Fair Value Measurements

12 Months Ended

Dec. 31, 2014

Fair Value Disclosures [Abstract]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.

• Level 1. Observable inputs such as quoted prices in active markets;

• Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

• Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on the valuation techniques identified in the tables below. The valuation techniques are as follows:

(a) Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; and

(b) Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models).

Assets (Liabilities) Measured at Fair Value on a Recurring Basis⁽¹⁾ 

(in millions)	December 31, 2014			Level 1			Level 2			Valuation Technique
Cash equivalents	$	1,612		$	1,612		$	—		(a)
Short-term investments
U.S. government and agency securities	59			—			59			(a)
Asset- and mortgage-backed securities	392			—			392			(a)
Corporate obligations	749			—			749			(a)
Other fixed income securities	17			—			17			(a)
Restricted cash equivalents and investments	37			37			—			(a)
Long-term investments	118			90			28			(a)(b)
Hedge derivatives, net
Fuel hedge contracts	(1,848		)	(167		)	(1,681		)	(a)(b)
Interest rate contracts	(7		)	—			(7		)	(a)(b)
Foreign currency exchange contracts	73			—			73			(a)

(in millions)	December 31, 2013			Level 1		Level 2			Valuation Technique
Cash equivalents	$	2,487		$	2,487	$	—		(a)
Short-term investments
U.S. government securities	959			959		—			(a)
Restricted cash equivalents and investments	118			118		—			(a)
Long-term investments	109			80		29			(a)(b)
Hedge derivatives, net
Fuel hedge contracts	314			16		298			(a)(b)
Interest rate contracts	(67		)	—		(67		)	(a)(b)
Foreign currency exchange contracts	257			—		257			(a)

⁽¹⁾  See Note 11, “Employee Benefit Plans,” for fair value of benefit plan assets.

Cash Equivalents and Restricted Cash Equivalents and Investments. Cash equivalents generally consist of money market funds. Restricted cash equivalents and investments primarily support letters of credit that relate to certain projected self-insurance obligations and airport commitments and generally consist of money market funds and time deposits. The fair value of these investments is based on a market approach using prices and other relevant information generated by market transactions involving identical or comparable assets.

Short-Term Investments. Short-term investments generally consist of U.S. government and agency securities, asset- and mortgage-backed securities, corporate obligations and other fixed income securities. The U.S. government securities designated as held-to-maturity are recorded at cost, which approximates fair value, while those that are designated as available-for-sale are valued based on quoted market prices. The fair values of our U.S. government agency securities, asset- and mortgage-backed securities, corporate obligations and other fixed term securities are based on a market approach using industry standard valuation techniques that incorporate observable inputs such as quoted interest rates, benchmark curves, credit ratings of the security and other observable information.

Long-Term Investments. Our long-term investments that are measured at fair value primarily consist of equity investments in Grupo Aeroméxico, S.A.B. de C.V., the parent company of Aeroméxico, and GOL Linhas Aéreas Inteligentes, S.A, the parent company of GOL. Shares of the parent companies of Aeroméxico and GOL are traded on public exchanges and we have valued our investments based on quoted market prices. The investments are classified in other noncurrent assets.

Hedge Derivatives. Our derivative contracts are generally negotiated with counterparties without going through a public exchange. Accordingly, our fair value assessments give consideration to the risk of counterparty default (as well as our own credit risk).

• Fuel Contracts. Our fuel hedge portfolio consists of options, swaps and futures. The hedge contracts include crude oil, diesel fuel and jet fuel, as these commodities are highly correlated with the price of jet fuel that we consume. Option contracts are valued under an income approach using option pricing models based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets. Volatilities used in these valuations ranged from 26% to 57% depending on the maturity dates, underlying commodities and strike prices of the option contracts. Swap contracts are valued under an income approach using a discounted cash flow model based on data either readily observable or derived from public markets. Discount rates used in these valuations vary with the maturity dates of the respective contracts and are based on LIBOR. Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.

• Interest Rate Contracts. Our interest rate derivatives consist of swap contracts and are valued primarily based on data readily observable in public markets.

• Foreign Currency Exchange Contracts. Our foreign currency derivatives consist of Japanese yen and Canadian dollar forward contracts and are valued based on data readily observable in public markets.