Fair Value Measurements

9 Months Ended

Sep. 30, 2012

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company’s short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. The Company’s fuel derivative contracts, primarily call options, collars (consisting of a purchased call option and a sold put option) and call spreads (consisting of a purchased call option and a sold call option), are valued using energy and commodity market data which is derived by combining raw inputs with quantitative models and processes to generate forward curves and volatilities. Heating oil, jet fuel and crude oil are the primary underlying commodities in the hedge portfolio. No changes in valuation techniques or inputs occurred during the nine months ended September 30, 2012.

Assets and liabilities measured at fair value on a recurring basis are summarized below:



(in millions)	Fair Value Measurements as of September 30, 2012
Description	Total		Level 1		Level 2		Level 3
Short-term investments ^{1, 2}
Money market funds	$	235	$	235	$	—	$	—
Government agency investments	580		—		580		—
Repurchase investments	293		—		293		—
Corporate obligations	1,859				1,859		—
Bank notes / Certificates of deposit / Time deposits	751				751		—
	3,718		235		3,483		—
Restricted cash and short-term investments ¹	847		847		—		—
Fuel derivative contracts, net ¹	98		—		98		—
Total	$	4,663	$	1,082	$	3,581	$	—


^1.	Unrealized gains or losses on short-term investments, restricted cash and short-term investments and derivatives qualifying for hedge accounting are recorded in Accumulated other comprehensive income (loss) (OCI) at each measurement date.


^2.	The Company’s short-term investments mature in one year or less except for $100 million of Bank notes/Certificates of deposit/Time deposits, $580 million of U.S. Government agency investments and $363 million of Corporate obligations which have maturity dates exceeding one year.

No significant transfers between Level 1 and Level 2 occurred during the nine months ended September 30, 2012. The Company’s policy regarding the recording of transfers between levels is to reflect any such transfers at the end of the reporting period.

As of September 30, 2012, the Company had no exposure to European sovereign debt.

The fair values of the Company’s long-term debt classified as Level 2 were estimated using quoted market prices or discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. All of the Company’s long term debt not classified as subject to compromise is classified as Level 2.

The carrying value and estimated fair values of the Company’s long-term debt, including current maturities, not classified as subject to compromise, were (in millions):



	September 30, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
Secured variable and fixed rate indebtedness	$	2,648	$	2,568	$	2,952	$	2,647
Enhanced equipment trust certificates	1,830		1,949		1,942		1,927
6.0%—8.5% special facility revenue bonds	1,318		1,332		1,436		1,230
7.50% senior secured notes	1,000		1,001		1,000		711
AAdvantage Miles advance purchase	809		815		890		902
6.25% senior convertible notes	—		—		—		—
9.0%—10.20% debentures	—		—		—		—
7.88%—10.55% notes	—		—		—		—
	$	7,605	$	7,665	$	8,220	$	7,417

The carrying value and estimated fair value of the Company’s long-term debt, including current maturities, classified as subject to compromise, were (in millions):



	September 30, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
Secured variable and fixed rate indebtedness	$	1,241	$	1,024	$	1,456	$	1,123
Enhanced equipment trust certificates	—		—		—		—
6.0%—8.5% special facility revenue bonds	186		106		186		37
7.50% senior secured notes	—		—		—		—
AAdvantage Miles advance purchase	—		—		—		—
6.25% senior convertible notes	460		307		460		101
9.0%—10.20% debentures	214		138		214		46
7.88%—10.55% notes	166		31		166		34
	$	2,267	$	1,606	$	2,482	$	1,341

All of the Company’s long term debt classified as subject to compromise is classified as Level 2.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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Reference 14: http://www.xbrl.org/2003/role/presentationRef

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+ Details