Financial Derivative Instruments and Risk Management

6 Months Ended

Jun. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivative Instruments and Risk Management

The Company may be exposed to interest rate risk through aircraft and spare engine lease contracts for the time period between agreement of terms and commencement of the lease, when portions of rental payments can be adjusted and become fixed based on the swap rate. As part of its risk management program, the Company enters into contracts in order to limit the exposure to fluctuations in interest rates. During each of the three and six months ended June 30, 2023, the Company did not enter into any swaps and, therefore, paid no upfront premiums. During each of the three and six months ended June 30, 2022, the Company paid upfront premiums of $9 million for the option to enter into and exercise cash-settled swaps with a forward starting effective date for seven of the Company’s future aircraft deliveries. As of June 30, 2023, the Company had hedged the interest rate exposure on $295 million of total aircraft and spare engine rent for seven aircraft and two engines to be delivered by the end of 2023.

Additionally, the Company is exposed to credit losses in the event of nonperformance by counterparties to its derivative instruments but does not presently expect that any of its counterparties will fail to meet their respective obligations. The amount of such credit exposure is generally the fair value of the Company’s outstanding contracts in a receivable position. To manage credit risks, the Company selects counterparties based on credit assessments and monitors the market position with each counterparty.

The assets associated with the Company’s derivative instruments are presented on a gross basis and include upfront premiums paid. These assets are recorded as a component of other current assets on the Company’s condensed consolidated balance sheets. There were $5 million and $24 million of assets outstanding as of June 30, 2023 and December 31, 2022, respectively.

The following table summarizes the effect of interest rate derivative instruments reflected in aircraft rent expense within the Company’s condensed consolidated statements of operations (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Derivatives designated as cash flow hedges
Amortization of cash flow hedges, net of tax	$	(1)	$	(1)	$	(1)	$	(1)

The following table summarizes the net of tax impact of the overall effectiveness of derivative instruments designated as cash flow hedging instruments within the Company’s condensed consolidated statements of comprehensive income (loss) (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Derivatives designated as cash flow hedges
Amortization of cash flow hedges, net of tax	$	1	$	1	$	1	$	1
Interest rate derivative contract gains (losses), net of tax	2		(1)		(5)		(1)
Total	$	3	$	—	$	(4)	$	—

As of June 30, 2023, $10 million of losses, net of tax, related to interest rate hedging instruments included in accumulated other comprehensive income (loss), a component of stockholders’ equity on the Company’s condensed consolidated balance sheets, is expected to be reclassified into aircraft rent within the Company’s condensed consolidated statements of operations over the aircraft or engine lease term.