SFAS 133, for which changes in underlying commodity prices result in valuation changes that are recorded in accumulated other comprehensive income.

In September 2008, one of our fuel hedge contract counterparties, Lehman Brothers Holdings, Inc. (“Lehman Brothers”), filed for bankruptcy. As a result, we terminated our fuel hedge contracts with Lehman Brothers prior to their scheduled settlement dates. Additionally, during the December 2008 quarter, we terminated certain fuel hedge contracts with other counterparties to reduce our exposure to projected fuel hedge losses due to the decrease in crude oil prices. In accordance with SFAS 133, we recorded an unrealized loss of $324 million, which represents the effective portion of these terminated contracts at the date of settlement, in accumulated other comprehensive income on our Consolidated Balance Sheet. These losses will be reclassified into earnings in accordance with their original contract settlement dates through December 2009. The ineffective portion of these contracts at the date of settlement resulted in an $11 million charge.

 

The following table shows the projected impact to aircraft fuel expense and fuel hedge margin based on the impact of our open fuel hedge contracts at January 31, 2009, excluding contracts we terminated early, assuming the following per barrel of crude oil sensitivities for 2009:

 

Interest Rate Risk

Our exposure to market risk from adverse changes in interest rates is primarily associated with our long-term debt obligations. Market risk associated with our fixed and variable rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates. We had $8.2 billion and $4.5 billion of fixed-rate debt and $9.7 billion and $3.8 billion of variable-rate debt at December 31, 2008 and 2007, respectively. At December 31, 2008 an increase of 100 basis points in average annual interest rates would have decreased the estimated fair value of our fixed-rate long-term debt by $155 million, inclusive of the impact of our interest rate swap agreements and increased interest expense on our variable-rate long-term debt by $92 million, inclusive of the impact of our interest rate swap and cap agreements.

Foreign Currency Exchange Risk

Our results of operations may be impacted by foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expense. Our largest exposure comes from the Japanese yen. In general, a weakening yen relative to the U.S. dollar results in (1) our operating income being unfavorably impacted to the extent net yen-denominated revenues exceed expenses and (2) recognition of a non-operating foreign currency gain due to the remeasurement of net yen-denominated liabilities. To manage exchange rate risk, we execute both our international revenue and expense transactions in the same foreign currency to the extent practicable. We believe changes in foreign currency exchange rates are not material to our results of operations.