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FAIR VALUE MEASUREMENTS | 9 Months Ended
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Sep. 30, 2021
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, 2021, 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), 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 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. Other available-for-sale securities primarily consist of investments in equity securities with readily determinable market values 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 currently consist solely of option contracts, whereas interest rate derivatives consist solely of swap agreements. See Note 4 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 a similar 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 deferred compensation plans, which consist of mutual funds that are publicly traded and for which market prices are readily available. These plans are non-qualified deferred compensation plans designed to hold contributions in excess of limits established by the Internal Revenue Code of 1986, as amended. The distribution timing and payment amounts under these plans are made based on the participant’s distribution election and plan balance. Assets related to the funded portions of the deferred compensation plans are held in a rabbi trust, and the Company remains liable to these participants for the unfunded portion of the plans. The Company records changes in the fair value of plan obligations and plan assets, which net to zero, within the Salaries, wages, and benefits line and Other (gains) losses line, respectively, of the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss). The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2021, and December 31, 2020:
|  |  |  | 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, 2021 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets |  | (in millions)
Cash equivalents: |  |  |  |  |  |  |  |
Cash equivalents (a) |  | $ | 12,790 |  |  | $ | 12,790 |  |  | $ | — |  |  | $ | — |
Commercial paper |  | 90 |  |  | — |  |  | 90 |  |  | — |
Time deposits |  | 100 |  |  | — |  |  | 100 |  |  | — |
Short-term investments: |  |  |  |  |  |  |  |
Treasury bills |  | 2,249 |  |  | 2,249 |  |  | — |  |  | — |
Time deposits |  | 775 |  |  | — |  |  | 775 |  |  | — |
Fuel derivatives: |  |  |  |  |  |  |  |
Option contracts (b) |  | 681 |  |  | — |  |  | — |  |  | 681 |
Interest rate derivatives (see Note 4) |  | 1 |  |  | — |  |  | 1 |  |  | — |
Other available-for-sale securities |  | 260 |  |  | 260 |  |  | — |  |  | — |
Total assets |  | $ | 16,946 |  |  | $ | 15,299 |  |  | $ | 966 |  |  | $ | 681 |
Liabilities |  |  |  |  |  |  |  |
Interest rate derivatives (see Note 4) |  | $ | (2) |  |  | $ | — |  |  | $ | (2) |  |  | $ | — |
(a) Cash equivalents are primarily composed of money market investments. (b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as an asset. See Note 4.
|  |  |  | 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, 2020 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Assets |  | (in millions)
Cash equivalents: |  |  |  |  |  |  |  |
Cash equivalents (a) |  | $ | 10,663 |  |  | $ | 10,663 |  |  | $ | — |  |  | $ | — |
Commercial paper |  | 90 |  |  | — |  |  | 90 |  |  | — |
Certificates of deposit |  | 10 |  |  | — |  |  | 10 |  |  | — |
Time deposits |  | 300 |  |  | — |  |  | 300 |  |  | — |
Short-term investments: |  |  |  |  |  |  |  |
Treasury bills |  | 1,800 |  |  | 1,800 |  |  | — |  |  | — |
Certificates of deposit |  | 46 |  |  | — |  |  | 46 |  |  | — |
Time deposits |  | 425 |  |  | — |  |  | 425 |  |  | — |
Fuel derivatives: |  |  |  |  |  |  |  |
Option contracts (b) |  | 134 |  |  | — |  |  | — |  |  | 134 |
Other available-for-sale securities |  | 259 |  |  | 259 |  |  | — |  |  | — |
Total assets |  | $ | 13,727 |  |  | $ | 12,722 |  |  | $ | 871 |  |  | $ | 134 |
Liabilities |  |  |  |  |  |  |  |
Interest rate derivatives (see Note 4) |  | $ | (6) |  |  | $ | — |  |  | $ | (6) |  |  | $ | — |
(a) Cash equivalents are primarily composed of money market investments. (b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as an asset. See Note 4. The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2021, or the year ended December 31, 2020. 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, 2021:
Fair value measurements using significant unobservable inputs (Level 3) |  |  |
(in millions) | Fuel derivatives |  |  |  |
Balance at June 30, 2021 | $ | 502 |  |  |  |  |
Total gains (losses) for the period |  |  |  |  |
Included in earnings | (3) |  | (a) |  |  |
Included in other comprehensive income | 166 |  |  |  |  |
Purchases | 41 |  | (b) |  |  |
Sales | (7) |  | (b) |  |  |
Settlements | (18) |  |  |  |  |
Balance at September 30, 2021 | $ | 681 |  |  |  |  |
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, 2021 | $ | 4 |  | (a) |  |  |
The amount of total gains for the period included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2021 | $ | 177 |  |  |  |  |
(a) Included in Other (gains) losses, net, within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss). (b) 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 was purchased as a single instrument or separate instruments.
