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The COVID-19 Pandemic (Notes) | 3 Months Ended
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Sep. 30, 2020
COVID-19 Pandemic [Abstract] |
COVID-19 Pandemic [Text Block] | The COVID-19 Pandemic The unprecedented coronavirus ("COVID-19") pandemic and the related travel restrictions and physical distancing measures implemented throughout the world have significantly reduced demand for air travel. Beginning in March 2020, large public events were canceled, governmental authorities began imposing restrictions on non-essential activities, businesses suspended travel, and popular leisure destinations temporarily closed to visitors. Certain countries have imposed bans on international travelers for specified periods or indefinitely. Demand for air travel began to weaken at the end of February 2020. The pace of decline accelerated throughout March into April 2020 and has remained depressed. This decline in demand has had a material adverse impact on our operating revenues and financial position. During the third quarter of 2020, our operating revenues were 76% lower than the same quarter of 2019. Although demand improved compared to the second quarter of 2020, it remains significantly lower than in prior years. The exact timing and pace of the recovery is uncertain given the significant impact of the pandemic on the overall U.S. and global economy. Some states have experienced a resurgence of COVID-19 cases after reopening and as a result, certain other states, such as New York, have implemented travel restrictions or advisories for travelers from such states. We have also seen a similar resurgence of COVID-19 cases in other countries and we expect to see fluctuations in the number of cases, which we believe will result in actions by governmental authorities restricting activities. We expect the demand environment to remain depressed until an accepted treatment and/or vaccine for COVID-19 is widely available. Our response to the pandemic and the measures we take to secure additional liquidity may be modified as we have more clarity on the timing of demand recovery. In response to these developments, since March 2020 we have implemented the following measures to focus on the safety of our customers, our crewmembers, and our business. Customers and Crewmembers The safety of our customers and crewmembers continues to be a priority. As the COVID-19 pandemic has developed, we have taken steps to promote physical distancing and implemented new procedures that reflect the recommendations of health experts, including some of the following:
• | Introduced "Safety from the Ground Up", an initiative with a multi-layer approach that encompasses enhanced safety and cleaning measures on our flights, at our airports, and in our offices;
• | Instituted temperature checks for our customer-facing and support-center crewmembers;
• | Updated our sick leave policy to provide up to 14 days of paid sick leave for crewmembers who have been diagnosed with COVID-19 or are required to quarantine;
• | Implemented a framework for internal contact tracing, crewmember notification, and a return to work clearance process for all crewmembers, wherever they may be located;
• | Required face coverings for all crewmembers while boarding, in flight, and when physical distancing cannot be maintained;
• | Administered more frequent disinfecting of common surfaces and areas with high touchpoints in our facilities;
• | Enhanced daily and overnight cleaning of our aircraft and all facilities, using electrostatic spraying of disinfectant in the cabins of aircraft parked overnight at selected focus cities;
• | Required customers to wear face coverings during check-in, boarding, and inflight;
• | Limited the number of seats available to be sold on most flights; we plan to continue limiting the capacity on our flights to less than 70% through December 1, 2020;
• | Suspended group boarding and implemented a back-to-front boarding process to minimize passing in the aisle;
• | Eliminated layovers for crewmembers in New York City and worked with crew transportation companies to ensure physical distancing;
• | Implemented jump seat buffers on our flights to further promote physical distancing measures;
• | Provided enhanced flexibility to our customers by waiving change and cancel fees for customers with existing bookings made through February 28, 2021, while also extending the expiration date of travel credits issued between February 27, 2020 and June 30, 2020 for flight purchases to 24 months; and
• | Announced our partnership with Vault Health to provide discounted at-home COVID-19 testing to customers with pending travel plans.
Our Business The COVID-19 pandemic drove a significant decline in demand beginning in the second half of March 2020. We have significantly reduced our capacity to a level that maintains essential services to align with demand. Our capacity for the third quarter of 2020 declined by 58% year-over-year. For the fourth quarter of 2020, we expect capacity to be down by at least 45%, as compared to the same period in prior year. As a result of the significant reduction in demand expectations and lower capacity, we have temporarily parked a portion of our fleet. The reductions in demand and in our capacity have resulted in a significant reduction to our revenue. As a result, we have, and will continue to implement cost saving initiatives to reduce our overall level of cash spend. Some of the initiatives we have undertaken include:
• | Adjustments in flying capacity to align with the expected demand.
•Temporary consolidations of our operations in certain cities that contain multiple airport locations.
