US Airways 2005 Annual Report Download - page 115

Table of Contents
US Airways Group, Inc.
Notes to Consolidated Financial Statements — (Continued)
market rates. These leasehold interests are amortized on a straight-line basis as an increase to aircraft rent expense over the applicable remaining lease periods,
generally 17 years.
(j) Frequent traveler program
US Airways Group's principal operating subsidiaries, AWA and US Airways, maintain frequent travel award programs known as "FlightFund" and
"Dividend Miles," respectively. These programs provide a variety of awards to program members based on accumulated mileage. The estimated cost of
providing the free travel, using the incremental cost method as adjusted for estimated redemption rates, is recognized as a liability and charged to operations
as program members accumulate mileage and requisite mileage award levels are achieved. For travel awards on partner airlines, the liability is based on the
average contractual amount to be paid to the other airline per redemption.
(k) Derivative instruments
The Company utilizes financial derivative instruments primarily to manage its risk associated with changing jet fuel prices. The Company utilizes heating
oil-based derivative instruments to hedge a portion of its exposure to jet fuel price increases. These instruments primarily consist of costless collars which
hedge over 20 percent of its 2006 total anticipated jet fuel requirements at average crude oil equivalent prices of no higher than $67 per barrel as of
December 31, 2005. The Company does not purchase or hold any derivative financial instruments for trading purposes.
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities, as amended," ("SFAS 133") requires that all derivatives be marked to market
(fair value) and recorded on the balance sheet. Derivatives that are not hedges must be adjusted to fair value through income.
As of December 31, 2005, US Airways had no open fuel hedge positions in place. As of December 31, 2005 and 2004, AWA had open fuel hedge
positions in place, which do not currently qualify for hedge accounting under SFAS 133. Accordingly, the derivative hedging instruments are recorded as an
asset or liability on the balance sheet at fair value and any changes in fair value are recorded as gains on fuel hedging instruments, net in operating expenses in
the accompanying consolidated statements of operations in the period of change. During 2005, 2004 and 2003, AWA recognized gains of $75 million,
$24 million and $11 million, respectively, related to hedging activities. The fair value of AWA's financial derivative instruments at December 31, 2005 and
2004 was a net asset of approximately $4 million and $0.2 million, respectively.
Since AWA's financial derivative instruments are not traded on a market exchange, the values are determined by the use of valuation models with
assumptions about commodity prices based on those observed in the underlying markets.
US Airways holds stock options in Sabre Holding Corporation ("Sabre") and warrants in a number of e-commerce companies as a result of service
agreements with them. On an ongoing basis, US Airways adjusts its balance sheet to reflect changes in the current fair market value of the stock options and
warrants to other non-operating income (expense) on its statements of operations. See Note 8 for more information on US Airways Group's derivative
financial instruments.
In 2004, AWA restated its consolidated financial statements to eliminate hedge accounting under SFAS 133 for its fuel hedging transactions. As part of
this restatement, $2 million of unrealized gains previously reported as a component of accumulated other comprehensive income in 2002 were eliminated in
the 2003 financial statements. 109