FINANCIAL DERIVATIVE INSTRUMENTS

0 Months Ended

Sep. 30, 2011

Notes to Financial Statements [Abstract]

FINANCIAL DERIVATIVE INSTRUMENTS

5.FINANCIAL DERIVATIVE INSTRUMENTS

Fuel contracts

Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Furthermore, jet fuel and oil typically represent one of the largest operating expenses for airlines. The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program. Because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel. However, the Company has found that financial derivative instruments in other commodities, such as West Texas Intermediate crude oil (“WTI”), Brent crude oil (“Brent”), and refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility. The Company does not purchase or hold any financial derivative instruments for trading purposes.

The Company has used financial derivative instruments for both short-term and long-term time frames, and primarily uses a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), and fixed price swap agreements in its portfolio.

The Company evaluates its hedge volumes strictly from an “economic” standpoint and thus does not consider whether the hedges have qualified or will qualify for hedge accounting. The Company defines its “economic” hedge as the net volume of fuel derivative contracts held, including the impact of positions that have been offset through sold positions, regardless of whether those contracts qualify for hedge accounting. For third quarter2011, the Company had fuel derivatives in place related to approximately 39 percent of its fuel consumption. As of September 30,2011, the Company had fuel derivative instruments in place to provide coverage on a portion of its remaining 2011 estimated fuel consumption at varying WTI price levels.The following table provides information about the Company's (inclusive of fuel derivative instruments acquired from Air Tran – See Note 2) volume of fuel hedging for the remainder of 2011, as well as the years 2012through 2015.

	Fuel hedged as of
	September 30, 2011
Period (by year)	(gallons in millions)
Fourth quarter 2011	177
2012	1,341
2013	969
2014	777
2015	357

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. All derivatives designated as hedges that meet certain requirements are granted hedge accounting treatment. 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 Accumulated other comprehensive income (loss) (“AOCI”) until the underlying jet fuel is consumed. See Note 6. The Company's results are subject to the possibility that periodic changes will not be effective, as defined, or that the derivatives will no longer qualify for hedge accounting. 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 jet fuel. To the extent that the periodic changes in the fair value of the derivatives are ineffective, the ineffective portion is recorded to Other (gains) losses, net in the statement of operations. Likewise, if a hedge ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last period is recorded to Other (gains) losses, net in the statement of operations in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense. When the Company has sold derivative positions in order to effectively “close” or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions are concurrently marked to market through earnings. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally 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. The Company did not have any such situations occur during 2010or during the nine months ended September 30, 2011.

Ineffectiveness is inherent in hedging jet fuel with derivative positions based in other crude oil related commodities. Due to the volatility in markets for crude oil and related products, the Company is unable to predict the amount of ineffectiveness each period, including the loss of hedge accounting, which could be determined on a derivative by derivative basis or in the aggregate for a specific commodity. This may result, and has resulted, in increased volatility in the Company's financial results. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs.

Accounting pronouncements pertaining to derivative instruments and hedging are complex with stringent requirements, including the documentation of a Company hedging strategy, statistical analysis to qualify a commodity for hedge accounting both on a historical and a prospective basis, and strict contemporaneous documentation that is required at the time each hedge is designated by the Company. As required, the Company assesses the effectiveness of each of its individual hedges on a quarterly basis. The Company also examines the effectiveness of its entire hedging program on a quarterly basis utilizing statistical analysis. This analysis involves utilizing regression and other statistical analyses that compare changes in the price of jet fuel to changes in the prices of the commodities used for hedging purposes.

All cash flows associated with purchasing and selling fuel derivatives are classified as Other operating cash flows in the unaudited Condensed Consolidated Statement of Cash Flows. The following table presents the location of all assets and liabilities associated with the Company's hedging instruments within the unaudited Condensed Consolidated Balance Sheet:

			Asset derivatives				Liability derivatives
	Balance Sheet	Fair value at		Fair value at		Fair value at		Fair value at
(in millions)	location	9/30/2011		12/31/10		9/30/2011		12/31/10
Derivatives designated as hedges*
Fuel derivative contracts (gross)	Other current assets	$	-	$	151	$	-	$	16
Fuel derivative contracts (gross)	Other assets		-		547		-		88
Fuel derivative contracts (gross)	Accrued liabilities		71		122		138		18
Fuel derivative contracts (gross)	Other noncurrent liabilities		361		71		157		9
Interest rate derivative contracts	Other current assets		1		73		6		-
Interest rate derivative contracts	Other assets		63		-		-		-
Interest rate derivative contracts	Other noncurrent liabilities		-		-		136		4
Total derivatives designated as hedges		$	496	$	964	$	437	$	135
Derivatives not designated as hedges*
Fuel derivative contracts (gross)	Other current assets	$	-	$	164	$	-	$	284
Fuel derivative contracts (gross)	Other assets		-		212		-		304
Fuel derivative contracts (gross)	Accrued liabilities		257		40		525		222
Fuel derivative contracts (gross)	Other noncurrent liabilities		109		33		635		257
Total derivatives not designated as hedges		$	366	$	449	$	1,160	$	1,067
Total derivatives		$	862	$	1,413	$	1,597	$	1,202
* Represents the position of each trade before consideration of offsetting positions with each counterparty and does not include the impact of cash collateral deposits provided to or received from counterparties. See discussion of credit risk and collateral following in this Note.

In addition, the Company also had the following amounts associated with fuel derivative instruments and hedging activities in its unaudited Condensed Consolidated Balance Sheet:

		Balance Sheet	September 30,		December 31,
(in millions)		location	2011		2010
Cash collateral deposits provided		Offset against Other
	to counterparties - noncurrent	noncurrent liabilities	$	246	$	125
Cash collateral deposits provided		Offset against Accrued
	to counterparties - current	liabilities		212		-
Cash collateral deposits held from		Offset against Other
	counterparty - noncurrent	assets		-		60
Cash collateral deposits held from		Offset against Other
	counterparty - current	current assets		-		-
Due to third parties for settled fuel contracts		Accrued liabilities		10		-
Receivable from third parties for settled		Accounts and other
	fuel contracts	receivables		-		1
Net unrealized (gains) losses from fuel		Accumulated other
	hedges, net of tax	comprehensive (income) loss		469		250

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Operations for the three and ninemonths endedSeptember 30,2011 and 2010:

Derivatives in cash flow hedging relationships
		(Gain) loss							(Gain) loss					(Gain) loss
		recognized in AOCI on							reclassified from AOCI					recognized in income
		derivatives (effective							into income (effective					on derivatives
		portion)							portion)(a)						(ineffective portion) (b)
		Three months ended						Three months ended						Three months ended
		September 30,						September 30,						September 30,
(in millions)		2011			2010			2011			2010			2011		2010
Fuel derivative
	contracts	$	417	*	$	(122)	*	$	45	*	$	77	*	$	85	$	(24)
Interest rate
	derivatives		30	*		12	*		-			-			-		-
Total		$	447		$	(110)		$	45		$	77		$	85	$	(24)
*	Net of tax
(a)	Amounts related to fuel derivative contracts and interest rate derivatives are included in Fuel and oil and Interest expense, respectively.
(b)	Amounts are included in Other (gains) losses, net.

Derivatives in cash flow hedging relationships
		(Gain) loss							(Gain) loss					(Gain) loss
		recognized in AOCI on							reclassified from AOCI					recognized in income
		derivatives (effective							into income (effective					on derivatives
		portion)							portion)(a)						(ineffective portion) (b)
		Nine months ended						Nine months ended						Nine months ended
		September 30,						September 30,						September 30,
(in millions)		2011			2010			2011			2010			2011		2010
Fuel derivative
	contracts	$	297	*	$	66	*	$	78	*	$	226	*	$	127	$	26
Interest rate
	derivatives		34	*		34	*		-			-			-		-
Total		$	331		$	100		$	78		$	226		$	127	$	26
*	Net of tax
(a)	Amounts related to fuel derivative contracts and interest rate derivatives are included in Fuel and oil and Interest expense, respectively.
(b)	Amounts are included in Other (gains) losses, net.

Derivatives not in cash flow hedging relationships
	(Gain) loss
	recognized in income on
	derivatives
	Three months ended				Location of (gain) loss
	September 30,				recognized in income
(in millions)	2011		2010		on derivatives
Fuel derivative contracts	$	284	$	(26)	Other (gains) losses, net

Derivatives not in cash flow hedging relationships
	(Gain) loss
	recognized in income on
	derivatives
	Nine months ended				Location of (gain) loss
	September 30,				recognized in income
(in millions)	2011		2010		on derivatives
Fuel derivative contracts	$	129	$	13	Other (gains) losses, net

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during thethree months ended September 30,2011 and 2010 of $36 million and $37 million, respectively, and the nine months ended September 30,2011 and 2010 of $93million and $98 million, respectively. These amounts are excluded from the Company's measurement of effectiveness for related hedges and are included as a component of Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Operations.