• | Renegotiated service rates with business partners and extended payment terms.
•Instituted a company-wide hiring freeze.
• | Implemented salary reductions of 20% to 50% for our officers through September 30, 2020, and 10% to 20% in the fourth quarter of 2020.
• | Offered crewmembers voluntary time off and separation programs, with most departures for the separation program occurring during the third quarter.
At September 30, 2020, we had cash, cash equivalents, short-term investments, and short-term restricted cash of approximately $3.1 billion. We believe the unprecedented impact of COVID-19 on the demand for air travel and the corresponding decline in revenue will continue to have an adverse impact on our operating cash flow. Given this situation, we have taken actions to increase liquidity, strengthen our financial position, and conserve cash. Some of the actions we have taken since the onset of the pandemic through September 30, 2020 include:
• | Executed a new $1.0 billion 364-day delayed draw term loan agreement in March 2020 and immediately drew down on the facility for the full amount available. This term loan facility was repaid during the third quarter.
• | Borrowed on our existing $550 million revolving credit facility in April 2020.
• | Executed a $150 million pre-purchase arrangement of TrueBlue® points with our co-brand credit card partner in April 2020.
• | Suspended non-critical capital expenditure projects.
• | Amended our purchase agreement with Airbus which changed the timing of our Airbus A321 and A220 deliveries in May 2020.
• | Suspended share repurchases.
• | Obtained $963 million of government funding under the Payroll Support Program of The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is discussed further below.
• | Executed a $750 million term loan credit facility and immediately drew down on the facility for the full amount available in June 2020.
• | Entered into $445 million of sale-leaseback transactions; which is discussed further below.
• | Completed public placements of equipment notes in an aggregate principal amount of $923 million secured by 49 Airbus A321 aircraft in August 2020, which is discussed further in Note 4 to our condensed consolidated financial
statements. The net proceeds were primarily used to repay the outstanding borrowings under our 364-day delayed draw term loan facility that was due to be repaid in March 2021.
• | Entered into a Loan and Guarantee agreement with the United States Department of the Treasury ("Treasury") under the Loan Pr ogram of the CARES Act which gives us access to loans in an aggregate principal amount of up to $1.14 billion until March 26, 2021, which is discussed further below. We made a drawing of $115 million under the Loan Program on September 29, 2020.
As a result of these activities, we had $2.5 billion in unrestricted and short-term restricted cash as of September 30, 2020. In the second quarter of 2020, we executed $118 million of sale-leaseback transactions. These transactions did not qualify as sales for accounting purposes. The assets associated with these transactions remain on our consolidated balance sheets within property and equipment and the related liabilities under the lease are classified within debt and finance leases obligations. These transactions are treated as cash from financing activities on our condensed consolidated statements of cash flows. In the third quarter of 2020, we executed $327 million of sale-leaseback transactions. Of these transactions, $118 million did not qualify as sales for accounting purposes. The remaining $209 million qualified as sales and generated a loss of $106 million. The assets associated with sale-leaseback transactions which qualified as sales are recorded within operating lease assets. The liabilities are recorded within current operating lease liabilities and long-term operating lease liabilities on our consolidated balance sheets. These transactions are treated as cash from investing activities on our condensed consolidated statements of cash flows. In October 2020, we further amended our our purchase agreement with Airbus to defer several aircraft deliveries, resulting in approximately $2.0 billion of reduction in aircraft capital expenditures through 2022. We also executed $59 million of sale-leaseback transactions in October 2020. In November 2020, we entered into an agreement with the Treasury to increase our borrowing capacity under the Loan Program of the CARES Act to $1.95 billion. We continue to evaluate future financing opportunities to leverage our unencumbered assets in an effort to build additional levels of liquidity. Valuation of Long-Lived Assets Under the Property, Plant, and Equipment topic of the Codification, we are required to assess long-lived assets for impairment when events and circumstances indicate that the assets may be impaired. An impairment of long-lived assets exists when the sum of the estimated undiscounted future cash flows expected to be generated directly by the assets are less than the book value of the assets. Our long-lived assets include both owned and leased properties which are classified as property and equipment, and operating lease assets on our consolidated balance sheets, respectively. As discussed above, our operations were adversely impacted by the unprecedented decline in demand for travel caused by the COVID-19 pandemic. To determine if impairment exists in our fleet, we grouped our aircraft by fleet-type and estimated their future cash flows based on projections of capacity, aircraft age, maintenance requirements, and