Fair value measurements using significant unobservable inputs (Level 3)
(in millions) | Fuel derivatives |
Balance at December 31, 2020 | $ | 134 |  |
Total gains for the period |  |
Included in earnings | 6 |  | (a)
Included in other comprehensive income | 533 |  |
Purchases | 41 |  | (b)
Sales | (7) |  | (b)
Settlements | (26) |  |
Balance at September 30, 2021 | $ | 681 |  |
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, 2021 | $ | 10 |  | (a)
The amount of total gains for the period included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2021 | $ | 510 |  |
(a) Included in Other (gains) losses, net, within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss). (b) 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 was purchased as a single instrument or separate instruments. The significant unobservable input used in the fair value measurement of the Company’s derivative option contracts is implied volatility. Holding other inputs constant, an increase (decrease) in implied volatility would have resulted in a higher (lower) fair value measurement, respectively, for the Company’s derivative option contracts. The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at September 30, 2021:
Quantitative information about Level 3 fair value measurements
|  | Valuation technique |  | Unobservable input |  | Period (by year) |  | Range |  | Weighted Average (a)
Fuel derivatives |  | Option model |  | Implied volatility |  | Fourth quarter 2021 |  | 22-37% |  | 30 | %
|  |  |  |  |  | 2022 |  | 30-43% |  | 35 | %
|  |  |  |  |  | 2023 |  | 28-34% |  | 31 | %
|  |  |  |  |  | 2024 |  | 26-31% |  | 28 | %
(a) Implied volatility weighted by the notional amount (barrels of fuel) that will settle in respective period. The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at September 30, 2021, 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. All privately held debt agreements are categorized as Level 3. 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
2.75% Notes due 2022 | $ | 300 |  |  | $ | 307 |  |  | Level 2
Pass Through Certificates due 2022 - 6.24% | 71 |  |  | 73 |  |  | Level 2
4.75% Notes due 2023 | 1,250 |  |  | 1,331 |  |  | Level 2
1.25% Convertible Notes due 2025 | 1,932 |  |  | 3,326 |  |  | Level 2
5.25% Notes due 2025 | 1,550 |  |  | 1,755 |  |  | Level 2
Term Loan Agreement payable through 2025 - 1.53% | 100 |  |  | 100 |  |  | Level 3
3.00% Notes due 2026 | 300 |  |  | 320 |  |  | Level 2
Term Loan Agreement payable through 2026 - 1.31% | 149 |  |  | 147 |  |  | Level 3
3.45% Notes due 2027 | 300 |  |  | 324 |  |  | Level 2
5.125% Notes due 2027 | 2,000 |  |  | 2,341 |  |  | Level 2
7.375% Debentures due 2027 | 117 |  |  | 143 |  |  | Level 2
Term Loan Agreement payable through 2028 - 1.53% | 165 |  |  | 165 |  |  | Level 3
2.625% Notes due 2030 | 500 |  |  | 508 |  |  | Level 2
1.000% Payroll Support Program Loan due April 2030 | 976 |  |  | 941 |  |  | Level 3
1.000% Payroll Support Program Loan due January 2031 | 566 |  |  | 537 |  |  | Level 3
1.000% Payroll Support Program Loan due April 2031 | 526 |  |  | 492 |  |  | Level 3
Convertible Notes On May 1, 2020, the Company completed the public offering of $2.3 billion aggregate principal amount of 1.250% Convertible Senior Notes due 2025 (the “Convertible Notes”). Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election. The Company intends to settle conversions by paying cash up to the principal amount of the convertible notes, with any excess conversion value settled in cash or shares of common stock. The initial conversion rate is 25.9909 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $38.48 per share of common stock). Upon issuance, the Company bifurcated the Convertible Notes for accounting purposes between a liability component and an equity component utilizing applicable guidance. The liability component was determined by estimating the fair value of a hypothetical issuance of an identical offering excluding the conversion feature of the Convertible Notes. The initial carrying amount of the equity component was calculated as the difference between the liability component and the face amount of the Convertible Notes. During the three months ended September 30, 2021, the Company repurchased $80 million in principal of the Convertible Notes for $121 million in cash. The Company accounted for the repurchase as a partial debt extinguishment, which resulted in (i) a loss of $12 million reflected in Other (gains) and losses, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended September 30, 2021, (ii) a $12 million reduction in debt discount and issuance costs, and (iii) a $42 million reduction to Capital in excess of par value related to the reacquisition of the equity component in the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2021. Additionally, an immaterial number of conversions were exercised and settled during the first nine months of 2021. The following table details the equity and liability component recognized related to the Convertible Notes as of September 30, 2021, and December 31, 2020:
(in millions) | September 30, 2021 |  | December 31, 2020
Carrying amount of equity component | $ | 361 |  |  | $ | 403 |
Liability component: |  |  |
Principal amount | $ | 2,221 |  |  | $ | 2,300 |
Unamortized debt discount | (289) |  |  | (355) |
Net carrying amount | $ | 1,932 |  |  | $ | 1,945 |
The effective interest rate on the liability component was approximately 5.2 percent for the three and nine months ended September 30, 2021. The Company recognized $40 million of interest expense associated with the Convertible Notes during the three months ended September 30, 2021, including $29 million of non-cash amortization of the debt discount, $4 million of non-cash amortization of debt issuance costs, and $7 million of contractual coupon interest. The Company recognized $96 million of interest expense associated with the Convertible Notes during the nine months ended September 30, 2021, including $66 million of non-cash amortization of the debt discount, $8 million of non-cash amortization of debt issuance costs, and $22 million of contractual coupon interest. The unamortized debt discount and issuance costs will be recognized as non-cash interest expense over the 5-year term of the notes, through May 1, 2025, less amounts that were or will be required to be accelerated to expense immediately upon conversion. As of September 30, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $748 million, using the closing stock price on September 30, 2021. The Convertible Notes did not meet the criteria to be converted as of the date of the financial statements, and thus are classified as Long-term debt in the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2021.

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=123874694&loc=d3e19207-110258 + Details
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