DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

DERIVATIVE INSTRUMENTS

Fuel Hedge Contracts

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options for crude oil and swap agreements for jet fuel refining margins, among other initiatives. The Company records these instruments on the balance sheet at their fair value. 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 nine months ended September 30, 2011 and 2010 (in millions):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011		2010
Raw or “into-plane” fuel cost	$	337.4	$	233.8		$	969.5	$	651.9
(Gains) or losses in value and settlements of fuel hedge contracts	82.7		(12.9		)	42.6		31.3
Aircraft fuel expense	$	420.1	$	220.9		$	1,012.1	$	683.2

Cash received, net of premiums expensed, for hedges that settled during the three months ended September 30, 2011 was $1.6 million, compared to the net cost from hedges that settled during the same period of 2010 of $3.8 million. Cash received, net of premiums expensed, for hedges that settled during the nine month periods ended September 30, 2011 and 2010 was $30.6 million and $2.1 million, respectively.

The Company uses the “market approach” in determining the fair value of its hedge portfolio. The Company’s fuel hedging contracts consist of over-the-counter contracts, which are not traded on an exchange. The fair value of these contracts is determined based on observable inputs that are readily available in active markets or can be derived from information available in active, quoted markets. Therefore, the Company has categorized these contracts as Level 2 in the fair value hierarchy described in Note 2.

Outstanding fuel hedge positions as of November 3, 2011 are as follows:

	Approximate % of Expected Fuel Requirements		Gallons Hedged (in millions)	Approximate Crude Oil Price per Barrel	Approximate Premium Price per Barrel
Fourth Quarter 2011	50	%	48.6	$86	$11
Remainder of 2011	50	%	48.6	$86	$11
First Quarter 2012	50	%	49.6	$88	$12
Second Quarter 2012	50	%	52.9	$92	$13
Third Quarter 2012	50	%	54.5	$94	$13
Fourth Quarter 2012	50	%	52.1	$92	$13
Full Year 2012	50	%	209.1	$92	$13
First Quarter 2013	38	%	38.4	$93	$14
Second Quarter 2013	32	%	34.7	$92	$15
Third Quarter 2013	27	%	30.1	$93	$15
Fourth Quarter 2013	21	%	22.9	$95	$15
Full Year 2013	29	%	126.1	$93	$14
First Quarter 2014	16	%	17.2	$96	$15
Second Quarter 2014	11	%	12.1	$94	$15
Third Quarter 2014	5	%	6.2	$86	$16
Full Year 2014	8	%	35.5	$94	$15

The Company pays a premium to enter into crude oil option contracts. In order to receive economic benefit from the contract, the market price of crude oil must exceed the total of the contract strike price and the premium cost per barrel at the time of contract settlement.

The Company also has financial swap agreements in place to fix the refining margin component for approximately 50% of fourth quarter 2011 estimated jet fuel purchases at an average price of 93 cents per gallon and approximately 30% of first quarter 2012 estimated jet fuel purchases at an average price of 92 cents per gallon.

As of September 30, 2011 and December 31, 2010, the net fair values of the Company's fuel hedge positions were as follows (in millions):

	September 30, 2011		December 31, 2010
Crude oil call options or “caps”	$	75.2	$	129.3
Refining margin swap contracts	3.0		2.0
Total	$	78.2	$	131.3

The balance sheet amounts include capitalized premiums paid to enter into the contracts of $128.7 million and $108.6 million at September 30, 2011 and December 31, 2010, respectively.

Interest Rate Swap Agreements

The Company has interest rate swap agreements with a third party designed to hedge the volatility of the underlying variable interest rate in the Company's aircraft lease agreements for six B737-800 aircraft. The agreements stipulate that the Company pay a fixed interest rate over the term of the contract and receive a floating interest rate. All significant terms of the swap agreement match the terms of the lease agreements, including interest-rate index, rate reset dates, termination dates and underlying notional values. The agreements expire from September 2020 through March 2021 to coincide with the lease termination dates.

The Company has formally designated these swap agreements as hedging instruments and records the effective portion of the hedge as an adjustment to aircraft rent in the consolidated statement of operations in the period of contract settlement. The effective portion of the changes in fair value for instruments that settle in the future is recorded in AOCL in the condensed consolidated balance sheets.

At September 30, 2011, the Company had a liability of $28.2 million associated with these contracts, $6.2 million of which is expected to be reclassified into earnings within the next twelve months. The fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end, multiplied by the total notional value. As such, the Company places these contracts in Level 2 of the fair value hierarchy.