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FAIR VALUE MEASUREMENTS | 9 Months Ended
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Sep. 30, 2015
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, 2015, 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 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 3 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. Included in Other available-for-sale securities are the Company’s investments associated with its excess benefit plan which consist of investment funds 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 asset in the Company’s earnings. All of the Company’s auction rate security instruments, totaling $27 million (net) at September 30, 2015, are classified as available-for-sale securities and are reflected at their estimated fair value in the unaudited Condensed Consolidated Balance Sheet. 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 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. The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2015, and December 31, 2014:
|  |  |  | 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, 2015 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets |  | (in millions)
Cash equivalents |  |  |  |  |  |  |  |
Cash equivalents (a) |  | $ | 1,528 |  |  | $ | 1,528 |  |  | $ | — |  |  | $ | — |
Commercial paper |  | 125 |  |  | — |  |  | 125 |  |  | — |
Certificates of deposit |  | 25 |  |  | — |  |  | 25 |  |  | — |
Eurodollar time deposits |  | 62 |  |  | — |  |  | 62 |  |  | — |
Short-term investments: |  |  |  |  |  |  |  |
Treasury bills |  | 1,149 |  |  | 1,149 |  |  | — |  |  | — |
Certificates of deposit |  | 207 |  |  | — |  |  | 207 |  |  | — |
Noncurrent investments (b) |  |  |  |  |  |  |  |
Auction rate securities |  | 27 |  |  | — |  |  | — |  |  | 27 |
Interest rate derivatives |  | 6 |  |  | — |  |  | 6 |  |  | — |
Fuel derivatives: |  |  |  |  |  |  |  |
Swap contracts (c) |  | 818 |  |  | — |  |  | 818 |  |  | — |
Option contracts (c) |  | 912 |  |  | — |  |  | — |  |  | 912 |
Other available-for-sale securities |  | 62 |  |  | 62 |  |  | — |  |  | — |
Total assets |  | $ | 4,921 |  |  | $ | 2,739 |  |  | $ | 1,243 |  |  | $ | 939 |
Liabilities |  |  |  |  |  |  |  |
Fuel derivatives: |  |  |  |  |  |  |  |
Swap contracts (c) |  | $ | (679 | ) |  | $ | — |  |  | $ | (679 | ) |  | $ | — |
Option contracts (c) |  | (2,281 | ) |  | — |  |  | — |  |  | (2,281 | )
Interest rate derivatives |  | (54 | ) |  | — |  |  | (54 | ) |  | — |
Total liabilities |  | $ | (3,014 | ) |  | $ | — |  |  | $ | (733 | ) |  | $ | (2,281 | )
(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 liability.
|  |  |  | 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, 2014 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets |  | (in millions)
Cash equivalents |  |  |  |  |  |  |  |
Cash equivalents (a) |  | $ | 1,110 |  |  | $ | 1,110 |  |  | $ | — |  |  | $ | — |
Commercial paper |  | 70 |  |  | — |  |  | 70 |  |  | — |
Certificates of deposit |  | 4 |  |  | — |  |  | 4 |  |  | — |
Eurodollar time deposits |  | 98 |  |  | — |  |  | 98 |  |  | — |
Short-term investments: |  |  |  |  |  |  |  |
Treasury bills |  | 1,450 |  |  | 1,450 |  |  | — |  |  | — |
Certificates of deposit |  | 256 |  |  | — |  |  | 256 |  |  | — |
Noncurrent investments (b) |  |  |  |  |  |  |  |
Auction rate securities |  | 27 |  |  | — |  |  | — |  |  | 27 |
Interest rate derivatives |  | 13 |  |  | — |  |  | 13 |  |  | — |
Fuel derivatives: |  |  |  |  |  |  |  |
Swap contracts (c) |  | 455 |  |  | — |  |  | 455 |  |  | — |
Option contracts (c) |  | 892 |  |  | — |  |  | — |  |  | 892 |
Other available-for-sale securities |  | 68 |  |  | 63 |  |  | — |  |  | 5 |
Total assets |  | $ | 4,443 |  |  | $ | 2,623 |  |  | $ | 896 |  |  | $ | 924 |
Liabilities |  |  |  |  |  |  |  |
Fuel derivatives: |  |  |  |  |  |  |  |
