Financial Derivative Instruments and Risk Management | 3 Months Ended |
Mar. 31, 2015 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
Financial Derivative Instruments and Risk Management | Financial Derivative Instruments and Risk Management |
To manage economic risks associated with the fluctuations of aircraft fuel prices, since 2012, the Company has hedged a targeted percentage of its forecasted fuel requirements over the following 12 months with a rolling strategy of entering into call options for crude oil and collar contracts for heating oil in the longer term, three to 12 months before the expected fuel purchase date; then prior to maturity of these contracts, within three months of the fuel purchase, the Company exited these contracts by entering into offsetting trades and locking in the price of a percentage of its fuel requirements through the purchase of fixed forward pricing (FFP) contracts in jet fuel. In 2015, the Company began eliminating the use of call options and collars from its fuel hedging program and, going forward, intends to utilize exclusively forward swaps on jet fuel, heating oil and crude oil to lock in future fuel purchase prices. |
The Company utilizes FFP contracts with its fuel service provider as part of its risk management strategy, wherein fixed prices are negotiated for set volumes of future purchases of fuel. The Company takes physical delivery of the future purchases. The Company has applied the normal purchase and normal sales exception for these commitments. As of March 31, 2015, the total commitment related to FFP contracts was $41.0 million, for which the related fuel will be purchased during 2015. |
The Company designates the majority of its fuel hedge derivatives contracts as cash flow hedges under the applicable accounting standard, if they qualify for hedge accounting. Under hedge accounting, all periodic changes in the fair value of the derivatives designated as effective hedges are recorded in accumulated other comprehensive income (loss) (AOCI) until the underlying fuel is purchased, at which point the deferred gain or loss will be recorded as fuel expense. In the event that the Company’s fuel hedge derivatives do not qualify as effective hedges, the periodic changes in fair value of the derivatives are included in fuel expense in the period they occur. If the Company terminates a fuel hedge derivative contract prior to its settlement date, the cumulative gain or loss recognized in AOCI at the termination date will remain in AOCI until the terminated intended transaction occurs. In the event it becomes improbable that such event will occur, the cumulative gain or loss is immediately reclassified into earnings. All cash flows associated with purchasing and settling of fuel hedge derivatives are classified as operating cash flows in the accompanying condensed consolidated statements of cash flows. |
The following tables present the fair value of derivative assets and liabilities that are designated and not designated as hedging instruments, as well as the location of the asset and liability balances within the condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014 (in thousands): |
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Derivatives designated as cash flow hedges | | Consolidated | | Fair value of derivatives as of | | | | | | | | | | | | | | |
balance sheet location | | 31-Mar-15 | | 31-Dec-14 | | | | | | | | | | | | | | |
| | | | (unaudited) | | | | | | | | | | | | | | | | |
Fuel derivative instruments—Heating oil collars | | Current liabilities | | (9,296 | ) | | (24,762 | ) | | | | | | | | | | | | | | |
Fuel derivative instruments—Brent calls | | Current liabilities | | — | | | (84 | ) | | | | | | | | | | | | | | |
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Fuel derivative instruments—Heating oil swaps | | Current liabilities | | (524 | ) | | — | | | | | | | | | | | | | | | |
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Fuel derivative instruments—Jet fuel swaps | | Current liabilities | | (636 | ) | | — | | | | | | | | | | | | | | | |
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Total current assets (liabilities) | | | | $ | (10,456 | ) | | $ | (24,846 | ) | | | | | | | | | | | | | | |
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Derivatives not designated as cash flow hedges | | Consolidated | | Fair value of derivatives as of | | | | | | | | | | | | | | |
balance sheet location | | 31-Mar-15 | | 31-Dec-14 | | | | | | | | | | | | | | |
| | | | (unaudited) | | | | | | | | | | | | | | | | |
Fuel derivative instruments—Heating oil collars | | Current liabilities | | (2,472 | ) | | (2,408 | ) | | | | | | | | | | | | | | |
Fuel derivative instruments—Brent calls | | Current liabilities | | (181 | ) | | 134 | | | | | | | | | | | | | | | |
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Fuel derivative instruments—Heating oil swaps | | Current liabilities | | (91 | ) | | — | | | | | | | | | | | | | | | |
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Total current assets (liabilities) | | | | $ | (2,744 | ) | | $ | (2,274 | ) | | | | | | | | | | | | | | |
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As of March 31, 2015 and December 31. 2014, the Company has deposited $5.3 million and $14.4 million as collateral with one of its counterparties to comply with margin call requirements related to derivative losses that exceed the portfolio’s credit limit. The Company has recorded the margin call deposits in other current liabilities in the accompanying condensed consolidated balance sheet as of March 31, 2015 and December 31, 2014, offsetting the net hedge liability of $13.2 million and $27.1 million. Thus the total net current liability related to hedges was $7.9 million at March 31, 2015 and $12.7 million at December 31, 2014. |
The following table summarizes the effect of fuel derivative instruments in the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014 (in thousands): |
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Derivatives accounted for as hedging | | Consolidated financial | | Gains (losses) on derivative | | | | | | | | | | | | | | |
instruments under ASC 815 | statement location | contracts for the three months ended | | | | | | | | | | | | | | |
| | | | 31-Mar-15 | | 31-Mar-14 | | | | | | | | | | | | | | |
| | | | (unaudited) | | (unaudited) | | | | | | | | | | | | | | |
Fuel derivative instruments | | Aircraft fuel expense | | $ | (15,215 | ) | | $ | (128 | ) | | | | | | | | | | | | | | |
Total impact to the consolidated statements of operations | | | | $ | (15,215 | ) | | $ | (128 | ) | | | | | | | | | | | | | | |
