Alaska Airlines and Horizon Air 2009 Annual Report Download - page 168

NOTE 3. FUEL HEDGE CONTRACTS
The Company’s operations are inherently
dependent upon the price and availability of
aircraft fuel. To manage economic risks
associated with fluctuations in aircraft fuel
prices, the Company periodically enters into call
options for crude oil and swap agreements for jet
fuel refining margins, among other initiatives.
The Company records these instruments on the
balance sheet at their fair value. Changes in the
fair value of these fuel hedge contracts are
recorded each period in aircraft fuel expense.
The following table summarizes the components
of aircraft fuel expense for the years ended
December 31, 2009, 2008 and 2007 (in
millions):
2009 2008 2007
Raw or “into-plane” fuel
cost .............. $686.2 $1,328.8 $ 981.9
(Gains) or losses in
value and
settlements of fuel
hedge contracts .... (28.1) 69.6 (105.6)
Aircraft fuel expense . . . $658.1 $1,398.4 $ 876.3
The premiums expensed, net of any cash
received, for hedges that settled during 2009
totaled $60.7 million. The cash received, net of
premiums expensed, in 2008 and 2007 was
$122.7 million and $53.4 million, respectively, for
fuel hedge contracts that settled during the period
based on their originally scheduled settlement
date. The Company also realized losses of $50
million on fuel hedge contracts terminated in the
fourth quarter of 2008 that had scheduled
settlement dates in 2009 and 2010. These
amounts represent the difference between the
cash paid or received at settlement and the
amount of premiums paid for the contracts at
origination.
As of December 31, 2009 and 2008, the fair
values of the Company’s fuel hedge positions
were $115.9 million and $28.3 million,
respectively, including capitalized premiums paid
to enter into the contracts of $88.9 million and
$89.1 million, respectively.
The Company uses the “market approach” in
determining the fair value of its hedge portfolio.
The Company’s fuel hedging contracts consist of
over-the-counter contracts, which are not traded
on an exchange. The fair value of these
contracts is determined based on observable
inputs that are readily available in active markets
or can be derived from information available in
active, quoted markets. Therefore, the Company
has categorized these contracts as Level 2 in the
fair value hierarchy described in Note 12.
Outstanding fuel hedge positions as of
December 31, 2009 are as follows:
Approximate
%of
Expected
Fuel
Requirements
Gallons
Hedged
(in millions)
Approximate
Crude Oil
Price per
Barrel
First Quarter
2010 .......... 50% 43.6 $69
Second Quarter
2010 .......... 50% 45.9 $69
Third Quarter
2010 .......... 50% 48.3 $74
Fourth Quarter
2010 .......... 50% 44.5 $83
Full Year 2010 .. 50% 182.3 $74
First Quarter
2011 .......... 50% 44.9 $87
Second Quarter
2011 .......... 41% 39.2 $83
Third Quarter
2011 .......... 36% 35.6 $86
Fourth Quarter
2011 .......... 22% 19.9 $84
Full Year 2011 .. 37% 139.6 $85
First Quarter
2012 .......... 23% 21.6 $87
Second Quarter
2012 .......... 7% 7.0 $86
Third Quarter
2012 .......... 6% 6.4 $97
Fourth Quarter
2012 .......... 6% 5.2 $93
Full Year 2012 .. 10% 40.2 $89
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