Spirit Airlines 2013 Annual Report Download - page 57

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57
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk-Sensitive Instruments and Positions
We are subject to certain market risks, including commodity prices (specifically aircraft fuel). The adverse effects of
changes in these markets could pose a potential loss as discussed below. The sensitivity analysis provided below does not
consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we
may take to mitigate our exposure to such changes. Actual results may differ.
Aircraft Fuel. Our results of operations can vary materially due to changes in the price and availability of aircraft fuel.
Aircraft fuel expense for the years ended December 31, 2013, 2012 and 2011 represented approximately 40.2%, 41.2% and
41.9% of our operating expenses. Increases in aircraft fuel prices or a shortage of supply could have a material adverse effect
on our operations and operating results. We source a significant portion of our fuel from refining resources located in the
southeast United States, particularly facilities adjacent to the Gulf of Mexico. Gulf Coast fuel is subject to volatility and supply
disruptions, particularly during hurricane season when refinery shutdowns have occurred, or when the threat of weather related
disruptions has caused Gulf Coast fuel prices to spike above other regional sources. Both jet fuel swaps and jet fuel options are
used at times to protect the refining price risk between the price of crude oil and the price of refined jet fuel, and to manage the
risk of increasing fuel prices. In addition to other fuel derivative contracts, we have historically protected approximately 70%
of our forecasted fuel requirements during peak hurricane season (August through October) using jet fuel swaps. Gulf Coast Jet
indexed fuel is the basis for a substantial majority of our fuel consumption. Based on our annual fuel consumption, a 10%
increase in the average price per gallon of aircraft fuel would have increased into-plane aircraft fuel cost for 2013 by
approximately $54.3 million. As of December 31, 2013, we had no derivative contracts outstanding.
The fair value of our fuel derivative contracts as of December 31, 2012 was $0.3 million net liability. We measure our
financial derivative instruments at fair value. Fair value of the instruments is determined using standard option valuation
models. We measure the fair value of the derivative instruments based on either quoted market prices or values provided by the
counterparty. Changes in the related commodity derivative instrument cash flows may change by more or less than this amount
based upon further fluctuations in futures prices. Outstanding financial derivative instruments expose us to credit loss in the
event of nonperformance by the counterparties to the agreements. However, we do not expect the counterparties to fail to meet
their obligations. As of December 31, 2013, we had no credit exposure related to counterparties as we had no derivative
contracts outstanding.
Interest Rates. We have market risk associated with changing interest rates due to LIBOR-based lease rates on five of our
aircraft. A hypothetical 10% change in interest rates in 2013 would affect total aircraft rent expense in 2014 by less than $0.1
million.