Financial Instruments and Risk Management

As part of the Company’s risk management program, the Company from time to time uses a variety of financial instruments, primarily costless collar contracts, to reduce its exposure to fluctuations in the price of jet fuel. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company is exposed to credit losses in the event of nonperformance by counterparties to these financial instruments. The Company periodically reviews and seeks to mitigate exposure to the counterparty’s financial deterioration and nonperformance by monitoring the absolute exposure levels, the counterparty’s credit rating, and the counterparty’s historical performance relating to hedge transactions. The credit exposure related to these financial instruments is limited to the fair value of contracts in a net receivable position at the reporting date. The Company also maintains security agreements that require the Company to post collateral if the value of selected instruments falls below specified mark-to-market thresholds.

The Company records financial derivative instruments at fair value, which includes an evaluation of the counterparty’s credit risk. Fair value of the instruments is determined using standard option valuation models. Management chose not to elect hedge accounting on any of the derivative instruments purchased during the three months ended March 31, 2012 and 2011 and, as a result, 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 three months ended March 31, 2012 and 2011:



	Three Months Ended March 31,
	2012			2011
	(in millions)
Into-plane fuel cost	$	110.9		$	85.6
Changes in value and settlements of fuel hedge contracts	(2.2		)	(4.7		)
Aircraft fuel expense	$	108.7		$	80.9

During the three months ended March 31, 2012, $2.2 million of net fuel derivative gains were recognized, consisting of realized gains of $2.4 million offset by unrealized losses of $0.2 million. During the three months ended March 31, 2011, $4.7 million of net fuel derivative gains were recognized, consisting of realized gains of $4.1 million and unrealized gains of $0.6 million. Changes in the fair value of such derivative contracts were recorded within aircraft fuel expense in the accompanying statements of operations. These amounts include both realized gains and losses and mark-to-market adjustments of the fair value of unsettled derivative instruments at the end of each period.

As of March 31, 2012 and December 31, 2011, the Company had fuel hedges using U.S. Gulf Coast jet fuel collars as the underlying commodity. As of March 31, 2012, the Company had agreements in place to protect 3,000,000 gallons or approximately 8% of its estimated fuel consumption for the second quarter of 2012 at a weighted-average ceiling and floor price of $3.39 and $3.16 per gallon, respectively. As of December 31, 2011, the Company had agreements in place to protect 13,450,000 gallons or approximately 9% of its estimated fuel consumption for the twelve months ended December 31, 2012 at a weighted-average ceiling and floor price of $2.99 and $2.81 per gallon, respectively. Additionally, during peak hurricane season (August through October), the Company enters into basis swap agreements using NYMEX Heating Oil indexes to protect the refining price risk between the price of crude oil and the price of refined jet fuel. As of March 31, 2012, the Company had approximately 71% of its August through October 2012 forecasted fuel requirements protected using these basis swaps.