2012 fuel hedging at jetblue airways - transtutors...2012 fuel hedging at jetblue airways in january...

UV6682 Rev. Mar. 1, 2016

This case was written by Associate Professor Pedro Matos. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2013 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

2012 Fuel Hedging at JetBlue Airways

In January 2012, Helena Morales was updating her JetBlue Airways (JetBlue) research report. Morales, an equity analyst, followed major U.S. airline carriers. JetBlue was a low-cost airline that had distinguished itself by offering in-flight entertainment and other amenities. JetBlue had started its operations in 2000 and experienced a remarkable growth rate, leading the company to go public in 2002 (NASDAQ: JBLU).

In 2005, JetBlue’s profits suffered a first hit due to rising jet fuel costs. Keeping an eye on jet fuel oil prices was essential for an airlines analyst. Although airlines had applied fuel surcharges to the price of tickets in the past, these surcharges were viable only when matched by competitors. Given the limited pass-through to customers, fuel hedging protected the airline’s cost structure from spikes in jet fuel prices and allowed airlines to follow their business plans. JetBlue entered into a variety of hedging instruments including swaps, call options, and collar contracts with underlyings of jet fuel, crude, and heating oil. Some of these derivatives could cost millions of dollars, however, and there was the risk that the airline would suffer negative effects from a sharp decline in fuel prices.

Jet fuel prices passed the $3-per-gallon mark in 2011, the highest since 2008 (Exhibit 1 shows spot jet fuel prices at a major trading hub: the U.S. Gulf Coast [USGC]). These levels were the result of a dramatic year in the oil market due to the Arab Spring, civil war in Libya, and demand growth from China. In its annual report, JetBlue reported that fuel costs were its largest operating expense, approaching nearly 40% of total operating costs in 2011. Table 1 shows fuel consumption and costs for the previous three years:

Table 1. Fuel consumption and costs for 2009–2011.

2009 2010 2011 Gallons consumed (millions) 455 486 525 Total cost ($ millions) $945 $1,115 $1,664 Average price per gallon $2.08 $2.29 $3.17 Percentage of operating expenses 31.4% 32.4% 39.8%

Source: JetBlue annual report, 2011.

Fuel costs had increased as a percentage of JetBlue’s operating expenses in the previous years (Exhibit 2—Panel A). One reason for the increase was the airline’s expansion and the corresponding increased fuel consumption (Exhibit 2—Panel B), but the main reason was the rise in the average price per gallon of jet fuel.1

1 Total cost and average price per gallon in Table 1 include effective fuel hedging gains and losses.

This document is authorized for use only by Carmen Phillips ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

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Morales took a detailed look at JetBlue’s Investor Update report released on October 26, 2011. The company described hedging 45% of its fourth quarter 2011 consumption (Exhibit 3). She also looked at a Bloomberg report that kept track of jet fuel hedging positions of other U.S., European, and Asian airlines (Exhibit 4). With the exception of US Airways, all major U.S. airlines had hedged about half of their fuel needs for the last quarter of the year; however, the situation was quite different for European and Asian airlines. Southwest Airlines had been a pioneer in fuel hedging and had benefited from lower than average fuel costs (Exhibit 4). From 2000 to 2010, it saved an estimated $3.5 billion in fuel costs due to hedging.2 Many of these airlines relied on West Texas Intermediate (WTI) crude oil hedges. JetBlue had used crude oil derivatives contracts for more than half of its 2011 hedging (Exhibit 3). But there were concerns that airlines would suffer losses because of WTI’s hedge ineffectiveness, which had been caused by a major development in the oil market: WTI, the main U.S. oil price benchmark, had become less well correlated with the global crude oil market (Exhibits 5 and 6).

In 2011, WTI started trading at a discount to the leading global price European benchmark Brent crude (Brent) due to an oil glut in Cushing, Oklahoma—the physical delivery hub for the WTI oil futures contracts for the Chicago Mercantile Exchange Group (CME Group). Cushing was known as the “pipeline crossroads of the world,” but it was facing a bottleneck. Brent’s premium to WTI reached a record level of almost $30 per barrel in September 2011. Jet fuel prices had tracked the price of Brent, instead of WTI, for much of 2011 (Exhibits 5 and 6). The WTI dislocation affected jet fuel hedging strategies because of basis risk (i.e., that the jet fuel price would not change perfectly in tandem with the value of the WTI derivative instrument used to hedge it).

Could the Brent-WTI premium be a temporary phenomenon? The oil glut in Cushing was due to record crude oil production from the Bakken shale formation and Canadian oil sands. But in November, there were signs that transportation constraints were easing after news of the coming reversal of the Seaway Pipeline, and the price of the Brent-WTI premium fell almost $20 per barrel; however, the spread ended the year close to $10 per barrel, still high by historical standards. Morales knew she had to cover JetBlue’s jet fuel hedging strategy for 2012. Would JetBlue continue using WTI for its hedges, or would it switch to Brent or heating oil?

Basics of Jet Fuel

Aircrafts were powered by kerosene-type jet fuel, which was distilled from crude oil. The petroleum first extracted from the ground was crude oil that was transported by pipeline or ship to be refined closer to consumers. Refineries used a process of distillation to separate crude oil into usable refined products. The typical mix is shown in Figure 1. A 42-gallon barrel (bbl.) of U.S. crude oil provided

2 Susan Carey, “Price Rises for Fuel Threaten Airline Net,” Wall Street Journal, January 13, 2011.

Figure 1. Typical mix of usable refined products.

