Derivatives

9 Months Ended

Sep. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

DERIVATIVES

Changes in aircraft fuel prices, interest rates and foreign currency exchange rates impact our results of operations. In an effort to manage our exposure to these risks, we enter into derivative contracts and adjust our derivative portfolio as market conditions change.

Aircraft Fuel Price Risk

Changes in aircraft fuel prices materially impact our results of operations. We have historically managed our fuel price risk through a hedging program intended to reduce the financial impact from changes in the price of jet fuel as jet fuel prices are subject to potential volatility.

In response to this volatility, during the March 2015 quarter, we entered into transactions that effectively deferred settlement of a portion of our hedge portfolio. These deferral transactions, excluding market movements from the date of inception, provided approximately $300 million in cash receipts during the second half of 2015 and require approximately $300 million in cash payments in 2016. We early terminated certain of the March 2015 quarter deferral transactions in the second half of 2015.

During the March 2016 quarter, we entered into transactions to further defer settlement of a portion of our hedge portfolio until 2017. These deferral transactions, excluding market movements from the date of inception, would provide approximately $300 million in cash receipts during the second half of 2016 and require approximately $300 million in cash payments in 2017.

Subsequently, to better participate in the low fuel price environment, we entered into derivatives designed to offset and effectively neutralize our existing airline segment hedge positions, which include the deferral transactions discussed above. As a result, we locked in the amount of the net hedge settlements for the remainder of 2016 and 2017. During the June 2016 quarter, we early settled $455 million of our airline segment's 2016 positions.

During the three and nine months ended September 30, 2016, we recorded fuel hedge losses of $11 million and $326 million, respectively. During the three and nine months ended September 30, 2015, we recorded fuel hedge losses of $250 million and $563 million, respectively.

Cash flows associated with the deferral transactions are reported as cash flows from financing activities within our Condensed Consolidated Statements of Cash Flows.

Hedge Position as of September 30, 2016

(in millions)	Volume		Final Maturity Date	Hedge Derivatives Asset		Other Noncurrent Assets		Hedge Derivatives Liability			Other Noncurrent Liabilities			Hedge Derivatives, net
Designated as hedges
Interest rate contract (fair value hedge)	349	U.S. dollars	August 2022	$	3	$	5	$	—		$	—		$	8
Foreign currency exchange contracts	60,509	Japanese yen	February 2019	10		2		(44		)	(32		)	(64		)
	396	Canadian dollars
Not designated as hedges
Fuel hedge contracts (1)	179	gallons - crude oil, diesel and jet fuel	December 2017	483		39		(680		)	(113		)	(271		)
Total derivative contracts				$	496	$	46	$	(724	)	$	(145	)	$	(327	)

⁽¹⁾  As discussed above, we have early settled $455 million of our airline segment's 2016 hedge positions and entered into hedges designed to offset and effectively terminate our 2017 airline segment hedge positions. The dollar amounts shown above primarily represent the offsetting derivatives that were used to neutralize the 2016 and 2017 airline segment hedge portfolio.

Hedge Position as of December 31, 2015

(in millions)	Volume		Final Maturity Date	Hedge Derivatives Asset		Other Noncurrent Assets		Hedge Derivatives Liability			Other Noncurrent Liabilities			Hedge Derivatives, net
Designated as hedges
Interest rate contract (fair value hedge)	384	U.S. dollars	August 2022	$	4	$	—	$	—		$	(7	)	$	(3	)
Foreign currency exchange contracts	46,920	Japanese yen	July 2018	76		20		(1		)	(1		)	94
	395	Canadian dollars
Not designated as hedges
Fuel hedge contracts	887	gallons - crude oil, diesel and jet fuel	November 2017	1,907		4		(2,580		)	(3		)	(672		)
Total derivative contracts				$	1,987	$	24	$	(2,581	)	$	(11	)	$	(581	)

Offsetting Assets and Liabilities

We have master netting arrangements with our counterparties giving us the right to offset hedge assets and liabilities. However, we have elected not to offset the fair value positions recorded on our Consolidated Balance Sheets. The following table shows the net fair value positions by counterparty had we elected to offset.

(in millions)	Hedge Derivatives Asset		Other Noncurrent Assets		Hedge Derivatives Liability			Other Noncurrent Liabilities			Hedge Derivatives, net
September 30, 2016
Net derivative contracts	$	10	$	7	$	(238	)	$	(106	)	$	(327	)
December 31, 2015
Net derivative contracts	$	143	$	21	$	(737	)	$	(8	)	$	(581	)

Designated Hedge Gains (Losses)

Gains (losses) related to our designated hedge contracts are as follows:

	Effective Portion Reclassified from AOCI to Earnings					Effective Portion Recognized in Other Comprehensive Income
(in millions)	2016			2015		2016			2015
Three Months Ended September 30,
Foreign currency exchange contracts	$	(2	)	$	69	$	(2	)	$	(53	)
Nine Months Ended September 30,
Foreign currency exchange contracts	$	34		$	161	$	(147	)	$	(105	)

As of September 30, 2016, we have recorded $24 million of losses on cash flow hedge contracts in AOCI, which are scheduled to settle and be reclassified into earnings within the next 12 months.

Credit Risk

To manage credit risk associated with our aircraft fuel price, interest rate and foreign currency hedging programs, we evaluate counterparties based on several criteria including their credit ratings and limit our exposure to any one counterparty.

Our hedge contracts contain margin funding requirements. The margin funding requirements may cause us to post margin to counterparties or may cause counterparties to post margin to us as market prices in the underlying hedged items change. Due to the fair value position of our hedge contracts, we posted margin of $20 million and $119 million as of September 30, 2016 and December 31, 2015, respectively.