Liquidity and Capital Resources

At December 31, 2005, we had cash and cash equivalents of $6 million and investment securities of $478 million, compared to cash and cash equivalents of $19 million and investment securities of $431 million at December 31, 2004. We presently have no lines of credit other than two short-term borrowing facilities for certain aircraft predelivery deposits. In September 2005, we renewed and increased the facility for our A320 deliveries to $58 million and, in December 2005, we entered into a similar agreement for our EMBRAER 190 deliveries for up to $19 million. At December 31, 2005, we had $65 million in borrowings outstanding under these facilities.

We rely primarily on cash flows from operations to provide working capital for current and future operations. Cash flows from operating activities totaled $170 million in 2005, $199 million in 2004, and $287 million in 2003. The $29 million decline in cash flows from operations in 2005 compared to 2004 was primarily a result of a 52.0% increase in fuel prices, partially offset by a 28.4% increase in revenue passenger miles. Cash flows from operations in 2004 compared to 2003 declined due to 24.5% higher fuel prices and 7.4% lower yields than in 2003 as well as the receipt of $23 million in government compensation in 2003. Net cash used in investing and financing activities was $183 million in 2005, $283 million in 2004 and $198 million in 2003.

Investing Activities. During 2005, capital expenditures related to our purchase of flight equipment included expenditures of $711 million for 16 Airbus A320, one EMBRAER 190 aircraft and three spare engines, $183 million for flight equipment deposits and $81 million for spare part purchases. Capital expenditures for other property and equipment, including ground equipment purchases and facilities improvements, were $149 million. Net cash used in the sale and purchase of available-for-sale securities was $79 million. Additional cash required for security deposits was $86 million, of which $80 million related to our lease for a new terminal at JFK.

During 2004, capital expenditures related to our purchase of flight equipment included expenditures of $511 million for 15 Airbus A320 aircraft and one spare engine, $180 million for flight equipment deposits and $19 million for spare part purchases. Capital expenditures for other property and equipment, including ground equipment purchases and facilities improvements, were $87 million. Net cash provided from the sale and purchase of available-for-sale securities was $76 million.

Financing Activities. Financing activities during 2005 consisted primarily of (1) our November 2005 public offering of 12.9 million shares of our common stock at $12.00 per share, as adjusted for our December 2005 three-for-two stock split, raising net proceeds of $153 million, (2) the sale and leaseback over 18 years of six EMBRAER 190 aircraft for $152 million by a U.S. leasing institution, (3) the financing of 15 Airbus A320 aircraft with $498 in floating rate equipment notes purchased with the proceeds from our November 2004 public offering of Series 2004-2 pass-through certificates, (4) our issuance of a $33 million 12-year fixed rate equipment note issued to a European bank secured by one Airbus A320 aircraft, (5) our March 2005 issuance of $250 million of 3¾% convertible debentures due 2035, raising net proceeds of approximately $243 million, (6) the financing of flight training devices with $50 million in secured loan proceeds from Export Development Canada, (7) the financing of a hangar and training center in Orlando, FL with $47 million in special facilities bonds, of which $41 million was received by year end and (8) scheduled maturities of $117 million of debt.

The net proceeds from our common stock and convertible debt offerings are being used to fund working capital and capital expenditures, including capital expenditures related to the purchase of aircraft and construction of facilities on or near airports. We currently have shelf registration statements on file with the Securities and Exchange Commission related to the issuance of $1 billion original aggregate amount of common stock, preferred stock, debt securities and/or pass-through certificates. The net proceeds of any securities sold under these registration statements may be used to fund working capital and capital expenditures, including the purchase of aircraft and construction of facilities on or near airports. Through December 31, 2005, we had issued a total of $903 million in securities under these registration statements.

Financing activities during 2004 consisted primarily of (1) the financing of 13 aircraft with $431 million in floating rate equipment notes purchased with proceeds from our March 2004 public offering of pass-through certificates, (2) the financing of two aircraft with $68 million of 12-year floating rate equipment notes issued to a European bank, (3) the repayment of three spare engine notes totaling $9 million, (4) scheduled maturities of $68 million of debt, and (5) net short-term borrowings of $14 million.

None of our lenders or lessors are affiliated with us. Our short-term borrowings are part of a floating rate facility with a group of commercial banks to finance aircraft predelivery deposits.

