OFFICE OF THE AUDITOR

OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION REVENUE AND COMPLIANCE AUDIT JANUARY 2005 Dennis J. Gallagher Auditor

Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado 80202 720-913-5000, FAX 720-913-5247 www.denvergov.org/auditor January 6, 2005 Ms. Vicki Braunagel, Co-Manager Mr. Turner West, Co-Manager Department of Aviation City and County of Denver Mr. James Smith Director of Corporate Real Estate JetBlue Airways Corporation 118-29 Queens Boulevard Forest Hills, NY 11375 Dear Ms. Braunagel, Mr. West, and Mr. Smith: Attached is the Auditor s Office Internal Audit Division s report of their revenue and compliance audit of JetBlue Airways Corporation for operations at Denver International Airport. The audit period was for the year ended December 31, 2002. The purpose of the audit was to determine whether JetBlue Airways Corporation and the City and County of Denver complied with the terms of the Denver Municipal Airport System Rules and Regulations and whether internal controls in place were adequate under the circumstances. We found some instances of non-compliance as described in the Internal Auditor s Report. If you have any questions, please call Mike Clark, Director of Internal Audit, at 720-913-5029. Sincerely, DJG/kh Dennis J. Gallagher Auditor cc: Honorable John Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee Mr. Cole Finegan, City Attorney Mr. John Bennett, City Council Staff Director Mr. Stan Koniz, Assistant Deputy Manager of Aviation/Finance Mr. Pete Gingras, Assistant Deputy Manager of Aviation/Properties The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government 1

TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 2 Internal Auditor s Report 3 Executive Summary 4 Background, Scope, Objective, and Methodology 5 Findings, Recommendations, and Responses 7 Schedule of Amounts Due and Paid and Related Notes 9 2

Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado 80202 720-913-5000, FAX 720-913-5247 www.denvergov.org/auditor INTERNAL AUDITOR S REPORT We have completed a revenue and compliance audit of JetBlue Airways Corporation operations at Denver International Airport. The purpose of this audit was to determine whether the accompanying Schedule of Amounts Due and Paid for the year ended December 31, 2002, is fairly presented in accordance with the Denver Municipal Airport System Rules and Regulations, and that the City and County of Denver and JetBlue Airways Corporation complied with other terms and conditions as required. This audit was included in the Auditor s Office Internal Audit Division s 2003 Annual Audit Plan, and authorized pursuant to the City and County of Denver Charter, Article V, Part 2, 5.2.1. We also completed a review of the Schedule of Passenger Facility Charges (PFC) Due and Paid for the year ended December 31, 2002. The purpose of this review was to report any concerns to the Department of Aviation. We conducted our audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Schedule of Amounts Due and Paid is free of material misstatement. An audit includes examining, on a test basis, evidence supporting revenue amounts and disclosures in the schedules. Our conclusion from the audit and review was that JetBlue Airways Corporation owes the City interest in the amount of $5,885 for various late payments made to the City. We also noted that the Department of Aviation allowed JetBlue to occupy 479.4 square feet of space on Concourse A without proper authorization from City Council. We did not identify any other significant reportable conditions. We extend our appreciation to all personnel who assisted and cooperated with us during the course of our examination. Sincerely, Mike Clark, CPA Date: January 6, 2005 Director of Internal Audit Staff: Dick Wibbens, CPA, Audit Manager Marcus Richardson, Audit Supervisor Traci Napue, Senior Auditor The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government. 3

EXECUTIVE SUMMARY FOR THE YEAR ENDED DECEMBER 31, 2002 This summary highlights the findings of this revenue and compliance audit, which are more fully described in the Findings, Recommendations, and Responses section beginning on page 7. The Findings, Recommendations, and Responses section includes responses from the Department of Aviation and JetBlue Airways Corporation. 1. Balance Due the City There is a balance due the City in the amount of $5,885 for interest charges assessed on late payments to the City. 2. Unauthorized Lease of City Property The Department of Aviation allowed JetBlue to lease space at Denver International Airport without prior approval from City Council. 4

BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2002 Background JetBlue Airways Corporation provides aircraft transportation service for passengers, property, cargo, etc. at Denver International Airport. JetBlue began operations in February 2000 with its inaugural flight from New York (JFK Airport) to Fort Lauderdale, Florida. Service to Denver began in May 2001. JetBlue currently provides service to 27 cities and operates a fleet of 60 Airbus A320 aircraft. Some of the unique amenities offered by JetBlue include leather seats, 24 DirecTV channels available at every seat, and an In-Flight Health program that includes Airplane Yoga and Flying Pilates. At Denver International Airport (DIA), JetBlue is required to pay various space rents, landing fees, baggage fees, gate fees, passenger facility charges, and various other fees and charges to the City. JetBlue is a non-signatory air carrier at DIA and has not entered into a contractual agreement with the airport. Amounts due and payable to the City from JetBlue are determined by the Schedule of Fees and Charges as noted in the Denver Municipal Airport System Rules and Regulations. In addition to the Schedule of Fees and Charges, portions of the Federal Aviation Administration s Code of Federal Regulations Part 158 Passenger Facility Charges, were used to perform this audit and review. Scope Our audit of JetBlue Airways Corporation at Denver International Airport (PeopleSoft Fund 73800/org 6000000) was for the year ended December 31, 2002. The scope of our work included determining compliance with the rules and regulations as stated above. Objective The objective of our audit was to determine whether JetBlue paid the City the correct amounts for landing fees, space rent, various baggage system fees, baggage claim fees, and nonpreferential gate usage in accordance with the Denver Municipal Airport System Rules and Regulations. Additional objectives included determining whether JetBlue and the Department of Aviation complied with other City rules and regulations as we considered necessary in the circumstances. The objective of our review of Passenger Facility Charges was to determine if the correct formula was utilized to calculate PFC amounts due. 5

BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY Methodology To meet our audit objectives, the following evidence gathering and analysis techniques were used including, but not limited to: Review of rules and regulations Interviews and discussions with the management and staff of JetBlue and the Department of Aviation Confirmation of receipts Verification and recalculation of rates, fees, and charges Review and verification of audit source documents Verification of evidence of insurance and bonding Review and recalculation of JetBlue s monthly and quarterly PFC reports 6

FINDINGS, RECOMMENDATIONS, AND RESPONSES FOR THE YEAR ENDED DECEMBER 31, 2002 1. Balance Due the City We found the Department of Aviation did not calculate or bill JetBlue and JetBlue did not pay the City $5,885 for interest on late payments. Interest was not assessed by the Department of Aviation because an accounting function field within their automated system that calculates interest was not activated when JetBlue began operations at DIA in 2001. According to Section 120.16.1 of the Denver Municipal Airport System Rules and Regulations, Schedule of Fees and Charges, any payments not made when due shall accrue interest at the rate of 18% per annum, commencing 5 days after the due date. Recommendation We recommend that the Department of Aviation activate JetBlue s accounting function field so that interest charges are assessed on all subsequent late payments. We also recommend that the Department of Aviation calculate, bill, and collect interest on all late payments made in 2001, 2003, and 2004. Additionally, we recommend that the Department of Aviation include an interest calculation activation alert feature into their accounting system. Including the alert feature should eliminate omitting the interest calculation activation. Department of Aviation Response The Department of Aviation is in agreement with the interest due of $5,885, and will invoice accordingly. JetBlue Response We are unable to locate any notices reflecting interest charges assessed for the period audited. Could you please supply copies of the assessed charges so that we may further investigate? 7

FINDINGS, RECOMMENDATIONS, AND RESPONSES 2. Unauthorized Lease of City Property The Department of Aviation has allowed Jet Blue to lease space at Denver International Airport without proper authorization from City Council. JetBlue occupies 479.4 square feet of space in the apron level of Concourse A. This space is utilized for JetBlue s day-to-day management and operations. According to paragraph B 3.2.6(C) of the Denver City Charter, all sales or leases of real property owned by the City shall be authorized by the Denver City Council acting by ordinance. The ordinance shall state the public purpose to be served by the sale or lease. Recommendation We recommend the Department of Aviation take steps to obtain City Council approval of all sales or leases of City property prior to tenant occupancy, as specified by the Charter. Department of Aviation Response The Department of Aviation is developing a month-to-month lease for the Concourse A Ramp level operating space to be approved by Denver s City Council. This lease will be used by all non-signatory airlines using exclusive space at DIA. In addition, the Department of Aviation is in the process of updating JetBlue s DIA Operating permit by obtaining a current ground handling permit and Hold Harmless Indemnification Agreement information for its files. JetBlue Response At the time JetBlue began service to Denver International Airport a Permit for City Council approval was not offered. The Airport is currently preparing a Permit and once received, JetBlue will circulate internally for review and comments. 8

SCHEDULE OF AMOUNTS DUE AND PAID FOR THE YEAR ENDED DECEMBER 31, 2002 Amounts Due Amounts Paid (Note 1) (Note 2) Balance Due Landing Fees $192,279 $192,279 $ - Concourse A Operations 41,460 41,460 - Joint Use Allocation Concourse A 7,152 7,152 - Baggage Claim 86,904 86,904 - Baggage Spine System Concourse A 8,043 8,043 - Conventional Baggage Equipment 84,365 84,365 - AGTS Transit System 113,706 113,706 - Concourse A Baggage Sort Equipment 26,746 26,746 - Concourse A Tenant Finish 14,457 14,457 - Conventional Baggage O&M 29,808 29,808 - Non-preferential Gate Use 131,081 131,081 - Passenger Facility Charges 217,802 217,802 - Interest Charges 5,885-5,885 Balance Due the City $959,688 $953,803 $5,885 The accompanying notes are an integral part of this schedule. 9

NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID Note 1. Amounts Due The rates used to calculate amounts due for this audit were obtained from the Denver Municipal Airport System Rules and Regulations, Schedule of Fees and Charges. Revenue amounts due for non-signatory airlines are determined by the Schedule of Fees and Charges. Detailed information for each revenue cost center for JetBlue is listed below: Landing Fees The annual landing fee rate for 2002 was $3.72 per 1000 pounds of landed weight for non-signatory carriers. JetBlue had 51,688 pounds of landed weight in 2002. Concourse A Operations The annual rate per square foot for space rent was $86.484. JetBlue occupies 479.4 sq. ft. of space in the apron level of Concourse A. The square footage space amount was obtained from the Department of Aviation billing invoices and space schematics. Joint Use Allocation - Concourse A JetBlue is required to pay their pro-rata share of joint use spaces utilized on Concourse A. Per the Department of Aviation billing invoices, JetBlue s joint use percentage was 0.1% of 596,000 sq. feet. Baggage Claim JetBlue is required to pay a fee for the use of the baggage claim facilities based on the number of deplaned domestic destination passengers (DDP). Per Department of Aviation invoices, JetBlue was billed 0.5% of 1,448,400 for its share of DDP. Baggage Spine System These charges are based on a percentage of the domestic originating and destination (O&D) passengers. Per Department of Aviation Billing invoices, JetBlue s O&D percentage was 2.1% of 33,100 for January to September and 1.8% of 33,100 for October to December 2002. Conventional Baggage Equipment Cost allocation is based on a prorated share of O&D passengers and the number of air carriers utilizing their assigned baggage carousel. JetBlue s percentage of baggage carousel use was 1.3% of 540,800, according to Department of Aviation billing invoices. Automatic Guideway Transit System (AGTS) These charges are based on the number of domestic originating and destination (O&D) passengers. Per Department of Aviation invoices, JetBlue was billed 0.5% of 1,895,100 for its share of O&D passengers. Concourse A Baggage Sortation Equipment Fees These fees are charged for equipment usage and are based on the number of enplaned passengers (ENP). JetBlue was billed 1.7% from January to September and 1.3% from October to December 2002, based on 139,300 ENP. Concourse A Tenant Finishes JetBlue had 479.4 sq. ft. of space in 2002. The annual rate per sq. ft. was $30.15. Conventional Baggage System Operation and Maintenance These amounts are for inbound and outbound baggage system related costs based on the number of origination and destination passengers. The Department of Aviation prepares an annual reconciliation of budgeted versus actual amounts. 10

NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID Non-Preferential Gate Usage According to Section 120.05 of the Denver Municipal Airport System Rules and Regulations, the rate for non-preferential gate usage is $1.268 per 1,000 pounds of maximum gross allowable landing weight for each Deplaning and Enplaning Aircraft Operation. The maximum gross allowable landing weight for JetBlue deplaning and enplaning aircraft was 142,000 lbs. JetBlue had at least one arrival and departure flight each day during 2002. Additionally, Section 120.21 states that the rate for overnight aircraft parking is $150 per night. JetBlue had no overnight parking charges during the audit period. Passenger Facility Charges Effective April 1, 2001, the City imposed a PFC of $4.50 per enplaned passenger in accordance with FAR Section 158.5. FAR Section 158.53(a) entitles the carrier to retain $0.08 in compensation for each PFC remitted to the City, with the balance due the City. The following formula was used to determine the amount due the City, and is in accordance with FAA guidelines: Number of PFCs Collected Sales Amount (PFC Amount Collected) Less: Number of PFCs Refunded Less: Refunded Amount Actual PFCs Collected Less: Airline Compensation (Handling Fee) Times $0.08 PFC Amount Due City Airline Compensation Amount The accuracy of this formula was confirmed in a letter from the Federal Aviation Administration dated June 9, 1998. Also, the following information was obtained from JetBlue s check stubs for 2002: Number of PFCs Collected 62,007 Number of PFCs Refunded 12,798 Sales Amount (PFC Amount Collected) $279,034 Refund Amount $57,592 Interest Charges According to Section 120.16.1 of the Denver Municipal Airport System Rules and Regulations, Schedule of Fees and Charges any payments not made when due shall accrue interest at the rate of 18% per annum, commencing 5 days after the due date. Note 2. Amounts Paid All amounts paid in the schedule of amounts due and paid were compiled from the Department of Aviation s cash receipts records. 11