Data source: U.S. Energy Information Administration, “Oil: Crude and Petroleum Products Explained,” http://www.eia.gov/energyexplained/index.cfm?page=oil_home.


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about 45 gallons of petroleum products, approximately 10% of which was jet fuel. In the spectrum, jet fuel was categorized as a middle distillate between light distillates (e.g., gasoline) and heavy distillates and residuum (e.g., asphalt).

As of 2011, there were no exchange-traded futures contracts directly on jet fuel, and trading was concentrated in crude oil benchmarks (Exhibit 7). The first one was WTI oil produced in the United States and traded in the CME Group.3 WTI futures were the world’s largest-volume futures contract on a commodity, and the contracts were physically settled. The second major benchmark was Brent, produced in the North Sea and the underlying for futures traded electronically in the Intercontinental Exchange (ICE).4 Brent contracts were financially settled. Despite the small output compared to other grades such as Arab Light, Urals, or Iranian Heavy, trading was concentrated in WTI and Brent because their pricing was transparent. Exhibit 7 shows the exchange-traded futures contracts on other middle distillates such as heating oil futures and light distillates such as gasoline, but these contracts had much lower trading volumes.

The process of distillation linked the prices of refined petroleum such as jet fuel to crude oil, as shown in the high correlation in Exhibit 5. The refining margin or “crack spread” was defined as the difference between the price of refined petroleum such as jet fuel less the price of crude oil. See Panel B of Exhibit 5. At the end of December 2011, oil refiners were getting more than $23 a barrel (or $0.5 a gallon) in profit for refining crude oil into jet fuel. From 2007 to 2011, the crack spread had oscillated from $3.9 to a maximum of $41.9 per barrel (from $0.09 to $1 per gallon). This variation constituted basis risk for any jet fuel hedging strategy based on crude oil derivatives. The term “basis risk” was used to describe the risk that the value of the commodity being hedged may not change perfectly in tandem with the value of the derivative instrument used to hedge the price risk. In this case, basis risk occurred because there was a mismatch in the quality of the underlying products because jet fuel and crude oil were different commodities.5

The Divergence between WTI and Brent Oil Prices

Brent was a low-sulfur (sweet) crude oil used to price two-thirds of the world’s internationally traded crude oil supplies, according to ICE. In contrast to Brent’s waterborne cargo market where crude oil arrived in discrete quantities, WTI was a midcontinent pipeline market where crude oil flowed continuously at near-constant rates. Exhibit 8 shows the location of Cushing—the physical settlement point for WTI oil futures—and the Brent oilfield. As of 2011, Cushing was landlocked, and oil only flowed north to refineries in Chicago, not south to the USGC. Brent was a more flexible waterborne market, but oil production from the North Sea was expected to shrink.

In 2011, Brent traded well above WTI (Exhibit 5). The widening of the Brent price premium to WTI was unusual. In the past, Brent was more likely to trade at a slight discount of $1 to $2 to WTI, due to WTI’s relatively higher quality. The rising crude production from the Bakken shale formation and Canadian oil sands that had created the oil glut in Cushing turned the typical discount of Brent over WTI into a premium, and the Brent-WTI spread reached a record of $29.70 per barrel on September 22, 2011.

3 The contract traded in units of 1,000 barrels (1,000 oil barrels = 42,000 U.S. gallons), and the delivery point was Cushing. See contract

specifications at the CME Group’s website, http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html. 4 One contract equaled 1,000 oil barrels, and delivery was cash settled. See contract specifications at the Intercontinental Exchange’s website,

https://www.theice.com/productguide/ProductDetails.shtml?specId=219. 5 Other types of basis risk are due to mismatch in time of the hedge and locational mismatch in delivery point between the derivatives contract and

the product being hedged.


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In October and November, there were signs that transportation constraints were beginning to ease, and the Brent price premium to WTI narrowed. On November 16, ConocoPhillips agreed to sell its 50% share of the Seaway crude oil pipeline to Enbridge Inc. The new ownership announced that it intended to reverse oil flows to run north to south starting as early as the second quarter of 2012 to partially alleviate the oil glut by allowing crude oil to move from the Cushing hub to refineries located on the USGC. Following the announcement of the reversal, the difference between the spot price of Brent crude oil and WTI fell to under $10 per barrel in December 2011.

Yet in a report at that time, the U.S. Energy Information Administration (EIA) had cast doubt on whether the situation could be resolved:

The reversal of the Seaway pipeline will not eliminate bottlenecks moving WTI’s crude oil to downstream markets. With crude oil production increases from Canada and the Bakken and other shale formations in the coming years expected to continue, the market will still be dependent on rail as the marginal mode of transportation, meaning some discount will be required to account for the costs of moving inland U.S. crudes to the Gulf Coast.6

Hedging Jet Fuel Price Risk at JetBlue

Fuel represented about 40% of JetBlue’s costs; thus the airline viewed its fuel hedging as an insurance policy. Airlines found it hard to apply fuel surcharges to the price of tickets if these were not matched by competitors.7 Given the limited pass-through to customers, fuel hedging protected the airline’s cost structure. But purchasing the derivatives could be costly, and there was the risk that the airline would suffer negative effects as a result of a sharp decline in fuel prices. In addition, there was the issue of basis risk between jet fuel and the hedging instruments based on crude oil prices because the crack spread fluctuated and added to airline costs.

JetBlue’s fuel hedging book combined swaps and options. The company disclosed details of advanced fuel derivative contracts for each quarter in 2011 (Exhibit 9). Airlines preferred these over-the-counter derivatives to exchange-traded futures because they were customizable. The hedge positions were mostly negotiated with banks, which would normally offset their positions with contracts with other market participants (e.g., oil producers) or directly using CME Group or ICE exchange-traded futures and options.

