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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2026-02-05 compared with 2025-02-07 · 37 added, 61 removed, 35 unchanged (74% of the section changed)

Quantitative and Qualitative Disclosures About Market Risk

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, 2024, the Company operated a total of 106 aircraft under operating and finance leases.

However, except for a small number of aircraft that have lease payments that fluctuate based in part on changes in market interest rates, the remainder of the leases are not considered market sensitive financial instruments and, therefore, are not included in the interest rate sensitivity analysis below.

The Company has at times had interest rate risk in its floating-rate debt obligations and 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, 2025, the Company also operated a total of 97 aircraft under operating and finance leases.

The Company previously operated a small number of aircraft that had lease payments that fluctuated based in part on changes in market interest rates.

The last fluctuating lease expired in July 2025.

Therefore, the Company's leases are not considered market sensitive financial instruments and, therefore, are not included in the interest rate sensitivity analysis below.

The Company does not purchase or hold any derivative financial instruments for trading purposes.

See Note 10 to the Consolidated Financial Statements for information on the Company’s accounting for its hedging program and for further details on the Company’s financial derivative instruments.

The Company purchases jet fuel at prevailing market prices, but seeks to manage market risk through execution of a documented hedging strategy.

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.

See Note 10 to the Consolidated Financial Statements for information on the Company’s financial derivative instruments.

Hedging and Aircraft Fuel Risk

Changes in fuel prices could materially affect the Company’s results of operations.

As discussed in Note 10 to the Consolidated Financial Statements, the Company discontinued its fuel hedging program in 2025.

During second quarter 2025, the Company terminated its remaining portfolio of fuel hedging contracts, which were scheduled to settle through 2027, to effectively close its fuel hedging portfolio and program.

Consequently, the Company is fully exposed to fluctuations in fuel prices like most of its competitors.

The Company currently expects to consume approximately 2.2 billion gallons of jet fuel in 2026.

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 2025, excluding any impact associated with fuel derivative instruments held.

As of December 31, 2024, 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 2027.

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.

Based on the current geopolitical and market dynamics, higher premium costs over time, and aggressive cost reductions underway, the Company does not intend to add new hedging positions to its current hedge book.

See Note 10 to the Consolidated Financial Statements for further information.

The gross fair value of outstanding financial derivative instruments related to the Company’s jet fuel market price risk as of December 31, 2024, was an asset of $130 million.

In addition, $22 million in cash collateral deposits were held by the Company in connection with these instruments based on their fair value as of December 31, 2024.

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.

An immediate 10 percent increase or decrease in underlying fuel-related commodity prices from prices as of December 31, 2024 would correspondingly change the fair value of the commodity derivative instruments in place by approximately $100 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.

This sensitivity analysis uses industry standard valuation models and holds all inputs constant as of December 31, 2024, 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.

As of December 31, 2024, the Company had nine 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.

As of December 31, 2024, 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 counterparty’s credit rating.

The C ompany also had agreements with counterparties in which cash deposits and letters of credit may be required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds.

Refer to the counterparty credit risk and collateral table provided in Note 10 to the Consolidated Financial Statements for the fair values of fuel derivatives, amounts held as collateral, and applicable collateral posting threshold amounts as of December 31, 2024, at which such postings are triggered.

The Company is also subject to the risk that the fuel derivatives it uses to hedge against fuel price volatility do not provide adequate protection.

For example, historically, a portion of the fuel derivatives in the Company's hedge portfolio have been based on the market price of WTI crude oil.

As mentioned above in "Critical Accounting Policies and Estimates", since the Company could no longer demonstrate that derivatives based on WTI crude oil prices would result in effective hedges on a prospective basis, the change in fair value of all of the Company's derivatives based in WTI have been recorded to Other (gains) losses during the second half of 2024.

The Company currently has no WTI-based derivatives that settle beyond 2024.

In recent years, jet fuel prices have been more closely correlated with changes in the price of Brent crude oil, and therefore the Company has attempted to mitigate some of this risk by entering into more fuel hedges based on Brent crude.

The Company has found that financial derivative instruments in commodities, such as WTI crude oil, Brent crude oil, and refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility.

In addition, to add further protection, the Company has in the past periodically entered into jet fuel derivatives for short-term timeframes.

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.

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.

As of December 31, 2024, 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 current fuel hedging program and the historical emphasis that the Company has placed 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.

For example, the Company has put in place controls designed to:

(i) create and maintain a comprehensive risk management policy;

(ii) provide for proper authorization by the appropriate levels of management;

(iii) provide for proper segregation of duties;

(iv) maintain an appropriate level of knowledge regarding the execution of and the accounting for derivative instruments;

and (v) have key performance indicators in place in order to adequately measure the performance of its hedging activities.

The Company believes the governance structure that it has in place is adequate given the size and sophistication of its hedging program.

Based on this anticipated usage, a change in jet fuel prices of one cent per gallon would impact the Company’s Fuel and oil expense by approximately $22 million for 2026.

The fair values of the derivative instruments held in prior periods, 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.

The Company’s credit exposure related to derivative instruments in prior periods was represented by the fair value of contracts that were in an asset position to the Company.

At such times, these outstanding instruments exposed the Company to credit loss in the event of nonperformance by the counterparties to the agreements.

The Company has agreements with a majority 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 counterparties' credit ratings.

