Quantitative and Qualitative Disclosures About Market Risk
−Removed: The Company has interest rate risk in its interest rate swaps, commodity price risk in jet fuel required to operate its aircraft fleet, and market risk in the derivatives used to manage its fuel hedging program and in the form of fixed-rate debt instruments.
+Added: The Company has at times had interest rate risk in its interest rate swaps, commodity price risk in jet fuel required to operate its aircraft fleet, and market risk in the derivatives used to manage its fuel hedging program and in the form of fixed-rate debt instruments.
As of December 31, 2023, the Company operated a total of 81 aircraft under operating and finance leases.
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The Company purchases jet fuel at prevailing market prices, but seeks to manage market risk through execution of a documented hedging strategy.
−Removed: The Company utilizes financial derivative instruments, on both a short-term and a long-term basis, as a form of insurance against the potential for significant increases in fuel prices.
+Added: The Company utilizes financial derivative instruments, on both a short-term and a long-term basis, as a form of insurance against the potential for significant, or catastrophic, increases in fuel prices.
The Company believes there can be significant risk in not hedging against the possibility of such fuel price increases, especially in energy markets in which prices are high and/or rising.
−Removed: The Company expects to consume approximately 2.2 billion gallons of jet fuel in 2023.
+Added: The Company currently expects to consume approximately 2.2 billion gallons of jet fuel in 2024.
Based on this anticipated usage, a change in jet fuel prices of just one cent per gallon would impact the Company’s Fuel and oil expense by approximately $22 million for 2024, excluding any impact associated with fuel derivative instruments held.
−Removed: As of December 31, 2022, the Company held a net position of fuel derivative instruments that represented a hedge for a portion of its anticipated jet fuel purchases for future periods.
+Added: As of December 31, 2023, the Company held a net position of fuel derivative instruments that represented a hedge for a portion of its anticipated jet fuel purchases for future periods through 2026.
See Note 11 to the Consolidated Financial Statements for further information.
−Removed: The Company may increase or decrease the volume of fuel hedged based on its expectation of future market prices and its forecasted fuel consumption levels, while considering the significant cost that can be associated with different types of hedging strategies.
−Removed: The gross fair value of outstanding financial derivative instruments related to the Company’s jet fuel market price risk at December 31, 2022, was an asset of $512 million.
+Added: The Company may increase or decrease the volume of fuel hedged based on its expectation of future market prices and its forecasted fuel consumption levels, while considering the significant premium cost that can be associated with different types of hedging strategies.
+Added: The gross fair value of outstanding financial derivative instruments related to the Company’s jet fuel market price risk as of December 31, 2023, was an asset of $223 million.
In addition, $50 million in cash collateral deposits were held by the Company in connection with these instruments based on their fair value as of December 31, 2023.
The fair values of the derivative instruments, depending on the type of instrument, were determined by use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets.
−Removed: An immediate 10 percent increase or decrease in underlying fuel-related commodity prices from the December 31, 2022, prices would correspondingly change the fair value of the commodity derivative instruments in place by approximately $191 million.
+Added: An immediate 10 percent increase or decrease in underlying fuel-related commodity prices from prices as of December 31, 2023 would correspondingly change the fair value of the commodity derivative instruments in place by approximately $148 million.
Fluctuations in the related commodity derivative instrument cash flows may change by more or less than this amount based upon further fluctuations in futures prices, as well as related income tax effects.
In addition, this does not consider changes in cash or letters of credit utilized as collateral provided to or by counterparties, which would fluctuate in an amount equal to or less than this amount, depending on the type of collateral arrangement in place with each counterparty.
−Removed: This sensitivity analysis uses industry standard valuation models and holds all inputs constant at December 31, 2022, levels, except underlying futures prices.
+Added: This sensitivity analysis uses industry standard valuation models and holds all inputs constant as of December 31, 2023, levels, except underlying futures prices.
The Company’s credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are in an asset position to the Company.
At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements.
−Removed: As of December 31, 2022, the Company had eight counterparties for which the derivatives held were an asset.
+Added: As of December 31, 2023, the Company had eight counterparties for which the derivatives held were an asset and none in a loss position.
To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty.
However, if one or more of these counterparties were in a liability position to the Company and were unable to meet their obligations, any open derivative contracts with the counterparty could be subject to early termination, which could result in substantial losses for the Company.
−Removed: At December 31, 2022, 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 based on the
−Removed: counterparty’s credit rating.
+Added: As of December 31, 2023, 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
+Added: threshold amount based on the counterparty’s credit rating.
The C ompany also had agreements with counterparties in which cash deposits and/or letters of credit are required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds.
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Jet fuel is not widely traded on an organized futures exchange and, therefore, there are limited opportunities to hedge directly in jet fuel for time horizons longer than approximately 24 months into the future.
−Removed: 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.
−Removed: As of December 31, 2022, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.
+Added: The Company also at times 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.
+Added: As of December 31, 2023, the Company had no outstanding interest rate swap agreements and therefore no cash collateral deposits provided or held.
Due to the significance of the Company’s fuel hedging program and the emphasis that the Company places on utilizing fuel derivatives to reduce its fuel price risk, the Company has created a system of governance and management oversight and has put in place a number of internal controls designed so that procedures are properly followed and accountability is present at the appropriate levels.
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The vast majority of the Company’s tangible assets are aircraft, which are long-lived.
−Removed: The Company’s strategy is to maintain a conservative balance sheet and grow capacity steadily and profitably under the right conditions.
