Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2013

Fair Value of Financial Instruments [Abstract]

(5) Fair Value of Financial Instruments

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosures about how fair value is determined for assets and liabilities and establishes a hierarchy by which these assets and liabilities must be grouped based on the type of inputs used in measuring fair value as follows:

Level 1:

quoted prices in active markets for identical assets or liabilities;

Level 2:

quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or

Level 3:

unobservable inputs, such as discounted cash flow models or valuations.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents, accounts receivable, notes receivable, notes payable, accounts payable, and accrued liabilities:

The carrying amounts approximate fair value because of the short maturity of these instruments.

Derivatives:

The Company’s cost of operations is affected by changes in the price and availability of aircraft fuel, which has historically fluctuated widely in price. Fuel costs represented approximately 4.2%, 3.8%, and 3.4% of the Company’s operating expenses for the years ended December 31, 2013, 2012, and 2011, respectively. The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through the use of short-term purchased call options. With the use of purchased call options, the Company cannot be in a liability position at settlement. For 2013 the Company had fuel derivatives in place to cover the majority of its fuel consumption.

The Company’s financial derivatives do not qualify for hedge accounting, and, therefore, realized and non-cash mark to market adjustments are included in aircraft operations expense in the Company’s consolidated statements of comprehensive income. Premiums paid under all agreements are included in prepaid expenses and other current assets on the Company’s balance sheet, and all cash flows associated with purchasing and selling derivatives are classified as operating cash flows in the Company’s statement of cash flows. The Company does not purchase or hold any derivative financial instruments for trading purposes.

The Company’s financial derivative agreements protected against increases in the cost of Gulf Coast jet fuel above $2.68 per gallon from January 1, 2011, through December 31, 2011; above $3.50 per gallon from January 1, 2012, through December 31, 2012; and above $3.55 per gallon from January 1, 2013, through December 31, 2013.

All fuel derivative contracts had expired as of December 31, 2013 and 2012. Balances are normally carried in prepaid expenses and other current assets and are valued using Level 2 inputs in the fair value hierarchy. Aircraft operations expense for the years ended December 31, 2013, 2012, and 2011, included non-cash mark to market derivative losses of $143,000, $257,000, and $800,000, respectively. Cash settlements under the terms of the agreements were $1,131,000 in 2011. There were no cash settlements under the agreements in 2013 or 2012.

Long-term debt:

The fair value of long-term debt is valued using Level 3 inputs in the fair value hierarchy because it is determined based on the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent in those cash flows. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities and on recent transactions, the fair value of long-term debt as of December 31, 2013, is estimated to be $513,436,000, compared to carrying value of $516,453,000. The fair value of long-term debt as of December 31, 2012, is estimated to be $406,856,000, compared to carrying value of $404,478,000.

- 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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