the fair value of its share based payments, such as stock options granted to employees. This standard replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” We adopted SFAS 123R on January 1, 2006. For additional information regarding SFAS 123R, see Note 2 in the Notes to the Consolidated Financial Statement.

 

Market Risks Associated with Financial Instruments

 

We have significant market risk exposure related to aircraft fuel prices and interest rates. Market risk is the potential negative impact of adverse changes in these prices or rates on our Consolidated Financial Statements. To manage the volatility relating to these exposures, we periodically enter into derivative transactions pursuant to stated policies (see Note 4 of the Notes to the Consolidated Financial Statements). We expect adjustments to the fair value of financial instruments accounted for under SFAS 133 to result in ongoing volatility in earnings and shareowners’ deficit.

 

The following sensitivity analyses do not consider the effects of a change in demand for air travel, the economy as a whole, or actions we may take to seek to mitigate our exposure to a particular risk. For these and other reasons, the actual results of changes in these prices or rates may differ materially from the following hypothetical results.

 

Aircraft Fuel Price Risk

 

Our results of operations may be materially impacted by changes in the price of aircraft fuel. To manage this risk, we periodically enter into derivative contracts comprised of heating oil and jet fuel swap and collar contracts, to hedge a portion of our projected aircraft fuel requirements. We do not enter into fuel hedge contracts for speculative purposes.

 

In 2006, aircraft fuel expense accounted for 25% of our total operating expenses. Aircraft fuel expense for 2006 increased 1% compared to 2005 due to higher fuel prices, despite reduced consumption. Our average fuel price per gallon increased 19% to $2.04, while total gallons consumed decreased 15%, due to a reduction in Mainline capacity and our sale of ASA.

 

As of December 31, 2006, we had hedged 36% of our projected fuel requirements for the March 2007 quarter using heating oil and jet fuel zero-cost collar contracts with a weighted average contract cap and floor price of $1.93 and $1.82, respectively. We recognized a $17 million loss from the settlement of certain of these contracts at January 31, 2007. During January 2007, we hedged approximately 24% of our projected fuel requirements for the nine months ending September 30, 2007 using heating oil and jet fuel zero-cost collar and swap contracts. The swap contracts have a weighted average contract price of $1.58 and the zero-cost collar contracts have a weighted average contract cap and floor price of $1.83 and $1.67, respectively. As of January 31, 2007, our open fuel hedge contracts had an estimated fair market value gain of $2 million. We have not entered into any hedges for the December 2007 quarter. We estimate that a 10% rise in the price per gallon of heating oil and jet fuel would change the