| JETBLUE AIRWAYS CORP ITEM 1A RISK FACTORS Risks Related to JetBlue We operate in an extremely competitive industry |
| The domestic airline industry is characterized by low profit margins, high fixed costs and significant price competition |
| We currently compete with other airlines on all of our routes and, in the future, may face greater competition on our existing as well as our new routes |
| Many of our competitors are larger and have greater financial resources and name recognition than we do |
| Following our entry into new markets or expansion of existing markets, some of our competitors have chosen to add service or engage in extensive price competition |
| Unanticipated shortfalls in expected revenues as a result of price competition or in the number of passengers carried would negatively impact our financial results and harm our business |
| As we continue to grow, the extremely competitive nature of the airline industry could prevent us from attaining the level of passenger traffic or maintaining the level of fares required to maintain profitable operations in new and existing markets and could impede our growth strategy, which would harm our business |
| Continued high fuel costs or a fuel supply shortage would harm our business |
| Fuel costs, which have been at unprecedented high levels, comprise a substantial portion of our total operating expenses and, in 2005, became our single largest operating expense |
| Our average fuel price increased 52dtta0prca in 2005, which has adversely affected our operating results |
| Historically, fuel costs have been subject to wide price fluctuations based on geopolitical issues and supply and demand |
| The availability of fuel is dependent on oil refining capacity |
| When even a small amount of the domestic or global oil refining capacity becomes unavailable, as was experienced during the 2005 hurricane season, supply shortages can result for extended periods of time |
| Availability is also affected by demand for home heating oil, gasoline and other petroleum products |
| Because of the effect 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 |
| To partially protect against significant increases in fuel prices, we utilize a fuel hedging program under which we enter into crude oil and heating oil option contracts and swap agreements; however, our fuel hedging program does not completely protect us against price increases and is limited in fuel volume and duration |
| Due to the competitive nature of the domestic airline industry, we have not been able to increase our fares substantially, and in some markets not at all, when fuel prices have risen and we may not be able to do so in the future |
| Continued high fuel costs or further price increases or fuel supply shortages may result in a curtailment of scheduled services and would harm our financial condition and results of operations |
| If we fail to successfully implement our growth strategy, our business could be harmed |
| Our growth strategy involves increasing the frequency of flights to markets we currently serve, expanding the number of markets served and increasing flight connection opportunities |
| Achieving our growth strategy is critical in order for our business to achieve economies of scale and to sustain or increase our profitability |
| Increasing the number of markets we serve depends on our ability to access suitable airports located in our targeted geographic markets in a manner that is consistent with our cost strategy |
| We will also need to obtain additional gates at some of our existing destinations |
| Any condition that would deny, limit or delay our access to airports we seek to serve in the future will constrain our ability to grow |
| Opening new markets requires us to commit a substantial amount of resources, even before the new services commence |
| Expansion is also dependent upon our ability to maintain a safe and secure operation and will require additional personnel, equipment and facilities |
| An inability to hire and retain personnel, timely secure the required equipment and facilities in a cost-effective manner, efficiently operate our expanded facilities, or obtain the necessary regulatory 16 _________________________________________________________________ approvals may adversely affect our ability to achieve our growth strategy |
| In addition, our competitors have often chosen to add service, reduce their fares and/or offer special promotions following our entry into a new market |
| We cannot assure you that we will be able to successfully expand our existing markets or establish new markets in this increased competitive environment, and if we fail to do so our business could be harmed |
| Expansion of our markets and services may also strain our existing management resources and operational, financial and management information systems to the point that they may no longer be adequate to support our operations, requiring us to make significant expenditures in these areas |
| We expect that we will need to develop further financial, operational and management reporting systems and procedures to accommodate future growth |
| While we believe our current systems and procedures are adequate, we cannot assure you that we will be able to develop such additional systems or procedures to accommodate our future expansion on a timely basis, and the failure to do so could harm our business |
| We have a significant amount of fixed obligations and we will incur significantly more fixed obligations, which could harm our ability to meet our growth strategy and impair our ability to service our fixed obligations |
| As of December 31, 2005, our debt of dlra2dtta33 billion accounted for 71dtta9prca of our total capitalization |