WTI calls were the right to buy a particular WTI asset or a fixed strike price at a time until a maturity date. There were some WTI exchange-traded options at the CME Group (previously called the NYMEX), but it was likely that JetBlue was using over-the-counter options where the settlement price was based on the average price over a given period (instead of the exact spot price at expiration). Buying the call option would protect the airline against a rise in the price of WTI crude oil. Of course, this would be a cross-market hedge involving some basis risk, as its natural position was in jet fuel, but it would work so long as WTI and jet fuel price changes stayed highly correlated. JetBlue would have to pay an option premium for these contracts, which were a form of insurance policy. For example, on October 26, 2011, the company had reported that it had hedged the equivalent of 7% of its 2011Q4 jet fuel consumption at a price of $92 per barrel (Exhibit 9). As the WTI spot price had increased and closed at $98.83 per gallon (Exhibit 6) at the end of December

6 U.S. Energy Information Administration, “Spread between WTI and Brent Prices Narrows on Signs of Easing Transportation Constraints,” Today

in Energy, December 5, 2011, http://www.eia.gov/todayinenergy/detail.cfm?id=4170 (accessed May 14, 2013). 7 Freight carriers UPS and FedEx did not hedge fuel. Almost a duopoly, they passed through fuel increases using fuel surcharges. For example,

FedEx developed an indexed fuel surcharge policy based on the average spot price for jet fuel, which it published on its website.


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2011, JetBlue had a gain on this hedge, which would keep JetBlue’s cost at $92 per barrel (not accounting for the premium).

A WTI (or heating oil) collar was the combination of a put and call option whose underlying asset was the WTI crude oil (or heating oil) spot price. It involved the purchase of call options where a premium was paid up front, but if prices increased, JetBlue would be protected. If prices decreased, then it lost the premium cost. The cost of these call options was offset with the sale of put options. Using the collar strategy, JetBlue would create a hedged position whereby it would have a minimum (floor) and maximum (cap) price on the underlying commodity. For example, on October 26, 2011, the company had reported that it had hedged the equivalent of 9% of its 2011Q4 jet fuel consumption at a price with a cap at $100 per barrel and a floor at $81 per barrel (Exhibit 9). The WTI spot price had increased and closed at $98.83 per gallon (Exhibit 6) at the end of December 2011, so it had not gained or lost from this hedge. This did not account for the collar net premium. The relative cost of put and call options depended on strike prices and volatility levels. A “zero-cost collar” could be structured so that the premium from selling the put option could offset the premium for the call option.

USGC jet fuel swaps were agreements to exchange the floating price of spot USGC jet fuel for a fixed price over a certain period of time. The differences between fixed and floating prices were typically cash settled. A swap can be thought of as a package of forward purchase agreements. JetBlue would be typically the fixed-price payer, thus allowing it to hedge the fuel price risk. For example, on October 26, 2011, the company had reported that it had hedged 12% of its 2011Q4 jet fuel consumption at a fixed price of $3.00 per gallon (Exhibit 9). The spot price of USGC jet fuel had fallen to $2.917 per gallon (Exhibit 6) by December 2011, so it had suffered a loss on this hedge.

JetBlue’s fuel hedging strategy had evolved over the years (Exhibit 3). The company’s approach to fuel hedging was to enter into hedges on a discretionary basis without specific targets. It hedged less in 2009 when oil prices were low and increased the percentage hedged again in 2010 and 2011. Dynamic strategies were based on the idea that oil prices followed a mean-reverting process. Ideally, airlines wanted to lock in prices at the low point in the cycle while capping prices at the high end but take advantage of eventual price declines. It was not clear whether the airline stood to gain from adjusting its strategy. Additionally, JetBlue had switched between derivatives written on different oil products. It had moved its hedging from heating oil between 2007 to 2009 to crude oil derivatives in 2010 and 2011, but it recently reverted to heating oil derivatives and directly to jet fuel swaps.

For derivative positions to be treated as cash flow hedges for accounting purposes, it was important that the hedges were effective. Testing for hedge effectiveness was ruled by the Statement of Financial Accounting Standards. In its annual report, JetBlue stated its procedures in this respect (Exhibit 10). Morales wondered whether hedge ineffectiveness of WTI derivatives contracts might become an issue for JetBlue’s 2012 fuel hedges and, if so, whether that would be another reason for JetBlue to consider switching to Brent or heating oil derivatives.

The Way Forward

Most U.S. airlines used WTI as the basis for their fuel hedges; however, for most of 2011, jet fuel prices had been tracking Brent more closely than WTI, and the increase in the jet-fuel-to-WTI refining margin was disrupting hedging programs. Several airlines reported large markdowns for fuel hedge ineffectiveness in the


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third quarter of 2011. United Continental reported a $56 million markdown. “During the quarter, WTI crude oil prices decreased while jet fuel prices remained high,” United Continental declared in a statement accompanying its quarterly results.8

In 2011, after many years of hedging gains, Southwest took a $227 million noncash markdown related to the hedge ineffectiveness of its hedge portfolio in large part due to the Brent-WTI divergence. The company was more optimistic for 2012. “To the extent we see WTI and Brent coming together, I think that the hedges we have in place will really give us much better protection than they were when WTI was trading at a discount,” said Southwest Airlines CFO Laura Wright.9

