Spirit Airlines 2015 Annual Report Download - page 61

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61
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, 2015, 2014 and 2013 represented approximately 28.3%, 38.9% and
40.2% of our operating expenses, respectfully. Volatility 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 hypothetical 10% increase in the average price per
gallon of aircraft fuel would have increased into-plane aircraft fuel cost for 2015 by $45.5 million.
As of December 31, 2015, we did not have any outstanding fuel derivatives. The fair value of our fuel derivative
contracts as of December 31, 2014 was an asset of $4.8 million. We measure our financial derivative instruments at fair value.
Fair value of the instruments is determined using standard option valuation models. Changes in the related commodity
derivative instrument cash flows may change by more or less than the amount based upon further fluctuations in future 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.
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 2015 would affect total aircraft rent expense in 2016 by less than $0.1
million.
Fixed-Rate Debt. As of December 31, 2015, we had $659.3 million outstanding in fixed-rate debt related to the purchase
of 12 Airbus A320 aircraft and 6 Airbus A321 aircraft, which had a fair value of $652.4 million. As of December 31, 2014, we
had $148.0 million outstanding in fixed-rate debt related to the purchase of four Airbus A320 aircraft, which had a fair value of
$148.1 million.