marketing expense decreased 4%, or $5 million, due to $4 million in lower credit card fees resulting from decreased passenger revenues as well as $2 million in lower advertising costs, offset by $1 million in higher commissions in 2009. On a cost per available seat mile basis, sales and marketing expense decreased 3% due to lower advertising and credit card fees.
Maintenance, materials, and repairs increased 15%, or $14 million, due to eight additional average operating aircraft in 2009 compared to the same period in 2008 and the age of our fleet. The average age of our

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fleet increased to 4.1 years compared to 3.5 years in the year ago period. Maintenance expense is expected to increase significantly as our fleet ages, which will result in the need for additional repairs over time. Cost per available seat mile increased 16% primarily due to the gradual aging of our fleet which results in additional repairs.
Other operating expenses increased 3%, or $10 million, primarily due to an increase in variable costs associated with 5% more departures versus 2008. Other operating expenses were reduced by $11 million for certain tax incentives and $1 million in gains on sales of aircraft in 2009, compared to $15 million in gains on sales of aircraft and $6 million for certain tax incentives in 2008. Cost per available seat mile increased 5% primarily due to decreases in capacity and the effect of lower fuel taxes.
Other Income (Expense). Interest expense decreased 18%, or $34 million, primarily due to lower interest rates and extinguishment of debt, totaling approximately $39 million, offset by the financing of additional aircraft and our 2009 6.75% convertible Debentures, which resulted in $21 million of additional interest expense. Interest expense in 2008 included the impact of $5 million of make whole payments from escrow in connection with the partial conversion of a portion of our 5.5% convertible debentures due 2038. Capitalized interest in 2008 included $32 million associated with the construction of our new terminal at JFK, which is no longer being capitalized.
Interest income and other decreased 84%, or $34 million, primarily due to lower interest rates earned on investments, and lower average cash and investment balances, resulting in $20 million lower interest income. Interest income and other also decreased due to a net $1 million loss related to our auction rate securities and related put option. Our derivative instruments not qualifying for cash flow hedges in 2009 resulted in a loss of $2 million, compared to a $4 million gain in 2008. Additionally, in 2008, accounting ineffectiveness on crude and heating oil derivatives classified as cash flow hedges resulted in a $1 million gain. We are unable to predict what the amount of ineffectiveness will be related to these instruments, or the potential loss of hedge accounting, which is determined on a derivative-by-derivative basis, due to the volatility in the forward markets for these commodities. Interest income and other included $2 million and $9 million in gains on the extinguishment of debt in 2009 and 2008, respectively.
The following table sets forth our operating statistics for the three and nine months ended September 30, 2009 and 2008:

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                                                     Three Months Ended                                                 Nine Months Ended
                                                        September 30,                      Percent                        September 30,                       Percent
                                                  2009                 2008                 Change                 2009                  2008                  Change
Operating Statistics:
Revenue passengers (thousands)                    6,011                5,657                 6.3                   16,993                16,812                 1.1
Revenue passenger miles (millions)                7,027                6,848                 2.6                   19,612                20,167                (2.8 )
Available seat miles (ASMs) (millions)            8,391                8,154                 2.9                   24,570                24,932                (1.4 )
Load factor                                        83.7 %               84.0 %              (0.3 ) pts.              79.8 %                80.9 %              (1.1 ) pts.
Aircraft utilization (hours per day)               11.5                 11.7                (3.3 )                   11.8                  12.4                (5.4 )

Average fare                                   $ 127.04             $ 142.55               (10.9 )              $  128.92             $  138.80                (7.1 )
Yield per passenger mile (cents)                  10.87                11.78                (7.7 )                  11.17                 11.57                (3.5 )
Passenger revenue per ASM (cents)                  9.10                 9.89                (8.0 )                   8.92                  9.36                (4.7 )
Operating revenue per ASM (cents)                 10.19                11.07                (8.0 )                   9.99                 10.34                (3.4 )
Operating expense per ASM (cents)                  9.40                10.80               (13.0 )                   9.11                 10.10                (9.7 )
Operating expense per ASM, excluding
fuel (cents)                                       6.47                 5.96                 8.5                     6.32                  5.80                 9.0
Airline operating expense per ASM
(cents) (1)                                        9.13                10.56               (13.5 )                   8.87                  9.87               (10.1 )

Departures                                       55,420               51,125                 8.4                  163,319               155,626                 4.9
Average stage length (miles)                      1,081                1,132                (4.6 )                  1,071                 1,134                (5.6 )
Average number of operating aircraft
during period                                     151.0                142.2                 6.2                    146.9                 139.4                 5.4
Average fuel cost per gallon                   $   2.07             $   3.42               (39.7 )              $    2.00             $    3.08               (35.0 )
Fuel gallons consumed (millions)                    119                  115                 3.1                      343                   348                (1.4 )
Full-time equivalent employees at
period end (1)                                                                                                     10,246                 9,398                 9.0

(1) Excludes operating expenses and employees of LiveTV, LLC, which are unrelated to our airline operations.

Liquidity and Capital Resources
At September 30, 2009, we had unrestricted cash and cash equivalents of $951 million compared to $561 million at December 31, 2008. Cash flows from operating activities were $357 million for the nine months ended September 30, 2009 compared to $109 million for the nine months ended September 30, 2008. The increase in operating cash flows includes the impact of the 35% lower price of fuel in 2009 compared to 2008 and the return of $25 million in restricted cash that collateralizes letters of credit issued to our primary credit card processor. We rely primarily on operating cash flows to provide working capital.
Investing Activities. During the nine months ended September 30, 2009, capital expenditures related to our purchase of flight equipment included expenditures of $303 million for 11 aircraft and two spare engines, $19 million for flight equipment deposits and $8 million for spare part purchases. Capital expenditures for other property and equipment, including ground equipment purchases and facilities improvements, were $61 million. Proceeds from the sale of two aircraft were $58 million. Investing activities also included $54 million in proceeds from the sale of certain auction rate securities.
During the nine months ended September 30, 2008, capital expenditures related to our purchase of flight equipment included expenditures of $442 million for 13 aircraft and two spare engines, $45 million for flight equipment deposits and $6 million for spare part purchases. Capital expenditures for other property and equipment, including ground equipment purchases and facilities improvements, were $50 million. Net cash provided by the purchase and sale of available-for-sale securities was $322 million and proceeds from the sale of . . .