Delta Air Lines decided to switch its hedges from WTI to Brent in the spring of 2011. “We’ve needed to restructure our hedge position,” said Delta Air Lines President Ed Bastian. “Given the fact that jet fuel is now being prompted and priced off of those Brent prices, we’ve needed to go in and reorient our hedge book toward Brent and heating oils, as compared to WTI,” Bastian told an investor conference in March 2011.10

Some airlines were not affected by this issue. AMR Corporation, the parent company of American Airlines, had not been influenced by the Brent-WTI spread because it hedged using a refined product. US Airways did not hedge and bought jet fuel on the open market. Hedging was “a large wealth transfer from industrial companies to Wall Street trading desks,” Scott Kirby, president of US Airways, said in a Wall Street Journal interview. “It’s an incredibly expensive insurance policy.”11

For 2012, many market participants expected the Brent-WTI spread to narrow. As the spread tightened, it could hurt Delta Air Lines and others pricing against Brent. But another bottleneck could emerge at Cushing, depending on what happened to projects in Canada and North Dakota. There was, of course, the risk that these analysts were wrong, and WTI would continue to decouple from global oil markets. Increasing Canadian supplies and a lack of export pipelines to the USGC would lead to inventory buildup around Cushing, and pipelines were unlikely to be reversed. The poor infrastructure of a land-locked delivery location could lead to the demise of WTI as the main oil benchmark. Heating oil prices, such as WTI, were also too domestically driven. Brent, on the other hand, was a water-borne contract and could potentially start fulfilling the key index role for oil prices.

Morales wondered whether JetBlue would continue to stick with WTI as a basis for its 2012 fuel hedges or switch to an alternative such as Brent or heating oil.

8 Alexander Osipovich, Risk.net, http://www.risk.net/energy-risk/news/2136013/wti-brent-spread-volatility-disrupts-hedging-programmes

(accessed May 13, 2013). 9 Karen Jacobs, “Narrowing WTI/Brent Spread Could Aid U.S. Airlines,” Reuters, November 23, 2012. 10 Dan Strumpf, “Oil Price Quirk Causes Delta to Rethink Fuel Hedges,” Dow Jones Newswires, March 31, 2011. 11 Carey.


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Exhibit 1


USGC Kerosene-Type Jet Fuel Spot Prices, 1990–2011 (End-of-Month)

Data source: “Petroleum & Other Liquids, Spot Prices,” U.S. Energy Information Administration website, http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm.


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Exhibit 2


JetBlue Airways—Jet Fuel Cost and Consumption (2007–2011, Quarterly)

Panel A: JetBlue Airways—Jet fuel cost as percentage of operating expense (quarterly).

Data source: U.S. Department of Transportation, “Air Carrier Financial: Schedule P-6 http://www.transtats.bts.gov/DL_SelectFields.asp?Table_ID=291&DB_Short_Name=Air Carrier Financial .

Panel B: JetBlue Airways—Jet fuel consumption in millions of gallons (quarterly).

Data source: U.S. Department of Transportation, “Airline Fuel Cost and Consumption (U.S. Carriers—Scheduled) January 2000–February 2013,” http://www.transtats.bts.gov/fuel.asp?pn=1.


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Exhibit 3


JetBlue—Fuel Percentage Hedged (2007–2012, Quarterly)

Source: Created by case writer based on JetBlue Airways investor updates (2007Q1–2012Q3).


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Exhibit 4


Jet Fuel Hedging at Major Airlines

Panel A: Jet fuel hedging positions for major airlines.

Region Company Disclosure Date % Hedged Hedging Period U.S. Alaska Air Group Inc. 10/20/2011 50% Fourth quarter

American Airlines 10/19/2011 52% Fourth quarter Delta Air Lines Inc. 10/25/2011 40% First half 2012 Hawaiian Airlines 10/18/2011 56% Fourth quarter JetBlue Airways Corporation 10/26/2011 45% Fourth quarter Southwest Airlines Co. 10/20/2011 hedged* Fourth quarter United Continental Holdings Inc. 10/27/2011 56% Fourth quarter US Airways Group Inc. 10/27/2011 0% Fourth quarter WestJet Airlines 11/9/2011 24% Fourth quarter

Europe Air France-KLM Group November 2011 57% October to December 2011 Aer Lingus Group Plc. February 2012 86% January to March 2012 Deutsche Lufthansa AG March 2012 74% 2012 EasyJet Plc. March 2012 75% Year to September 2012 Ryanair Holdings Plc. January 2012 90% Year to March 2012 SAS Group May 2012 50% April to June 2012

Asia Air China March 2012 20% FY11/12 Cathay Pacific March 2011 27% FY11/12 China Airlines March 2011 0% FY11/12 China Eastern Airlines March 2011 0% FY11/12 China Southern Airlines March 2011 0% FY11/12 EVA Airways Corporation March 2011 10% FY11/12 Jet Airways March 2011 0% FY11/12 Korean Air March 2011 8% FY11/12 Qantas Airways March 2011 27% FY11/12 Singapore Airlines March 2011 10% FY11/12

*Exact percentage not disclosed in the earnings release.

Data sources: Bloomberg, “Jet Fuel Hedging Positions for U.S., Canadian Airlines,” November 10, 2011; “Jet Fuel Hedging Positions for Europe-Based Airlines,” May 3, 2012; HSBC Global Research, “Asian Airlines—Fueling a Shift to Premium Carriers,” March 3, 2011.


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Exhibit 4 (continued)

Panel B: Airline fuel cost for JetBlue and major U.S. airlines (2000–2011, $ per gallon).

Data source: Bureau of Transportation Statistics (F41 Schedule P12A) http://www.transtats.bts.gov/fuel.asp?pn=0&display=data1.


