Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of June 30, 2012, the Company held certain items that are required to be measured at fair value on a recurring basis. These included cash equivalents, short-term investments (primarily treasury bills, commercial paper, and certificates of deposit), certain noncurrent investments, interest rate derivative contracts, fuel derivative contracts, and available-for-sale securities. The majority of the Company's short-term investments consist of instruments classified as Level 1. However, the Company has certificates of deposit and commercial paper that are classified as Level 2, due to the fact that the fair value for these instruments is determined utilizing observable inputs in non-active markets. Noncurrent investments consist of certain auction rate securities, primarily those collateralized by student loan portfolios, which are guaranteed by the U.S. Government. Other available-for-sale securities primarily consist of investments associated with the Company's excess benefit plan.

The Company's fuel and interest rate derivative instruments consist of over-the-counter (OTC) contracts, which are not traded on a public exchange. Fuel derivative instruments include swaps, as well as different types of option contracts, whereas interest rate derivatives consist solely of swap agreements. See Note 5 for further information on the Company's derivative instruments and hedging activities. The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2. The Company's Treasury Group, which reports to the Chief Financial Officer, determines the value of option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are provided by financial institutions that trade these contracts. The option pricing model used by the Company is an industry standard model for valuing options and is the same model used by the broker/dealer community (i.e., the Company's counterparties). The inputs to this option pricing model are the option strike price, underlying price, risk free rate of interest, time to expiration, and volatility. Because certain inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as Level 3. Volatility information is obtained from external sources, but is analyzed by the Company for reasonableness and compared to similar information received from other external sources. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. To validate the reasonableness of the Company's option pricing model, on a monthly basis, the Company compares its option valuations to third party valuations. If any significant differences were to be noted, they would be researched in order to determine the reason. However, historically, no significant differences have been noted. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.

The Company's investments associated with its excess benefit plan consist of mutual funds that are publicly traded and for which market prices are readily available. This plan is a non-qualified deferred compensation plan designed to hold Employee contributions in excess of limits established by Section 415 of the Internal Revenue Code of 1986, as amended. Payments under this plan are made based on the participant's distribution election and plan balance. Assets related to the funded portion of the deferred compensation plan are held in a rabbi trust and the Company remains liable to these participants for the unfunded portion of the plan. The Company records changes in the fair value of the liability and the asset in the Company's earnings.

All of the Company's auction rate security instruments, totaling $54 million at June 30, 2012, are classified as available-for-sale securities and are reflected at estimated fair value in the unaudited Condensed Consolidated Balance Sheet. In periods when an auction process successfully took place every 30-35 days, quoted market prices would be readily available, which would qualify the securities as Level 1. However, due to events in credit markets beginning during first quarter 2008, the auction events for these remaining instruments failed, and have continued to fail through the current period. Therefore, the Company's Treasury Group determines the estimated fair values of these securities utilizing a discounted cash flow analysis. The Company has performed, and routinely updates, a valuation for each of its auction rate security instruments, considering, among other items, the collateralization underlying the security investments, the expected future cash flows, including the final maturity, associated with the securities, estimates of the next time the security is expected to have a successful auction or return to full par value, forecasted reset rates based on the London Interbank Offered Rate (“LIBOR”) or the issuer's net loan rate, and a counterparty credit spread. To validate the reasonableness of the Company's discounted cash flow analyses, the Company compares its valuations to third party valuations on a quarterly basis.

In association with its estimate of fair value related to auction rate security instruments as of June 30, 2012, the Company has recorded a temporary unrealized decline in fair value of $19 million, with an offsetting entry to AOCI. The Company continues to believe that this decline in fair value is due entirely to market liquidity issues, because the underlying assets for the majority of these auction rate securities held by the Company are currently rated investment grade by Moody's, Standard and Poor's, and Fitch and are almost entirely backed by the U.S. Government. The range of maturities for the Company's auction rate securities are from 6 years to 35 years. Considering the relative insignificance of these securities in comparison to the Company's liquid assets and other sources of liquidity, the Company has no current intention of selling these securities nor does it expect to be required to sell these securities before a recovery in their cost basis. At the time of the first failed auctions during first quarter 2008, the Company held a total of $463 million in auction rate securities and, since that time, has been able to sell $390 million of these instruments at par value.

The Company remains in discussions with its remaining counterparties to determine whether mutually agreeable decisions can be reached regarding the effective repurchase of its remaining auction rate securities. The Company continues to earn interest on its outstanding auction rate security instruments. Any future fluctuation in fair value related to these instruments that the Company deems to be temporary, including any recoveries of previous temporary write-downs, would be recorded to AOCI. If the Company determines that any future valuation adjustment is other than temporary, it will record a charge to earnings as appropriate.

