FINANCIAL DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements [Abstract]

FINANCIAL DERIVATIVE INSTRUMENTS

10.FINANCIAL DERIVATIVE INSTRUMENTS

Fuel contracts

Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Furthermore, jet fuel and oil typically represent one of the largest operating expenses for airlines. The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program. Because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel. However, the Company has found that financial derivative instruments in other commodities, such as West Texas Intermediate crude oil (“WTI”), Brent crude oil (“Brent”), and refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility. The Company does not purchase or hold any financial derivative instruments for trading purposes.

The Company has used financial derivative instruments for both short-term and long-term time frames, and primarily uses a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), and fixed price swap agreements in its portfolio. Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than purchased call options in that the Company could end up in a liability position when the collar structure or swap agreement settles. With the use of purchased call options and call spreads, the Company cannot be in a liability position at settlement.

The Company evaluates its hedge volumes strictly from an “economic” standpoint and thus does not consider whether the hedges have qualified or will qualify for hedge accounting. The Company defines its “economic” hedge as the net volume of fuel derivative contracts held, including the impact of positions that have been offset through sold positions, regardless of whether those contracts qualify for hedge accounting. For 2011, the Company had fuel derivatives in place related to approximately 38 percent of its fuel consumption. As of December 31, 2011, the Company had fuel derivative instruments in place to provide coverage on aportion of its 2012 estimated fuel consumption. The following table provides information about the Company's (inclusive of fuel derivative instruments acquired from Air Tran – See Note 2) volume of fuel hedging for the years 2012 through 2015 on an “economic” basis.

	Fuel hedged as of
	December 31, 2011
Period (by year)	(gallons in millions)
2012	111
2013	1,000
2014	815
2015	395

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. All derivatives designated as hedges that meet certain requirements are granted hedge accounting treatment. Generally, utilizing hedge accounting, all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective are recorded in AOCI until the underlying jet fuel is consumed. See Note 13. The Company's results are subject to the possibility that periodic changes will not be effective, as defined, or that the derivatives will no longer qualify for hedge accounting. Ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company's expected future cash outlay to purchase and consume jet fuel. To the extent that the periodic changes in the fair value of the derivatives are ineffective, the ineffective portion is recorded to Other (gains) losses, net in the Consolidated Statement of Income. Likewise, if a hedge ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last reporting period is recorded to Other (gains) losses, net, in the Consolidated Statement of Income in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense. When the Company has sold derivative positions in order to effectively “close” or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions are concurrently marked to market through earnings. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs. In a situation where it becomes probable that a hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings. The Company did not have any such situations occur during2009,2010,or2011.

Ineffectiveness is inherent in hedging jet fuel with derivative positions based in other crude oil related commodities. Due to the volatility in markets for crude oil and related products, the Company is unable to predict the amount of ineffectiveness each period, including the loss of hedge accounting, which could be determined on a derivative by derivative basis or in the aggregate for a specific commodity. This may result, and has resulted, in increased volatility in the Company's financial results. Factors that have and may continue to lead to ineffectiveness and unrealized gains and losses on derivative contracts include: significant fluctuation in energy prices, the number of derivative positions the Company holds, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs.

Accounting pronouncements pertaining to derivative instruments and hedging are complex with stringent requirements, including the documentation of a Company hedging strategy, statistical analysis to qualify a commodity for hedge accounting both on a historical and a prospective basis, and strict contemporaneous documentation that is required at the time each hedge is designated by the Company. The Company also examines the effectiveness of each individual hedge and its entire hedging program on a quarterly basis utilizing statistical analysis. This analysis involves utilizing regression and other statistical analyses that compare changes in the price of jet fuel to changes in the prices of the commodities used for hedging purposes.

All cash flows associated with purchasing and selling fuel derivatives are classified as Other operating cash flows in the Consolidated Statement of Cash Flows. The following table presents the location of all assets and liabilities associated with the Company's hedging instruments within the Consolidated Balance Sheet:

			Asset derivatives				Liability derivatives
	Balance Sheet	Fair value at		Fair value at		Fair value at		Fair value at
(in millions)	location	12/31/2011		12/31/2010		12/31/2011		12/31/2010
Derivatives designated as hedges*
Fuel derivative contracts (gross)	Other current assets	$	17	$	151	$	-	$	16
Fuel derivative contracts (gross)	Other assets		542		547		107		88
Fuel derivative contracts (gross)	Accrued liabilities		97		122		8		18
Fuel derivative contracts (gross)	Other noncurrent liabilities		93		71		24		9
Interest rate derivative contracts	Other assets		64		73		-		-
Interest rate derivative contracts	Accrued liabilities		2		-		-		-
Interest rate derivative contracts	Other noncurrent liabilities		-		-		132		4
Total derivatives designated as hedges		$	815	$	964	$	271	$	135
Derivatives not designated as hedges*
Fuel derivative contracts (gross)	Other current assets	$	124	$	164	$	58	$	284
Fuel derivative contracts (gross)	Other assets		26		212		272		304
Fuel derivative contracts (gross)	Accrued liabilities		326		40		687		222
Fuel derivative contracts (gross)	Other noncurrent liabilities		9		33		122		257
Total derivatives not designated as hedges		$	485	$	449	$	1,139	$	1,067
Total derivatives		$	1,300	$	1,413	$	1,410	$	1,202
* Represents the position of each trade before consideration of offsetting positions with each counterparty and does not include the impact of cash collateral deposits provided to or received from counterparties. See discussion of credit risk and collateral following in this Note.