Swap contracts (c) |  | $ | (365 | ) |  | $ | — |  |  | $ | (365 | ) |  | $ | — |
Option contracts (c) |  | (1,983 | ) |  | — |  |  | — |  |  | (1,983 | )
Interest rate derivatives |  | (61 | ) |  | — |  |  | (61 | ) |  | — |
Total liabilities |  | $ | (2,409 | ) |  | $ | — |  |  | $ | (426 | ) |  | $ | (1,983 | )
(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 liability. The Company had no transfers of assets or liabilities between any of the above levels during the nine months ended September 30, 2015, or the year ended December 31, 2014. 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, 2015:
| Fair value measurements using significant unobservable inputs (Level 3)
| Fuel |  | Auction rate |  | Other |  |
(in millions) | derivatives |  | securities |  | securities |  | Total
Balance at June 30, 2015 | $ | (1,055 | ) |  | $ | 27 |  |  | $ | — |  |  | $ | (1,028 | )
Total losses (realized or unrealized) |  |  |  |  |  |  |  |  |  |  |
Included in earnings | (405 | ) |  | — |  |  | — |  |  | (405 | )
Included in other comprehensive income | (488 | ) |  | — |  |  | — |  |  | (488 | )
Purchases | 408 |  | (a) | — |  |  | — |  |  | 408 |
Sales | (11 | ) | (a) | — |  |  | — |  |  | (11 | )
Settlements | 182 |  |  | — |  |  | — |  |  | 182 |
Balance at September 30, 2015 | $ | (1,369 | ) |  | $ | 27 |  | (b) | $ | — |  |  | $ | (1,342 | )
The amount of total losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2015 | $ | (317 | ) |  | $ | — |  |  | $ | — |  |  | $ | (317 | )
(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, 2014 | $ | (1,091 | ) |  | $ | 27 |  |  | $ | 5 |  |  | $ | (1,059 | )
Total losses (realized or unrealized) |  |  |  |  |  |  |  |  |  |
Included in earnings | (413 | ) |  | — |  |  | (1 | ) |  | (414 | )
Included in other comprehensive income | (517 | ) |  | — |  |  | — |  |  | (517 | )
Purchases | 652 |  | (a) | — |  |  | — |  |  | 652 |
Sales | (182 | ) | (a) | — |  |  | (4 | ) |  | (186 | )
Settlements | 182 |  |  | — |  |  | — |  |  | 182 |
Balance at September 30, 2015 | $ | (1,369 | ) |  | $ | 27 |  | (b) | $ | — |  |  | $ | (1,342 | )
The amount of total losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2015 | $ | (324 | ) |  | $ | — |  |  | $ | — |  |  | $ | (324 | )
(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, 2015:
Quantitative information about Level 3 fair value measurements
| Valuation technique | Unobservable input | Period (by year) | Range
Fuel derivatives | Option model | Implied volatility | Fourth quarter 2015 | 21-41%
|  |  | 2016 | 24-41%
|  |  | 2017 | 22-34%
|  |  | 2018 | 16-29%
Auction rate securities | Discounted cash flow | Time to principal recovery |  | 8 years
|  | Illiquidity premium |  | 3-4%
|  | Counterparty credit spread |  | 1-2%
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, 2015, 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
5.75% Notes due 2016 | $ | 308 |  |  | $ | 324 |  |  | Level 2
5.25% Convertible Senior Notes due 2016 | 112 |  |  | 294 |  |  | Level 2
5.125% Notes due 2017 | 310 |  |  | 326 |  |  | Level 2
French Credit Agreements due 2018 - 1.15% | 31 |  |  | 31 |  |  | Level 3
Fixed-rate 737 Aircraft Notes payable through 2018 - 7.02% | 18 |  |  | 19 |  |  | Level 3
2.75% Notes due 2019 | 308 |  |  | 313 |  |  | Level 2
Term Loan Agreement due 2019 - 6.315% | 152 |  |  | 158 |  |  | Level 3
Term Loan Agreement due 2019 - 4.84% | 36 |  |  | 38 |  |  | Level 3
Term Loan Agreement due 2020 - 5.223% | 340 |  |  | 337 |  |  | Level 3
Floating-rate 737 Aircraft Notes payable through 2020 | 267 |  |  | 261 |  |  | Level 3
Pass Through Certificates due 2022 - 6.24% | 339 |  |  | 380 |  |  | Level 2
7.375% Debentures due 2027 | 132 |  |  | 160 |  |  | Level 2

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- 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 Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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