Delta Airlines 2012 Annual Report Download - page 73

NOTE 4 . DERIVATIVES AND RISK MANAGEMENT
Our results of operations are impacted by changes in aircraft fuel prices, interest rates and foreign currency exchange rates. In an effort to manage
our exposure to these risks, we enter into derivative contracts and may adjust our derivative portfolio as market conditions change.
Aircraft Fuel Price Risk
Our results of operations are materially impacted by changes in aircraft fuel prices. We actively manage our fuel price risk through a hedging
program intended to reduce the financial impact on us from changes in the price of jet fuel. This fuel hedging program utilizes several different
contract and commodity types. The economic effectiveness of this hedge portfolio is frequently tested against our financial targets. The hedge
portfolio is rebalanced from time to time according to market conditions, which may result in locking in gains or losses on hedge contracts prior to
their settlement dates .
Effective June 2011, we stopped designating substantially all of our new fuel derivative contracts as accounting hedges and discontinued hedge
accounting for our then existing fuel derivative contracts that previously had been designated as accounting hedges. As a result, we record market
adjustments for changes in fair value of fuel derivative contracts to earnings in aircraft fuel and related taxes. Prior to this change in accounting
designation, gains or losses on these contracts were deferred in AOCI until contract settlement. We reclassify to earnings all amounts from market
adjustments for changes in fair value relating to our fuel derivative contracts in AOCI on the contract settlement dates.
The following table shows the impact of fuel hedge losses (gains) for both designated and undesignated contracts on aircraft fuel and related
taxes:
Interest Rate Risk
Our exposure to market risk from adverse changes in interest rates is primarily associated with our long-term debt obligations. Market risk
associated with our fixed and variable rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings,
respectively, from an increase in interest rates.
In an effort to manage our exposure to the risk associated with our variable rate long-term debt, we periodically enter into derivative contracts
comprised of interest rate swaps and call option agreements. We designate our interest rate contracts used to convert our interest rate exposure on a
portion of our debt portfolio from a floating rate to a fixed rate as cash flow hedges, while those contracts converting our interest rate exposure from
a fixed rate to a floating rate are designated as fair value hedges.
We also have exposure to market risk from adverse changes in interest rates associated with our cash and cash equivalents and benefit plan
obligations. Market risk associated with our cash and cash equivalents relates to the potential decline in interest income from a decrease in interest
rates. Pension, postretirement, postemployment, and worker's compensation obligation risk relates to the potential increase in our future obligations
and expenses from a decrease in interest rates used to discount these obligations.
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange rate risk because we have revenue and expense denominated in foreign currencies with our primary
exposures being the Japanese yen and Canadian dollar. To manage exchange rate risk, we execute both our international revenue and expense
transactions in the same foreign currency to the extent practicable. From time to time, we may also enter into foreign currency option and forward
contracts. These foreign currency exchange contracts are designated as cash flow hedges.
66
Year Ended December 31,
(in millions) 2012 2011 2010
Market adjustments for changes in fair value
$
81
$
(187
)
$
2
Effective portion reclassified from AOCI to earnings
(15
)
(233
)
87
Losses (gains) recorded in aircraft fuel and related taxes
$
66
$
(420
)
$
89