Spirit Airlines 2014 Annual Report Download - page 58

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58
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) and interest rates. We
purchase the majority of our jet fuel at prevailing market prices and seek to manage market risk through execution of our
hedging strategy and other means. We have market-sensitive instruments in the form of fixed-rate debt instruments, and
financial derivative instruments used to hedge our exposure to jet fuel price increases and interest rate increases. We do not
purchase or hold any derivative financial instruments for trading purposes. 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, 2014, 2013 and 2012 represented approximately 38.9%, 40.2% and
41.2% of our operating expenses, respectfully. 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. 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 2014 by approximately $60.8 million. As of December 31,
2014, we had jet fuel option agreements in place to protect 88.7 million gallons, or approximately 35% of our 2015 anticipated
fuel consumption, at a weighted-average ceiling price of $2.07 per gallon.
The fair value of our fuel derivative contracts as of December 31, 2014 was a $4.8 million asset. 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 2014 would affect total aircraft rent expense in 2015 by less than $0.1
million. We also have market risk associated with changing interest rates due to LIBOR-based forward interest rate swaps that
fix the benchmark interest rate component of the forecasted interest payments on the debt related to three Airbus A321 aircraft
with expected delivery dates ranging from July 2015 to September 2015. The interest rate swaps will be designated as cash
flow hedges. The fair value of our interest rate swaps as of December 31, 2014 was a $1.1 million liability.
Fixed-Rate Debt. As of December 31, 2014, we had $148.0 million outstanding in fixed-rate debt related to the purchase
of four Airbus A320 aircraft in the fourth quarter of 2014, which had a fair value of $148.1 million.