Fair Value Measurements

Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize use of unobservable inputs. These inputs are prioritized as follows:


•	Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.


•	Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs.


•	Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants price the asset or liability.

The valuation techniques that may be used to measure fair value are as follows:


•	The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.


•	The income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts.


•	The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

The following tables set forth our financial assets and liabilities as of December 31, 2013 and 2014 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.



	Fair Value as of December 31, 2013		Fair Value Measurements at December 31, 2013 Using Fair Value Hierarchy
	Fair Value as of December 31, 2013		Level 1		Level 2		Level 3		Valuation Technique
Assets:
Cash and cash equivalents	$	654,613	$	654,613	$	—	$	—	Market
Restricted cash and cash equivalents	122,773		122,773		—		—		Market
Total	$	777,386	$	777,386	$	—	$	—



Liabilities:
Derivative liabilities	$	39,992	$	—	$	39,992	$	—	Income



	Fair Value as of December 31, 2014		Fair Value Measurements at December 31, 2014 Using Fair Value Hierarchy
	Fair Value as of December 31, 2014		Level 1		Level 2		Level 3		Valuation Technique
Assets:
Cash and cash equivalents	$	169,656	$	169,656	$	—	$	—	Market
Restricted cash and cash equivalents	98,884		98,884		—		—		Market
Total	$	268,540	$	268,540	$	—	$	—



Liabilities
Derivative liabilities	$	2,879	$	—	$	2,879	$	—	Income

Our cash and cash equivalents, along with our restricted cash and cash equivalents balances, consist largely of money market securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy. Our interest rate derivatives included in Level 2 consist of United States dollar-denominated interest rate derivatives, and their fair values are determined by applying standard modeling techniques under the income approach to relevant market interest rates (cash rates, futures rates, swap rates) in effect at the period close to determine appropriate reset and discount rates and incorporates an assessment of the risk of non-performance by the interest rate derivative counterparty in valuing derivative assets and an evaluation of the Company’s credit risk in valuing derivative liabilities.

The following table reflects the activity for the classes of our assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2013 and 2014:



	Assets
	Debt Investments
Balance as of December 31, 2012	$	40,388
Purchases	—
Total gains/(losses), net:
Included in other revenue	1,613
Settlements	(42,001		)
Balance as of December 31, 2013	—
Total gains/(losses), net:
Included in other revenue	—
Settlements	—
Balance as of December 31, 2014	—

For the year ended December 31, 2013, we had no transfers into or out of Level 3; however in 2013, we settled the debt investment during the first quarter of 2013. For the year ended December 31, 2014, we had no transfers into or out of Level 3.

We measure the fair value of certain assets and liabilities on a non-recurring basis, when US GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include our investment in an unconsolidated joint venture and aircraft. We account for our investment in an unconsolidated joint venture under the equity method of accounting and record impairment when its fair value is less than its carrying value. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft in impairment tests are based on an income approach which uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft.

Aircraft Valuation

Annual Fleet-Wide Impairments

We perform our annual fleet-wide recoverability assessment during the third quarter of each year. This recoverability assessment is a comparison of the carrying value of each aircraft to its undiscounted expected future cash flows. We develop the assumptions used in the recoverability assessment, including those relating to current and future demand for each aircraft type, based on management's experience in the aircraft leasing industry as well as information received from third party sources. Estimates of the undiscounted cash flows for each aircraft type are impacted by changes in contracted and future expected lease rates, residual values, expected scrap values, economic conditions and other factors.

In the 2014 assessment, we reduced our forecast of future cash flows for certain freighter aircraft to reflect the cumulative effect of increasing supply of such aircraft over the past three years, relative to a modest increase in demand observed in 2014.

More specifically, we determined the cash flows expected to be generated by two of our McDonnell Douglas MD-11 freighter aircraft did not support their carrying values. As a result, we impaired these two aircraft during the third quarter of 2014, which had an aggregate net book value as of June 30, 2014 of $53,777, writing down their book values by a total of $19,515. We also shortened their expected lives from 25 to 21 years and reduced their residual values.

In addition, for our five Boeing 747-400 production freighters, all of which passed the annual recoverability assessment in 2014, we shortened the expected lives from 35 years to 30 years from the date of manufacture.

For changes we made to our aircraft mentioned above and other adjustments to lives and/or residual values, we estimate an increase in depreciation expense for the year ended December 31, 2015 of approximately $7,757.

Other than the aircraft discussed above, management believes that the net book value of each aircraft is currently supported by the estimated future undiscounted cash flows expected to be generated by that aircraft, and accordingly, no other aircraft were impaired as a consequence of this recoverability assessment. However, if our expectations warrant, we may change our cash flow assumptions and require future impairment charges. While we believe that the estimates and related assumptions used in the recoverability assessment are appropriate, actual results could differ from those estimates.

Other Impairments

In addition to impairment from our fleet wide review, during 2014 we recorded impairment charges of $42,681 on six passenger and one freighter aircraft that were returned to us early as a result of lease terminations or amendments which we refer to as “Transactional Impairments”. We recorded maintenance revenue of $42,490 and other revenue of $515 and reversed lease incentives of $456 related to these aircraft.

We also recorded impairment charges of $30,877 during 2014 related to two 747-400 converted freighter aircraft which we refer to as “Freighters Held for Sale”, and recorded maintenance revenue of $9,137 and other revenue of $183 and reversed lease incentives of $3,626 related to these aircraft. One of these converted freighters was sold in January 2015 and the other is under a consignment contract and is in the process of being parted out.

A summary of Other Impairments for the year ended December 31, 2014 follows:



	Freighters Held for Sale			Transactional Impairments
	(Dollars in thousands)

Impairment Charges	$	(30,877	)	$	(42,681	)
Maintenance revenue recorded	9,137			42,490
Lease incentives reversed	3,626			456
Other revenue recorded	183			515
Total	$	(17,931	)	$	780

Following our recoverability assessment during the third quarter of 2013, we impaired six Boeing 747-400 converted freighter aircraft and one Boeing 737-700 aircraft and recorded impairment charges of $88,647 and $8,945, respectively.

In addition, during 2013 we recorded impairment charges of $19,713 on five passenger aircraft that were returned to us early as a result of lease terminations or amendments. We recorded maintenance revenue of $28,178 and other revenue of $1,784 related to these aircraft.

Financial Instruments

Our financial instruments, other than cash, consist principally of cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, amounts borrowed under financings and interest rate derivatives. The fair value of cash, cash equivalents, restricted cash and cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short-term nature.

The fair values of our securitization which contain third party credit enhancements are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates of borrowing arrangements that do not contain third party credit enhancements. The fair values of our credit facilities, ECA term financings and bank financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our Senior Notes is estimated using quoted market prices.

The carrying amounts and fair values of our financial instruments at December 31, 2013 and 2014 are as follows:



	December 31, 2013						December 31, 2014
	Carrying Amount of Asset (Liability)			Fair Value of Asset (Liability)			Carrying Amount of Asset (Liability)			Fair Value of Asset (Liability)
Securitizations	$	(828,871	)	$	(779,901	)	$	(391,680	)	$	(376,752	)
Credit Facilities	—			—			(200,000		)	(200,000		)
ECA term financings	(493,708		)	(506,227		)	(449,886		)	(471,918		)
Bank financings	(264,256		)	(268,435		)	(554,888		)	(560,285		)
Senior Notes	(2,150,527		)	(2,325,965		)	(2,200,000		)	(2,300,615		)

All of our financial instruments are classified as Level 2 with the exception of our senior Notes, which are classified as Level 1.