| In addition to long-term debt, we have a significant amount of other fixed obligations under leases related to our aircraft, airport terminal space, other airport facilities and office space |
| As of December 31, 2005, future minimum payments under noncancelable leases and other financing obligations were approximately dlra786 million for 2006 through 2010 and an aggregate of dlra1dtta95 billion for the years thereafter |
| We have commenced construction of a new terminal at JFK under a 30-year lease with the PANYNJ The minimum payments under this lease will be accounted for as a financing obligation and have been included above |
| As of December 31, 2005, we had commitments of approximately dlra6dtta44 billion to purchase 192 additional aircraft and other flight equipment over the next seven years, including estimated amounts for contractual price escalations |
| We will incur additional debt and other fixed obligations as we take delivery of new aircraft and other equipment and continue to expand into new markets |
| We typically finance our aircraft through either secured debt or lease financing |
| Although we believe that debt and/or lease financing should be available for our aircraft deliveries, we cannot assure you that we will be able to secure such financing on terms acceptable to us or at all |
| Our high level of debt and other fixed obligations could: [spacer |
| gif] • 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; [spacer |
| gif] • divert substantial cash flow from our operations and expansion plans in order to service our fixed obligations; [spacer |
| gif] • require us to incur significantly more interest or rent expense than we currently do, since most of our debt has floating interest rates and five of our aircraft leases have variable-rate rent; and [spacer |
| gif] • place us at a possible competitive disadvantage compared to less leveraged competitors and competitors that have better access to capital resources |
| Our ability to make scheduled payments on our debt and other fixed obligations will depend on our future operating performance and cash flow, 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 dependent upon our operating cash flows to fund our operations and to make scheduled payments on debt and other fixed obligations |
| We cannot assure you that we will be able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations as they become due, and if we fail to do so our business could be harmed |
| 17 _________________________________________________________________ If we are unable to make payments on our debt and other fixed obligations, we could be forced to renegotiate those obligations or obtain additional equity or debt financing |
| 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 growth strategy |
| We cannot assure you that our renegotiation efforts would be successful or timely or that we could refinance our obligations on acceptable terms, if at all |
| If we are unable to attract and retain qualified personnel at reasonable costs or fail to maintain our company culture, our business could be harmed |
| We expect salaries, wages and benefits to increase on a gross basis and these costs could increase as a percentage of our overall costs |
| Since we compete against the other major US airlines for pilots, mechanics and other skilled labor and some of them offer wage and benefit packages that exceed ours, we may be required to increase wages and/or benefits in order to attract and retain qualified personnel or risk considerable employee turnover |
| If we are unable to hire, train and retain qualified employees at a reasonable cost, our business could be harmed and we may be unable to complete our expansion plans |
| In addition, as we hire more people and grow, we believe it may be increasingly challenging to continue to hire people who will maintain our company culture |
| One of our principal competitive strengths is our service-oriented company culture that emphasizes friendly, helpful, team-oriented and customer-focused employees |
| Our company culture is important to providing high quality customer service and having a productive workforce that helps keep our costs low |
| As we grow, we may be unable to identify, hire or retain enough people who meet the above criteria, including those in management or other key positions |
| Our company culture could otherwise be adversely affected by our growing operations and geographic diversity |
| If we fail to maintain the strength of our company culture, our competitive ability and our business may be harmed |
| If we fail to successfully take delivery of, operate reliably and integrate into our operations the new EMBRAER 190 aircraft we agreed to purchase, our business could be harmed |
| Acquisition of an all-new type of aircraft, such as the EMBRAER 190, involves a variety of risks relating to its ability to be successfully placed into service, including delays in meeting the agreed upon delivery schedule and the inability of the aircraft and all of its components to comply with agreed upon specifications and performance standards |
| In addition, we also face risks in integrating a second type of aircraft into our existing infrastructure and operations, including, among other things, the additional costs, resources and time needed to hire and train new pilots, technicians and other skilled support personnel |
| If we fail to successfully take delivery of, operate reliably and integrate into our operations the new EMBRAER 190 aircraft, our business could be harmed |
| We rely on maintaining a high daily aircraft utilization rate to keep our costs low, which makes us especially vulnerable to delays |
| One of our key competitive strengths is to maintain a high daily aircraft utilization rate, which is the amount of time that our aircraft spend in the air carrying passengers |
