Delta Airlines 2008 Annual Report Download - page 80

Table of Contents
Index to Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
we are required to recognize all derivative instruments as either assets or liabilities at fair value on our Consolidated Balance Sheets and recognize certain
changes in their fair value on our Consolidated Statements of Operations.
We believe our hedge contracts will be highly effective during their term in offsetting changes in cash flow or fair value attributable to the hedged risk.
We perform both a prospective and retrospective assessment to this effect at least quarterly, including assessing the possibility of counterparty default. If we
determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in
the fair value of the hedge to aircraft fuel and related taxes on our Consolidated Statements of Operations. As a result of our effectiveness assessment at
December 31, 2008, we believe our hedge contracts will continue to be highly effective in offsetting changes in cash flow or fair value attributable to the
hedged risk.
Cash flow hedges
For derivative instruments that are designated and qualify as cash flow hedges under SFAS 133, the effective portion of the gain or loss on the
derivative is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair
value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the
ineffective portion of the hedge is immediately recognized in other (expense) income on our Consolidated Statements of Operations. The following table
summarizes the accounting treatment and classification of our cash flow hedges on our Consolidated Financial Statements:
Impact of Unrealized Gains and Losses
Consolidated
Balance Sheets
Consolidated
Income Statements
Derivative Instrument(1) Hedged Risk Effective Portion Ineffective Portion
Designated under SFAS 133:
Fuel hedges consisting of crude oil,
heating oil, and jet fuel swaps, collars
and call options(2)
Volatility in jet
fuel prices
Effective portion of hedge is recorded in
accumulated other comprehensive income
Excess, if any, over effective portion of hedge is
recorded in other (expense) income
Interest rate swaps and caps Changes in
interest rates
Entire hedge is recorded in
accumulated other
comprehensive income
Expect hedge to fully offset
hedged risk; no
ineffectiveness recorded
Foreign currency
forwards and collars
Foreign currency
exchange rate
fluctuations
Entire hedge is recorded in
accumulated other
comprehensive income
Expect hedge to fully offset
hedged risk; no
ineffectiveness recorded
Not qualifying or not designated under
SFAS 133:
Fuel hedges consisting of crude oil,
heating oil and jet fuel extendable
swaps and three-way collars
Volatility in jet
fuel prices
Entire amount of change in fair value of hedge is recorded in aircraft fuel expense and related
taxes
(1) In the Merger, we assumed Northwest's outstanding hedge contracts, which include fuel, interest rate and foreign currency cash flow hedges. On the Closing Date, we designated certain
of these contracts as hedges in accordance with SFAS 133. The remaining Northwest derivative contracts that were not designated under SFAS 133 did not qualify for hedge accounting.
(2) Ineffectiveness on our fuel hedge option contracts is calculated using a "perfectly effective" hypothetical derivative, which acts as a proxy for the fair value of the change in expected cash
flows from the purchase of aircraft fuel.
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