JetBlue Airlines 2006 Annual Report Download - page 73

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these commodities are normally highly correlated to aircraft fuel, making derivatives of them effective
at offsetting aircraft fuel prices to provide some short-term protection against a sharp increase in
average fuel prices. We have agreements whereby cash deposits are required if market risk exposure
exceeds a specified threshold amount. The fair values of our financial derivative instruments are
estimated through the use of standard option value models and/or present value methods since these
instruments are not actively traded on a market exchange. The following is a summary of our
derivative contracts (in millions, except as otherwise indicated):
2006 2005
At December 31:
Fair value of derivative instruments at year end ......................... $ (15) $ 2
Longest remaining term (months) ..................................... 12 12
Hedged volume (barrels) ............................................. 4,077 3,225
2006 2005 2004
Year ended December 31:
Hedge effectiveness net gains (losses) recognized in aircraft fuel expense . . $ (4) $ 43 $ 37
Hedge ineffectiveness net gains recognized in other income (expense) .... — — —
Other fuel derivative net losses recognized in other income (expense)..... (5) — —
Percentage of actual consumption economically hedged ................. 64%22%42%
As of December 31, 2006, 93%of our outstanding derivative contracts were designated as cash
flow hedges for accounting purposes. While outstanding, these contracts are recorded at fair value on
the balance sheet with the effective portion of the change in their fair value being reflected in
accumulated other comprehensive income (loss). At December 31, 2005, none of our derivative
contracts were designated as cash flow hedges.
Ineffectiveness results when the change in the total fair value of the derivative instrument does
not exactly equal the change in the value of our expected future cash outlays to purchase aircraft fuel.
To the extent that the periodic changes in the fair value of the hedging instruments are not effective,
the ineffectiveness is recognized in other income (expense) immediately. Likewise, if a hedge ceases to
qualify for hedge accounting, those periodic changes in the fair value of the derivative instruments are
recognized in other income (expense) in the period of the change. When aircraft fuel is consumed and
the related derivative contract settles, any gain or loss previously deferred in other comprehensive
income is recognized in aircraft fuel expense.
Any outstanding financial derivative instruments expose us to credit loss in the event of
nonperformance by the counterparties to the agreements, but we do not expect any of our four
counterparties to fail to meet their obligations. The amount of such credit exposure is generally the
unrealized gains, if any, in such contracts. To manage credit risks, we select counterparties based on
credit assessments, limit overall exposure to any single counterparty and monitor the market position
with each counterparty. We do not use derivative instruments for trading purposes.
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