Financial Derivative Instruments and Risk Management

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivative Instruments and Risk Management

Financial Derivative Instruments and Risk ManagementThe Company is exposed to variability in jet fuel prices. Aircraft fuel is one of the Company’s largest operating expenses. Increases in jet fuel prices may adversely impact its financial performance, operating cash flow and financial position. As part of its risk management program, the Company may enter into derivative contracts in order to limit exposure to the fluctuations in jet fuel prices. There were no fuel hedges entered into during the year ended December 31, 2021. The types of instruments the Company utilized in its 2020 hedging program were call options and collar structures, which include both a purchased call option and sold put option. Although the use of collar

structures can reduce the overall cost of hedging, these instruments carry more risk than purchased call options alone in that these instruments may result in a net liability for the Company upon settlement.

Additionally, the Company may be exposed to interest rate risk through aircraft lease contracts for the time period between agreement of terms and commencement of the lease, when portions of rental payments can be adjusted and become fixed based on the seven- or nine-year swap rate. As part of its risk management program, the Company enters into contracts in order to limit the exposure to fluctuations in interest rates. During the year ended December 31, 2021, the Company did not enter into any swaps and therefore, paid no upfront premiums for options. During the year ended December 31, 2020, the Company paid $4 million in upfront premiums for the option to enter into and exercise cash settled swaps with a forward starting effective date. As of December 31, 2021, the Company had no interest rate hedges outstanding.

The Company formally designates and accounts for derivative instruments that meet established accounting criteria under ASC 815, Derivatives and Hedging, as cash flow hedges. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instruments is recorded in AOCI/L, a component of stockholders’ equity on the consolidated balance sheets. The Company recognizes the associated gains or losses deferred in AOCI/L, as well as the amounts that are paid or received in connection with the purchase or sale of fuel-related financial derivative instruments (i.e., premium costs of option contracts), as a component of aircraft fuel expense within the consolidated statements of operations in the period that the jet fuel subject to hedging is consumed. For interest rate derivatives, the Company recognizes the associated gains or losses deferred in AOCI/L, as well as amounts that are paid or received in connection with the purchase or sale of interest rate derivative instruments (i.e., premium costs of swaption contracts), as a component of aircraft rent expense within the consolidated statements of operations over the period of the related aircraft lease. The Company does not enter into derivative instruments for speculative purposes.

In March 2020, the Company determined that it was no longer probable that estimated future fuel consumption for gallons subjected to fuel hedges would occur, primarily related to second quarter 2020 settled trades as the Company reduced scheduled flights as a result of the decline in customer demand from the COVID-19 pandemic, and, therefore, the Company was required to de-designate certain fuel hedges associated with estimated future consumption declines. The impacts of the de-designation in the Company’s results of operations are reflected in the tables below.

The Company is exposed to credit losses in the event of nonperformance by counterparties to its derivative instruments but does not expect any of its counterparties will fail to meet their obligations. The amount of such credit exposure is generally the fair value of the Company’s outstanding contracts in a receivable position. To manage credit risks, the Company selects counterparties based on credit assessments, limits its overall exposure to any single counterparty and monitors the market position with each counterparty. Based on the fair value of the Company’s fuel derivative instruments, its counterparties may require it to post collateral when the price of the underlying commodity decreases, and the Company may require its counterparties to provide collateral when the price of the underlying commodity increases. The amount of collateral posted, if any, is periodically adjusted based on the fair value of the hedge contracts. The Company’s policy is to offset the liabilities represented by these contracts with any cash collateral paid to the counterparties.

The assets and liabilities associated with the Company’s fuel and interest rate derivative instruments are presented on a gross basis and include upfront premiums paid. These assets and liabilities are recorded as a component of other current assets and other current liabilities, respectively, on the Company’s consolidated balance sheets and there were none as of December 31, 2021 and these assets and liabilities were less than $1 million as of December 31, 2020.

The following table summarizes the effect of fuel and interest rate derivative instruments reflected in aircraft fuel and rent expense, respectively, within the consolidated statements of operations (in millions):


	Year Ended December 31,
	2021		2020		2019
Derivatives designated as cash flow hedges
Losses on fuel derivative contracts	$	—	$	(26)	$	(17)
Amortization of swaption cash flow hedges	$	(1)	$	(1)	$	—



Derivatives not designated as cash flow hedges
Losses on fuel derivative contracts	$	—	$	(56)	$	—

The following table presents the net of tax impact of the overall effectiveness of derivative instruments designated as cash flow hedging instruments within the consolidated statements of comprehensive income (loss) (in millions):


	Year Ended December 31,
	2021		2020		2019
Derivatives designated as cash flow hedges
Fuel derivative contract gains (losses) – net of tax impact	$	—	$	(16)	$	22
Fuel derivative losses reclassified to earnings due to de-designation – net of tax impact	—		11		—
Interest rate derivative contract losses – net of tax impact	—		(10)		(1)
Amortization of swaption cash flow hedges, net of tax	1		—		—
Total	$	1	$	(15)	$	21

As of December 31, 2021, $10 million is included in AOCI/L related to interest rate hedging instruments that is expected to be reclassified into aircraft rent within the consolidated statements of operations over the aircraft lease term of the hedging instrument.