Financial Instruments and Risk Management

9 Months Ended

Sep. 30, 2015

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 absolute exposure levels, credit ratings, and historical performance of 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, 2015, 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.

Fuel Derivative Instruments

The Company's fuel 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 accounts for its fuel derivative contracts at fair value and recognizes them in the balance sheet in prepaid expenses and other current assets or other current liabilities. The Company did not elect hedge accounting on any fuel derivative instruments entered into during the three and nine months ended September 30, 2015 and 2014 and, as a result, changes in the fair value of these fuel derivative contracts are recorded in aircraft fuel expense. During the three and nine months ended September 30, 2015, the Company paid $0.3 million and $2.5 million in premiums to acquire jet fuel options.

The following table summarizes the components of aircraft fuel expense for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015			2014
	(in thousands)
Into-plane fuel cost	$	114,081	$	171,138	$	349,549		$	473,994
Realized losses (gains) related to fuel derivative contracts, net	1,736		151		8,575			151
Unrealized losses (gains) related to fuel derivative contracts, net	82		295		(1,892		)	762
Aircraft fuel	$	115,899	$	171,584	$	356,232		$	474,907

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 out of period jet fuel FET amount of $9.3 million is recorded within aircraft fuel in the statement of operations for the three and nine months ended September 30, 2014. 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 2014 financial statements.

As of September 30, 2015, the Company had fuel derivatives consisting of jet fuel options with refined products as the underlying commodities designed to protect 15.3 million gallons, or approximately 23% of its remaining 2015 anticipated jet fuel consumption, at a weighted-average ceiling price of $1.92 per gallon. As of December 31, 2014, the Company had fuel derivatives consisting of jet fuel options with refined products as the underlying commodities designed to protect 88.7 million gallons, or approximately 35% of its 2015 anticipated jet fuel consumption, at a weighted-average ceiling price of $2.07 per gallon. As of September 30, 2015 and December 31, 2014, the Company had no outstanding jet fuel swaps.

Interest Rate Swaps

During the third quarter of 2015, the Company settled six forward interest rate swaps having a total notional amount of $120 million. These interest rate swaps fixed the benchmark interest rate component of interest payments on the debt related to three Airbus A321 aircraft, which the Company took delivery of during the third quarter of 2015. These instruments limited the Company's exposure to changes in the benchmark interest rate in the period from the trade date through the date of maturity. The interest rate swaps are designated as cash flow hedges. The Company accounts for interest rate swaps at fair value and recognizes them in the balance sheet in prepaid expenses and other current assets or other current liabilities with changes in fair value recorded within accumulated other comprehensive income (AOCI). Realized gains and losses from cash flow hedges are recorded in the statement of cash flows as a component of cash flows from operating activities. Subsequent to the issuance of each debt instrument, amounts remaining in AOCI are amortized over the life of the fixed-rate debt instrument.

For the three and nine months ended September 30, 2015, an unrealized loss of $0.6 million and $0.9 million, net of deferred taxes of $0.3 million and $0.5 million, respectively, was recorded within AOCI related to these instruments. For the three and nine months ended September 30, 2015, the Company reclassified $25.3 thousand, net of tax of $14.8 thousand, to earnings. As of September 30, 2015, $1.6 million, net of tax, remained in AOCI.

Given that there may be some uncertainty regarding the terms on which the Company issues its fixed-rate debt, the Company evaluates the effect of such uncertainty on the effectiveness of the hedging relationship designated for each reporting period. Any ineffectiveness is recorded within other non-operating expense in the Company's statement of operations. During the three and nine months ended September 30, 2015, the Company recorded no ineffectiveness associated with the Company's interest rate cash flow hedges.