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Exhibit 5


Jet Fuel, Heating Oil, and Crude Oil (WTI and Brent) Spot Prices (2007–2011, Monthly)

Panel A: Spot prices.

Data source: “Petroleum & Other Liquids, Spot Prices,” U.S. Energy Information Administration website, http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm.


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Jet Fuel, Heating Oil, and Crude Oil (WTI and Brent) Spot Prices (2007–2011, Monthly)

Panel B: Difference in prices between Jet Fuel and crude oil (crack spread) and heating oil.

Source: Case writer calculations based on prices in Panel A.


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Exhibit 6


Jet Fuel, Heating Oil, WTI, and Brent Crude Oil Spot Prices, 2007–2011 (Monthly)

Year

JET FUEL (U.S. Gulf Coast

Kerosene-Type Jet Fuel Spot Price FOB, Dollars per Gallon)

WTI (Cushing, OK WTI

Spot Price FOB, Dollars per Barrel)

BRENT (Europe Brent Spot Price FOB, Dollars

per Barrel)

HEATING OIL(New York Harbor No. 2 Heating Oil Spot Price FOB,

Dollars per Gallon) Jan-2007 1.759 58.17 56.52 1.681 Feb-2007 1.853 61.78 59.39 1.781 Mar-2007 2.017 65.94 68.47 1.871 Apr-2007 2.049 65.78 67.23 1.897 May-2007 2.044 64.02 68.18 1.892 Jun-2007 2.09 70.47 72.22 2.023 Jul-2007 2.198 78.2 77.01 2.095 Aug-2007 2.135 73.98 72.29 2.037 Sep-2007 2.288 81.64 80.97 2.199 Oct-2007 2.592 94.16 89.87 2.506 Nov-2007 2.568 88.6 88.71 2.499 Dec-2007 2.673 95.95 93.68 2.648 Jan-2008 2.572 91.67 91.58 2.523 Feb-2008 2.915 101.78 100.9 2.806 Mar-2008 3.061 101.54 102.33 3.078 Apr-2008 3.329 113.7 111.12 3.195 May-2008 3.736 127.35 127.85 3.647 Jun-2008 4.02 139.96 138.4 3.89 Jul-2008 3.554 124.17 124.1 3.435 Aug-2008 3.296 115.55 113.49 3.15 Sep-2008 3.022 100.7 93.52 2.851 Oct-2008 2.094 68.1 60 2.085 Nov-2008 1.76 55.21 47.72 1.696 Dec-2008 1.32 44.6 35.82 1.314 Jan-2009 1.416 41.73 44.17 1.437 Feb-2009 1.265 44.15 44.41 1.271 Mar-2009 1.341 49.64 46.13 1.336 Apr-2009 1.294 50.35 50.3 1.299 May-2009 1.672 66.31 64.98 1.636 Jun-2009 1.788 69.82 68.11 1.715 Jul-2009 1.831 69.26 70.08 1.793 Aug-2009 1.781 69.97 69.02 1.773 Sep-2009 1.794 70.46 65.82 1.805 Oct-2009 1.976 77.04 74.91 1.965 Nov-2009 2.004 77.19 77.77 1.984 Dec-2009 2.088 79.39 77.91 2.109


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Year

JET FUEL (U.S. Gulf Coast

Kerosene-Type Jet Fuel Spot Price FOB, Dollars per Gallon)

WTI (Cushing, OK WTI

Spot Price FOB, Dollars per Barrel)

BRENT (Europe Brent Spot Price FOB, Dollars

per Barrel)

HEATING OIL(New York Harbor No. 2 Heating Oil Spot Price FOB,

Dollars per Gallon) Jan-2010 1.91 72.85 71.2 1.894 Feb-2010 2.055 79.72 76.36 2.02 Mar-2010 2.188 83.45 80.37 2.162 Apr-2010 2.324 86.07 86.19 2.265 May-2010 2.039 74 73 2.006 Jun-2010 1.993 75.59 74.94 1.975 Jul-2010 2.093 78.85 77.5 2.038 Aug-2010 2.01 71.93 75.51 1.966 Sep-2010 2.239 79.95 80.77 2.239 Oct-2010 2.253 81.45 82.47 2.211 Nov-2010 2.291 84.12 86.02 2.288 Dec-2010 2.528 91.38 93.23 2.546 Jan-2011 2.742 90.99 98.97 2.723 Feb-2011 2.998 97.1 112.27 2.928 Mar-2011 3.161 106.19 116.94 3.098 Apr-2011 3.368 113.39 126.59 3.263 May-2011 3.134 102.7 117.18 3.049 Jun-2011 2.996 95.3 111.71 2.936 Jul-2011 3.161 95.68 115.93 3.086 Aug-2011 3.113 88.81 116.48 3.068 Sep-2011 2.844 78.93 105.42 2.781 Oct-2011 3.028 93.19 108.43 3.04 Nov-2011 3.001 100.36 111.22 3.012 Dec-2011 2.917 98.83 108.09 2.917

Data source: http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm.


UV6682

Exhibit 7


Most Heavily Traded Energy Futures Contracts (October 2011)

CME Group Futures—Monthly Volume of Contracts

Light sweet crude oil (WTI) 14,785,297 Natural gas futures (Henry Hub) 7,199,901 Heating oil 2,964,162 RBOB gasoline 2,791,760 PJM financially settled electricity 211,304

Data source: CME Group, “CMEG Exchange Volume Report—Monthly October 2011,” http://www.cmegroup.com/wrappedpages/web_monthly_report/Web_Volume_Report_CMEG.pdf.