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets. Included in the Company's cumulative net unrealized losses from fuel hedges as of September 30,2011, were approximately $228 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 30,2011. In addition, as of September 30,2011, the Company had already recognized cumulative net losses due to ineffectiveness and derivatives that do not qualify for hedge accounting treatment totaling $198 million, net of taxes. These net losses were recognized in third quarter2011 and prior periods, and are reflected in Retained earnings as of September 30,2011, but the underlying derivative instruments will not expire/settle until fourth quarter2011 or future periods.

Interest rate swaps

The Company is party to certain interest rate swap agreements that are accounted for as either fair value hedges or cash flow hedges, as defined in the applicable accounting guidance for derivative instruments and hedging. The interest rate swap agreements accounted for as fair value hedges qualify for the “shortcut” method of accounting for hedges, which dictates that the hedges are assumed to be perfectly effective, and, thus, there is no ineffectiveness to be recorded in earnings. For the Company's interest rate swap agreements accounted for as cash flow hedges, ineffectiveness is required to be measured at each reporting period.

AirTran has also entered into a number of interest rateswap agreements, which convert a portion of AirTran's floating-rate debt to a fixed-rate basis for the remaining life of the debt, thus reducing the impact of interest rate changes on future interest expense and cash flows. Under these agreements, which expire between 2016 and 2020, the Company pays fixed rates between 4.34 percent and 6.435 percentand receives either three-month or six-month USD London Interbank Offered Rate (LIBOR) on the notional values. The notional amount of outstanding debt related to interest rate swaps as of September 30,2011,was $451 million. These interest rate swap arrangements were designated as cash flow hedges as of the acquisition date. The ineffectiveness associated with all of the Company's interest rate cash flow hedges for all periods presented was not material.

Credit risk and collateral

Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date. These outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At September 30,2011, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount or credit ratings fall below certain levels. The Company also had agreements with counterparties in which cash deposits and/or pledged aircraft are required to be posted whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of September 30,2011, at which such postings are triggered:

Counterparty (CP)

A

B

C

D

E

Other(a)

Total

(in millions)

Fair value of fuel derivatives

$

(256)

$

(228)

$

(95)

$

(50)

$

(23)

$

(5)

$

(657)

Cash collateral held from (by) CP

(205)

(220)

(33)

-

-

-

(458)

If credit rating is investment

grade, fair value of fuel

derivative level at which:

Cash is provided to CP

0 to (300)

0 to (125)

>(50)

>(75)

>(50)

or >(700)

or >(625)

Cash is received from CP

>40

>150

>200(c)

>125(c)

>250

Aircraft or cash can be pledged to CP

(300) to

(125) to

N/A

N/A

N/A

(700)(d)

(625)(d)

If credit rating is non-investment

grade, fair value of fuel derivative

level at which:

Cash is provided to CP

0 to (300)

0 to (125)

(b)

(b)

(b)

or >(700)

or >(625)

Cash is received from CP

(b)

(b)

(b)

(b)

(b)

Aircraft can be pledged to CP

(300) to

(125) to

N/A

N/A

N/A

(700)

(625)

(a) Individual counterparties with fair value of fuel derivatives <$15 million.

(b) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

(c) Thresholds may vary based on changes in credit ratings within investment grade.

(d) The Company has the option of providing cash or pledging aircraft as collateral. No aircraft were pledged as collateral as of September 30, 2011.

The Company also has agreements with each of its counterparties associated with its outstanding interest rate swap agreements in which cash collateral may be required based on the fair value of outstanding derivative instruments, as well as the Company's and its counterparty's credit ratings. As of September 30, 2011, $64million had been provided to one counterparty associated with interest rate derivativesbased on the Company's outstanding net liability derivative position with that counterparty. In addition, in connection with interest rate swaps entered into by AirTran, a total of$34 million in collateral had been provided to two counterparties at September 30, 2011, as a result of net liability derivative positions with those counterparties.The outstanding interest rate net derivative positions with all other counterparties at September 30, 2011,were assets to the Company.

In the accompanying unaudited Condensed Consolidated Balance Sheet, the Company has elected to present its cash collateral utilizing a net presentation, in which cash collateral amounts held or provided have been netted against the fair value of outstanding derivative instruments.The Company's application of this policy differs depending on whether its derivative instruments are in a net asset position or a net liability position. If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current derivative amounts (those that will settle during the twelve months following the balance sheet date) associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments (those that will settle beyond one year following the balance sheet date). If the Company's fuel derivative instruments are in a net liability position with a counterparty, cash collateral amounts provided are first netted against noncurrent derivative amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of current outstanding derivative instruments.