Financial Derivative Instruments

6 Months Ended

Jun. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

FINANCIAL DERIVATIVE INSTRUMENTS

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 represents 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.

The Company has used financial derivative instruments for both short-term and long-term timeframes, 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), put spreads (which include a purchased put option and a sold put option), and fixed price swap agreements in its portfolio. The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes.

For the purpose of evaluating its net cash spend for jet fuel and for forecasting its future estimated jet fuel expense, 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 economically 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 at settlement and may even produce hedging losses depending on market prices, the types of instruments held, and the strike prices of those instruments.

As of June 30, 2023, the Company had fuel derivative instruments in place to provide coverage at varying price levels. The following table provides information about the Company’s volume of fuel hedging on an economic basis:

	Maximum fuel hedged as of
	June 30, 2023	Derivative underlying commodity type as of
Period (by year)	(gallons in millions) (a)	June 30, 2023
Remainder of 2023	542	West Texas Intermediate ("WTI") crude oil, Brent crude oil, and Heating oil
2024	1,265	WTI crude oil and Brent crude oil
2025	1,033	Brent crude oil
2026	151	Brent crude oil

(a) Due to the types of derivatives utilized by the Company and different price levels of those contracts, these volumes represent the maximum economic hedge in place and may vary significantly as market prices and the Company's flight schedule fluctuate.

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges are recorded in Accumulated other comprehensive income ("AOCI") until the underlying jet fuel is consumed. See Note 4.

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 and were de-designated as hedges 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 fuel 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 where a derivative ceased to qualify for hedge accounting during 2022, or during the six months ended June 30, 2023.

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 derivative 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	6/30/2023		12/31/2022		6/30/2023		12/31/2022
Derivatives designated as hedges (a)
Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	128	$	352	$	—	$	—
Fuel derivative contracts (gross)	Other assets	194		160		—		—
Interest rate derivative contracts	Other assets	14		14		—		—
Total derivatives designated as hedges		$	336	$	526	$	—	$	—
Derivatives not designated as hedges (a)
Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	17	$	—	$	23	$	—
Total derivatives		$	353	$	526	$	23	$	—

(a) 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 had the following amounts associated with fuel derivative instruments and hedging activities in its unaudited Condensed Consolidated Balance Sheet:

	Balance Sheet	June 30,		December 31,
(in millions)	location	2023		2022
Cash collateral deposits held from counterparties for fuel contracts - current	Offset against Prepaid expenses and other current assets	$	27	$	106
Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Offset against Other assets	33		—
Receivable from third parties for fuel contracts	Accounts and other receivables	10		34

All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging. The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt. For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio by each counterparty. The Company has elected to utilize netting for both its fuel derivative instruments and interest rate swap agreements and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet. If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current outstanding derivative asset amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments. As of June 30, 2023, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

The Company had the following recognized financial assets and financial liabilities resulting from those transactions that meet the scope of the disclosure requirements as necessitated by applicable accounting guidance for balance sheet offsetting:

Offsetting of derivative assets
(in millions)
		(i)		(ii)		(iii) = (i) + (ii)			(i)		(ii)		(iii) = (i) + (ii)
		June 30, 2023							December 31, 2022
Description	Balance Sheet location	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet			Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet
Fuel derivative contracts	Prepaid expenses and other current assets	$	145	$	(50)	$	95		$	352	$	(106)	$	246
Fuel derivative contracts	Other assets	$	194	$	(33)	$	161	(a)	$	160	$	—	$	160	(a)
Interest rate derivative contracts	Other assets	$	14	$	—	$	14	(a)	$	14	$	—	$	14	(a)

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 8.

Offsetting of derivative liabilities
(in millions)
		(i)		(ii)		(iii) = (i) + (ii)		(i)		(ii)		(iii) = (i) + (ii)
		June 30, 2023						December 31, 2022
Description	Balance Sheet location	Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet		Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet
Fuel derivative contracts	Prepaid expenses and other current assets	$	50	$	(50)	$	—	$	106	$	(106)	$	—
Fuel derivative contracts	Other assets	$	33	$	(33)	$	—	$	—	$	—	$	—

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2023 and 2022:

Location and amount recognized in income on cash flow and fair value hedging relationships
	Three months ended June 30, 2023				Three months ended June 30, 2022
(in millions)	Fuel and oil		Other operating expenses		Fuel and oil		Other operating expenses
Total	$	(14)	$	2	$	(306)	$	2
(Gain) loss on cash flow hedging relationships:
Commodity contracts:
Amount of (gain) reclassified from AOCI into income	(14)		—		(306)		—
Interest contracts:
Amount of loss reclassified from AOCI into income	—		2		—		2