ICE Europe Futures—Monthly Volume of

Contracts Brent 12,454,684Gas oil 6,655,441WTI 4,132,829Heating oil 77,063RBOB gasoline 79,862Coal 117,818EU natural gas 577,605Electricity 915Emissions 561,522

Data source: Intercontinental Exchange, “ICE Futures Europe—Futures Monthly Volume,” https://www.theice.com/marketdata/reports/ReportCenter.shtml#report/7.


UV6682

Exhibit 8


Physical Location of WTI versus Brent Crude Oil

Panel A: Location of Cushing, OK (settlement point for WTI).

Panel B: Location of the Brent oilfield.

Source: International Energy Agency, “Oil Supply Security 2007,” http://www.iea.org/publications/freepublications/publication/oil_security.pdf.


Pag

e 19

UV

6682

Exh

ibit

9

20

12

Fue

l Hed

ging

at

JetB

lue

Air

way

s

JetB

lue—

Fue

l Hed

ges

(201

1Q1

to 2

011Q

4)

Inve

stor

Up

dat

e:

1/27

/20

11

2011

Q1

2011

Q2

2011

Q3

2011

Q4

Gal

lons

(in

mill

ions

) 44

50

45

28

(e

st. %

of

cons

umpt

ion)

37

%

38%

31

%

21%

Hed

ge 1

18

% i

n cr

ude

call

optio

ns w

ith

the

aver

age

cap

at $

92/b

bl.

21%

in

crud

e ca

ll op

tions

with

the

ave

rage

ca

p at

$93

/bbl

. 18

% i

n cr

ude

call

optio

ns w

ith t

he

aver

age

cap

at $

94/b

bl.

7% i

n cr

ude

call

optio

ns w

ith

the

aver

age

cap

at $

92/b

bl.

Hed

ge 2

11

% i

n cr

ude

colla

rs w

ith t

he

aver

age

cap

at $

99/b

bl.

and

the

aver

age

put a

t $82

/bbl

.

10%

in c

rude

col

lars

with

the

ave

rage

cap

at

$100

/bbl

. and

the

aver

age

put a

t $80

/bbl

. 9%

in c

rude

col

lars

with

the

ave

rage

ca

p at

$10

0/bb

l. an

d th

e av

erag

e pu

t at

$80

/bbl

.

9% i

n cr

ude

colla

rs w

ith t

he

aver

age

cap

at $

100/

bbl.

and

the

aver

age

put a

t $81

/bbl

.

Hed

ge 3

5%

in

heat

co

llars

w

ith

the

aver

age

cap

at $

2.61

/gal

. and

the

av

erag

e pu

t at $

2.21

/gal

.

5%

in

crud

e th

ree-

way

co

llars

w

ith

the

aver

age

purc

hase

d ca

ll at

$1

00/b

bl.,

the

aver

age

sold

ca

ll at

$1

10/b

bl.

and

the

aver

age

put a

t $85

/bbl

.

4% i

n cr

ude

thre

e-w

ay c

olla

rs w

ith

the

aver

age

purc

hase

d ca

ll at

$1

00/b

bl.,

the

aver

age

sold

cal

l at

$1

10/b

bl.

and

the

aver

age

put

at

$83/

bbl.

5% i

n cr

ude

thre

e-w

ay c

olla

rs

with

th

e av

erag

e pu

rcha

sed

call

at $

100/

bbl.,

the

ave

rage

so

ld c

all

at $

110/

bbl.

and

the

aver

age

put a

t $80

/bbl

.

Hed

ge 4

3%

in U

SGC

jet f

uel s

wap

s at

an

aver

age

of $

2.29

/gal

. 2%

in U

SGC

jet

fuel

sw

aps

at a

n av

erag

e of

$2

.32/

gal.

Est

imat

ed

fuel

ga

llons

co

nsum

ed (i

n m

illio

ns)

119

Est

imat

ed

aver

age

fuel

pr

ice

per

gallo

n,

net

of

hedg

es

$2.8

4


Pag

e 20

UV

6682

Exh

ibit

9 (c

ontin

ued)

JetB

lue—

Fue

l Hed

ges

(201

1Q2

to 2

012Q

1)

Inve

stor

Up

dat

e:

4/21

/20

11

2011

Q2

2011

Q3

2011

Q4

2012

Q1

Gal

lons

(in

mill

ions

) 57

51

35

9

(est

. % o

f co

nsum

ptio

n)

43%

36

%

26%

8%

Hed

ge 1

21

% i

n cr

ude

call

optio

ns w

ith

the

aver

age

cap

at $

93/b

bl.

18%

in

crud

e ca

ll op

tions

with

the

ave

rage

ca

p at

$94

/bbl

. 7%

in

crud

e ca

ll op

tions

with

the

av

erag

e ca

p at

$92

/bbl

. 3%

in

crud

e ca

ll op

tions

w

ith

the

aver

age

cap

at

$99/

bbl.

Hed

ge 2

10%

in

crud

e co

llars

with

the

av

erag

e ca

p at

$10

0/bb

l. an

d th

e av

erag

e pu

t at $

80/b

bl.

9% in

cru

de c

olla

rs w

ith t

he a

vera

ge c

ap a

t $1

00/b

bl. a

nd th

e av

erag

e pu

t at $

80/b

bl.

10%

in

cr

ude

colla

rs

with

th

e av

erag

e ca

p at

$1

00/b

bl.

and

the

aver

age

put a

t $81

/bbl

.

