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FAIR VALUE MEASUREMENTS
 9 Months Ended
Sep. 30, 2013
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

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 September 30, 2013, 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, commercial paper, and Eurodollar time deposits 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 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 Department, 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 $39 million (net) at September 30, 2013, are classified as available-for-sale securities and are reflected at their estimated fair value in the unaudited Condensed Consolidated Balance Sheet.  In prior periods, due to the auction process which took place every 30-35 days for most securities, quoted market prices were readily available, which would have qualified 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 Department 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 September 30, 2013, the Company has previously recorded a temporary unrealized decline in fair value of $11 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 5 years to 34 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 $413 million of these instruments at par value.


The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2013, and December 31, 2012:

 
 
 
 
Fair value measurements at reporting date using:
 
 
 
 
Quoted prices in
active markets
for identical assets
 
Significant
other observable
inputs
 
Significant
unobservable
inputs
Description
 
September 30, 2013
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
(in millions)
Cash equivalents
 
 
 
 
 
 
 
 
Cash equivalents (a)
 
$
1,107

 
$
1,107

 
$
—

 
$
—

Commercial paper
 
215

 
—

 
215

 
—

Certificates of deposit
 
11

 
—

 
11

 
—

Short-term investments:
 
 
 
 
 
 
 
 
Treasury bills
 
1,760

 
1,760

 
—

 
—

Certificates of deposit
 
235

 
—

 
235

 
—

Noncurrent investments (b)
 
 
 
 
 
 
 
 
Auction rate securities
 
39

 
—

 
—

 
39

Interest rate derivatives (see Note 5)
 
22

 
—

 
22

 
—

Fuel derivatives:
 
 
 
 
 
 
 
 
Swap contracts (c)
 
46

 
—

 
46

 
—

Option contracts (c)
 
435

 
—

 
—

 
435

Option contracts (d)
 
20

 
—

 
—

 
20

Other available-for-sale securities
 
58

 
53

 
—

 
5

Total assets
 
$
3,948

 
$
2,920

 
$
529

 
$
499

Liabilities
 
 
 
 
 
 
 
 
Fuel derivatives:
 
 
 
 
 
 
 
 
Swap contracts (c)
 
(38
)
 
—

 
(38
)
 
—

Option contracts (c)
 
(335
)
 
—

 
—

 
(335
)
Option contracts (d)
 
(41
)
 
—

 
—

 
(41
)
Interest rate derivatives (see Note 5)
 
(87
)
 
—

 
(87
)
 
—

Deferred compensation
 
(149
)
 
(149
)
 
—

 
—

Total liabilities
 
$
(650
)
 
$
(149
)
 
$
(125
)
 
$
(376
)

(a) Cash equivalents are 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. See Note 5.
(d) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net liability. See Note 5.

 
 
 
 
Fair value measurements at reporting date using:
 
 
 
 
Quoted prices in
active markets
for identical assets
 
Significant
other observable
inputs
 
Significant
unobservable
inputs
Description
 
December 31, 2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
(in millions)
Cash equivalents
 
 
 
 
 
 
 
 
Cash equivalents (a)
 
$
829

 
$
829

 
$
—

 
$
—

Commercial paper
 
170

 
—

 
170

 
—

Certificates of deposit
 
34

 
—

 
34

 
—

Eurodollar Time Deposits
 
80

 
—

 
80

 
—

Short-term investments:
 
 
 
 
 
 
 
 
Treasury bills
 
1,624

 
1,624

 
—

 
—

Certificates of deposit
 
233

 
—

 
233

 
—

Noncurrent investments (b)
 
 
 
 
 
 
 
 
Auction rate securities
 
36

 
—

 
—

 
36

Interest rate derivatives (see Note 5)
 
31

 
—

 
31

 
—

Fuel derivatives:
 
 
 
 
 
 
 
 
Swap contracts (c)
 
113

 
—

 
113

 
—

Option contracts (c)
 
850

 
—

 
—

 
850

Option contracts (d)
 
10

 
—

 
—

 
10

Other available-for-sale securities
 
49

 
44

 
—

 
5

Total assets
 
$
4,059

 
$
2,497

 
$
661

 
$
901

Liabilities
 
 
 
 
 
 
 
 
Fuel derivatives:
 
 
 
 
 
 
 
 
Swap contracts (c)
 
$
(57
)
 
$
—

 
$
(57
)
 
$
—

Option contracts (c)
 
(637
)
 
—

 
—

 
(637
)
Swap contracts (d)
 
(56
)
 
—

 
(56
)
 
—

Option contracts (d)
 
(4
)
 
—

 
—

 
(4
)
Interest rate derivatives (see Note 5)
 
(126
)
 
—

 
(126
)
 
—

Deferred Compensation
 
(137
)
 
(137
)
 
—

 
—

Total liabilities
 
$
(1,017
)
 
$
(137
)
 
$
(239
)
 
$
(641
)

(a) Cash equivalents are 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.  See Note 5.
(d) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net liability.  See Note 5.

