Southwest Airlines 2015 Annual Report Download - page 59

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As of January 15, 2016, on an economic basis, the Company had derivative contracts in place related
to expected future fuel consumption as follows:
Average percent of estimated fuel consumption covered by
fuel derivative contracts at varying WTI/Brent Crude Oil,
Period Heating Oil, and Gulf Coast Jet Fuel-equivalent price levels
First quarter 2016 (1) —
Full year 2016 (2) Approx. 20%
2017 (2) Approx. 65%
2018 (2) Approx. 35%
(1) The Company is effectively unhedged for the first quarter 2016 at current price levels. A majority of the
financial impact of the derivative contracts currently held for the quarter is locked-in and is included in the
economic jet fuel price simulations below.
(2) Given the Company has entered into different derivative contracts at various prices, these percentages are an
average based on the assumption that Brent crude oil prices settle above current market prices. See Note 10 to the
Consolidated Financial Statements for further information.
As a result of applying hedge accounting in prior periods, a portion of the amounts in Accumulated
other comprehensive income (loss) (“AOCI”) are considered “frozen,” and these amounts will be
recognized in earnings in future periods when the underlying fuel derivative contracts settle. The
following table displays the Company’s estimated fair value of remaining fuel derivative contracts (not
considering the impact of the cash collateral provided to or received from counterparties (See Note 10
to the Consolidated Financial Statements for further information), as well as the amount of deferred
gains/losses in AOCI at December 31, 2015, and the expected future periods in which these items are
expected to settle and/or be recognized in earnings (in millions):
Year
Fair value (liability) of fuel
derivative contracts
at December 31, 2015
Amount of gains (losses) deferred
in AOCI at December 31,
2015 (net of tax)
2016 $ (863) $ (618)
2017 (630) (409)
2018 12 (21)
Total $ (1,481) $ (1,048)
Based on forward market prices and the amounts in the above table (and excluding any other
subsequent changes to the fuel hedge portfolio), the Company’s jet fuel costs per gallon could exceed
market (i.e., unhedged) prices during some of these future periods. This is based primarily on expected
future cash settlements associated with fuel derivatives, but excludes any impact associated with the
ineffectiveness of fuel hedges or fuel derivatives that are marked to market because they do not qualify
for hedge accounting. See Note 10 to the Consolidated Financial Statements for further information.
Assuming no changes to the Company’s current fuel derivative portfolio, but including all previous
hedge activity for fuel derivatives that have not yet settled, and considering only the expected net cash
payments related to hedges that will settle, the Company is providing a sensitivity table for first quarter
2016, and full year 2016, jet fuel prices at different crude oil assumptions as of January 15, 2016, and
for expected premium costs associated with settling contracts each period, respectively.
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