Financial Derivative Instruments

6 Months Ended

Jun. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivative Instruments

Financial Derivative Instruments

The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in global fuel prices and foreign currencies.

Fuel Risk Management

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 derivative financial instruments. During the three and six months ended June 30, 2017, the Company primarily used crude oil call options and jet fuel swaps to hedge its aircraft fuel expense.  These derivative instruments were not designated as hedges under ASC Topic 815, Derivatives and Hedging (ASC 815), for hedge accounting treatment. As a result, any changes in fair value of these derivative instruments are adjusted through other nonoperating income (expense) in the period of change.

The following table reflects the amount of realized and unrealized gains and losses recorded as nonoperating income (expense) in the unaudited Consolidated Statements of Operations.

	Three months ended June 30,						Six months ended June 30,
Fuel derivative contracts	2017			2016			2017			2016
	(in thousands)
Gains (losses) realized at settlement	$	(1,902	)	$	(8,799	)	$	687		$	(27,824	)
Reversal of prior period unrealized amounts	3,441			22,882			(4,506		)	40,692
Unrealized gains (losses) that will settle in future periods	(6,251		)	7,004			(9,691		)	6,154
Gains (losses) on fuel derivatives recorded as Nonoperating income (expense)	$	(4,712	)	$	21,087		$	(13,510	)	$	19,022

Foreign Currency Exchange Rate Risk Management

The Company is subject to foreign currency exchange rate risk due to revenues and expenses denominated in foreign currencies, with the primary exposures being the Japanese Yen and Australian Dollar. To manage exchange rate risk, the Company executes its international revenue and expense transactions in the same foreign currency to the extent practicable.  

The Company enters into foreign currency forward contracts to further manage the effects of fluctuating exchange rates. The effective portion of the gain or loss of designated cash flow hedges is reported as a component of accumulated other comprehensive income (AOCI) and reclassified into earnings in the same period in which the related sales are recognized as passenger revenue. The effective portion of the foreign currency forward contracts represents the change in fair value of the hedge that offsets the change in the fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized as nonoperating income (expense). Foreign currency forward contracts that are not designated as cash flow hedges are recorded at fair value, and any changes in fair value are recognized as other nonoperating income (expense) in the period of change.

The Company believes that its foreign currency forward contracts that are designated as cash flow hedges will continue to be effective in offsetting changes in cash flow attributable to the hedged risk. The Company expects to reclassify a net gain of approximately $0.8 million into earnings over the next 12 months from AOCI based on the values at June 30, 2017.

The following tables present the gross fair value of asset and liability derivatives that are designated as hedging instruments under ASC 815 and derivatives that are not designated as hedging instruments under ASC 815, as well as the net derivative positions and location of the asset and liability balances within the unaudited Consolidated Balance Sheets.

Derivative position as of June 30, 2017

	Balance Sheet Location	Notional Amount	Final Maturity Date	Gross fair value of assets	Gross fair value of (liabilities)		Net derivative position
		(in thousands)		(in thousands)
Derivatives designated as hedges
Foreign currency derivatives	Prepaid expenses and other	16,282,275 Japanese Yen 44,327 Australian Dollars	June 2018	3,748	(2,969	)	779
	Long-term prepayments and other	5,068,850 Japanese Yen 7,386 Australian Dollars	June 2019	1,623	(243	)	1,380
Derivatives not designated as hedges
Foreign currency derivatives	Prepaid expenses and other	1,081,750 Japanese Yen 2,651 Australian Dollars	September 2017	154	(58	)	96
Fuel derivative contracts	Prepaid expenses and other	91,266 gallons	June 2018	3,338	(488	)	2,850

Derivative position as of December 31, 2016

	Balance Sheet Location	Notional Amount	Final Maturity Date	Gross fair value of assets	Gross fair value of (liabilities)		Net derivative position
		(in thousands)		(in thousands)
Derivatives designated as hedges
Foreign currency derivatives	Prepaid expenses and other	16,121,500 Japanese Yen 41,917 Australian Dollars	December 2017	9,803	(1,349	)	8,454
	Long-term prepayments and other	4,371,900 Japanese Yen 8,434 Australian Dollars	December 2018	2,632	(59	)	2,573
Derivatives not designated as hedges
Foreign currency derivatives	Prepaid expenses and other	879,050 Japanese Yen 5,802 Australian Dollars	March 2017	471	(61	)	410
Fuel derivative contracts	Prepaid expenses and other	17,850 gallons	December 2017	15,090	—		15,090

The following table reflects the impact of cash flow hedges designated for hedge accounting treatment and their location within the unaudited Consolidated Statements of Comprehensive Income. 

	(Gain) loss recognized in AOCI on derivatives (effective portion)					(Gain) loss reclassified from AOCI into income (effective portion)						(Gain) loss recognized in nonoperating (income) expense (ineffective portion)
	Three months ended June 30,					Three months ended June 30,						Three months ended June 30,
	2017			2016		2017			2016			2017		2016
	(in thousands)
Foreign currency derivatives	$	(2,505	)	$	10,938	$	(480	)	$	(868	)	$	—	$	—
Interest rate derivatives	—			—		—			1,235			—		—

	(Gain) loss recognized in AOCI on derivatives (effective portion)				(Gain) loss reclassified from AOCI into income (effective portion)						(Gain) loss recognized in nonoperating (income) expense (ineffective portion)
	Six months ended June 30,				Six months ended June 30,						Six months ended June 30,
	2017		2016		2017			2016			2017		2016
	(in thousands)
Foreign currency derivatives	$	7,705	$	20,155	$	(1,692	)	$	(3,521	)	$	—	$	—
Interest rate derivatives	—		923		—			944			—		—

Risk and Collateral

Financial derivative instruments expose the Company to possible credit loss in the event the counterparties fail to meet their obligations. To manage such credit risks, the Company (1) selects its counterparties based on past experience and credit ratings, (2) limits its exposure to any single counterparty, and (3) regularly monitors the market position and credit rating of each counterparty. Credit risk is deemed to have a minimal impact on the fair value of the derivative instruments as cash collateral would be provided by the counterparties based on the current market exposure of the derivative.

ASC 815 requires a reporting entity to elect a policy of whether to offset rights to reclaim cash collateral or obligations to return cash collateral against derivative assets and liabilities executed with the same counterparty under a master netting agreement, or present such amounts on a gross basis. The Company’s accounting policy is to present its derivative assets and liabilities on a net basis, including any collateral posted with the counterparty. The Company had no collateral posted with counterparties as of June 30, 2017 and December 31, 2016.

The Company is also subject to market risk in the event these financial instruments become less valuable in the market. However, changes in the fair value of the derivative instruments will generally offset the change in the fair value of the hedged item, limiting the Company’s overall exposure.