Capital Resources. We have been able to generate sufficient funds from operations to meet our working capital requirements. We do not currently have any lines of credit, other than our short-term aircraft predelivery deposit facilities, and almost all of our property and equipment is encumbered. We typically finance our aircraft through either secured debt or lease financing. At December 31, 2005, we operated a fleet of 85 Airbus A320 aircraft, of which 25 are financed under operating leases with the remaining 60 financed by secured debt, and seven EMBRAER 190 aircraft, six of which are financed under operating leases. The remaining EMBRAER 190 aircraft was financed with secured debt in January 2006. Financing in the form of secured debt or operating leases had been arranged for 11 of our 16 Airbus A320 aircraft and all 19 of our EMBRAER 190 aircraft scheduled for delivery in 2006. Although we believe that debt and/or lease financing should be available for our remaining aircraft deliveries, we cannot assure you that we will be able to secure financing on terms attractive to us, if at all. While these financings may or may not result in an increase in liabilities on our balance sheet, our fixed costs will increase significantly regardless of the financing method ultimately chosen. To the extent we cannot secure financing, we may be required to modify our aircraft acquisition plans or incur higher than anticipated financing costs.

Working Capital. We had a working capital deficit of $41 million at December 31, 2005, which is customary for airlines, primarily because air traffic liability is classified as a current liability, compared to positive working capital of $26 million at December 31, 2004. We expect to meet our obligations as they become due through available cash, investment securities and internally generated funds, supplemented as necessary by debt and/or equity financings and proceeds from aircraft sale and leaseback transactions. We expect to generate positive working capital through our operations. However, we cannot predict whether current trends and conditions will continue or what the effect on our business might be from the extremely competitive environment we are operating in or from events that are beyond our control, such as continued unprecedented high fuel prices, the impact of airline bankruptcies or consolidations, U.S. military actions, or acts of terrorism. Assuming that we utilize the predelivery short-term borrowing facilities available to us and obtain financing for the five remaining A320 aircraft scheduled for delivery in 2006, we believe the working capital available to us will be sufficient to meet our cash requirements for at least the next 12 months.

Contractual Obligations

Our noncancelable contractual obligations at December 31, 2005 include the following (in millions):

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(1)Includes actual interest and estimated interest for floating-rate debt based on December 31, 2005 rates.

(2)Amounts include noncancelable commitments for the purchase of goods and services.

All of our debt, other than our convertible debt and notes for one A320 aircraft, has floating interest rates and had a weighted average maturity of 9.1 years at December 31, 2005. Interest rates adjust quarterly or semi-annually based on the London Interbank Offered Rate, or LIBOR. Under the debt agreements related to two of our aircraft, we are required to comply with two specific financial covenants. The first requires that our tangible net worth be at least 12% of our total assets. The second requires, that for each quarter, our EBITDA for the prior four quarters must be at least twice our interest expense for those four quarters. Our inability to comply with the required financial maintenance covenants or provisions could result in default under these financing agreements and would result in a cross-default under our other financing agreements. In the event of any such default and our inability to obtain a waiver of the default, all amounts outstanding under the agreements could be declared to be immediately due and payable. If we did not have sufficient available cash to pay all amounts that become due and payable, we would have to seek additional debt or equity financing, which may not be available on acceptable terms, or at all. At December 31, 2005, we were in compliance with the covenants of all of our debt and lease agreements.

We have significant operating lease obligations for 31 aircraft with initial lease terms that range from 10 to 20 years. Five of these aircraft have variable-rate rent payments and adjust semi-annually based on LIBOR. We also lease airport terminal space and other airport facilities in each of our markets, as well as office space and other equipment. We have $111 million of restricted assets pledged under standby letters of credit related to certain of our leases, $80 million of which will expire in 2007 and the remainder at the end of the related lease terms.

Our firm aircraft orders at December 31, 2005 consisted of 98 Airbus A320 aircraft and 94 EMBRAER 190 aircraft scheduled for delivery as follows: 35 in each of 2006, 2007 and 2008, 36 in each of 2009 and 2010, and 15 in 2011. We meet our predelivery deposit requirements for our aircraft by paying cash or by using short-term borrowing facilities for deposits required six to 24 months prior to delivery. Any predelivery deposits paid by the issuance of notes are fully repaid at the time of delivery of the related aircraft.