The following tables present the Company's assets and liabilities that are measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011:

				Fair value measurements at reporting date using:
				Quoted prices in		Significant		Significant
				active markets		other observable		unobservable
				for identical assets		inputs		inputs
Description		June 30, 2012		(Level 1)		(Level 2)		(Level 3)
Assets		(in millions)
Cash equivalents
	Cash equivalents (a)	$	909	$	909	$	-	$	-
	Commercial paper		150		-		150		-
	Certificates of deposit		24		-		24		-
Short-term investments:
	Treasury bills		1,954		1,954		-		-
	Certificates of deposit		219		-		219		-
Noncurrent investments (b)
	Auction rate securities		54		-		-		54
Interest rate derivatives (see Note 5)			69		-		69		-
Fuel derivatives:
	Swap contracts (c)		13		-		13		-
	Option contracts (c)		199		-		-		199
	Swap contracts (d)		173		-		173		-
	Option contracts (d)		447		-		-		447
Other available-for-sale securities			47		42		-		5
Total assets		$	4,258	$	2,905	$	648	$	705

Liabilities
Fuel derivatives:
	Swap contracts (c)	$	(16)	$	-	$	(16)	$	-
	Option contracts (c)		(128)		-		-		(128)
	Swap contracts (d)		(374)		-		(374)		-
	Option contracts (d)		(454)		-		-		(454)
Interest rate derivatives (see Note 5)			(128)		-		(128)		-
Deferred compensation			(126)		(126)		-		-
Total liabilities		$	(1,226)	$	(126)	$	(518)	$	(582)


(a) Cash equivalents is primarily composed of money market investments.
(b) Noncurrent investments are included in Other assets in the unaudited Condensed Consolidated Balance Sheet.
(c) In the unaudited Condensed Consolidated Balance Sheet, amounts are presented as a net asset, and are also net of cash collateral received from counterparties. See Note 5.
(d) In the unaudited Condensed Consolidated Balance Sheet, amounts are presented as a net liability, and are also net of cash collateral provided to counterparties. See Note 5.

				Fair value measurements at reporting date using:
				Quoted prices in		Significant		Significant
				active markets		other observable		unobservable
				for identical assets		inputs		inputs
Description		December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Assets		(in millions)
Cash equivalents
	Cash equivalents (a)	$	774	$	774	$	-	$	-
	Commercial paper		48		-		48		-
	Certificates of deposit		7		-		7		-
Short-term investments:
	Treasury bills		2,014		2,014		-		-
	Certificates of deposit		221		-		221		-
	Commercial paper		80		-		80		-
Noncurrent investments (b)
	Auction rate securities		67		-		-		67
	Certificates of deposit		25		-		25		-
Interest rate derivatives (see Note 5)			66		-		66		-
Fuel derivatives:
	Option contracts (c)		709		-		-		709
	Swap contracts (d)		180		-		180		-
	Option contracts (d)		345		-		-		345
Other available-for-sale securities			43		38		-		5
Total assets		$	4,579	$	2,826	$	627	$	1,126

Liabilities
Fuel derivatives:
	Swap contracts (c)	$	(65)	$	-	$	(65)	$	-
	Option contracts (c)		(371)		-		-		(371)
	Swap contracts (d)		(576)		-		(576)		-
	Option contracts (d)		(266)		-		-		(266)
Interest rate derivatives (see Note 5)			(132)		-		(132)		-
Deferred Compensation			(121)		(121)		-		-
Total liabilities		$	(1,531)	$	(121)	$	(773)	$	(637)


(a) Cash equivalents is primarily composed of money market investments.
(b) Noncurrent investments are included in Other assets in the unaudited Condensed Consolidated Balance Sheet.
(c) In the unaudited Condensed Consolidated Balance Sheet, amounts are presented as a net asset, and are also net of cash collateral received from counterparties. See Note 5.
(d) In the unaudited Condensed Consolidated Balance Sheet, amounts are presented as a net liability, and are also net of cash collateral provided to counterparties. See Note 5.

