Hedging Activities

9 Months Ended

Sep. 30, 2015

Hedging Activities

NOTE 7 - HEDGING ACTIVITIES

Fuel Derivatives

The Company routinely hedges a portion of its expected aircraft fuel requirements to protect against increases in the price of fuel. The Company may restructure hedges in response to market conditions prior to their original settlement dates which may result in changes in hedge coverage levels and the potential recognition of gains or losses on such hedge contracts. As of September 30, 2015, the Company had hedged approximately 23% and 17% of its projected fuel requirements (221 million gallons and 652 million gallons, respectively) for the remainder of 2015 and 2016, respectively, with commonly used financial hedge instruments based on aircraft fuel or crude oil. As of September 30, 2015, the Company had fuel hedges expiring through December 2016.

Upon proper qualification, the Company accounts for certain fuel derivative instruments as cash flow hedges. All derivatives designated as hedges that meet certain requirements are granted hedge accounting treatment. Instruments that qualify for hedge accounting treatment typically include swaps, call options, collars (which consist of a purchased call option and a sold put option) and four-way collars (a collar with a higher strike sold call option and a lower strike purchased put option). Generally, utilizing hedge accounting, all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective are recorded in AOCI until the underlying fuel is consumed and recorded in fuel expense. The Company is exposed to the risk that its hedges may not be effective in offsetting changes in the cost of fuel and that its hedges may not continue to qualify for hedge accounting. Hedge ineffectiveness results when the change in the fair value of the cash flow hedge exceeds the change in the value of the Company’s expected future cash outlay to purchase fuel. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is classified as Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations.

The Company also uses certain combinations of derivative contracts that are economic hedges but do not qualify for hedge accounting under GAAP. Additionally, the Company may enter into contracts at different times and later combine those contracts into structures designated for hedge accounting. As with derivatives that qualify for hedge accounting, the economic hedges and individual contracts are part of the Company’s program to mitigate the adverse financial impact of potential increases in the price of fuel. The Company records changes in the fair value of these various contracts that are not designated for hedge accounting to Nonoperating income (expense): Miscellaneous, net in the statements of consolidated operations.

If the Company settles a derivative prior to its contractual settlement date, then the cumulative gain or loss recognized in AOCI at the termination date remains in AOCI until the forecasted transaction occurs. In a situation where it becomes probable that a hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings. All cash flows associated with purchasing and settling derivatives are classified as operating cash flows in the condensed statements of consolidated cash flows.

The Company records each derivative instrument as a derivative asset or liability (on a gross basis) in its consolidated balance sheets, and, accordingly, records any related collateral on a gross basis. The table below presents the fair value amounts of fuel derivative assets and liabilities and the location of amounts recognized in the Company’s financial statements.

The Company’s derivatives were reported in its consolidated balance sheets as follows (in millions):

Classification	Balance Sheet Location	September 30, 2015		December 31, 2014
Derivatives designated as cash flow hedges
Assets:
Fuel contracts due within one year	Receivables	$	6	$	—
Fuel contracts with maturities greater than one year	Other assets: Other, net		7		—
Total assets		$	13	$	—
Liabilities:
Fuel contracts due within one year	Fuel derivative instruments	$	217	$	450
Fuel contracts with maturities greater than one year	Other liabilities and deferred credits: Other		—		27
Total liabilities		$	217	$	477
Derivatives not designated for hedge accounting
Assets:
Fuel contracts due within one year	Receivables	$	4	$	6
Fuel contracts with maturities greater than one year	Other assets: Other, net		—		—
Total assets		$	4	$	6
Liabilities:
Fuel contracts due within one year	Fuel derivative instruments	$	112	$	244
Fuel contracts with maturities greater than one year	Other liabilities and deferred credits: Other		—		2
Total liabilities		$	112	$	246
Total derivatives
Assets:
Fuel contracts due within one year	Receivables	$	10	$	6
Fuel contracts with maturities greater than one year	Other assets: Other, net		7		—
Total assets		$	17	$	6
Liabilities:
Fuel contracts due within one year	Fuel derivative instruments	$	329	$	694
Fuel contracts with maturities greater than one year	Other liabilities and deferred credits: Other		—		29
Total liabilities		$	329	$	723

Derivative Credit Risk and Fair Value

The Company is exposed to credit losses in the event of nonperformance by counterparties to its derivative instruments. While the Company records derivative instruments on a gross basis, the Company monitors its net derivative position with each counterparty to monitor credit risk. Based on the fair value of our fuel derivative instruments, our counterparties may require us to post collateral when the price of the underlying commodity decreases, and we may require our counterparties to provide us with collateral when the price of the underlying commodity increases. The Company posted $156 million and $577 million of collateral with fuel derivative counterparties as of September 30, 2015 and December 31, 2014, respectively. The collateral is recorded as Fuel hedge collateral deposits on the Company’s balance sheet.

We have master trading agreements with all of our fuel hedging counterparties that allow us to net our fuel hedge derivative positions. We have elected not to net the fair value positions recorded on our consolidated balance sheets. The following table shows the potential net fair value positions (including fuel derivatives and related collateral) had we elected to offset. The table reflects offset at the counterparty level (in millions):

	September 30, 2015			December 31, 2014
Fuel derivative instruments	$	(238	)	$	(209	)
Other liabilities and deferred credits: Other		—			(30	)
Hedge derivatives liabilities, net	$	(238	)	$	(239	)

The following tables present the impact of derivative instruments and their location within the Company’s unaudited statements of consolidated operations (in millions):

Derivatives designated as cash flow hedges

	Amount of Loss Recognized in AOCI on Derivatives (Effective Portion)						Loss Reclassified from AOCI into Fuel Expense					Amount of Loss Recognized in Nonoperating income (expense): Miscellaneous, net (Ineffective Portion)
	Three Months Ended September 30,						Three Months Ended September 30,					Three Months Ended September 30,
	2015			2014			2015			2014		2015		2014
Fuel contracts	$	(181	)	$	(120	)	$	(150	)	$	—	$	—	$	(8	)

Derivatives designated as cash flow hedges

	Amount of Loss Recognized in AOCI on Derivatives (Effective  Portion)						Loss Reclassified from AOCI into Fuel Expense						Amount of Loss Recognized in Nonoperating income (expense):  Miscellaneous, net (Ineffective Portion)
	Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014			2015		2014
Fuel contracts	$	(227	)	$	(99	)	$	(429	)	$	(4	)	$	—	$	(4	)

Derivatives not designated for hedge accounting

Fuel contracts

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Amount of loss recognized in Nonoperating income (expense): Miscellaneous, net	$	(67	)	$	(102	)	$	(69	)	$	(103	)

Foreign Currency Derivatives

The Company generates revenues and incurs expenses in numerous foreign currencies. Changes in foreign currency exchange rates impact the Company’s results of operations through changes in the dollar value of foreign currency-denominated operating revenues and expenses. Some of the Company’s more significant foreign currency exposures include the Canadian dollar, Chinese renminbi, European euro, British pound and Japanese yen. At times, the Company uses derivative financial instruments, such as options, collars and forward contracts, to hedge its exposure to foreign currency. The Company does not enter into derivative instruments for non-risk management purposes. At September 30, 2015, the Company had foreign currency derivative contracts in place to hedge European euro denominated sales. The notional amount of the hedges equates to 36% and 21% of the Company’s projected European euro denominated net cash inflows for the remainder of 2015 and 2016, respectively. Net cash relates primarily to passenger ticket sales inflows partially offset by expenses paid in local currencies. At September 30, 2015, the fair value of the Company’s foreign currency derivatives was an asset of $2 million.