US Airways 2008 Annual Report Download - page 77

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 in value 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 2009 forecasted mainline and Express fuel consumption is approximately
1.44 billion gallons, and a one cent per gallon increase in aviation fuel price results in a $14 million annual increase in expense, excluding
the impact of hedge transactions.
As of December 31, 2008, we have entered into no premium collars, which establish an upper and lower limit on heating oil futures
prices, to protect us from fuel price risks. These transactions are in place with respect to approximately 14% of our projected mainline
and Express 2009 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 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. As of December 31, 2008, the fair value of our fuel hedging instruments was a net liability of $375 million.
Further, these instruments do not provide protection from future price increases unless heating oil prices exceed the call option price of
the no premium collar. Although heating oil prices are generally highly correlated with those of jet fuel, the prices of jet fuel may change
more or less than heating oil, resulting in a change in fuel expense that is not fully offset by the hedge transactions. At December 31,
2008, we estimate that a 10% increase in heating oil futures prices would increase the fair value of the hedge transactions by
approximately $30 million. We estimate that a 10% decrease in heating oil futures prices would decrease the fair value of the hedging
transactions by approximately $30 million. Since we have not entered into any new fuel hedge transactions since the third quarter of
2008, the impact of changes in heating oil futures prices will decrease as existing hedges are settled.
When our fuel hedging derivative instruments are in a net asset position, we are exposed to credit losses in the event of non-
performance by counterparties to our fuel hedging derivatives. The amount of such credit exposure is limited to the unrealized gains, if
any, on our fuel hedging derivatives. To manage credit risks, we carefully select counterparties, conduct transactions with multiple
counterparties which limits our exposure to any single counterparty, and monitor the market position of the program and our relative
market position with each counterparty. We
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