Fair Value Measurements

12 Months Ended

Dec. 31, 2015

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⁾ 

	December 31, 2015								Valuation Technique
(in millions)	Total			Level 1		Level 2
Cash equivalents	$	1,543		$	1,543	$	—		(a)
Short-term investments
U.S. government and agency securities	151			74		77			(a)
Asset- and mortgage-backed securities	380			—		380			(a)
Corporate obligations	896			—		896			(a)
Other fixed income securities	38			—		38			(a)
Restricted cash equivalents and investments	49			49		—			(a)
Long-term investments	155			130		25			(a)
Hedge derivatives, net
Fuel hedge contracts	(672		)	65		(737		)	(a)(b)
Interest rate contract	(3		)	—		(3		)	(a)(b)
Foreign currency exchange contracts	94			—		94			(a)

	December 31, 2014									Valuation Technique
(in millions)	Total			Level 1			Level 2
Cash equivalents	$	1,612		$	1,612		$	—		(a)
Short-term investments
U.S. government 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)
Hedge derivatives, net
Fuel hedge contracts	(1,848		)	(167		)	(1,681		)	(a)(b)
Interest rate contract	(7		)	—			(7		)	(a)(b)
Foreign currency exchange contracts	73			—			73			(a)

⁽¹⁾  See Note 9, “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 generally consist of money market funds and time deposits, which primarily support letters of credit that relate to certain projected self-insurance obligations and airport commitments. 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. The fair values of short-term investments are based on a market approach using industry standard valuation techniques that incorporate observable inputs such as quoted market prices, 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, the parent company of Aeroméxico, and GOL Linhas Aéreas Inteligentes, the parent company of VRG Linhas Aéreas (operating as 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. A portion of our derivative contracts are negotiated over-the-counter 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). Such contracts are classified as Level 2 within the fair value hierarchy. The remainder of our hedge contracts are comprised of futures contracts, which are traded on a public exchange. These contracts are classified within

Level 1 of the fair value hierarchy.

• 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 31% to 53% 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 provided by counterparties who regularly trade in public markets. Discount rates used in these valuations vary with the maturity dates of the respective contracts and are based on the London interbank offered rate ("LIBOR"). Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.

• Interest Rate Contract. Our interest rate derivative is a swap contract, which is valued 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.