As of December 31, 2025, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

Financial Market Risk

The vast majority of the Company’s tangible assets are aircraft, which are long-lived.

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 investment grade credit ratings with all three major credit rating agencies as of December 31, 2024.

The Company’s long-term strategy is to maintain an investment grade 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 and efficient balance sheet and has investment grade credit ratings with all three major credit rating agencies as of December 31, 2025.

See Note 6 to the Consolidated Financial Statements for more information on the material terms of the Company’s short-term and long-term debt.

The Company's senior unsecured notes outstanding as of December 31, 2024 are all fixed-rate obligations.

All the Company's senior unsecured notes outstanding as of December 31, 2025 were issued as fixed-rate obligations.

See Note 6 to the Consolidated Financial Statements for further information.

During fourth quarter 2025, the Company entered into interest rate swap agreements as a hedge related to its $750 million 5.25% Notes due 2035.

The primary objective for the Company's use of this interest rate hedge was to hedge against changes in the fair value of the debt instrument caused by changes in market interest rates, specifically SOFR.

The hedge strategy is to eliminate the changes in fair value of the debt by converting the fixed rate interest of the debt to a floating rate.

Under these interest rate swap agreements, the Company pays SOFR plus a margin every six months on the notional amount of the debt, and receives payments based on the fixed stated rate of the notes every six months until the date the notes become due.

These interest rate swap agreements collectively qualify as a fair value hedge.

As a result of the fixed-to-floating interest rate swap agreements in place, the average floating rate recognized during 2025 was approximately 5.44 percent, based on actual and forward rates as of December 31, 2025.

The $100 million 7.375% debentures due 2027 had at one point been converted to a floating rate, but the Company subsequently terminated the fixed-to-floating interest rate swap agreements related to it.

The effect of this

termination was that the interest associated with this debt prospectively reverted back to its original fixed rate.

The effect of this termination was that the interest associated with this debt prospectively reverted back to its original fixed rate.

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.

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These swap agreements had been classified as cash flow hedges, and all fair market value changes were recorded to AOCI prior to their termination.

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 new debt instruments, which could be issued through 2027.

Following the issuance of the Company's $750 million 5.25% Notes due 2035 in fourth quarter 2025, the deferred gain of $23 million associated with these terminated swaps is now being amortized as a reduction to Interest expense over the life of the notes.

See Note 10 to the Consolidated Financial Statements for further information.

The Company's total debt divided by total assets was 16.9 percent as of December 31, 2025.

The Company also has some risk associated with changing interest rates due to the short-term nature of its invested cash, which totaled $7.5 billion, and short-term investments, which totaled $1.2 billion as of December 31, 2024.

The Company also has some risk associated with changing interest rates due to the short-term nature of its invested cash, which totaled $3.2 billion, as of December 31, 2025.

See Notes 1 and 11 to the Consolidated Financial Statements for further information.

The Company currently invests available cash in certificates of deposit, highly rated money market instruments, treasury securities, U.S.

government agency securities, and other highly rated financial instruments, depending on market conditions and operating cash requirements.

The Company currently invests available cash in time deposits, highly rated money market instruments, and other highly rated financial instruments, depending on market conditions and operating cash requirements.

Because of the short-term nature of these investments, the returns earned parallel closely with short-term floating interest rates.

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See Note 11 to the Consolidated Financial Statements for further information on the fair value of financial instruments.

A change in market interest rates could, however, have a corresponding effect on earnings and cash flows associated with the Company’s invested cash (excluding cash collateral deposits held, if applicable) and short-term investments because of the floating-rate nature of these items.

Assuming floating market rates in effect as of December 31, 2024 were held constant throughout a 12-month period, a hypothetical 10 percent change in those rates would have resulted in an approximate $36 million impact on the Company’s net earnings and cash flows.

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, 2024, an increase in rates would have a net negative effect on the Company’s earnings and cash flows, while a decrease in rates would have a net positive 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.

A change in market interest rates could, however, have a corresponding effect on earnings and cash flows associated with the Company’s debt that has been converted to a floating interest rate and invested cash (excluding cash collateral deposits held, if applicable) because of the floating-rate nature of these items.

Assuming floating market rates in effect as of December 31, 2025, were held constant throughout a 12-month period, a hypothetical 10 percent change in those rates would have resulted in an immaterial impact on the Company’s net earnings and cash flows.

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 floating-rate debt outstanding as of December 31, 2025, 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 hypothetical 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.

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.

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The Company currently has agreements with organizations that process credit card transactions arising from purchases of air travel tickets by its Customers utilizing American Express, Discover, and MasterCard/VISA.

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;

Credit card processors have financial risk associated with tickets purchased for air 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;

therefore, the processor will have liability if the Company does not ultimately provide the air travel.

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A majority of the Company’s sales transactions are processed by Chase Paymentech.

Should chargebacks processed by Chase Paymentech reach a certain level, proceeds from advance ticket sales could be held back and used to establish a reserve account to cover such chargebacks and any other disputed charges that might occur.

Should Customer chargebacks processed by Chase Paymentech reach a certain level, cash proceeds from advance ticket sales could be held back and used to establish a reserve account to cover such chargebacks and any other Customer-disputed charges that might occur.

Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels below investment grade.

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, 2024, no holdbacks were in place.

As of December 31, 2025, no cash holdbacks were in place.

As of December 31, 2025, the Company was in compliance with all credit card processing agreements.

2 unchanged sentences

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.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk