US Airways 2005 Annual Report Download - page 98

Table of Contents
consider the effects that an adverse change may have on the overall economy nor do they consider additional actions the Company may take to mitigate its
exposure to these changes. Actual results of changes in prices or rates may differ materially from the following hypothetical results.
Commodity Price Risk
Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of the Company's control.
Accordingly, the price and availability of aviation fuel, as well as other petroleum products, can be unpredictable. Prices may be affected by many factors,
including:
• the impact of global political instability on crude production;
• unexpected changes to the availability of petroleum products due to disruptions in distribution systems or refineries as evidenced in the third quarter of
2005 when Hurricane Katrina and Hurricane Rita caused widespread disruption to oil production, refinery operations and pipeline capacity along
certain portions of the U.S. Gulf Coast. As a result of these disruptions, the price of jet fuel increased significantly and the availability of jet fuel
supplies was diminished;
• unpredicted increases to oil demand due to weather or the pace of economic growth;
• inventory levels of crude, refined products and natural gas; and
• other factors, such as the relative fluctuation between the U.S. dollar and other major currencies and influence of speculative positions on the futures
exchanges.
Because our operations are dependent upon aviation fuel, significant increases in aviation fuel costs materially and adversely affect the Company's
liquidity, results of operations and financial condition. Forecasted fuel consumption for the Company is approximately 1.57 billion gallons per year, and a one
cent per gallon increase in fuel price results in a $16 million annual increase in expense, excluding the impact of hedges.
As of December 31, 2005, the Company had entered into costless collar transactions, which establish an upper and lower limit on heating oil futures
prices. These transactions are in place with respect to approximately 20% of the Company's 2006 fuel requirements.
The use of such hedging transactions in the Company's fuel hedging program could result in the Company not fully benefiting from certain declines in
heating oil futures prices. Further, these instruments do not provide protection from the increases. The Company estimates that a 10% increase in price levels
of heating oil on December 31, 2005 would increase the fair value of the costless collar transactions by approximately $30 million. The Company estimates
that a 10% decrease in heating oil futures prices would decrease the fair value of the costless collar transactions by approximately $28 million.
As of February 28, 2006, approximately 34% of the Company's 2006 projected fuel requirements, respectively, are hedged. In January of 2006, the
Company diversified the instruments used in its hedge portfolio to include call options. Although call options require up-front premium payments, the
Company can fully participate in price decreases. As of February 28, 2006, the hedges held by the Company do not qualify for hedge accounting per
SFAS 133.
Interest Rate Risk
The Company's exposure to interest rate risk relates primarily to its cash equivalents and short-term investments portfolios and variable rate debt
obligations. At December 31, 2005, the Company's variable-rate long-term debt obligations of approximately $2.73 billion represented approximately 87% of
its total long-term debt. If interest rates increased 10% in 2006, the impact on the Company's results of operations
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