Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company is subject to the risk of fluctuating interest rates in the normal course of business, primarily as a result of its variable rate borrowing. The Company has entered into variable to fixed rate interest-rate swap agreements on certain obligations to effectively reduce its exposure to interest rate fluctuations.
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We are also exposed to certain losses in the event of nonperformance by the counterparties under the swaps. We regularly evaluate the financial condition of our counterparties. Based on this review, we currently expect the counterparties to perform fully under the swaps. However, if a counterparty defaults on its obligations under a swap, we could be required to pay the full rates on the applicable debt, even if such rates were in excess of the rate in the contract.
As a result of the acquisition of Rex, the Company is also exposed to jet fuel price risk in its regional airline segment. Jet fuel is one of Rex’s largest operating costs. Jet fuel prices are correlated with the price of Brent crude oil, are affected by refining margins and transportation costs, and are denominated in U.S. dollars, which exposes Rex to fluctuations in the Australian dollar/U.S. dollar exchange rate. Rex does not currently use derivative financial instruments to hedge its exposure to jet fuel prices or related currency risk; Rex seeks to mitigate increases in fuel costs primarily through fare adjustments and capacity and schedule management, and there can be no assurance that it will be able to do so. Certain of Rex’s competitors maintain fuel hedging programs and may realize a relative cost advantage during periods of rising fuel prices.
The Company is also exposed to foreign currency exchange-rate risk, primarily with respect to the Australian dollar. Rex’s revenues, expenses, assets, liabilities, cash flows, and financing arrangements may be denominated in Australian dollars, while our consolidated financial statements are presented in U.S. dollars. Fluctuations in the exchange rate between the Australian dollar and the U.S. dollar may affect reported revenues, expenses, assets, liabilities, stockholders’ equity, and cash flows, and may create volatility in our consolidated financial statements. A weakening of the Australian dollar against the U.S. dollar may reduce the U.S. dollar value of Rex’s revenues, operating results, cash flows, and net assets, while a strengthening of the Australian dollar against the U.S. dollar may increase the U.S. dollar value of Rex’s expenses, liabilities, and Australian dollar-denominated obligations.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and the Notes to Consolidated Financial Statements for a description of our accounting policies and other information related to these financial instruments.
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