In addition, the Company also had the following amounts associated with fuel derivative instruments and hedging activities in its Consolidated Balance Sheet:

		Balance Sheet	December 31,		December 31,
(in millions)		location	2011		2010
Cash collateral deposits provided		Offset against Other
	to counterparties - noncurrent	noncurrent liabilities	$	41	$	125
Cash collateral deposits provided		Offset against Accrued
	to counterparties - current	liabilities		185		-
Cash collateral deposits held from		Offset against Other
	counterparty - noncurrent	assets		-		60
Due to third parties for settled fuel contracts		Accrued liabilities		21		-
Receivable from third parties for settled		Accounts and other
	fuel contracts	receivables		3		1

The following tables present the impact of derivative instruments and their location within the Consolidated Statement of Income for the years endedDecember 31,2011 and 2010:

Derivatives in cash flow hedging relationships
		(Gain) loss							(Gain) loss					(Gain) loss
		recognized in AOCI on							reclassified from AOCI					recognized in income
		derivatives (effective							into income (effective					on derivatives
		portion)							portion)(a)						(ineffective portion) (b)
		Year ended						Year ended						Year ended
		December 31,						December 31,						December 31,
(in millions)		2011			2010			2011			2010			2011		2010
Fuel derivative
	contracts	$	44	*	$	(47)	*	$	111	*	$	283	*	$	35	$	(7)
Interest rate
	derivatives		32	*		15	*		-			-			-		-
Total		$	76		$	(32)		$	111		$	283		$	35	$	(7)
*Net of tax
(a) Amounts related to fuel derivative contracts and interest rate derivatives are included in Fuel and oil and Interest expense, respectively.
(b) Amounts are included in Other (gains) losses, net.

Derivatives not in cash flow hedging relationships
	(Gain) loss
	recognized in income on
	derivatives
	Year ended				Location of (gain) loss
	December 31,				recognized in income
(in millions)	2011		2010		on derivatives
Fuel derivative contracts	$	53	$	(26)	Other (gains) losses, net

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during 2011, 2010, and 2009 of $107 million,$134 million, and $148 million, respectively. These amounts are excluded from the Company's measurement of effectiveness for related hedges and are included as a component of Other (gains) losses, net, in the Consolidated Statement of Income.

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties. Included in the Company's cumulative net unrealized losses from fuel hedges as of December 31,2011, were approximately $93 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to December 31,2011. In addition, as of December 31,2011, the Company had already recognized cumulative net losses due to ineffectiveness and derivatives that do not qualify for hedge accounting treatment totaling $68 million, net of taxes. These net losses were recognized in 2011 and prior periods, and are reflected in Retained earnings as of December 31,2011, but the underlying derivative instruments will not expire/settle until 2012or future periods.

Interest rate swaps

The Company is party to certain interest rate swap agreements that are accounted for as either fair value hedges or cash flow hedges, as defined in the applicable accounting guidance for derivative instruments and hedging. The interest rate swap agreements accounted for as fair value hedges qualify for the “shortcut” method of accounting for hedges, which dictates that the hedges are assumed to be perfectly effective, and, thus, there is no ineffectiveness to be recorded in earnings. For the Company's interest rate swap agreements accounted for as cash flow hedges, ineffectiveness is required to be measured at each reporting period.

The Company has floating-to-fixed interest rate swap agreements associated with its $600 million floating-rate term loan agreement and its $332 million term loan agreement that are accounted for as cash flow hedges. These interest rate hedges have fixed the interest rate on the $600 million floating-rate term loan agreement at 5.223 percent until maturity, and for the $332 million term loan agreement at 6.315 percent until maturity.

In January 2011, the Company terminated the fixed-to-floating interest rate swap agreements related to its $350 million 5.25% senior unsecured notes due 2014 and its $300 million 5.125% senior unsecured notes due 2017. The effect of these terminations is basically that the interest associated with these debts prospectively reverts back to their original fixed rates. As a result of the gains realized on these transactions, which will be amortized over the remaining term of the corresponding notes, and based on projected interest rates at the date of termination, the Company does not believe its future interest expense associated with these notes will significantly differ from the expense it would have recorded had the notes remained at floating rates.

The fair values of the interest rate swap agreements, which are adjusted regularly, have been aggregated by counterparty for classification in the Consolidated Balance Sheet. Agreements totaling an asset of $64 million are classified as a component of Other assets and agreements totaling an asset of $2 millionare classified as a component of Accrued liabilities with a corresponding adjustment to the carrying value of the long-term debt. Agreements totaling a net liability of $132 million are classified as a component of Other noncurrent liabilities. The corresponding adjustment related to the net liability associated with the Company's fair value hedges is to the carrying value of the long-term debt. The corresponding adjustment related to the net liability associated with the Company's cash flow hedges is to AOCI. See Note 13.