We also have options to acquire 50 additional Airbus A320 aircraft for delivery from 2008 through 2013 and 100 additional EMBRAER190 aircraft for delivery from 2011 through 2016. We can elect to substitute Airbus A321 aircraft or A319 aircraft for the A320 aircraft until 21 months prior to the scheduled delivery date for those aircraft not on firm order.

Anticipated capital expenditures for facility improvements, spare parts and ground purchases for 2006 are projected to be approximately $175 million in the aggregate. In November 2005, we executed a 30-year lease agreement with the PANYNJ for the construction and operation of a new terminal at JFK with occupancy projected in early 2009, which for financial reporting purposes will be accounted for as a financing obligation. JetBlue has committed to rental payments under the lease, including ground rents for the new terminal site which began on lease execution and are included with lease commitments in the table above. Facility rents are anticipated to commence upon the date of beneficial occupancy and are included with financing obligations and other in the table above.

Our commitments also include those of LiveTV, which has several noncancelable long-term purchase agreements with its suppliers to provide equipment to be installed on its customers' aircraft, including JetBlue's aircraft.

We enter into individual employment agreements with each of our FAA-licensed employees. Each employment agreement is for a term of five years and automatically renews for an additional five-year term unless either the employee or we elect not to renew it. Pursuant to these agreements, these employees can only be terminated for cause. In the event of a downturn in our business, we are obligated to pay these employees a guaranteed level of income and to continue their benefits if they do not obtain other aviation employment. As we are not currently obligated to pay this guaranteed income and benefits, no amounts related to these guarantees are included in the table above.

Off-Balance Sheet Arrangements

None of our operating lease obligations are reflected on our balance sheet. Although some of our aircraft lease arrangements are variable interest entities, as defined by FASB Interpretation No. 46, Consolidation of Variable Interest Entities, or FIN 46, none of them require consolidation in our financial statements. The decision to finance these aircraft through operating leases rather than through debt was based on an analysis of the cash flows and tax consequences of each option and a consideration of our liquidity requirements. We are responsible for all maintenance, insurance and other costs associated with operating these aircraft; however, we have not made any residual value or other guarantees to our lessors.

We have determined that we hold a variable interest in, but are not the primary beneficiary of, certain pass-through trusts which are the purchasers of equipment notes issued by us to finance the acquisition of new aircraft and held by such pass-through trusts. These pass-through trusts maintain liquidity facilities whereby a third party agrees to make payments sufficient to pay up to 18 months of interest on the applicable certificates if a payment default occurs. The liquidity providers for the Series 2004-1 certificates are Landesbank Hessen-Thüringen Girozentrale and Morgan Stanley Capital Services Inc. The liquidity providers for the Series 2004-2 certificates are Landesbank Baden-Württemberg and Citibank, N.A.

We utilize a policy provider to provide credit support on the Class G-1 and Class G-2 certificates. The policy provider has unconditionally guaranteed the payment of interest on the certificates when due and the payment of principal on the certificates no later than 18 months after the final expected regular distribution date. The policy provider is MBIA Insurance Corporation (a subsidiary of MBIA, Inc.). Financial information for the parent company of the policy provider is available at the SEC's website at http://www.sec.gov or at the SEC's public reference room in Washington, D.C.

We have also made certain guarantees and indemnities to other unrelated parties that are not reflected on our balance sheet, which we believe will not have a significant impact on our results of operations, financial condition or cash flows. We have no other off-balance sheet arrangements. See Notes 2, 3 and 12 to our consolidated financial statements for a more detailed discussion of our variable interests and other contingencies, including guarantees and indemnities.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with generally accepted accounting principles requires management to adopt accounting policies and make estimates and judgments to develop amounts reported in our financial statements and accompanying notes. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the estimates that are required to prepare our financials statements. We believe that our estimates and judgments are reasonable; however, actual results and the timing of recognition of such amounts could differ from those estimates. In addition, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

Critical accounting policies and estimates are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The policies and estimates discussed below have been reviewed with our independent registered public accounting firm and with the Audit Committee of our Board of Directors. For a discussion of these and other accounting policies, see Note 1 to our consolidated financial statements.

Passenger revenue. Passenger ticket sales are initially recorded as a component of air traffic liability. Revenue is recognized when transportation is provided or when a ticket expires, as all of our tickets are non-refundable. Upon payment of a change fee, we provide our customers with a credit that is recorded in air traffic liability, which expires 12 months from the date of scheduled travel if not used.

