US Airways 2008 Annual Report Download - page 151

Table of Contents
US Airways, Inc.
Notes to Consolidated Financial Statements — (Continued)
5. Risk management and financial instruments
US Airways 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 US Airways'
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 US Airways' results of operations, financial performance and liquidity.
(a) Fuel Price Risk
Because US Airways' 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, US
Airways 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, US Airways 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 US Airways' fuel hedging derivative instruments at December 31, 2008 was a liability of $375 million recorded in
accounts payable. The fair value of US Airways' fuel hedging derivative instruments at December 31, 2007 was an asset of $121 million
recorded in prepaid expenses and other. Refer to Note 6 for discussion on how US Airways 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 US Airways' 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 US Airways' fuel hedging derivative instruments are in a net asset position, US Airways 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 US Airways' fuel hedging derivatives. To manage credit risks, US Airways 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. US Airways 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 US Airways' fuel hedging derivative instruments are in a net liability position, US Airways is exposed to credit risks related
to the return of collateral in situations in which US Airways has posted collateral with counterparties for unrealized losses. When
possible, in order to mitigate this risk, US Airways provides letters of credit to certain counterparties in lieu of cash. At December 31,
2008, $185 million related to letters of credit
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