FINANCIAL DERIVATIVE INSTRUMENTS

3 Months Ended

Mar. 31, 2012

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, Brent crude oil, 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. Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than purchased call options in that the Company could end up in a liability position when the collar structure or swap agreement settles. With the use of purchased call options and call spreads, the Company cannot be in a liability position at settlement.

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. The level at which the Company is hedged for a particular period is also dependent on current market prices for that period as well as the types of derivative instruments held and the strike prices of those instruments. For example, the Company may enter into “out-of-the-money” option contracts (including catastrophic protection),which may not generate intrinsic gains at settlement if market prices do not rise above the option strike price. Therefore, even though the Company may have an “economic” hedge in place for a particular period, that hedge may not produce any hedging gains and may even produce hedging losses depending on market prices, the types of instruments held, and the strike prices of those instruments.

For first quarter2012, the Company had fuel derivatives in place fora minimalpercentage of its fuel consumption. As of March 31,2012, the Company had fuel derivative instruments in place to provide coverage on aportion of its remaining 2012estimated fuel consumption. The following table provides information about the Company'svolume of fuel hedging for the years 2012 through 2015 on an “economic” basis considering current market prices

	Fuel hedged as of
	March 31, 2012
Period (by year)	(gallons in millions)
Remainder of 2012	313
2013	886
2014	330
2015	336

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 unaudited Condensed Consolidated Statement of Comprehensive Income. Likewise, if a hedge ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last reporting period is recorded to Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Incomein 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 2011or during the three months ended March 31,2012.

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. Factors that have and may continue to lead to ineffectiveness and unrealized gains and losses on derivative contracts include: significant fluctuations in energy prices, the number of derivative positions the Company holds, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging. 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. The Company also examines the effectiveness of each individual hedge and 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	03/31/12		12/31/11		03/31/12		12/31/11
Derivatives designated as hedges*
Fuel derivative contracts (gross)	Other current assets	$	171	$	17	$	8	$	-
Fuel derivative contracts (gross)	Other assets		361		542		53		107
Fuel derivative contracts (gross)	Accrued liabilities		24		97		-		8
Fuel derivative contracts (gross)	Other noncurrent liabilities		51		93		6		24
Interest rate derivative contracts	Other assets		58		64		-		-
Interest rate derivative contracts	Accrued liabilities		-		2		-		-
Interest rate derivative contracts	Other noncurrent liabilities		-		-		123		132
Total derivatives designated as hedges		$	665	$	815	$	190	$	271
Derivatives not designated as hedges*
Fuel derivative contracts (gross)	Other current assets	$	452	$	124	$	448	$	58
Fuel derivative contracts (gross)	Other assets		400		26		557		272
Fuel derivative contracts (gross)	Accrued liabilities		135		326		284		687
Fuel derivative contracts (gross)	Other noncurrent liabilities		21		9		75		122
Total derivatives not designated as hedges		$	1,008	$	485	$	1,364	$	1,139
Total derivatives		$	1,673	$	1,300	$	1,554	$	1,410
* 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	March 31,		December 31,
(in millions)		location	2012		2011
Cash collateral deposits provided		Offset against Other
	to counterparties - noncurrent	noncurrent liabilities	$	-	$	41
Cash collateral deposits provided		Offset against Accrued
	to counterparties - current	liabilities		85		185
Due to third parties for fuel contracts		Accrued liabilities		25		21
Receivable from third parties for		Accounts and other
	fuel contracts	receivables		1		3

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income for the three months endedMarch 31,2012 and 2011:

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
		March 31,						March 31,						March 31,
(in millions)		2012			2011			2012			2011			2012		2011
Fuel derivative
	contracts	$	(136)	*	$	(315)	*	$	23	*	$	16	*	$	32	$	34
Interest rate
	derivatives		(6)	*		(7)	*		-			-			-		-
Total		$	(142)		$	(322)		$	23		$	16		$	32	$	34
*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
	March 31,				recognized in income
(in millions)	2012		2011		on derivatives
Fuel derivative contracts	$	(208)	$	(5)	Other (gains) losses, net

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended March 31,2012 and2011 of $6 million and$31 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 Comprehensive Income.

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties. Included in the Company's cumulative net unrealized losses from fuel hedges as of March 31,2012, were approximately $49 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to March 31,2012. In addition, as of March 31,2012, the Company had already recognized cumulative net gains due to ineffectiveness and derivatives that do not qualify for hedge accounting treatment totaling $57 million, net of taxes. These net gains were recognized in first quarter2012 and prior periods, and are reflected in Retained earnings as of March 31,2012, but the underlying derivative instruments will not expire/settle untilsecond quarter2012or 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. The ineffectiveness associated with all of the Company's, including AirTran'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 March 31,2012, 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 March 31,2012, at which such postings are triggered:

		Counterparty (CP)
		A	B	C	D	E	Other(a)	Total
(in millions)
Fair value of fuel derivatives	$	67	$(71)	$(21)	$51	$159	$(1)	$ 184
Cash collateral held from (by) CP		-	(85)	-	-	-	-	(85)
If credit rating is investment
grade, fair value of fuel
derivative level at which:
Cash is provided to CP		(40) to (340)	0 to (125)	>(50)	>(75)	>(50)
		or >(740)	or >(625)
Cash is received from CP		>75	>150	>200(c)	>125(c)	>250
Aircraft or cash can be pledged
to CP as collateral		(340) to	(125) to	N/A	N/A	N/A
		(740)(d)	(625)(d)
If credit rating is non-investment
grade, fair value of fuel derivative
level at which:
Cash is provided to CP		(40) to (340)	0 to (125)	(b)	(b)	(b)
		or >(740)	or >(625)
Cash is received from CP		(b)	(b)	(b)	(b)	(b)
Aircraft can be pledged to CP
as collateral		(340) to	(125) to	N/A	N/A	N/A
		(740)	(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 with such counterparty as of March 31, 2012.

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 March 31, 2012, $58million 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$32 million had been provided to two counterparties at March 31, 2012, as a result of net liability derivative positions with those counterparties.The outstanding interest rate net derivative positions with all other counterparties at March 31, 2012,were assets to the Company.

Applicable accounting provisions require an entity to select a policy for how it records the offset rights to reclaim cash collateral associated with the related derivative fair value of the assets or liabilities of such derivative instruments. 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.