AirTran has also entered into a number of interest rateswap agreements, which convert a portion of AirTran's floating-rate debt to a fixed-rate basis for the remaining life of the debt, thus reducing the impact of interest rate changes on future interest expense and cash flows. Under these agreements, which expire between 2016 and 2020, it paysfixed rates between 4.34 percent and 6.435 percent and receives either three-month or six-month LIBOR on the notional values. The notional amount of outstanding debt related to interest rate swaps as of December 31,2011,was $442 million. These interest rate swap arrangements were designated as cash flow hedges as of the acquisition date. The ineffectiveness associated with all of the Company's and Air Tran'sinterest rate cash flow hedges for all periods presented was not material.

The following table contains the floating rates recognized during 2011, based on actual and forward rates at December 31, 2011, under the Company's fixed-to-floating interest rate agreements in existence at December 31, 2011:

	Fixed rate associated		Average floating
Debt instrument	with debt instrument		rate recognized in 2011
$385 million Notes due 2012	6.5	%	2.91	%
$300 million Notes due 2016	5.75	%	2.77	%
$100 million Debentures due 2027	7.375	%	2.36	%

Credit risk and collateral

Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date. These outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At December 31,2011, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount or credit ratings fall below certain levels. The Company also had agreements with counterparties in which cash deposits and/or pledged aircraft are required to be posted whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of December 31,2011, at which such postings are triggered:

Counterparty (CP)

A

B

C

D

E

Other(a)

Total

(in millions)

Fair value of fuel derivatives

$

(9)

$

(147)

$

(87)

$

61

$

133

$

5

$

(44)

Cash collateral held from (by) CP

(40)

(152)

(34)

-

-

-

(226)

If credit rating is investment

grade, fair value of fuel

derivative level at which:

Cash is provided to CP

0 to (300)

0 to (125)

>(50)

>(75)

>(50)

or >(700)

or >(625)

Cash is received from CP

>40

>150

>200(c)

>125(c)

>250

Aircraft or cash can be pledged to CP

(300) to

(125) to

N/A

N/A

N/A

(700)(d)

(625)(d)

If credit rating is non-investment

grade, fair value of fuel derivative

level at which:

Cash is provided to CP

0 to (300)

0 to (125)

(b)

(b)

(b)

or >(700)

or >(625)

Cash is received from CP

(b)

(b)

(b)

(b)

(b)

Aircraft can be pledged to CP

(300) to

(125) to

N/A

N/A

N/A

(700)

(625)

(a) Individual counterparties with fair value of fuel derivatives <$15 million.

(b) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

(c) Thresholds may vary based on changes in credit ratings within investment grade.

(d) The Company has the option of providing cash or pledging aircraft as collateral. No aircraft were pledged as collateral as of December 31, 2011.

The Company also has agreements with each of its counterparties associated with its outstanding interest rate swap agreements in which cash collateral may be required based on the fair value of outstanding derivative instruments, as well as the Company's and its counterparty's credit ratings. As of December 31, 2011, $64million had been provided to one counterparty associated with interest rate derivativesbased on the Company's outstanding net liability derivative position with that counterparty. In addition, in connection with interest rate swaps entered into by AirTran, a total of$32 million had been provided to two counterparties at December 31, 2011, as a result of net liability derivative positions with those counterparties.The outstanding interest rate net derivative positions with all other counterparties at December 31, 2011,were assets to the Company.

Applicable accounting provisions require an entity to select a policy for how it records the offset rights to reclaim cash collateral associated with the related derivative fair value of the assets or liabilities of such derivative instruments. In the accompanying Consolidated Balance Sheet, the Company has elected to present its cash collateral utilizing a net presentation, in which cash collateral amounts held or provided have been netted against the fair value of outstanding derivative instruments.The Company's application of this policy differs depending on whether its derivative instruments are in a net asset position or a net liability position. If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current derivative amounts (those that will settle during the twelve months following the balance sheet date) associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments (those that will settle beyond one year following the balance sheet date). If the Company's fuel derivative instruments are in a net liability position with the counterparty, cash collateral amounts provided are first netted against noncurrent derivative amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of current outstanding derivative instruments. At December 31, 2011, of the entire $226 million in cash collateral deposits posted with counterparties under the Company's bilateral collateral provisions,$41 million has been netted against noncurrent fuel derivative instruments within Other noncurrent liabilities and $185 million has been netted against current fuel derivative instruments within Accrued liabilities in the Consolidated Balance Sheet.At December 31, 2010, the entire $125 million in cash collateral deposits posted with counterparties under the Company's bilateral collateral provisions has been netted against noncurrent fuel derivative instruments within Other noncurrent liabilities. The $60 million in cash collateral deposits held from counterparties at December 31, 2010, is netted against noncurrent fuel derivative instrument assets within Other assets in the Consolidated Balance Sheet.