United Airlines 2012 Annual Report Download - page 64

Table of Contents
Commodity Price Risk (Aircraft Fuel). The availability and price of aircraft fuel significantly affects the Company’s operations, results of operations,
financial position and liquidity.
To protect against increases in the prices of aircraft fuel, the Company routinely hedges a portion of its future fuel requirements. The Company generally uses
financial hedge instruments including fixed price swaps, purchased call options, and commonly used combinations using put and call options including
collars (sold put option combined with purchased call option) and three-ways (sold put option combined with purchased call option and a higher strike sold
call option). These hedge instruments are generally based on aircraft fuel or closely related commodities including heating oil, diesel fuel and crude oil.
Some financial hedge contracts may result in losses if the underlying commodity prices drop below specified floor prices. However, the negative impact of
these losses may be outweighed by the benefit of lower aircraft fuel cost since the Company typically hedges only a portion of its future fuel requirements. The
Company does not enter into hedge instruments for trading purposes.
If fuel prices decline significantly from the levels existing at the time we enter into a hedge contract, we may be required to post collateral (margin) with our
hedge counterparties. The Company frequently monitors this margin risk and assesses the potential of posting collateral with each of its counterparties. At
times, when the fair market value of the Company’s hedge contracts is net positive to the Company, it is exposed to the event of non-performance by the
counterparty to the hedge contract. The Company periodically monitors the credit worthiness of its counterparties and limits its exposure to any single
counterparty.
The Company may adjust its hedging program based on changes in market conditions. The following table summarizes information related to the Company’s
cost of fuel and hedging (in millions, except percentages):
  

In 2012, fuel cost as a percent of total operating expenses (a) 36% 36% 36%
Impact of $1 increase in price per barrel of aircraft fuel on annual fuel expense
(b) $ 94 $ 52 $ 42

Asset fair value at December 31, 2012 (c) $ 46 $ 28 $ 18
Impact of a concurrent 10% decrease in forward prices of the underlying
commodities on the value of fuel hedges (d) $(148) $(85) $ (63)
Collateral UAL, United and Continental would be required to post with fuel
hedge counterparties upon a concurrent 10% decrease in forward prices of the
underlying commodities of fuel hedges (e) $ 11 $ 5 $ 6
(a) Includes related taxes and excludes hedging impacts and special charges. In 2011, UAL’s, United’s and Continental’s fuel cost was 37%, 37%, and 36% of total operating expenses, respectively.
(b) Based on 2013 projected fuel consumption. Does not include the impact of fuel hedges.
(c) As of December 31, 2011, the net fair value of UAL’s, United’s and Continental’s fuel hedges was $73 million, $44 million and $29 million, respectively.
(d) Based on fuel hedge positions at December 31, 2012.
(e) Assumes instantaneous change in prices and includes margin related to some hedge positions beyond December 31, 2013; approximately 2% for 2014.
As of December 31, 2012, the Company had hedged approximately 31% and 2% of its projected fuel requirements (1.2 billion and 63 million gallons,
respectively) for 2013 and 2014, respectively, with commonly used financial hedge instruments based on aircraft fuel or closely related commodities, such as
heating oil, diesel fuel and crude oil.
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