The Company had no transfers of assets or liabilities between any of the above levels during the nine months ended September 30, 2013, or the year ended December 31, 2012.  The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2013:

 
Fair value measurements using significant
unobservable inputs (Level 3)
 
Fuel
 
Auction rate
 
Other
 
 
(in millions)
derivatives
 
securities
 
securities
 
Total
Balance at June 30, 2013
$
(76
)
 
$
36

 
$
5

 
$
(35
)
Total gains (realized or unrealized)
 

 
 

 
 

 
 

Included in earnings
62

 
—

 
—

 
62

Included in other comprehensive income
155

 
3

 
—

 
158

Purchases
26

(a)
—

 
—

 
26

Sales
(88
)
(a)
—

 
—

 
(88
)
Settlements
—

 
—

 
—

 
—

Balance at September 30, 2013
$
79

 
$
39

(b)
$
5

 
$
123

The amount of total gains for the period
  included in earnings attributable to the
  change in unrealized gains or losses relating
  to assets still held at September 30, 2013
$
58

 
$
—

 
$
—

 
$
58

(a) The purchase and sale of fuel derivatives are recorded gross based on the structure of the derivative instrument and
whether a contract with multiple derivatives is purchased as a single instrument or separate instruments.
(b) 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, 2012
$
219

 
$
36

 
$
5

 
$
260

Total gains or (losses) (realized or unrealized)
 

 
 

 
 

 
 

Included in earnings
73

 
—

 
—

 
73

Included in other comprehensive income
(190
)
 
3

 
—

 
(187
)
Purchases
301

(a)
—

 
—

 
301

Sales
(371
)
(a)
—

 
—

 
(371
)
Settlements
47

 
—

 
—

 
47

Balance at September 30, 2013
$
79

 
$
39

(b)
$
5

 
$
123

The amount of total gains for the period
  included in earnings attributable to the
  change in unrealized gains or losses relating
  to assets still held at September 30, 2013
$
92

 
$
—

 
$
—

 
$
92

(a) The purchase and sale of fuel derivatives are recorded gross based on the structure of the derivative instrument and
whether a contract with multiple derivatives is purchased as a single instrument or separate instruments.
(b) 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, respectively, 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, respectively.

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 September 30, 2013:

Quantitative information about Level 3 fair value measurements
 
Valuation technique
Unobservable input
Period (by year)
Range
Fuel derivatives
Option model
Implied volatility
Fourth quarter 2013
11-26%
 
 
 
2014
14-28%
 
 
 
2015
14-22%
 
 
 
2016
14-20%
 
 
 
2017
14-17%
Auction rate securities
Discounted cash flow
Time to principal recovery
 
5-8 years
 
 
Illiquidity premium
 
3-4%
 
 
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 nine months ended September 30, 2013 and 2012.

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 September 30, 2013, are presented 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.  Six 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.

(in millions)
 Carrying value
 
Estimated fair value
 
Fair value level hierarchy
5.25% Notes due 2014
359

 
364

 
Level 2
5.75% Notes due 2016
322

 
353

 
Level 2
5.25% Convertible Senior Notes due 2016
115

 
153

 
Level 2
5.125% Notes due 2017
324

 
353

 
Level 2
Fixed-rate 717 Aircraft Notes payable through 2017 - 10.38%
55

 
52

 
Level 2
French Credit Agreements due 2018 - 1.12%
51

 
51

 
Level 3
Fixed-rate 737 Aircraft Notes payable through 2018 - 7.02%
31

 
32

 
Level 3
Term Loan Agreement due 2019 - 6.315%
218

 
221

 
Level 3
Term Loan Agreement due 2019 - 6.84%
85

 
91

 
Level 3
Term Loan Agreement due 2020 - 5.223%
422

 
396

 
Level 3
Floating-rate 737 Aircraft Notes payable through 2020
348

 
343

 
Level 3
Pass Through Certificates due 2022 - 6.24%
371

 
423

 
Level 2
7.375% Debentures due 2027
137

 
149

 
Level 2