Financial Instruments and Risk Management

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments and Risk Management

Financial Instruments and Risk Management

As part of the Company’s risk management program, the Company from time to time may use a variety of financial instruments to reduce its exposure to fluctuations in the price of jet fuel and interest rates. 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, each counterparty's credit ratings, and the historical performance of the counterparties relating to derivative 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. As of September 30, 2014, the Company did not hold any derivatives with requirements to post collateral.

The Company records financial derivative instruments at fair value, which includes an evaluation of each counterparty's credit risk. The Company's derivative contracts generally consist of United States Gulf Coast jet fuel swaps (jet fuel swaps) and United States Gulf Coast jet fuel options (jet fuel options). Both jet fuel swaps and jet fuel options are used at times to protect the refining price risk between the price of crude oil and the price of refined jet fuel, and to manage the risk of increasing fuel prices. Fair value of the instruments is determined using standard option valuation models.

The Company did not elect hedge accounting on any fuel derivative instruments entered into during the three and nine months ended September 30, 2014 and 2013 and, as a result, changes in the fair value of these fuel derivative contracts are recorded in aircraft fuel expense. Premiums paid for fuel options are recognized in earnings within aircraft fuel expense as the fair value of the time value portion of each option changes.

The following table summarizes the components of aircraft fuel expense for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
	(in thousands)
Into-plane fuel cost	$	171,138	$	143,978		$	473,994	$	402,066
Settlement losses (gains)	—		6,663			—		6,348
Unrealized mark-to-market losses (gains)	—		(5,655		)	—		3,489
Premium expense recognized related to fuel option contracts	446		—			913		—
Aircraft fuel	$	171,584	$	144,986		$	474,907	$	411,903

Premiums and settlements received or paid on fuel derivative contracts are reflected in the accompanying statements of cash flows in net cash provided by operating activities.

During the third quarter of 2014, the Company became aware of an underpayment of Federal Excise Tax (FET) for fuel purchases during the period between July 1, 2009 and August 31, 2014. The commencement of the period in which the Company underpaid FET coincided with a change in its fuel service provider that took place in July 2009. The amount of underpayment of jet fuel FET from July 1, 2009 through December 31, 2013 is $9.3 million along with an additional $2.1 million for the nine months ended September 30, 2014. The total amount of $11.4 million is recorded within aircraft fuel in the statement of operations for the three and nine months ended September 30, 2014. Approximately, $0.8 million of interest was incurred related to the past-due tax payments. The Company does not believe the error to be material to the 2009 through 2013 financial statements nor for the cumulative out of period error to be material to the current year financial statements.

Historically, during peak hurricane season (August through October), the Company has entered into jet fuel derivative contracts to protect the refining price risk between the price of crude oil and the price of refined jet fuel. As of September 30, 2014, the Company had fuel derivatives consisting of jet fuel options with refined products as the underlying commodities designed to protect 32.0 million gallons, or approximately 29.2% of the Company's fourth quarter 2014 and first quarter 2015 anticipated jet fuel consumption, at a weighted-average ceiling price of $3.19 per gallon. As of December 31, 2013, the Company had no outstanding fuel derivatives in place.