other relevant conditions. Based on the assessment, we determined the future cash flows from the operation of our Embraer E190 fleet were lower than the carrying value. For those aircraft, including the ones that are under operating lease, and related spare parts in our Embraer E190 fleet, we recorded an impairment loss of $56 million and $258 million for the three and nine months ended September 30, 2020, respectively. These losses represent the difference between the book value of these assets and their fair value. We estimated the fair value of our Embraer E190 fleet using third party valuations and considered specific circumstances such as aircraft age, maintenance requirements and condition, and therefore classified as Level 3 in the fair value hierarchy. We evaluated the remaining fleet and determined the future cash flows of our Airbus A320 and Airbus A321 fleet exceeded their carrying value as of September 30, 2020. As the extent of the ongoing impact from the COVID-19 pandemic remains uncertain, we expect to update our assessment from time to time, as new information becomes available. Valuation of Indefinite-Lived Intangibles Our intangible assets consist primarily of acquired take-off and landing slots, or Slots, at certain domestic airports. Slots are the rights to take-off or land at a specific airport during a specific time period of the day and are a means by which airport capacity and congestion can be managed. We account for Slots at High Density Airports, including Reagan National Airport in Washington, D.C., LaGuardia Airport, and JFK Airport, both in New York City, as indefinite life intangible assets which result in no amortization expense. We evaluate our intangible assets for impairment at least annually or when events and circumstances indicate they may be impaired. Indicators include operating or cash flow losses as well as various market factors to determine if events and circumstances could reasonably have affected the fair value. We performed an impairment assessment as of September 30, 2020 and determined our indefinite-lived intangible assets are not impaired. The Coronavirus Aid, Relief, and Economic Security Act On March 27, 2020, Congress passed the CARES Act. Under the CARES Act, assistance was made available to the aviation industry in the form of direct payroll support (the "Payroll Support Program") and secured loans (the "Loan Program"). On April 23, 2020, we entered into a Payroll Support Program Agreement (the "PSP Agreement") with the United States Department of the Treasury ("Treasury") governing our participation in the Payroll Support Program. Under the Payroll Support Program, Treasury provided us with a payment of $936 million (the "Payroll Support Payment"), consisting of $685 million in grants and $251 million in an unsecured term loan. The loan has a 10-year term and bears interest on the principal amount outstanding at an annual rate of 1.00% until April 23, 2025, and the applicable Secured Overnight Financing Rate ("SOFR") plus 2.00% thereafter until April 23, 2030. The principal amount may be repaid at any time prior to maturity at par. In consideration for the Payroll Support Payment, we issued warrants to purchase approximately 2.6 million shares of our common stock to the Treasury at an exercise price of $9.50 per share. The warrants will expire five years after issuance, and will be exercisable either through net cash settlement or net share settlement, at JetBlue's option, in whole or in part at any time. In accordance with the PSP Agreement, we are required to comply with the relevant provisions of the CARES Act which, among other things, includes the following: the requirement to use the Payroll Support Payment exclusively for the continuation of payment of crewmember wages, salaries and benefits; the prohibition on involuntary furloughs and reductions in crewmember pay rates and benefits through September 30, 2020; the requirement that certain levels of commercial air service be maintained until March 1, 2022; the prohibitions on share repurchases and the payment of common stock dividends; and restrictions on the payment of certain executive compensation until March 24, 2022. On September 30, 2020, Treasury provided us a payment of $27 million (the "Additional Payroll Support Payment"), consisting of $19 million in grants and $8 million in an unsecured term loan under the PSP Agreement. The terms of the unsecured term loan are identical to those under the initial loan issued on April 23, 2020. In consideration for the Additional Payroll Support Payment, we issued warrants to purchase approximately 85,540 additional shares of our common stock to the Treasury at an exercise price of $9.50 per share (the "Additional PSP Warrants"). The Additional PSP Warrants have the same terms and exercise price as the initial warrants issued on April 23, 2020 under the Payroll Support Program. The total payroll support funding of $963 million received under the CARES Act was originally classified as short-term restricted cash since the funds had to be utilized to pay the salaries and benefits costs of our crewmembers. The funds are reclassified from short-term restricted cash within prepaid expenses and other on our consolidated balance sheets to cash and cash equivalents when the funds are utilized. As of September 30, 2020, $74 million of payroll support funding remained available. The carrying value relating to the payroll support grants is recorded within other liabilities and will be recognized as a contra-expense within special items on our consolidated