US Airways 2008 Annual Report Download - page 107

Table of Contents
US Airways Group, Inc.
Notes to Consolidated Financial Statements — (Continued)
6. Risk management and financial instruments
The Company operates in an industry whose economic prospects are heavily dependent upon two variables it cannot control: the
health of the economy and the price of fuel. Due to the discretionary nature of business and leisure travel spending, airline industry
revenues are heavily influenced by the condition of the U.S. economy and the economies in other regions of the world. Unfavorable
economic conditions may result in decreased passenger demand for air travel, which in turn could have a negative effect on the
Company's revenues. Similarly, the airline industry may not be able to sufficiently raise ticket prices to offset increases in aviation jet fuel
prices. These factors could impact the Company's results of operations, financial performance and liquidity.
(a) Fuel Price Risk
Because the Company's operations are dependent upon aviation fuel, significant increases in aviation fuel costs materially and
adversely affect its liquidity, results of operations and financial condition. To manage the risk of changes in aviation fuel prices, the
Company periodically enters into derivative contracts comprised of heating oil-based derivative instruments to hedge a portion of its
projected jet fuel requirements. As of December 31, 2008, the Company had entered into no premium collars to hedge approximately
14% of its projected mainline and Express 2009 jet fuel requirements at a weighted average collar range of $3.41 to $3.61 per gallon of
heating oil or $131.15 to $139.55 per barrel of estimated crude oil equivalent.
The fair value of the Company's fuel hedging derivative instruments at December 31, 2008 was a liability of $375 million recorded
in accounts payable. The fair value of the Company's fuel hedging derivative instruments at December 31, 2007 was an asset of
$121 million recorded in prepaid expenses and other. Refer to Note 7 for discussion on how the Company determines the fair value of its
fuel hedging derivative instruments. The net change in the fair value from an asset of $121 million to a liability of $375 million
represents the unrealized loss of $496 million for 2008. The unrealized loss was due to the significant decline in the price of oil in the
latter part of 2008. The following table details the Company's loss (gain) on fuel hedging instruments, net (in millions):
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2008 2007 2006
Realized loss (gain) $ (140) $ (58) $ 9
Unrealized loss (gain) 496 (187) 70
Loss (gain) on fuel hedging instruments, net $ 356 $ (245) $ 79
(b) Credit Risk
Fuel Hedging
When the Company's fuel hedging derivative instruments are in a net asset position, the Company is exposed to credit losses in the
event of non-performance by counterparties to its fuel hedging derivatives. The amount of such credit exposure is limited to the
unrealized gains, if any, on the Company's fuel hedging derivatives. To manage credit risks, the Company carefully selects
counterparties, conducts transactions with multiple counterparties which limits its exposure to any single counterparty, and monitors the
market position of the program and its relative market position with each counterparty. The Company also maintains industry-standard
security agreements with all of its counterparties which may require the counterparty to post collateral if the value of the fuel hedging
derivatives exceeds specified thresholds related to the counterparty's credit ratings.
When the Company's fuel hedging derivative instruments are in a net liability position, the Company is exposed to credit risks
related to the return of collateral in situations in which the Company has posted collateral with counterparties for unrealized losses. When
possible, in order to mitigate this risk, the Company provides letters
105