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Financial Derivative Instruments | 9 Months Ended
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Sep. 30, 2022
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. As of September 30, 2022, 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 |  |  |
|  | September 30, 2022 |  | Derivative underlying commodity type as of |
Period (by year) |  | (gallons in millions) (a) |  | September 30, 2022 |
Remainder of 2022 |  | 305 |  |  | WTI crude oil, Brent crude oil, and Heating oil |
2023 |  | 1,084 |  |  | WTI crude oil and Brent crude oil |
2024 |  | 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 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 5. If a derivative initially does not qualify or ceases to qualify for hedge accounting, any change in the fair value of the derivative instrument since the last reporting period would be recorded in 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. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices, 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. Certain types of derivative instruments do not qualify for hedge accounting, including those that result in a net sold position (sold gallons exceeding purchased gallons). Increased volatility in certain commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results. However, even though certain derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes they continue to afford the Company the opportunity to stabilize jet fuel costs. 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. During 2021, as a result of the drop in demand for air travel compared with 2019 due to the pandemic, the Company was in an estimated "over-hedged" position and was required to de-designate a portion of its fuel hedges for hedge accounting purposes. However, the impact of such de-designations was not material to 2021 financial results. 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 |  | 9/30/2022 |  | 12/31/2021 |  | 9/30/2022 |  | 12/31/2021
Derivatives designated as hedges (a) |  |  |  |  |  |  |  |  |  |
Fuel derivative contracts (gross) |  | Prepaid expenses and other current assets |  | $ | 371 |  |  | $ | 409 |  |  | $ | — |  |  | $ | — |
Fuel derivative contracts (gross) |  | Other assets |  | 168 |  |  | 287 |  |  | — |  |  | — |
Interest rate derivative contracts |  | Other assets |  | 14 |  |  | — |  |  | — |  |  | — |
Interest rate derivative contracts |  | Other noncurrent liabilities |  | — |  |  | — |  |  | — |  |  | 4 |
Total derivatives designated as hedges |  | $ | 553 |  |  | $ | 696 |  |  | $ | — |  |  | $ | 4 |
Derivatives not designated as hedges (a) |  |  |  |  |  |  |  |  |  |
Fuel derivative contracts (gross) |  | Prepaid expenses and other current assets |  | $ | 26 |  |  | $ | — |  |  | $ | 29 |  |  | $ | — |
Total derivatives |  |  |  | $ | 579 |  |  | $ | 696 |  |  | $ | 29 |  |  | $ | 4 |
(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 4. 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 |  | 2022 |  | 2021
Cash collateral deposits held from counterparties for fuel contracts - current |  | Offset against Prepaid expenses and other current assets |  | $ | 96 |  |  | $ | 80 |
Cash collateral deposits held from counterparties for fuel contracts - noncurrent |  | Offset against Other assets |  | 38 |  |  | 95 |
Receivable from third parties for fuel contracts |  | Accounts and other receivables |  | 56 |  |  | 8 |
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 September 30, 2022, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements. 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, 2022 |  | December 31, 2021 |
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 |  | $ | 397 |  |  | $ | (125) |  | (b) | $ | 272 |  |  | $ | 409 |  |  | $ | (80) |  |  | $ | 329 |  |
Fuel derivative contracts |  | Other assets |  | $ | 168 |  |  | $ | (38) |  |  | $ | 130 |  | (a) | $ | 287 |  |  | $ | (95) |  |  | $ | 192 |  | (a)
Interest rate derivative contracts |  | Other assets |  | $ | 14 |  |  | $ | — |  |  | $ | 14 |  | (a) | $ | — |  |  | $ | — |  |  | $ | — |  | (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 9. (b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts.
