Derivative And Financial Instruments

9 Months Ended

Sep. 30, 2011

Derivative And Financial Instruments

Derivative And Financial Instruments

9. As part of the Company's risk management program, it uses a variety of financial instruments, including heating oil, jet fuel, and WTI crude option and collar contracts, as cash flow hedges to mitigate commodity price risk. The Company does not hold or issue derivative financial instruments for trading purposes. As of September 30, 2011, the Company had fuel derivative contracts outstanding covering 25 million barrels of jet fuel that will be settled over the next 15 months. A deterioration of the Company's liquidity and financial position may negatively affect the Company's ability to hedge fuel in the future.

For the three and nine months ended September 30, 2011, the Company recognized a decrease of approximately $31 million and $268 million, respectively, in fuel expense on the accompanying consolidated statements of operations related to its fuel hedging agreements, including the ineffective portion of the hedges. For the three and nine months ended September 30, 2010, the Company recognized an increase of approximately $21 million and $135 million, respectively, in fuel expense on the accompanying consolidated statements of operations related to its fuel hedging agreements, including the ineffective portion of its hedges. The net fair value of the Company's fuel hedging agreements at September 30, 2011 and December 31, 2010, representing the amount the Company would receive upon termination of the agreements (net of settled contract assets), totaled $78 million and $257 million, respectively.

The impact of cash flow hedges on the Company's consolidated financial statements is depicted below (in millions):

Fair Value of Aircraft Fuel Derivative Instruments (all cash flow hedges)

Asset Derivatives as of						Liability Derivatives as of
September 30, 2011			December 31, 2010			September 30, 2011			December 31, 2010
Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Fuel derivative contracts	$	137	Fuel derivative contracts	$	269	Accrued liabilities	$	31	Accrued liabilities	$	—

Effect of Aircraft Fuel Derivative Instruments on Statements of Operations (all cash flow hedges)

Amount of Gain (Loss) Recognized in OCI on Derivative1 as of September 30,				Location of Gain (Loss) Reclassified from Accumulated OCI into Income1	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income1 for the nine months ended September 30,					Location of Gain (Loss) Recognized in Income on Derivative2	Amount of Gain (Loss) Recognized in Income on Derivative2 for the nine months ended September 30,
2011	2010				2011		2010				2011			2010
$152	$	(56	)	Aircraft Fuel	$	287	$	(133	)	Aircraft Fuel	$	(19	)	$	(2	)

Amount of Gain (Loss) Recognized in OCI on Derivative1 for the three months ended September 30,					Location of Gain (Loss) Reclassified from Accumulated OCI into Income1		Amount of Gain (Loss) Reclassified from Accumulated OCI into Income1 for the three months ended September 30,					Location of Gain (Loss) Recognized in Income on Derivative2	Amount of Gain (Loss) Recognized in Income on Derivative2 for the three months ended September 30,
2011			2010				2011		2010				2011			2010
$	(142	)	$	67		Aircraft Fuel	$	57	$	(30	)	Aircraft Fuel	$	(26	)	$	9

¹  Effective portion of gain (loss)

²  Ineffective portion of gain (loss)

The Company is also exposed to credit losses in the event of non-performance by counterparties to these financial instruments, and although no assurances can be given, the Company does not expect any counterparty to fail to meet its obligations. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date, reduced by the effects of master netting agreements. To manage credit risks, the Company selects counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines, and monitors the market position of the program and its relative market position with each counterparty. The Company also maintains industry-standard security agreements with a number of its counterparties which may require the Company or the counterparty to post collateral if the value of selected instruments exceeds specified mark-to-market thresholds or upon certain changes in credit ratings.

As of September 30, 2011, the Company had received cash collateral of $28 million which is included in short-term investments.

The Company includes changes in the fair value of certain derivative financial instruments that qualify for hedge accounting and unrealized gains and losses on available-for-sale securities in comprehensive income. For the three month periods ended September 30, 2011 and 2010, comprehensive income (loss) was $(332) million and $277 million, respectively. For the nine month periods ended September 30, 2011 and 2010, comprehensive income (loss) was $(912) million and $(189) million, respectively. The difference between net earnings (loss) and comprehensive income (loss) for the three month periods ended September 30, 2011 and 2010 is due primarily to the accounting for the Company's derivative financial instruments and the actuarial loss on the pension benefit obligation of the Company's pension plans.