Location and amount recognized in income on cash flow and fair value hedging relationships
	Six months ended June 30, 2023				Six months ended June 30, 2022
(in millions)	Fuel and oil		Other operating expenses		Fuel and oil		Other operating expenses
Total	$	(42)	$	3	$	(508)	$	3
(Gain) loss on cash flow hedging relationships
Commodity contracts:
Amount of (gain) reclassified from AOCI into income	(42)		—		(508)		—
Interest contracts:
Amount of loss reclassified from AOCI into income	—		3		—		3

Derivatives designated and qualified in cash flow hedging relationships
	(Gain) loss recognized in AOCI on derivatives, net of tax
	Three months ended
	June 30,
(in millions)	2023		2022
Fuel derivative contracts	$	126	$	(140)
Interest rate derivatives	(1)		(7)
Total	$	125	$	(147)

Derivatives designated and qualified in cash flow hedging relationships
	(Gain) loss recognized in AOCI on derivatives, net of tax
	Six months ended
	June 30,
(in millions)	2023		2022
Fuel derivative contracts	$	252	$	(792)
Interest rate derivatives	—		(12)
Total	$	252	$	(804)

Derivatives not designated as hedges
	(Gain) loss recognized in income on derivatives
	Three months ended				Location of (gain) loss recognized in income on derivatives
	June 30,
(in millions)	2023		2022
Fuel derivative contracts	$	6	$	(20)	Other (gains) losses, net

Derivatives not designated as hedges
	(Gain) loss recognized in income on derivatives
	Six months ended				Location of (gain) loss recognized in income on derivatives
	June 30,
(in millions)	2023		2022
Fuel derivative contracts	$	6	$	15	Other (gains) losses, net

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three and six months ended June 30, 2023 and 2022. Gains and/or losses associated with fuel derivatives that qualify for hedge accounting are ultimately recorded to Fuel and oil expense. Gains and/or losses associated with fuel derivatives that do not qualify for hedge accounting are recorded to Other (gains) and losses, net. The following tables present the impact of premiums paid for fuel derivative contracts and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income during the period the contract settles:

	Premium expense recognized in income on derivatives
	Three months ended				Location of premium expense recognized in income on derivatives
	June 30,
(in millions)	2023		2022
Fuel derivative contracts designated as hedges	$	30	$	26	Fuel and oil

	Premium expense recognized in income on derivatives
	Six months ended				Location of premium expense recognized in income on derivatives
	June 30,
(in millions)	2023		2022
Fuel derivative contracts designated as hedges	$	61	$	53	Fuel and oil

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 unrealized losses from fuel hedges as of June 30, 2023, recorded in AOCI, were approximately $13 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to June 30, 2023.

Interest Rate Swaps

The Company is party to certain interest rate swap agreements that are accounted for as cash flow hedges. The Company did not have any interest rate swap agreements designated as fair value hedges, as defined, during the periods presented. All of the Company's interest rate swap agreements qualify for the "shortcut" or "critical terms match" methods of accounting for hedges, which dictate that the hedges were assumed to be perfectly effective at origination, and, thus, there was no ineffectiveness to be recorded in earnings.

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. At such times, 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 with respect

to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. As of June 30, 2023, 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 based on the counterparty's credit rating. The Company also had agreements with counterparties in which cash deposits and letters of credit were required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. In certain cases, the Company has the ability to substitute among these different forms of collateral at its discretion.

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of June 30, 2023, at which such postings are triggered:

Counterparty (CP)

(in millions)

A

B

C

D

E

F

G

Other (a)

Total

Fair value of fuel derivatives

$

69

$

39

$

59

$

18

$

50

$

23

$

41

$

17

$

316

Cash collateral held from CP

60

—

—

—

—

—

—

—

60

Option to substitute LC for cash

N/A

N/A

(b)

(b)

(b)

N/A

(b)

If credit rating is investment grade, fair value of fuel derivative level at which:

Cash is provided to CP

>(100)

>(50)

>(75)

>(125)

>(40)

>(65)

>(100)

Cash is received from CP

>0(c)

>150(c)

>250(c)

>125(c)

>100(c)

>70(c)

>100(c)

If credit rating is non-investment grade, fair value of fuel derivative level at which:

Cash is received from CP

(d)

(d)

(d)

(d)

(d)

(d)

(d)

(a) Individual counterparties with fair value of fuel derivatives < $18 million.

(b) The Company has the option to substitute letters of credit for 100 percent of cash collateral requirement.

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

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