United Airlines 2008 Annual Report Download - page 131

(b) Net current exposure equals relevant advance ticket sales less certain exclusions, and as adjusted for specified amounts pay-
able between United and the processor, as further defined by the agreement.
The new agreement permits the Company to provide certain replacement collateral in lieu of cash
collateral, as long as the Company’s unrestricted cash is above $1.35 billion. Such replacement collateral
may be pledged for any amount of the required reserve up to the full amount thereof, with the stated
value of such collateral determined according to the agreement. Replacement collateral may be
comprised of aircraft, slots and routes, real estate or other collateral as agreed between the parties.
In the near term, the Company will not be required to post reserves under the new American
Express agreement as long as unrestricted cash as measured at each month-end, and as defined in the
agreement, is equal to or above $2.0 billion.
If the terms of the new agreement had been in place at December 31, 2008, and ignoring the near
term protection in the preceding sentence, the Company would have been required to provide collateral
of approximately $40 million.
An increase in the future reserve requirements as provided by the terms of either or both the
Company’s material card processing agreements could materially reduce the Company’s liquidity.
(13) Fair Value Measurements and Derivative Instruments
Instruments designated as cash flow hedges are accounted for under SFAS 133, as long as the hedge
is highly effective and the underlying transaction is probable. If both factors are present, the effective
portion of the changes in fair value of these contracts is recorded in accumulated other comprehensive
income (loss) until earnings are affected by the cash flows being hedged. To the extent that the
designated cash flow hedges are ineffective, gain or loss is recognized currently in earnings. The
Company offsets the fair value of derivative instruments executed with the same counterparty when
netting agreements exist.
Instruments classified as economic hedges do not qualify for hedge accounting under SFAS 133.
Under this classification all changes in the fair value of these contracts are recorded currently in income,
with the offset to either current assets or liabilities each reporting period. Economic fuel hedge gains
and losses are classified as part of aircraft fuel expense and fuel hedge gains and losses from instruments
that are not deemed economic hedges are classified as part of nonoperating income. Foreign currency
hedge gains and losses are classified as part of nonoperating income.
Aircraft Fuel Hedges.
The Company has a risk management strategy to hedge a portion of its price risk related to
projected jet fuel requirements. As presented in the table below, the Company utilizes various types of
hedging instruments including purchased calls, collars, 3-way collars and 4-way collars. A collar involves
the purchase of fuel call options with the simultaneous sale of fuel put options with identical expiration
dates. Derivative gains (losses) from economic hedges are included in fuel expense while gains (losses)
from other hedges are recorded in nonoperating income (expense).
The following table presents the fuel hedge (gains) losses recognized during the periods presented
and their classification in the Statements of Consolidated Operations.
(In millions) 2008 2007 2006 2008 2007 2006
Mainline Fuel
Year Ended
December 31,
Nonoperating income (expense)
Year Ended
December 31,
Fuel hedges(a):
Cash fuel hedge (gains) losses.................. $ 40 $(63) $24 $249 $— $—
Non-cash fuel hedge (gains) losses .............. 568 (20) 2 279 — —
Total fuel hedge (gains) losses .............. $608 $(83) $26 $528 $— $—
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