| High daily aircraft utilization allows us to generate more revenue from our aircraft and is achieved in part by reducing turnaround times at airports so we can fly more hours on average in a day |
| The expansion of our business to include a new fleet type, new destinations, more frequent flights on current routes and expanded facilities could increase the risk of delays |
| Aircraft utilization is reduced by delays and cancellations from various factors, many of which are beyond our control, including adverse weather conditions, security requirements, air traffic congestion and unscheduled maintenance |
| Our operations are concentrated in the Northeast and Florida, areas which have been vulnerable to delays in the past due to weather and congestion |
| Reduced aircraft utilization may limit our ability to achieve and maintain profitability as well as lead to customer dissatisfaction |
| Our business is highly dependent on the New York metropolitan market and increases in competition or a reduction in demand for air travel in this market would harm our business |
| We maintain a large presence in the New York metropolitan market, with approximately 72prca of our daily flights having JFK, LaGuardia or Newark as either their destination or origin |
| Our business 18 _________________________________________________________________ would be harmed by any circumstances causing a reduction in demand for air transportation in the New York metropolitan area, such as adverse changes in local economic conditions, negative public perception of the city, additional terrorist attacks or significant price increases linked to increases in airport access costs and fees imposed on passengers |
| Our business could also be harmed by an increase in the amount of direct competition we face at JFK, LaGuardia or Newark, or by an increase in congestion or delays |
| As a result, we remain highly dependent on the New York metropolitan market |
| We rely heavily on automated systems and technology to operate our business and any failure of these systems could harm our business |
| We are increasingly dependent on automated systems and technology to operate our business, enhance customer service and achieve low operating costs, including our computerized airline reservation system, flight operations system, telecommunications systems, website, maintenance systems, check-in kiosks and in-flight entertainment systems |
| Since we only issue electronic tickets, our website and reservation system must be able to accommodate a high volume of traffic and deliver important flight information |
| During 2006, we plan to replace or upgrade several of these critical systems |
| The performance and reliability of our automated systems is critical to our ability to operate our business and compete effectively |
| These systems cannot be completely protected against events that are beyond our control, including natural disasters, computer viruses or telecommunications failures |
| Substantial or sustained system failures could impact customer service and result in our customers purchasing tickets from another airline |
| We have implemented security measures and change control procedures and have disaster recovery plans; however, we cannot assure you that these measures are adequate to prevent disruptions, which, if they were to occur, could result in the loss of important data, increase our expenses, decrease our revenues and generally harm our business |
| Our maintenance costs will increase as our fleet ages |
| We have incurred lower maintenance expenses because most of the parts on our aircraft are under multi-year warranties |
| Our maintenance costs will increase significantly, both on an absolute basis and as a percentage of our operating expenses, as our fleet ages and these warranties expire |
| We may be subject to unionization, work stoppages, slowdowns or increased labor costs |
| Unlike most airlines, we have a non-union workforce |
| If our employees unionize, it could result in demands that may increase our operating expenses and adversely affect our profitability |
| Each of our different employee groups could unionize at any time and require separate collective bargaining agreements |
| If any group of our employees were to unionize and we were unable to reach agreement on the terms of their collective bargaining agreement or we were to experience widespread employee dissatisfaction, we could be subject to work slowdowns or stoppages |
| In addition, we may be subject to disruptions by organized labor groups protesting our non-union status |
| Any of these events would be disruptive to our operations and could harm our business |
| Our results of operations will fluctuate |
| We expect our quarterly operating results to fluctuate due to price changes in aircraft fuel as well as the timing and amount of maintenance and advertising expenditures |
| Seasonality also impacts our operations, with high vacation and leisure demand occurring on the Florida routes between October and April and on our western routes during the summer |
| Actions of our competitors may also contribute to fluctuations in our results |
| We are more susceptible to adverse weather conditions, including snow storms and hurricanes, as a result of our operations being concentrated on the East Coast, than are some of our competitors |
| As we enter new markets, we could be subject to additional seasonal variations along with any competitive responses to our entry by other airlines |
| As a result of these factors, quarter-to-quarter comparisons of our operating results may not be a good indicator of our future performance |
| In addition, it is possible that in any future quarter our operating results 19 _________________________________________________________________ could be below the expectations of investors and any published reports or analyses regarding JetBlue |
