Alaska Airlines and Horizon Air 2012 Annual Report Download - page 135

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Aircraft Fuel
Currently, our fuel-hedging portfolio consists of
crude oil call options and jet fuel refining margin
swap contracts. Both call options and swaps
effectively cap our pricing for the crude oil and
refining margin components, limiting our
exposure to increasing fuel prices for about half
of our planned fuel consumption. With the call
option contracts, we still benefit from the decline
in crude oil prices, as there is no future cash
exposure above the premiums we pay to enter
into the contracts. The swap contracts do not
require an upfront premium, but do expose us to
future cash outlays in the event actual prices are
below the swap price during the hedge period.
We believe there is risk in not hedging against
the possibility of fuel price increases. We
estimate that a 10% increase or decrease in
crude oil prices as of December 31, 2012 would
increase or decrease the fair value of our crude
oil hedge portfolio by approximately $112 million
and $35 million, respectively.
Our portfolio value of fuel hedge contracts was
$64 million at December 31, 2012 compared to
a portfolio value of $107 million at
December 31, 2011. We do not have any
collateral held by counterparties to these
agreements as of December 31, 2012.
We continue to believe that our fuel hedge
program is an important part of our strategy to
reduce our exposure to volatile fuel prices. We
expect to continue to enter into these types of
contracts prospectively, although significant
changes in market conditions could affect our
decisions. For more discussion, see “Derivative
Instruments” note in our consolidated financial
statements.
Interest Rates
We have exposure to market risk associated with
changes in interest rates related primarily to our
debt obligations and short-term investment
portfolio. Our debt obligations include variable-
rate instruments, which have exposure to
changes in interest rates. This exposure is
somewhat mitigated through our variable-rate
investment portfolio. A hypothetical 10% change
in the average interest rates incurred on variable-
rate debt during 2012 would correspondingly
change our net earnings and cash flows
associated with these items by less than $1
million. In order to help mitigate the risk of
interest rate fluctuations, we have fixed the
interest rates on certain existing variable-rate
debt agreements. Our variable-rate debt is
approximately 18% of our total long-term debt at
December 31, 2012 compared to 23% at
December 31, 2011.
We also have investments in marketable
securities, which are exposed to market risk
associated with changes in interest rates. If
short-term interest rates were to average 1%
more than they did in 2012, interest income
would increase by approximately $12 million.
47
ŠForm 10-K