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 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 financial deterioration and nonperformance of any counterparty by monitoring the absolute exposure levels, the counterparty credit ratings, and the historical performance of the counterparties 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 credit risk. Fair value of the instruments is determined using standard option valuation models.

Management chose not to elect hedge accounting on any derivative instruments during the six months ended June 30, 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 and six months ended June 30, 2012 and 2011:



	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(in millions)
Into-plane fuel cost	$	116.6	$	107.0	$	227.5	$	192.6
Changes in value and settlements of fuel hedge contracts	3.6		0.3		1.4		(4.3		)
Aircraft fuel expense	$	120.2	$	107.3	$	229.0	$	188.2

During the three months ended June 30, 2012, $3.6 million of net fuel derivative losses were recognized, consisting of realized losses of $2.5 million and unrealized losses of $1.1 million. During the three months ended June 30, 2011, $0.3 million of net fuel derivative losses were recognized, consisting of realized gains of $3.1 million offset by unrealized losses of $3.5 million. During the six months ended June 30, 2012, $1.4 million of net fuel derivative losses were recognized, consisting of realized losses of $37 thousand and unrealized losses of $1.4 million. During the six months ended June 30, 2011, $4.3 million of net fuel derivative gains were recognized, consisting of realized gains of $7.2 million offset by unrealized losses of $2.9 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 June 30, 2012 and December 31, 2011, the Company had fuel hedges using U.S. Gulf Coast jet fuel collars as the underlying commodity. As of June 30, 2012, the Company had agreements in place to protect 7.5 million gallons, or approximately 19% of its estimated fuel consumption for the third quarter of 2012, at a weighted-average ceiling and floor price of $3.16 and $2.95 per gallon, respectively. As of June 30, 2012, the Company did not have any of these fuel hedges in place for the fourth quarter of 2012 and beyond. As of December 31, 2011, the Company had agreements in place to protect 13.5 million 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 June 30, 2012, the Company had approximately 72% of its August through October 2012 forecasted refining risk protected using these basis swaps.