US Airways 2007 Annual Report Download - page 67

Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments
Our primary market risk exposures include commodity price risk (i.e., the price paid to obtain aviation fuel) and interest rate risk.
The potential impact of adverse increases in these risks and general strategies that we employ to manage these risks are discussed below.
The following sensitivity analyses do not consider the effects that an adverse change may have on the overall economy nor do they
consider additional actions we may take to mitigate our 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
our 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
our liquidity, results of operations and financial condition. Our 2008 forecasted mainline and Express fuel consumption is approximately
1.57 billion gallons and a one cent per gallon increase in fuel price results in a $16 million annual increase in expense, excluding the
impact of hedge transactions.
As of December 31, 2007, we have entered into costless collars to protect ourself from fuel price risks, which establish an upper and
lower limit on heating oil futures prices. These transactions are in place with respect to approximately 22% of our mainline and Express
2008 fuel requirements at a weighted average collar range of $2.05 to $2.25 per gallon of heating oil.
The use of such hedging transactions in our fuel hedging program could result in us not fully benefiting from certain declines in
heating oil futures prices. Further, these instruments do not provide protection from the increases unless heating oil prices exceed the call
option price of the costless collar. Although heating oil prices are generally highly correlated with those of jet fuel, the prices of jet fuel
may change more or less then heating oil, resulting in a change in fuel expense that is not perfectly offset by the hedge transactions. As of
December 31, 2007, we estimate that a 10% increase in heating oil futures prices would increase the fair value of the hedge transactions
by approximately $85 million. We estimate that a 10% decrease in heating oil futures prices would decrease the fair value of the hedging
transactions by approximately $75 million.
As of February 15, 2008, approximately 28% of our 2008 projected fuel requirements for mainline and Express operations are
hedged.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our cash equivalents, investments portfolios and variable rate debt obligations.
At December 31, 2007, our variable-rate long-term debt obligations of approximately $2.13 billion represented approximately 65% of our
total long-term debt. If interest rates increased 10% in 2007, the
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