+Added: The Company’s long-term strategy is to maintain a conservative balance sheet and generate adequate profits and returns on capital, while growing capacity steadily under the right conditions.
While the Company uses financial leverage, it strives to maintain a strong balance sheet and has a "BBB+" rating with Fitch, a "BBB" rating with Standard & Poor’s, and a "Baa1" credit rating with Moody’s as of December 31, 2023, all of which are considered "investment grade." See Note 7 to the Consolidated Financial Statements for more information on the material terms of the Company’s short-term and long-term debt.
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As a result of the gain realized on this transaction, which is being 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, based on projected future interest rates at the date of termination, associated with these notes will significantly differ from the expense it would have recorded had the notes remained at floating rates.
+Added: During fourth quarter 2023, the Company terminated $150 million notional value of forward-starting interest rate swap agreements.
+Added: These swap agreements had been classified as cash flow hedges, and all fair market value changes were recorded to AOCI prior to their termination.
+Added: The effect of this termination is that the value of the swaps originally recorded in AOCI, a gain of $23 million, will be amortized to Interest expense over the life of the debt, which will be within the years 2024-2027.
+Added: See Note 11 to the Consolidated Financial Statements for further information.
The Company's total debt divided by total assets was 21.9 percent as of December 31, 2023.
−Removed: The Company also has some risk associated with changing interest rates due to the short-term nature of its invested cash, which totaled $9.5 billion, and short-term investments, which totaled $2.8 billion at December 31, 2022.
+Added: The Company also has some risk associated with changing interest rates due to the short-term nature of its invested cash, which totaled $9.3 billion, and short-term investments, which totaled $2.2 billion as of December 31, 2023.
See Notes 1 and 12 to the Consolidated Financial Statements for further information.
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Assuming floating market rates in effect as of December 31, 2023 were held constant throughout a 12-month period, a hypothetical 10 percent change in those rates would have resulted in an approximate $59 million impact on the Company’s net earnings and cash flows.
−Removed: Utilizing these assumptions and considering the Company’s cash balance (excluding the impact of cash collateral deposits held from or provided to counterparties, if applicable) and short-term investments outstanding at December 31, 2022, an increase in rates would have a net positive effect on the Company’s earnings and cash flows, while a decrease in rates would have a net negative effect on the Company’s earnings and cash flows.
+Added: Utilizing these assumptions and considering the Company’s cash balance (excluding the impact of cash collateral deposits held from or provided to counterparties, if applicable) and short-term investments outstanding as of December 31, 2023, an increase in rates would have a net positive effect on the Company’s earnings and cash flows, while a decrease in rates would have a net negative effect on the Company’s earnings and cash flows.
However, a 10 percent change in market rates would not impact the Company’s earnings or cash flow associated with the Company’s publicly traded fixed-rate debt.
−Removed: The Company is also subject to a financial covenant included in its Amended A&R Credit Agreement, and is subject to credit rating triggers related to its credit card transaction processing agreements, the pricing related to any funds drawn under its Amended A&R Credit Agreement, and some of its hedging counterparty agreements.
+Added: The Company is also subject to a financial covenant included in its Amended Credit Agreement, and is subject to credit rating triggers related to its credit card transaction processing agreements, the pricing related to any funds drawn under its Amended Credit Agreement, and some of its hedging counterparty agreements.
Certain covenants include the maintenance of minimum credit ratings and/or triggers that are based on changes in these ratings.
−Removed: The Company’s Amended A&R Credit Agreement contains a financial covenant to maintain total liquidity, as defined therein, of $1.5 billion at all times.
−Removed: As of December 31, 2022, the Company was in compliance with this covenant and there were no amounts outstanding under the Amended A&R Credit Agreement.
−Removed: However, if conditions change and the Company fails to meet the minimum standards set forth in the Amended A&R Credit Agreement, there could be a reduction in the availability of cash under the facility, or an increase in the costs to keep the facility intact as written.
+Added: The Company’s Amended Credit Agreement contains a financial covenant to maintain a Coverage Ratio (as defined therein) of 1.25 to 1.00, subject to the Company's one-time option to reduce this ratio requirement to 0.80 to 1.00 for two consecutive fiscal quarters.
+Added: As of December 31, 2023, the Company was in compliance with this covenant and there were no amounts outstanding under the Amended Credit Agreement.
+Added: However, if conditions change and the Company fails to meet the minimum standards set forth in the Amended Credit Agreement, there could be a reduction in the availability of cash under the facility, or an increase in the costs to keep the facility intact as written.
The Company’s hedging counterparty agreements contain ratings triggers in which cash collateral could be required to be posted with the counterparty if the Company’s credit rating were to fall below investment grade by two of the three major rating agencies, and if the Company were in a net liability position with the counterparty.
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Credit card processors have financial risk associated with tickets purchased for travel because the processor generally forwards the cash related to the purchase to the Company soon after the purchase is completed, but the air travel generally occurs after that time;
−Removed: therefore, the processor will have liability if the Company does not ultimately provide the air travel.
+Added: therefore, the processor will have liability if the Company does not ultimately
+Added: provide the air travel.
Under these processing agreements, and based on specified conditions, increasing amounts of cash reserves could be required to be posted with the counterparty.
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Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels below investment grade.
−Removed: Cash reserve requirements are based on the Company’s public debt rating and a
−Removed: corresponding percentage of the Company’s Air traffic liability.
+Added: Cash reserve requirements are based on the Company’s public debt rating and a corresponding percentage of the Company’s Air traffic liability.
As of December 31, 2023, no holdbacks were in place.
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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.