Accounting for long-lived asset. In accounting for long-lived assets, we make estimates about the expected useful lives, projected residual values and the potential for impairment. In estimating useful lives and residual values of our aircraft, we have relied upon actual industry experience with the same or similar aircraft types and our anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government regulations and changes in our maintenance program or operations could result in changes to these estimates. Our purchased technology, which resulted from our acquisition of LiveTV in 2002, is being amortized over six years based on the average number of aircraft expected to be in service as of the date of acquisition, resulting in an increasing annual expense as we had commitments at that time to purchase additional aircraft over the next three years.

Our long-lived assets are evaluated for impairment at least annually or when events and circumstances indicate that the assets may be impaired. Indicators include operating or cash flow losses, significant decreases in market value or changes in technology. As our assets are all relatively new and we continue to have positive cash flow, we have not identified any significant impairments related to our long-lived assets at this time.

Stock-based compensation. The adoption of SFAS No. 123(R), Share Based Payment, in 2006 will require the recording of stock-based compensation expense for issuances under our stock purchase plan and stock option plan over their requisite service period using a fair value approach similar to the current pro forma disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) does not mandate an option-pricing model to be used in determining fair value, but does require that the model selected consider certain variables. Different models would result in different valuations. Regardless of the method selected, significant judgment is required for some of the valuation variables. The most significant of these is the volatility of our common stock and the estimated term over which our stock options will be outstanding. The valuation calculation is sensitive to even slight changes in these estimates.

Although there will be no impact to our overall cash flows, the adoption of SFAS No. 123(R) will have a significant impact on our results of operations. Most of the stock-based compensation expense to be recorded in 2006 will relate to our stock purchase plan and stock options expected to be granted in 2006, as we accelerated the vesting of 20 million outstanding stock options in December 2005.

Lease accounting. We operate airport facilities, offices buildings and aircraft under operating leases with minimum lease payments associated with these agreements recognized as rent expense on a straight-line basis over the expected lease term. Within the provisions of certain leases there are minimum escalations in payments over the base lease term, as well as renewal periods. The effects of the escalations have been reflected in rent expense on a straight-line basis over the lease term, which includes renewal periods when it is deemed to be reasonably assured that we would incur an economic penalty for not renewing. The amortization period for leasehold improvements is the term used in calculating straight-line rent expense or their estimated economic life, whichever is shorter. Had different conclusions been reached with respect to the lease term and related renewal periods, different amounts of amortization and rent expense would have been reported. Derivative instruments used for aircraft fuel. We utilize financial derivative instruments to help manage the risk of changing aircraft fuel prices. At December 31, 2005, the net fair value of our derivative instruments was $1 million. Since the majority of our financial derivative instruments are not traded on a market exchange, their fair values are estimated, with the assistance of third parties, through the use of present value methods or standard option value models, with assumptions about commodity prices based on those observed in underlying markets. When possible, we designate these instruments as cash flow hedges for accounting purposes, as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which permits the deferral of the effective portions of gains or losses until contract settlement.

SFAS No. 133 is a complex accounting standard, requiring 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. jet 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 jet fuel prices since there is no quoted forward market for jet fuel. These estimates 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 effective portions of gains and losses have been recognized into earnings over a relatively short period of time.

Frequent flyer accounting. We utilize a number of estimates in accounting for our TrueBlue customer loyalty program, which are consistent with industry practices. We record a liability, which was $1 million as of December 31, 2005, for the estimated incremental cost of providing free travel awards, including an estimate for partially earned awards. The estimated cost includes incremental fuel, insurance, passenger food and supplies, and reservation costs. In estimating the liability, we currently assume that 90% of earned awards will be redeemed and that 30% of our outstanding points will ultimately result in awards. Periodically, we evaluate our assumptions for appropriateness, including comparison of the cost estimates to actual costs incurred as well as the expiration and redemption assumptions to actual experience. Changes in the minimum award levels or in the lives of the awards would also require us to reevaluate the liability, potentially resulting in a significant impact in the year of change as well as in future years.

We also sell TrueBlue points to participating partners. Revenue from these sales is allocated between passenger revenues and other revenues. The amount attributable to passenger revenue is determined based on the fair value of transportation expected to be provided when awards are redeemed and is recognized when travel is provided. Total sales proceeds in excess of the estimated transportation fair value is recognized at the time of sale.