5% i

n cr

ude

colla

rs w

ith

the

aver

age

cap

at

$98/

bbl.

and

the

aver

age

put a

t $78

/bbl

.

Hed

ge 3

5%

in

crud

e th

ree-

way

co

llars

w

ith t

he a

vera

ge p

urch

ased

cal

l at

$1

00/b

bl.,

the

aver

age

sold

ca

ll at

$11

0/bb

l. an

d th

e av

erag

e pu

t at $

85/b

bl.

5%

in

crud

e th

ree-

way

co

llars

w

ith

the

aver

age

purc

hase

d ca

ll at

$1

00/b

bl.,

the

aver

age

sold

ca

ll at

$1

10/b

bl.

and

the

aver

age

put a

t $83

/bbl

.

5% i

n cr

ude

thre

e-w

ay c

olla

rs w

ith

the

aver

age

purc

hase

d ca

ll at

$1

00/b

bl.,

the

aver

age

sold

cal

l at

$1

10/b

bl.

and

the

aver

age

put

at

$80/

bbl.

Hed

ge 4

5%

in

he

at

colla

rs

with

th

e av

erag

e ca

p at

$3.

24/g

al. a

nd t

he

aver

age

put a

t $2.

84/g

al.

4% i

n he

at c

olla

rs w

ith t

he a

vera

ge c

ap a

t $3

.27/

gal.

and

the

aver

age

put a

t $2.

87/g

al.

4% i

n he

at c

olla

rs w

ith t

he a

vera

ge

cap

at $

3.31

/gal

. and

the

aver

age

put

at $

2.91

/gal

.

Hed

ge 5

2%

in U

SGC

jet f

uel s

wap

s at

an

aver

age

of $

2.32

/gal

.

Est

imat

ed f

uel

gallo

ns c

onsu

med

(in

mill

ions

) 13

3

Est

imat

ed a

vera

ge

fuel

pric

e pe

r ga

llon,

ne

t of

hedg

es

$3.3

7


Pag

e 21

UV

6682

Exh

ibit

9 (c

ontin

ued)

JetB

lue—

Fue

l Hed

ges

(201

1Q3

to 2

011Q

2)

Inve

stor

Up

dat

e:

7/26

/20

11

2011

Q3

2011

Q4

2012

Q1

2012

Q2

Gal

lons

(in

mill

ions

) 67

51

22

22

(e

st. %

of

cons

umpt

ion)

48

%

38%

18

%

16%

Hed

ge 1

18

%

in

crud

e ca

ll op

tions

w

ith

the

aver

age

cap

at $

94/b

bl.

7% i

n cr

ude

call

optio

ns w

ith t

he

aver

age

cap

at $

92/b

bl.

3% i

n cr

ude

call

optio

ns w

ith t

he

aver

age

cap

at $

99/b

bl.

2% i

n cr

ude

call

optio

ns w

ith

the

aver

age

cap

at $

99/b

bl.

Hed

ge 2

9%

in c

rude

col

lars

with

the

ave

rage

cap

at

$1

00/b

bl.

and

the

aver

age

put

at

$80/

bbl.

9% in

cru

de c

olla

rs w

ith t

he a

vera

ge

cap

at $

100/

bbl.

and

the

aver

age

put

at $

81/b

b

5%

in

crud

e co

llars

w

ith

the

aver

age

cap

at

$98/

bbl.

and

the

aver

age

put a

t $78

/bbl

.

5% i

n cr

ude

colla

rs w

ith t

he

aver

age

cap

at $

97/b

bl.

and

the

aver

age

put a

t $78

/bbl

.

Hed

ge 3

5% i

n cr

ude

thre

e-w

ay c

olla

rs w

ith t

he

aver

age

purc

hase

d ca

ll at

$10

0/bb

l., t

he

aver

age

sold

cal

l at

$11

0/bb

l. an

d th

e av

erag

e pu

t at $

83/b

bl.

5% i

n cr

ude

thre

e-w

ay c

olla

rs w

ith

the

aver

age

purc

hase

d ca

ll at

$1

00/b

bl.,

the

aver

age

sold

cal

l at

$1

10/b

bl.

and

the

aver

age

put

at

$80/

bbl.

8% in

hea

t co

llars

with

the

ave

rage

ca

p at

$3.

31/g

al.

and

the

aver

age

put a

t $2.

91/g

al.

7% i

n he

at c

olla

rs w

ith t

he

aver

age

cap

at $

3.27

/gal

. an

d th

e av

erag

e pu

t at $

2.87

/gal

.

Hed

ge 4

9%

in

heat

col

lars

with

the

ave

rage

cap

at

$3

.26/

gal.

and

the

aver

age

put

at

$2.8

6/ga

l.

9% i

n he

at c

olla

rs w

ith t

he a

vera

ge

cap

at $

3.30

/gal

. and

the

aver

age

put

at $

2.90

/gal

.

2% i

n U

SGC

jet

fue

l sw

aps

at a

n av

erag

e of

$3.

15/g

al.

2% in

USG

C je

t fu

el s

wap

s at

an

ave

rage

of

$3.1

4/ga

l.

Hed

ge 5

7%

in

U

SGC

je

t fu

el

swap

s at

an

av

erag

e of

$3.

03/g

al.

8% i

n U

SGC

jet

fue

l sw

aps

at a

n av

erag

e of

$3.

03/g

al.