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Derivatives not accounted for as hedging | | Consolidated financial | | Gains (losses) on derivative | | | | | | | | | | | | | | |
instruments under ASC 815 | statement location | contracts for the three months ended | | | | | | | | | | | | | | |
| | | | 31-Mar-15 | | 31-Mar-14 | | | | | | | | | | | | | | |
| | | | (unaudited) | | (unaudited) | | | | | | | | | | | | | | |
Fuel derivative instruments | | Aircraft fuel expense | | $ | (447 | ) | | $ | (452 | ) | | | | | | | | | | | | | | |
Total impact to the consolidated statements of operations | | | | $ | (447 | ) | | $ | (452 | ) | | | | | | | | | | | | | | |
At March 31, 2015, the Company estimates that approximately $13.9 million of net derivative losses related to its cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next nine months. |
The effect of fuel derivative instruments designated as cash flow hedges and the underlying hedged items on the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014, respectively, is summarized as follows (in thousands): |
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Fuel derivatives designated as cash flow hedges | | Amount of gain (loss) | | Gain (loss) reclassified | | Amount of gain (loss) |
recognized in AOCI | from AOCI into | recognized into |
on derivatives | income (Fuel expense) | income (Ineffective |
(Effective portion) | (Effective portion) | portion) |
| | 31-Mar-15 | | 31-Mar-14 | | 31-Mar-15 | | 31-Mar-14 | | 31-Mar-15 | | 31-Mar-14 |
| | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) |
Fuel derivative instruments | | $ | (3,018 | ) | | $ | (2,745 | ) | | $ | (15,235 | ) | | $ | (17 | ) | | $ | 20 | | | $ | (111 | ) |
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The notional amounts of the Company’s outstanding fuel derivatives are summarized as follows (gallons in millions): |
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| | 31-Mar-15 | | 31-Dec-14 | | | | | | | | | | | | | | | | | | |
| | (unaudited) | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | |
Fuel derivative instruments—Heating oil collars | | 16 | | | 36 | | | | | | | | | | | | | | | | | | | |
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Fuel derivative instruments—Brent calls | | 0 | | | 16 | | | | | | | | | | | | | | | | | | | |
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Fuel derivative instruments—Heating oil swaps | | 7 | | | 0 | | | | | | | | | | | | | | | | | | | |
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Fuel derivative instruments—Jet fuel swaps | | 7 | | | 0 | | | | | | | | | | | | | | | | | | | |
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| | 30 | | | 52 | | | | | | | | | | | | | | | | | | | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | |
Fuel derivative instruments—Heating oil collars | | 3 | | | 3 | | | | | | | | | | | | | | | | | | | |
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Fuel derivative instruments—Brent calls | | 24 | | | 13 | | | | | | | | | | | | | | | | | | | |
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Fuel derivative instruments—Heating oil swaps | | 3 | | | 0 | | | | | | | | | | | | | | | | | | | |
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Fuel derivative instruments—Jet fuel swaps | | 0 | | | 0 | | | | | | | | | | | | | | | | | | | |
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| | 30 | | | 16 | | | | | | | | | | | | | | | | | | | |
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Total | | 60 | | | 68 | | | | | | | | | | | | | | | | | | | |
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As of March 31, 2015, the Company had entered into fuel derivative contracts for approximately 29% of its forecasted aircraft fuel requirements for 2015 at a weighted-average cost per gallon of $2.09. |
The Company presents its fuel derivative instruments at net fair value in the accompanying condensed consolidated balance sheets. The Company’s master netting arrangements with counterparties allow for net settlement under certain conditions. As of March 31, 2015 and December 31, 2014, information related to these offsetting arrangements was as follows (in thousands): |
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| | March 31, 2015 (unaudited) |
| | Derivatives offset in consolidated balance sheet | | Derivatives eligible for offsetting |
| | Gross derivative | | Gross derivative | | Net amount | | Gross derivative | | Gross derivative | | Net amount |
amounts | amounts offset in | amounts | amounts eligible |
| consolidated | | for offsetting |
| balance sheet | | |
Fair value of assets | | $ | 133 | | | $ | (133 | ) | | $ | — | | | $ | 133 | | | $ | (133 | ) | | $ | — | |
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Fair value of liabilities | | (13,333 | ) | | 133 | | | (13,200 | ) | | (13,333 | ) | | 133 | | | (13,200 | ) |
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Margin call deposits | | | | | | 5,300 | | | | | | | 5,300 | |
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Total | | | | | | $ | (7,900 | ) | | | | | | $ | (7,900 | ) |
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| | 31-Dec-14 |
| | Derivatives offset in consolidated balance sheet | | Derivatives eligible for offsetting |
| | Gross derivative | | Gross derivative | | Net amount | | Gross derivative | | Gross derivative | | Net amount |
amounts | amounts offset in | amounts | amounts eligible |
| consolidated | | for offsetting |
| balance sheet | | |
Fair value of assets | | $ | 256 | | | $ | (256 | ) | | $ | 0 | | | $ | 256 | | | $ | (256 | ) | | $ | 0 | |
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Fair value of liabilities | | (27,376 | ) | | 256 | | | (27,120 | ) | | (27,376 | ) | | 256 | | | (27,120 | ) |
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Margin call deposits | | | | | | 14,390 | | | | | | | 14,390 | |
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Total | | | | | | (12,730 | ) | | | | | | (12,730 | ) |
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The fuel derivative agreements the Company has with its counterparties may require the Company to pay all, or a portion of, the outstanding loss positions related to these contracts in the form of a margin call prior to their scheduled maturities. The amount of collateral posted, if any, is adjusted based on the fair value of the fuel hedge derivatives. The Company had $5.3 million and $14.4 million of collateral posted related to outstanding fuel hedge contracts at March 31, 2015 and December 31, 2014, which is reflected in the table above. |