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FINANCIAL DERIVATIVE INSTRUMENTS | 9 Months Ended
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Sep. 30, 2017
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. Although the Company may periodically enter into jet fuel derivatives for short-term timeframes, because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel for time horizons longer than approximately 24 months into the future. However, the Company has found that financial derivative instruments in other commodities, such as West Texas Intermediate ("WTI") 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 or speculative purposes. 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. 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, but does not have coverage once market prices fall below the strike price of the purchased call option. 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. For the three and nine months ended September 30, 2017, the Company had fuel derivative instruments in place for up to 61 percent and 62 percent, respectively, of its fuel consumption. As of September 30, 2017, the Company also had fuel derivative instruments in place to provide coverage at varying price levels, but up to a maximum of approximately 64 percent of its remaining 2017 estimated fuel consumption, depending on where market prices settle. The following table provides information about the Company’s volume of fuel hedging on an economic basis considering current market prices:
|  | Maximum fuel hedged as of |  |
|  | September 30, 2017 |  | Derivative underlying commodity type as of
Period (by year) |  | (gallons in millions) (a) |  | September 30, 2017
Remainder of 2017 |  | 320 |  |  | WTI crude and Brent crude oil
2018 |  | 1,647 |  |  | WTI crude and Brent crude oil
2019 |  | 1,377 |  |  | WTI crude and Brent crude oil
Beyond 2019 |  | 358 |  |  | WTI 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 fluctuate. Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. 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 4. 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 in the period of the change. 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 Income 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 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 occur during 2016, or during the nine months ended September 30, 2017. 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 |  | 9/30/2017 |  | 12/31/2016 |  | 9/30/2017 |  | 12/31/2016
Derivatives designated as hedges (a) |  |  |  |  |  |  |  |  |  |
Fuel derivative contracts (gross) |  | Prepaid expenses and other current assets |  | $ | 23 |  |  | $ | 7 |  |  | $ | 36 |  |  | $ | 44 |
Fuel derivative contracts (gross) |  | Other assets |  | 85 |  |  | 126 |  |  | — |  |  | — |
Fuel derivative contracts (gross) |  | Accrued liabilities |  | 16 |  |  | 4 |  |  | 84 |  |  | 412 |
Interest rate derivative contracts |  | Other noncurrent liabilities |  | — |  |  | — |  |  | 18 |  |  | 35 |
Total derivatives designated as hedges |  | $ | 124 |  |  | $ | 137 |  |  | $ | 138 |  |  | $ | 491 |
Derivatives not designated as hedges (a) |  |  |  |  |  |  |  |  |  |
Fuel derivative contracts (gross) |  | Prepaid expenses and other current assets |  | $ | 41 |  |  | $ | 54 |  |  | $ | 25 |  |  | $ | — |
Fuel derivative contracts (gross) |  | Other assets |  | 14 |  |  | 52 |  |  | 14 |  |  | 52 |
Fuel derivative contracts (gross) |  | Accrued liabilities |  | 55 |  |  | 201 |  |  | 85 |  |  | 262 |
Interest rate derivative contracts |  | Other noncurrent liabilities |  | — |  |  | — |  |  | 3 |  |  | — |
Total derivatives not designated as hedges |  |  |  | $ | 110 |  |  | $ | 307 |  |  | $ | 127 |  |  | $ | 314 |
Total derivatives |  |  |  | $ | 234 |  |  | $ | 444 |  |  | $ | 265 |  |  | $ | 805 |
(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 |  | September 30, |  | December 31,
(in millions) |  | location |  | 2017 |  | 2016
Cash collateral deposits held from counterparties for fuel contracts - current |  | Offset against Prepaid expenses and other current assets |  | $ | 3 |  |  | $ | 4 |
Cash collateral deposits held from counterparties for fuel contracts - noncurrent |  | Offset against Other assets |  | 1 |  |  | 6 |
Cash collateral deposits provided to counterparties for fuel contracts - current |  | Offset against Accrued liabilities |  | 18 |  |  | 311 |
Due to third parties for fuel contracts |  | Accounts payable |  | 50 |  |  | 75 |
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. The Company's application of its netting policy associated with cash collateral 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 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. If the Company's fuel derivative instruments are in a net liability position with the counterparty, cash collateral amounts provided are first netted against noncurrent outstanding derivative liability 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. The Company has 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) |
|  |  |  | September 30, 2017 |  | December 31, 2016 |
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 |  | $ | 64 |  |  | $ | (64 | ) |  | $ | — |  |  | $ | 61 |  |  | $ | (48 | ) |  | $ | 13 |  |
Fuel derivative contracts |  | Other assets |  | $ | 99 |  |  | $ | (15 | ) |  | $ | 84 |  | (a) | $ | 178 |  |  | $ | (58 | ) |  | $ | 120 |  | (a)
Fuel derivative contracts |  | Accrued liabilities |  | $ | 89 |  |  | $ | (89 | ) |  | $ | — |  | (a) | $ | 516 |  |  | $ | (516 | ) |  | $ | — |  | (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 5.
Offsetting of derivative liabilities |
(in millions) |
|  |  |  | (i) |  | (ii) |  | (iii) = (i) + (ii) |  | (i) |  | (ii) |  | (iii) = (i) + (ii) |
|  |  |  | September 30, 2017 |  | December 31, 2016 |
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 |  | $ | 64 |  |  | $ | (64 | ) |  | $ | — |  |  | $ | 48 |  |  | $ | (48 | ) |  | $ | — |  |
Fuel derivative contracts |  | Other assets |  | $ | 15 |  |  | $ | (15 | ) |  | $ | — |  | (a) | $ | 58 |  |  | $ | (58 | ) |  | $ | — |  | (a)
Fuel derivative contracts |  | Accrued liabilities |  | $ | 169 |  |  | $ | (89 | ) |  | $ | 80 |  | (a) | $ | 674 |  |  | $ | (516 | ) |  | $ | 158 |  | (a)
Interest rate derivative contracts |  | Other noncurrent liabilities |  | $ | 21 |  |  | $ | — |  |  | $ | 21 |  | (a) | $ | 35 |  |  | $ | — |  |  | $ | 35 |  | (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 5. 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 nine months ended September 30, 2017 and 2016:
Derivatives in cash flow hedging relationships
| (Gain) loss recognized in AOCI on derivatives (effective portion) |  | (Gain) loss reclassified from AOCI into income (effective portion) (a) |  | (Gain) loss recognized in income on derivatives (ineffective portion) (b)
| Three months ended |  | Three months ended |  | Three months ended
| September 30, |  | September 30, |  | September 30,
(in millions) | 2017 |  | 2016 |  | 2017 |  | 2016 |  | 2017 |  | 2016
Fuel derivative contracts | $ | (29 | ) | * | $ | 19 |  | * | $ | 94 |  | * | $ | 141 |  | * | $ | 8 |  |  | $ | (4 | )
Interest rate derivatives | — |  | * | (2 | ) | * | 2 |  | * | 2 |  | * | — |  |  | (2 | )
Total | $ | (29 | ) |  | $ | 17 |  |  | $ | 96 |  |  | $ | 143 |  |  | $ | 8 |  |  | $ | (6 | )
*Net of tax (a) Amounts related to fuel derivative contracts and interest rate derivatives, which 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 recognized in AOCI on derivatives (effective portion) |  | (Gain) loss reclassified from AOCI into income (effective portion)(a) |  | (Gain) loss recognized in income on derivatives (ineffective portion)(b)
| Nine months ended |  | Nine months ended |  | Nine months ended
| September 30, |  | September 30, |  | September 30,
(in millions) | 2017 |  | 2016 |  | 2017 |  | 2016 |  | 2017 |  | 2016
Fuel derivative contracts | $ | 104 |  | * | $ | (62 | ) | * | $ | 282 |  | * | $ | 484 |  | * | $ | 29 |  |  | $ | (3 | )
Interest rate derivatives | 1 |  | * | 4 |  | * | 6 |  | * | 7 |  | * | — |  |  | (3 | )
Total | $ | 105 |  |  | $ | (58 | ) |  | $ | 288 |  |  | $ | 491 |  |  | $ | 29 |  |  | $ | (6 | )
*Net of tax (a) Amounts related to fuel derivative contracts and interest rate derivatives, which 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 recognized in income on derivatives
| September 30, |
(in millions) | 2017 |  | 2016 |
Fuel derivative contracts | $ | (4 | ) |  | $ | 35 |  |  | Other (gains) losses, net
Interest rate derivatives | (1 | ) |  | — |  |  | Interest expense
| $ | (5 | ) |  | $ | 35 |  |  |
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) | 2017 |  | 2016 |  | on derivatives
Fuel derivative contracts | $ | 80 |  |  | $ | 23 |  |  | Other (gains) losses, net
Interest rate derivatives | (3 | ) |  | — |  |  | Interest expense
| $ | 77 |  |  | $ | 23 |  |  |