Est

imat

ed f

uel

gallo

ns c

onsu

med

(in

mill

ions

) 14

2

Est

imat

ed a

vera

ge

fuel

pric

e pe

r ga

llon,

ne

t of

hedg

es

$3.3

3


Pag

e 22

UV

6682

Exh

ibit

9 (c

ontin

ued)

JetB

lue—

Fue

l Hed

ges

(201

1Q4

to 2

012Q

3)

Inve

stor

Up

dat

e:

10/

26/

2011

20

11Q

4 20

12Q

1 20

12Q

2 20

12Q

3 G

allo

ns (i

n m

illio

ns)

60

31

31

31

(est

. % o

f co

nsum

ptio

n)

45%

23

%

22%

18

%

Hed

ge 1

7%

in

cr

ude

call

optio

ns

with

th

e av

erag

e ca

p at

$92

/bbl

. 2%

in c

rude

cal

l opt

ions

with

th

e av

erag

e ca

p at

$99

/bbl

. 2%

in

cr

ude

call

optio

ns

with

th

e av

erag

e ca

p at

$99

/bbl

. 4%

in

crud

e co

llars

with

the

av

erag

e ca

p at

$97

/bbl

. an

d th

e av

erag

e pu

t at $

78/b

bl.

Hed

ge 2

9%

in c

rude

col

lars

with

the

ave

rage

cap

at

$1

00/b

bl.

and

the

aver

age

put

at

$81/

bbl.

5% i

n cr

ude

colla

rs w

ith t

he

aver

age

cap

at $

98/b

bl.

and

the

aver

age

put a

t $78

/bbl

.

4% i

n cr

ude

colla

rs w

ith t

he a

vera

ge

cap

at $

97/b

bl.

and

the

aver

age

put

at

$78/

bbl.

6% i

n he

at c

olla

rs w

ith t

he

aver

age

cap

at $

3.28

/gal

. an

d th

e av

erag

e pu

t at $

2.87

/gal

.

Hed

ge 3

5% i

n cr

ude

thre

e-w

ay c

olla

rs w

ith t

he

aver

age

purc

hase

d ca

ll at

$10

0/bb

l., t

he

aver

age

sold

cal

l at

$11

0/bb

l. an

d th

e av

erag

e pu

t at $

80/b

bl.

7% i

n he

at c

olla

rs w

ith t

he

aver

age

cap

at $

3.27

/gal

. an

d th

e av

erag

e pu

t at $

2.87

/gal

.

7% in

hea

t co

llars

with

the

ave

rage

cap

at

$3.

27/g

al.

and

the

aver

age

put

at

$2.8

7/ga

l.

6% in

USG

C je

t fu

el s

wap

s at

an

ave

rage

of

$3.0

5/ga

l.

Hed

ge 4

10%

in h

eat

colla

rs w

ith t

he a

vera

ge c

ap

at

$3.3

0/ga

l. an

d th

e av

erag

e pu

t at

$2

.90/

gal.

7% in

USG

C je

t fu

el s

wap

s at

an

ave

rage

of

$3.0

3/ga

l. 7%

in

U

SGC

je

t fu

el

swap

s at

an

av

erag

e of

$3.

02/g

al.

2% i

n U

SGC

jet

fue

l co

llars

w

ith

the

aver

age

cap

at

$3.0

2/ga

l. an

d th

e av

erag

e pu

t at

$2.

72/g

al.

Hed

ge 5

12%

in

U

SGC

je

t fu

el

swap

s at

an

av

erag

e of

$3.

00/g

al.

2% i

n U

SGC

jet

fue

l co

llars

w

ith

the

aver

age

cap

at

$3.0

4/ga

l. an

d th

e av

erag

e pu

t at

$2.

74/g

al.

2% i

n U

SGC

jet

fue

l co

llars

with

the

av

erag

e ca

p at

$3

.01/

gal.

and

the

aver

age

put a

t $2.

71/g

al.

Hed

ge 6

2%

in

USG

C j

et f

uel

colla

rs w

ith t

he

aver

age

cap

at

$3.0

4/ga

l. an

d th

e av

erag

e pu

t at $

2.74

/gal

.

Est

imat

ed f

uel g

allo

ns

cons

umed

(in

mill

ions

) 13

3

E

stim

ated

ave

rage

fue

l pr

ice

per

gallo

n, n

et o

f he

dges

$3

.23

Sour

ce: “

JBL

U I

nves

tor

Rel

atio

ns—

Inve

stor

Upd

ate,

” Je

tBlu

e w

ebsi

te, h

ttp:

//in

vest

or.je

tblu

e.co

m/p

hoen

ix.z

htm

l?c=

1310

45&

p=ir

ol-in

vest

orU

pdat

e.


UV6682

Exhibit 10


JetBlue Airways—Disclosure on Accounting Treatment of Fuel Hedges

“The Derivatives and Hedging topic is a complex accounting standard and requires that we develop and maintain a significant amount of documentation related to (1) our fuel hedging program and strategy, (2) statistical analysis supporting a highly correlated relationship between the underlying commodity in the derivative financial instrument and the risk being hedged (i.e., aircraft fuel) on both a historical and prospective basis, and (3) cash flow designation for each hedging transaction executed, to be developed concurrently with the hedging transaction. This documentation requires that we estimate forward aircraft fuel prices since there is no reliable forward market for aircraft fuel. These prices are developed through the observation of similar commodity futures prices, such as crude oil and/or heating oil, and adjusted based on variations to those like commodities. Historically, our hedges have settled within 24 months; therefore, the deferred gains and losses have been recognized into earnings over a relatively short period of time.

(…) 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, which 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 fuel expense in the period the underlying fuel is consumed.

Ineffectiveness results, 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.”

Source: JetBlue annual report, 2011.


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