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48
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitive Instruments and Positions
The risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss arising
from adverse changes in the price of fuel, foreign currency exchange rates and interest rates as discussed below.
The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall
economic activity, nor do they consider additional actions management may take to mitigate the Company’s
exposure to such changes. Therefore, actual results may differ. The Company does not hold or issue derivative
financial instruments for trading purposes. See Note 7 to the consolidated financial statements for accounting
policies and additional information.
Aircraft Fuel The Company’s earnings are affected by changes in the price and availability of aircraft fuel. In
order to provide a measure of control over price and supply, the Company trades and ships fuel and maintains fuel
storage facilities to support its flight operations. The Company also manages the price risk of fuel costs primarily
by using jet fuel and heating oil hedging contracts. Market risk is estimated as a hypothetical 10 percent increase
in the December 31, 2008 and 2007 cost per gallon of fuel. Based on projected 2009 fuel usage, such an increase
would result in an increase to aircraft fuel expense of approximately $399 million in 2009, inclusive of the impact of
effective fuel hedge instruments outstanding at December 31, 2008, and assumes the Company’s fuel hedging
program remains effective under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities”. Comparatively, based on projected 2008 fuel usage, such an increase would
have resulted in an increase to aircraft fuel expense of approximately $649 million in 2008, inclusive of the impact
of fuel hedge instruments outstanding at December 31, 2007. The change in market risk is primarily due to the
decrease in fuel prices. As of January 2009, the Company had cash flow hedges, with collars and options,
covering approximately 35 percent of its estimated 2009 fuel requirements. Comparatively, as of December 31,
2007 the Company had hedged, with collars and options, approximately 24 percent of its estimated 2008 fuel
requirements. The consumption hedged for 2009 by cash flow hedges is capped at an average price of
approximately $2.59 per gallon of jet fuel, and the Company’s collars have an average floor price of approximately
$1.94 per gallon of jet fuel (both the capped and floor price exclude taxes and transportation costs). The
Company’s collars represent approximately 32 percent of its estimated 2009 fuel requirements. A deterioration of
the Company’s financial position could negatively affect the Company’s ability to hedge fuel in the future.
As of December 31, 2008, the Company estimates that during the next twelve months it will reclassify from
Accumulated other comprehensive loss into earnings approximately $711 million in net incremental expense
(based on prices as of December 31, 2008) related to its fuel derivative hedges, including expenses from
terminated contracts with a bankrupt counterparty and unwound trades.
Ineffectiveness is inherent in hedging jet fuel with derivative positions based in crude oil or other crude oil related
commodities. As required by Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activity” (SFAS 133), the Company assesses, both at the inception of each hedge and
on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in
offsetting changes in cash flows of the hedged items. In doing so, the Company uses a regression model to
determine the correlation of the change in prices of the commodities used to hedge jet fuel (e.g. NYMEX Heating
oil) to the change in the price of jet fuel. The Company also monitors the actual dollar offset of the hedges’ market
values as compared to hypothetical jet fuel hedges. The fuel hedge contracts are generally deemed to be “highly
effective” if the R-squared is greater than 80 percent and the dollar offset correlation is within 80 percent to 125
percent. The Company discontinues hedge accounting prospectively if it determines that a derivative is no longer
expected to be highly effective as a hedge or if it decides to discontinue the hedging relationship.