Offsetting of derivative liabilities |
(in millions) |
|  |  |  | (i) |  | (ii) |  | (iii) = (i) + (ii) |  | (i) |  | (ii) |  | (iii) = (i) + (ii) |
|  |  |  | September 30, 2022 |  | December 31, 2021 |
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 |  | $ | 125 |  |  | $ | (125) |  | (b) | $ | — |  |  | $ | 80 |  |  | $ | (80) |  |  | $ | — |  |
Fuel derivative contracts |  | Other assets |  | $ | 38 |  |  | $ | (38) |  |  | $ | — |  | (a) | $ | 95 |  |  | $ | (95) |  |  | $ | — |  | (a)
Interest rate derivative contracts |  | Other noncurrent liabilities |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 4 |  |  | $ | — |  |  | $ | 4 |  |
(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 9. (b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts. 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, 2022 and 2021:
Location and amount recognized in income on cash flow and fair value hedging relationships
|  | Three months ended September 30, 2022 |  | Three months ended September 30, 2021
(in millions) |  | Fuel and oil |  |  |  | Other operating expenses |  | Fuel and oil |  |  |  | Other operating expenses
Total |  | $ | (195) |  |  |  |  | $ | 2 |  |  | $ | 2 |  |  |  |  | $ | 1 |
(Gain) loss on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount of (gain) loss reclassified from AOCI into income |  | (195) |  |  |  |  | — |  |  | 2 |  |  |  |  | — |
Interest contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount of loss reclassified from AOCI into income |  | — |  |  |  |  | 2 |  |  | — |  |  |  |  | 1 |
Location and amount recognized in income on cash flow and fair value hedging relationships
|  | Nine months ended September 30, 2022 |  | Nine months ended September 30, 2021
(in millions) |  | Fuel and oil |  | Other (gains)/losses, net |  | Other operating expenses |  | Fuel and oil |  | Other (gains)/losses, net |  | Other operating expenses
Total |  | $ | (703) |  |  | $ | — |  |  | $ | 5 |  |  | $ | 30 |  |  | $ | 6 |  |  | $ | 4 |
(Gain) loss on cash flow hedging relationships |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount of (gain) loss reclassified from AOCI into income |  | (703) |  |  | — |  |  | — |  |  | 30 |  |  | 6 |  |  | — |
Interest contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amount of loss reclassified from AOCI into income |  | — |  |  | — |  |  | 5 |  |  | — |  |  | — |  |  | 4 |
Derivatives designated and qualified in cash flow hedging relationships |  |  |
| (Gain) loss recognized in AOCI on derivatives, net of tax
| Three months ended
| September 30,
(in millions) | 2022 |  | 2021
Fuel derivative contracts | $ | 354 |  |  | $ | (128) |
Interest rate derivatives | (2) |  |  | (1) |
Total | $ | 352 |  |  | $ | (129) |
Derivatives designated and qualified in cash flow hedging relationships |  |  |
| (Gain) loss recognized in AOCI on derivatives, net of tax
| Nine months ended
| September 30,
(in millions) | 2022 |  | 2021
Fuel derivative contracts | $ | (438) |  |  | $ | (402) |
Interest rate derivatives | (14) |  |  | (5) |
Total | $ | (452) |  |  | $ | (407) |
Derivatives not designated as hedges
| (Gain) loss recognized in income on derivatives |  |
| Three months ended |  | Location of gain recognized in income on derivatives
| September 30, |
(in millions) | 2022 |  | 2021 |
Fuel derivative contracts | $ | (38) |  |  | $ | 3 |  |  | Other (gains) losses, net
Derivatives not designated as hedges
| (Gain) loss recognized in income on derivatives |  |
| Nine months ended |  | Location of (gain) loss recognized in income on derivatives
| September 30, |
(in millions) | 2022 |  | 2021 |
Fuel derivative contracts | $ | (23) |  |  | $ | (13) |  |  | Other (gains) losses, net
The Company also recorded expense (benefit) associated with premiums paid for fuel derivative contracts that settled/expired during the three and nine months ended September 30, 2022 and 2021. 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 or received for fuel derivative contracts and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income during the period the contract settles:
| Premium (benefit) expense recognized in income on derivatives |  |
| Three months ended |  | Location of premium (benefit) expense recognized in income on derivatives
| September 30, |
(in millions) | 2022 |  | 2021 |
Fuel derivative contracts designated as hedges | $ | 26 |  |  | $ | 14 |  |  | Fuel and oil
Fuel derivative contracts not designated as hedges | (14) |  |  | 11 |  |  | Other (gains) losses, net
| Premium (benefit) expense recognized in income on derivatives |  |
| Nine months ended |  | Location of premium (benefit) expense recognized in income on derivatives
| September 30, |
(in millions) | 2022 |  | 2021 |
Fuel derivative contracts designated as hedges | $ | 79 |  |  | $ | 43 |  |  | Fuel and oil
Fuel derivative contracts not designated as hedges | (14) |  |  | 32 |  |  | Other (gains) losses, net
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 gains from fuel hedges as of September 30, 2022, recorded in AOCI, were approximately $194 million in net unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 30, 2022. Interest Rate Swaps The Company is party to certain interest rate swap agreements that are accounted for as cash flow hedges, and has in the past held interest rate swap agreements that have qualified as fair value 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" 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. For the Company’s interest rate swap agreements that do not qualify for the "shortcut" or "critical terms match" methods of accounting, ineffectiveness is assessed at each reporting period. If hedge accounting is achieved, all periodic changes in fair value of the interest rate swaps are recorded in AOCI. 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, 2022, 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 September 30, 2022, 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 | $ | 134 |  |  | $ | 73 |  |  |  |  | $ | 119 |  |  | $ | 38 |  |  | $ | 67 |  |  | $ | 45 |  |  | $ | 50 |  |  | $ | 10 |  |  | $ | 536 |
Cash collateral held from CP | 134 |  |  | — |  |  |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 134 |
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 < $8 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.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI https://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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