statements of operations as the funds are utilized. The relative fair value of the warrants, estimated to be $19 million, was recorded within stockholder's equity and reduced the total carrying value of the grants to $685 million. As of September 30, 2020, the carrying value of the grants was $49 million. Proceeds from the payroll support grants and from the issuance of warrants were classified within operating activities and financing activities, respectively, on our condensed consolidated statements of cash flows. The carrying value relating to the unsecured term loan is recorded within long-term debt and finance lease obligations on our consolidated balance sheets. The proceeds from the loan were classified as financing activities on our consolidated statement of cash flows. On April 29, 2020, we submitted our application for the Loan Program of the CARES Act. Under the Loan Program, we have the ability to borrow up to approximately $1.14 billion from the Treasury. Any loans issued under the Loan Program are expected to be senior secured obligations of the Company. If we accept the full amount of the loan, we will issue warrants to purchase approximately 12.0 million shares of our common stock to the Treasury. Any amount received under the Loan Program will be subject to the relevant provisions of the CARES Act, including many of those described above under the Payroll Support Program. On September 29, 2020, we enter ed into a Loan and Guarantee Agreement (the "Loan Agreement") with the Treasury under the Loan Program of the CARES Act. Pursuant to the Loan Agreement, Treasury agreed to extend loans to us in an aggregate principal amount of up to $1.14 billion until March 26, 2021, subject to specified terms. Unless otherwise terminated early, all borrowings under the Loan Agreement are due and payable on the fifth anniversary of the initial borrowing date. We drew $115 million under the Loan Agreement on September 29, 2020. Borrowings under the Loan Agreement bear interest at a variable rate equal to LIBOR (or another rate based on certain market interest rates, plus a margin of 1% per annum, in each case with a floor of 0%), plus a margin of 2.75% per annum. Our obligations under the Loan Agreement are secured by liens on (i) certain eligible aircraft collateral, (ii) certain loyalty program assets, including JetBlue's rights in certain loyalty program agreements, loyalty program data and intellectual property, and (iii) certain cash accounts (collectively, the "Collateral"). Under the terms of the Loan Agreement, we may also pledge eligible spare parts, slots, gates and routes, and a dditional aircraft, real property, ground support equipment, flight simulators and equity interests. The Loan Agreement includes affirmative and negative covenants that restrict our ability to, among other things, dispose of Collateral, merge, consolidate or sell assets, incur certain additional indebtedness or pay certain dividends. In addition, we are required to maintain unrestricted cash and cash equivalents and unused commitments available under all revolving credit facilities aggregating not less than $550 million and to maintain a minimum ratio of the borrowing base of the Collateral (determined as the sum of a specified percentage of the appraised value of each type of Collateral) to outstanding obligations under the Loan Agreement of not less than 1.6 to 1.0. If we do not meet the minimum collateral coverage ratio, we must either provide additional Collateral to secure our obligations under the Loan Agreement or repay the loans by an amount necessary to maintain compliance with the collateral coverage ratio. The Loan Agreement contains events of default customary for similar financings. Upon the occurrence of an event of default, the outstanding obligations under the Loan Agreement may be accelerated and become due and payable immediately. In addition, if certain change of control events were to occur with respect to JetBlue, we would be required to prepay the loans in full under the Loan Agreement. In connection with the Loan Agreement, on September 29, 2020, we entered into a warrant agreement with Treasury, pursuant to which we agreed to issue to Treasury warrants to purchase approximately 1.2 million shares of our common stock at an exercise price of $9.50 per share. As previously discussed, we entered into an agreement with the Treasury to increase our borrowing capacity under the Loan Program of the CARES Act to $1.95 billion in November 2020. The CARES Act also provides for deferred payments of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. We have deferred $36 million in payments through September 30, 2020. We expect to defer approximately $13 million of additional payments for the remainder of 2020. Income Taxes Among other things, the CARES Act allows a five-year carryback period for tax losses generated in 2018 through 2020. As a result, our effective tax rate includes an income tax benefit related to anticipated refunds from tax losses generated during 2020 that are permitted to be carried back to certain years when the U.S. federal income tax rate was 35%. A benefit of $10 million was recorded in the quarter related to the release of a valuation allowance to adjust deferred tax assets to an amount we consider is more likely than not to be realized. Because realizability is dependent on future income, we plan to continue monitoring and updating our assessment and it is possible tax attributes may require a valuation allowance in future periods.

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