Financial Instruments and Risk Management

12 Months Ended

Dec. 31, 2016

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 uses 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 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 each counterparty's credit risk. As of December 31, 2016 and 2015, the Company did not hold any derivatives.

Fuel Derivative Instruments

From time to time, the Company may enter into fuel derivative contracts in order to mitigate the risk of future volatility in fuel prices. 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 enter into any fuel derivative instruments during 2016. The Company did not elect hedge accounting on any fuel derivative instruments entered into during 2015 and 2014 and, as a result, changes in the fair value of these fuel derivative contracts are recorded in aircraft fuel expense. In 2016, the Company did not pay any premiums to acquire jet fuel options. The Company paid $2.5 million and $9.7 million in premiums to acquire jet fuel options during 2015 and 2014, respectively.

The following table summarizes the components of aircraft fuel expense for the years ended December 31, 2016, 2015 and 2014:

	Year Ended December 31,
	2016		2015			2014
	(in thousands)
Into-plane fuel cost	$	447,553	$	454,747		$	608,033
Realized losses (gains) related to fuel derivative contracts, net	—		10,580			995
Unrealized losses (gains) related to fuel derivative contracts, net	—		(3,880		)	3,881
Aircraft fuel	$	447,553	$	461,447		$	612,909

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 year ended December 31, 2014.

As of December 31, 2016 and 2015, the Company did not have any outstanding fuel derivatives and had no fuel hedging activity for the twelve months ended December 31, 2016.

Interest Rate Swaps

During 2015, the Company settled six forward interest rate swaps that were designed to fix the benchmark interest rate component of the 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 were designated as cash flow hedges. The Company accounts for these interest rate swaps at fair value and recognizes them in the balance sheet in prepaid expenses and other current assets or other current assets or other current liabilities with changes in fair value recorded within accumulated other comprehensive income (AOCI). As of December 31, 2016 and 2015, the Company did not have any outstanding interest rate swaps.

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. During the twelve months ended December 31, 2016, there were no unrealized gains or losses recorded within AOCI related to these instruments as they settled in 2015. During the twelve months ended December 31, 2015, an unrealized loss of $0.9 million, net of deferred taxes of $0.6 million, was recorded within AOCI related to these instruments. During the twelve months ended December 31, 2016, the Company reclassified interest rate swap losses of $224 thousand, net of tax of $130 thousand, into earnings. During the twelve months ended December 31, 2015, the Company reclassified interest rate swap losses of $82 thousand, net of tax of $50 thousand, into earnings. As of December 31, 2016 and December 31, 2015, $1.3 million and $1.5 million, net of tax, remained in AOCI related to these instruments.