The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended September 30, 2017 and 2016 of $34 million and $34 million, respectively, and the nine months ended September 30, 2017 and 2016 of $102 million and $117 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 September 30, 2017, recorded in AOCI, were approximately $118 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 30, 2017. 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. Several of the Company's interest rate swap agreements 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 that do not qualify for the "shortcut" method of accounting, ineffectiveness is required to be measured at each reporting period. The ineffectiveness associated with all of the Company’s interest rate swap agreements 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. 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. At September 30, 2017, 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 credit rating. The Company also had agreements with counterparties in which cash deposits, letters of credit, and/or pledged aircraft are 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 September 30, 2017, at which such postings are triggered:
| Counterparty (CP) |  |
(in millions) | A |  | B |  | C |  | D |  | E |  | F |  | Other (a) |  | Total
Fair value of fuel derivatives | $ | (42 | ) |  | $ | (3 | ) |  | $ | 16 |  |  | $ | 10 |  |  | $ | 4 |  |  | $ | 3 |  |  | $ | 2 |  |  | $ | (10 | )
Cash collateral held from (by) CP | (18 | ) |  | — |  |  | — |  |  | — |  |  | 4 |  |  | — |  |  | — |  |  | (14 | )
Aircraft collateral pledged to CP | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Letters of credit (LC) | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Option to substitute LC for aircraft | (200) to (600)(b) |  | (100) to (500)(c) |  | (150) to (550)(c) |  | (150) to (550)(c) |  | N/A |  | N/A |  |  |  |
Option to substitute LC for cash | N/A |  | >(500)(c) |  | (75) to (150) or >(550)(c) |  | (125) to (150) or >(550)(d) |  | (d) |  | N/A |  |  |  |
If credit rating is investment grade, fair value of fuel derivative level at which: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash is provided to CP | (50) to (200) or >(600) |  | (50) to (100) or >(500) |  | (75) to (150) or >(550) |  | (125) to (150) or >(550) |  | >(100) |  | >(65) |  |  |  |
Cash is received from CP | >50(e) |  | >150(e) |  | >250(e) |  | >75(e) |  | >0(e) |  | >30(e) |  |  |  |
Aircraft or cash can be pledged to CP as collateral | (200) to (600)(f) |  | (100) to (500)(c) |  | (150) to (550)(c) |  | (150) to (550)(c) |  | N/A |  | N/A |  |  |  |
If credit rating is non-investment grade, fair value of fuel derivative level at which: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash is provided to CP | (0) to (200) or >(600) |  | (0) to (100) or >(500) |  | (0) to (150) or >(550) |  | (0) to (150) or >(550) |  | (g) |  | (g) |  |  |  |
Cash is received from CP | (g) |  | (g) |  | (g) |  | (g) |  | (g) |  | (g) |  |  |  |
Aircraft or cash can be pledged to CP as collateral | (200) to (600) |  | (100) to (500) |  | (150) to (550) |  | (150) to (550) |  | N/A |  | N/A |  |  |  |
(a) Individual counterparties with fair value of fuel derivatives <$2 million. (b) The Company has the option of providing letters of credit in addition to aircraft collateral if the appraised value of the aircraft does not meet the collateral requirements. (c) The Company has the option of providing cash, letters of credit, or pledging aircraft as collateral. (d) The Company has the option to substitute letters of credit for 100 percent of cash collateral requirement. (e) Thresholds may vary based on changes in credit ratings within investment grade. (f) The Company has the option of providing cash or pledging aircraft as collateral. (g) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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