The Company had no transfers of assets or liabilities between any of the above levels during the six months ended June 30, 2012 or the year ended December 31, 2011. The following table presents the Company's activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2012:

		Fair value measurements using significant
		unobservable inputs (Level 3)
		Fuel		Auction rate			Other
(in millions)		derivatives		securities			securities		Total
Balance at March 31, 2012		$	562	$	68		$	5	$	635
Total gains (realized or unrealized)
	Included in earnings		(183)		-			-		(183)
	Included in other comprehensive income		(432)		(6)			-		(438)
Purchases			157		-			-		157
Sales			-		(8)			-		(8)
Settlements			(40)		-			-		(40)
Balance at June 30, 2012		$	64	$	54	(a)	$	5	$	123

The amount of total gains or (losses) for the
	period included in earnings attributable to the
	change in unrealized gains or losses relating to
	assets still held at June 30, 2012	$	(177)	$	-		$	-	$	(177)

(a) Included in Other assets in the unaudited Condensed Consolidated Balance Sheet.

		Fair value measurements using significant
		unobservable inputs (Level 3)
		Fuel		Auction rate			Other
(in millions)		derivatives		securities			securities		Total
Balance at December 31, 2011		$	417	$	67		$	5	$	489
Total gains or (losses) (realized or unrealized)
	Included in earnings		(4)		-			-		(4)
	Included in other comprehensive income		(228)		(5)			-		(233)
Purchases			329		-			-		329
Sales			(396)		(8)			-		(404)
Settlements			(54)		-			-		(54)
Balance at June 30, 2012		$	64	$	54	(a)	$	5	$	123

The amount of total gains or (losses) for the
	period included in earnings attributable to the
	change in unrealized gains or losses relating to
	assets still held at June 30, 2012	$	1	$	-		$	-	$	1

(a) Included in Other assets in the unaudited Condensed Consolidated Balance Sheet.

The significant unobservable input used in the fair value measurement of the Company's derivative option contracts is implied volatility. Holding other inputs constant, a significant increase (decrease) in implied volatility would result in a significantly higher (lower) fair value measurement for the Company's derivative option contracts. The significant unobservable inputs used in the fair value measurement of the Company's auction rate securities are time to principal recovery, an illiquidity premium, and counterparty credit spread. Holding other inputs constant, a significant increase (decrease) in such unobservable inputs would result in a significantly lower (higher) fair value measurement.

The following table presents a range of the unobservable inputs utilized in the fair value measurements of the Company's assets and liabilities classified as Level 3 at June 30, 2012:

Quantitative information about Level 3 fair value measurements

	Valuation technique	Unobservable input	Period (by year)	Range
Fuel derivatives	Option model	Implied volatility	Third quarter 2012	14%-39%
			Fourth quarter 2012	22%-41%
			2013	23%-38%
			2014	22%-32%
			2015	22%-26%
			2016	20%-25%
Auction rate securities	Discounted cash flow	Time to principal recovery		6yrs-8yrs
		Illiquidity premium		2%-5%
		Counterparty credit spread		1%-3%

All settlements from fuel derivative contracts that are deemed “effective” are included in Fuel and oil expense in the period the underlying fuel is consumed in operations. Any “ineffectiveness” associated with hedges, including amounts that settled in the current period (realized), and amounts that will settle in future periods (unrealized), is recorded in earnings immediately, as a component of Other (gains) losses, net. See Note 5 for further information on hedging. Any gains and losses (realized and unrealized) related to other investments are reported in Other operating expenses, and were immaterial for the three and six months ended June 30, 2012 and 2011.

The carrying amounts and estimated fair values of the Company's long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at June 30, 2012, are contained in the table below. The fair values of the Company's publicly held long-term debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these agreements as Level 2. Seven of the Company's debt agreements are not publicly held. The Company has determined the estimated fair value of this debt to be Level 3 as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.

	Carrying		Estimated fair		Fair value level
(in millions)	value		value		hierarchy
French Credit Agreements due 2012	$	3	$	3		Level 3
5.25% Notes due 2014		371		393		Level 2
5.75% Notes due 2016		331		372		Level 2
5.25% Convertible Senior Notes due 2016		118		121		Level 2
5.125% Notes due 2017		333		363		Level 2
Fixed-rate 717 Aircraft Notes payable through 2017 - 10.39%		65		64		Level 2
French Credit Agreements due 2018		60		60		Level 3
Fixed-rate 737 Aircraft Notes payable through 2018 - 7.02%		39		40		Level 3
Term Loan Agreement due 2019 - 6.315%		255		255		Level 3
Term Loan Agreement due 2019 - 6.84%		100		108		Level 3
Term Loan Agreement due 2020 - 5.223%		469		418		Level 3
Floating-rate 737 Aircraft Notes payable through 2020 - 3.99%		577		551		Level 3
Pass Through Certificates due 2022		402		446		Level 2
7.375% Debentures due 2027		138		150		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.

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