DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT

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.

As of December 31, 2020, the Company had outstanding fuel hedge contracts covering approximately 300 million gallons of crude oil that will be settled from January 2021 to June 2022.

Interest Rate Swap Agreements

The Company is exposed to market risk from adverse changes in variable interest rates on long-term debt and certain aircraft lease agreements. To manage this risk, the Company periodically enters into interest rate swap agreements. As of December 31, 2020, the Company has an outstanding interest rate swap agreement with a third party designed to hedge the volatility of the underlying variable interest rates on a lease agreement for one B737-800 aircraft, as well as 13 interest rate swap agreements with third parties designed to hedge the volatility of the underlying variable interest rates on $614 million of debt. All of the interest rate swap agreements stipulate that the Company pay a fixed interest rate and receive a floating interest rate over the term of the underlying contracts. The interest rate swap agreement associated with the lease expires in March 2021, corresponding with the aircraft lease term, and December 2021 through August 2029 to coincide with the debt maturity dates. All significant terms of the swap agreements match the terms of the underlying hedged items and have been designated as qualifying hedging instruments, which are accounted for as cash flow hedges.

As qualifying cash flow hedges, the interest rate swaps are recognized at fair value on the balance sheet, and changes in the fair value are recognized in accumulated other comprehensive loss. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is recognized in interest expense, if material.

Fair Values of Derivative Instruments

Fair values of derivative instruments on the consolidated balance sheet (in millions):


	2020		2019
Fuel hedge contracts (not designated as hedges)
Prepaid expenses and other current assets	$	11	$	8
Other assets	4		3
Interest rate swaps (designated as hedges)
Prepaid expenses and other current assets	—		1
Other noncurrent assets	—		2
Other accrued liabilities	(10)		(5)
Other liabilities	(15)		(5)
Losses in accumulated other comprehensive loss (AOCL)	(21)		(13)

The net cash paid for new fuel hedge positions and received from settlements was $14 million, $19 million and $21 million during 2020, 2019, and 2018.

Pretax effect of derivative instruments on earnings and AOCL (in millions):


	2020		2019		2018
Fuel hedge contracts (not designated as hedges)
Gains (losses) recognized in Aircraft fuel	$	(10)	$	(10)	$	1
Interest rate swaps (designated as hedges)
Losses recognized in Aircraft rent	(3)		(3)		(3)
Gains (losses) recognized in other comprehensive income (OCI)	(21)		(13)		—

The amounts shown as recognized in aircraft rent for cash flow hedges (interest rate swaps) represent the realized losses transferred out of AOCL to aircraft rent. Losses related to interest rate swaps on variable rate debt of $6 million were recognized in interest expense during 2020. The amounts shown as recognized in OCI are prior to the losses recognized in aircraft rent during the period. The Company expects an insignificant amount to be reclassified from OCI to aircraft rent and $10 million to interest expense within the next twelve months.