Fair Value Measurements

12 Months Ended

Dec. 31, 2017

Fair Value Measurements

Fair Value Measurements

(7) Fair Value Measurements

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of judgment, and therefore cannot be determined with precision.

Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

· Cash and cash equivalents, restricted cash, operating lease related receivables, and accounts payable: The amounts reported in the accompanying Consolidated Balance Sheets approximate fair value due to their short-term nature.

· Debt obligations: The carrying amount of the Company’s outstanding balance on its Debt obligations as of December 31, 2017 and 2016 was estimated to have a fair value of approximately $1,090.0 million and $864.0 million, respectively, based on the fair value of estimated future payments calculated using interest rates that approximate prevailing market rates at each year end.

Assets Measured and Recorded at Fair Value on a Recurring Basis

As of December 31, 2017 and 2016, the Company measured the fair value of its interest rate swap of $100.0 million (notional amount) based on Level 2 inputs, due to the usage of inputs that can be corroborated by observable market data. The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-performance. The interest rate swap agreement had a net fair value of $1.1 million and $68,000 as of December 31, 2017 and 2016, respectively. In 2017, 2016 and 2015, $0.6 million, $25,000 and nil, respectively, was realized through the income statement as an increase in interest expense.

The following table shows by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value as of:

	Assets and (Liabilities) at Fair Value
	December 31, 2017								December 31, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)								(in thousands)
Derivatives	$	—	$	1,129	$	—	$	1,129	$	—	$	69	$	—	$	69
Total	$	—	$	1,129	$	—	$	1,129	$	—	$	69	$	—	$	69

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

The Company determines fair value of long-lived assets held and used, such as Equipment held for operating lease and Equipment held for sale, by reference to independent appraisals, quoted market prices (e.g. an offer to purchase) and other factors. An impairment charge is recorded when the carrying value of the asset exceeds its fair value. At December 31, 2017 and 2016, the Company used Level 2 inputs to measure write down of equipment held for lease, equipment held for sale, and spare parts inventory. 

	Assets at Fair Value																Total Losses
	December 31, 2017								December 31, 2016								December 31,
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		2017		2016
	(in thousands)																(in thousands)
Equipment held for lease	$	—	$	23,255	$	—	$	23,255	$	—	$	1,196	$	—	$	1,196	$	(12,879)	$	(3,674)
Equipment held for sale		—		39,261		—		39,261		—		8,976		—		8,976		(8,708)		(5,365)
Spare parts inventory		—		5,336		—		5,336		—		1,538		—		1,538		(3,343)		(475)
Total	$	—	$	67,852	$	—	$	67,852	$	—	$	11,710	$	—	$	11,710	$	(24,930)	$	(9,514)

Write-downs of equipment to their estimated fair values totaled $24.9 million for the year ended December 31, 2017 which included write-downs of $16.9 million for the adjustment of the carrying value of nine impaired engines and $4.7 million to adjust the carrying value of five impaired aircraft within the portfolio to reflect estimated market value.

A writedown of $5.5 million was recorded due to the adjustment of the carrying value for six impaired engines and one impaired aircraft within the portfolio to reflect estimated market value. A further write-down of equipment totaling $2.0 million was recorded in the year ended December 31, 2016 due to a management decision to consign one engine for part-out and sale, in which the asset’s net book value exceeded the estimated proceeds.  An additional writedown of $2.0 million was recorded in year ended December 31, 2016 to adjust the carrying value of engine parts held on consignment for which market conditions for the sale of parts has changed.