| In that event, the price of our common stock could decline, perhaps substantially |
| We are subject to the risks of having a limited number of suppliers for our aircraft, engines and a key component of our in-flight entertainment system |
| Our current dependence on two types of aircraft and engines for all of our flights makes us particularly vulnerable to any problems associated with the Airbus A320 aircraft or the IAE International Aero Engines V2527-A5 engine, and the EMBRAER 190 aircraft or the General Electric Engines CF-34-10 engine, including design defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public that would result in customer avoidance or in actions by the FAA resulting in an inability to operate our aircraft |
| Carriers that operate a more diversified fleet are better positioned than we are to manage such events |
| One of the unique features of our fleet is that every seat in each of our aircraft is equipped with free LiveTV An integral component of the system is the antenna, which is supplied to us by EMS Technologies, Inc |
| If EMS were to stop supplying us with its antennas for any reason, we would have to incur significant costs to procure an alternate supplier |
| Our business could be harmed if we lose the services of our key personnel |
| Our business depends upon the efforts of our Chief Executive Officer, David Neeleman, and our President and Chief Operating Officer, David Barger |
| The loss of the services of either of these individuals could harm our business |
| Our reputation and financial results could be harmed in the event of an accident or incident involving our aircraft |
| An accident or incident involving one of our aircraft, or an aircraft containing LiveTV equipment, could involve significant potential claims of injured passengers or others in addition to repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service |
| We are required by the DOT to carry liability insurance |
| Although we believe we currently maintain liability insurance in amounts and of the type generally consistent with industry practice, the amount of such coverage may not be adequate and we may be forced to bear substantial losses from an accident |
| Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results |
| Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that we are less safe or reliable than other airlines, which would harm our business |
| Risks Associated with the Airline Industry The airline industry has incurred significant losses resulting in airline restructurings and bankruptcies, which could result in changes in our industry |
| In 2005, the domestic airline industry reported its fifth consecutive year of losses, which is causing fundamental and permanent changes in the industry |
| These losses have resulted in airlines renegotiating or attempting to renegotiate labor contracts, reconfiguring flight schedules, furloughing or terminating employees, as well as consideration of other efficiency and cost-cutting measures |
| Despite these actions, several airlines, including Delta Air Lines and Northwest Airlines in September 2005, have sought reorganization under Chapter 11 of the US Bankruptcy Code permitting them to reduce labor rates, restructure debt, terminate pension plans and generally reduce their cost structure |
| In the fall of 2005, US Airways, which had been in bankruptcy, and America West completed a merger, which may enable the combined entity to have lower costs and a more rationalized route structure and therefore be better able to compete |
| It is foreseeable that further airline reorganizations, bankruptcies or consolidations may occur, the effects of which we are unable to predict |
| We cannot assure you that the occurrence of these events, or potential changes resulting from these events, will not harm our business or the industry |
| 20 _________________________________________________________________ A future act of terrorism, the threat of such acts or escalation of US military involvement overseas could adversely affect our industry |
| Even if not directed at the airline industry, a future act of terrorism, the threat of such acts or escalation of US military involvement overseas could have an adverse effect on the airline industry |
| In the event of a terrorist attack, the industry would likely experience significantly reduced demand |
| We cannot assure you that these actions, or consequences resulting from these actions, will not harm our business or the industry |
| Changes in government regulations imposing additional requirements and restrictions on our operations or the US government ceasing to provide adequate war risk insurance could increase our operating costs and result in service delays and disruptions |
| Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, that involve significant compliance costs |
| In the last several years, Congress has passed laws, and the DOT, FAA and the TSA have issued regulations relating to the operation of airlines that have required significant expenditures |
| We expect to continue to incur expenses in connection with complying with government regulations |
| Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel |
| If adopted, these measures could have the effect of raising ticket prices, reducing revenue and increasing costs |
| We cannot assure you that these and other laws or regulations enacted in the future will not harm our business |
| The US government currently provides insurance coverage for certain claims resulting from acts of terrorism, war or similar events |
| Should this coverage no longer be offered, the coverage that would be available to us through commercial aviation insurers may have substantially less desirable terms, result in higher costs and not be adequate to protect our risk, any of which could harm our business |