Hedging Activities

3 Months Ended

Mar. 31, 2013

Hedging Activities

NOTE 7—HEDGING ACTIVITIES

Aircraft Fuel Hedges. To protect against increases in the prices of aircraft fuel, the Company routinely hedges a portion of its future fuel requirements. As of March 31, 2013, the Company had hedged approximately 32% and 11% of its projected fuel requirements (963 million and 428 million gallons, respectively) for the remainder of 2013 and 2014, respectively, with commonly used financial hedge instruments based on aircraft fuel or closely related commodities, such as heating oil, diesel fuel and crude oil. The Company does not enter into derivative instruments for non-risk management purposes.

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 special hedge accounting treatment. The types of instruments the Company utilizes that qualify for special 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 the special hedge accounting, all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective are recorded in accumulated other comprehensive income (loss) (“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 special hedge accounting. Hedge ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company’s expected future cash outlay to purchase and consume 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.

The Company also utilizes certain derivative instruments that are economic hedges but do not qualify for hedge accounting under U.S. GAAP. As with derivatives that qualify for hedge accounting, the purpose of these economic hedges is to mitigate the adverse financial impact of potential increases in the price of fuel. Currently, the only such economic hedges in the Company’s hedging portfolio are three-way collars (which consist of a collar with a cap on maximum price protection available). The Company records changes in the fair value of three-way collars to Nonoperating income (expense): Miscellaneous, net.

If the Company terminates 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 statements of 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 following tables present information about the financial statement classification of the Company’s derivatives (in millions):

Classification	Balance Sheet Location	March 31, 2013		December 31, 2012
Derivatives designated as cash flow hedges
Assets:
Fuel contracts due within one year	Receivables	$	19	$	7
Liabilities:
Fuel contracts due within one year	Current liabilities: Other	$	—	$	2
Derivatives not designated as hedges
Assets:
Fuel contracts due within one year	Receivables	$	51	$	44
Fuel contracts with maturities greater than one year	Other assets: Other, net		3		—
Total assets		$	54	$	44
Liabilities:
Fuel contracts due within one year	Current liabilities: Other	$	—	$	2
Fuel contracts with maturities greater than one year	Other liabilities and deferred credits: Other		—		1
Total liabilities		$	—	$	3
Total derivatives
Assets:
Fuel contracts due within one year	Receivables	$	70	$	51
Fuel contracts with maturities greater than one year	Other assets: Other, net		3		—
Total assets		$	73	$	51
Liabilities:
Fuel contracts due within one year	Current liabilities: Other	$	—	$	4
Fuel contracts with maturities greater than one year	Other liabilities and deferred credits: Other		—		1
Total liabilities		$	—	$	5

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

Fuel contracts	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective portion)					Loss Reclassified from AOCI into Fuel Expense						Amount of Gain Recognized in Nonoperating income (expense): Miscellaneous, net (Ineffective Portion)
	Three Months Ended March 31,					Three Months Ended March 31,						Three Months Ended March 31,
	2013			2012		2013			2012			2013		2012
	$	(9	)	$	93	$	(9	)	$	(31	)	$	—	$	25

Derivatives not designated as hedges

Fuel contracts
	Three Months Ended March 31,
	2013		2012
Amount of gain recognized in Nonoperating income (expense):  Miscellaneous, net	$	50	$	—

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 following table presents information related to the Company’s derivative credit risk as of March 31, 2013 (in millions):

Net derivative asset with counterparties	$	73
Collateral held by the Company (a)		—
Potential loss related to the failure of the Company’s counterparties to perform		73

(a) Classified as an other current liability.