Alaska Airlines and Horizon Air 2013 Annual Report Download - page 137

value of the long-lived assets, management
decisions regarding the future use of the assets,
a significant change in the long-lived assets
condition, and operating cash flow losses
associated with the use of the long-lived asset.
There is inherent risk in estimating the fair value
of our aircraft and related parts and their salvage
values at the time of impairment. Actual
proceeds upon disposition of the aircraft or
related parts could be materially less than
expected, resulting in additional loss. Our
estimate of salvage value at the time of disposal
could also change, requiring us to increase the
depreciation expense on the affected aircraft.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
We have interest-rate risk on our variable-rate
debt obligations and our available-for-sale
marketable investment portfolio, and commodity-
price risk in jet fuel required to operate our
aircraft fleet. We purchase the majority of our jet
fuel at prevailing market prices and seek to
manage market risk through execution of our
hedging strategy and other means. We have
market-sensitive instruments in the form of fixed-
rate debt instruments, and financial derivative
instruments used to hedge our exposure to jet-
fuel price increases and interest-rate increases.
We do not purchase or hold any derivative
financial instruments for trading purposes.
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, 2013 would
increase or decrease the fair value of our crude
oil hedge portfolio by approximately $27 million
and $12 million, respectively.
Our portfolio value of fuel hedge contracts was
$16 million at December 31, 2013 compared to
a portfolio value of $64 million at December 31,
2012. We do not have any collateral held by
counterparties to these agreements as of
December 31, 2013.
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 the
"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 2013 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 19% of our total long-term debt at
December 31, 2013 compared to 18% at
December 31, 2012.
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ŠForm 10-K