Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements

Note 7 – Fair Value Measurements

The following tables present our assets that are measured at fair value on a recurring basis and are categorized using the three levels of fair value hierarchy:

September 30, 2012	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market funds	$	334	$	334	$	–	$	–
Available-for-sale investments:
EETC		4		–		–		4
Interest rate swaps		30		–		30		–
Total	$	368	$	334	$	30	$	4

December 31, 2011	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market funds	$	218	$	218	$	–	$	–
Available-for-sale investments:
EETC		5		–		–		5
Interest rate swaps		29		–		29		–
Total	$	252	$	218	$	29	$	5

Money market funds. Money market funds are valued using a market approach based on the quoted market prices of identical instruments in an active market.

Enhanced Equipment Trust Certificate (EETC). The fair value of our EETC is derived using cash flows discounted at market yield derived from trading prices for comparable debt securities. Unrealized gains (losses) are recorded in Accumulated Other Comprehensive Income (AOCI).

Interest rate swaps. The fair values of our interest rate swaps are determined using cash flows discounted at market interest rates in effect at the period close.

The following tables present a reconciliation of Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30:

2012	Fair Value Beginning of Year		Realized Gains Included in Income		Accumulated Other Comprehensive Income/(Loss)		Settlements			Transfers In/(Out)		Fair Value at End of Period
Assets
EETC	$	5	$	–	$	–	$	(1	)	$	–	$	4
Total	$	5	$	–	$	–	$	(1	)	$	–	$	4
2011
Assets
EETC	$	5	$	–	$	–	$	(1	)	$	–	$	4
Total	$	5	$	–	$	–	$	(1	)	$	–	$	4

We value the EETC on a recurring basis using a valuation technique of contractual cash flows discounted using the bond yield of a debt security with similar coupon and maturity, which is considered an unobservable input. As of September 30, 2012 the yield of 2.11% was used, having an inverse relationship to the fair value of the EETC.

Certain assets are measured at fair value on a non-recurring basis using significant unobservable inputs (Level 3). The table below presents the non-recurring losses recognized for the nine months ended September 30, and the fair value and asset classification of the related assets as of the impairment date:

	2012					2011
	Fair Value		Total Losses			Fair Value			Total Losses
Assets
Equipment under operating leases	$	12	$	(2	)	$	96	(1)	$	(49	)
Assets held for sale or re-lease		13		(12	)		15	(1)		(4	)
Total	$	25	$	(14	)	$	111		$	(53	)

⁽¹⁾  For an asset that incurred impairments in both Equipment under operating leases and Assets held for sale or re-lease, the losses are reflected in the asset’s classification as of the time of the respective impairments while the fair value of the asset as of the date of the latest impairment is reflected only in the asset’s then current classification. As of September 30, 2011, such asset with a fair value of $7 changed classification from Equipment under operating leases to Assets held for sale or re-lease.

When an asset is determined to be impaired, the amount of the asset impairment expense recorded is the excess of the carrying value less the fair value of the asset reduced by the consideration of asset value guarantees we hold, if applicable. The fair value of the impaired asset is derived by calculating a median collateral value from a consistent group of third party aircraft value publications. The values provided by the third party aircraft value publications are derived from their knowledge of market trades or other market factors taking into account estimated revenues and costs to operate the aircraft. Management reviews the publications quarterly to assess their continued appropriateness and consistency with market trends. The responsibility of these reviews resides principally within our risk management group. Under certain circumstances, we adjust values based on the attributes and condition of the specific aircraft or equipment, usually when the features or use of the aircraft vary significantly from the more generic aircraft attributes covered by outside publications, or based on the expected net sales price for the aircraft.

For Level 3 assets that were measured at fair value on a non-recurring basis during the nine months ended September 30, 2012, the following table presents the fair value of those assets as of the measurement date, valuation techniques and related unobservable inputs of those assets.

	Fair Value		Valuation Techniques	Unobservable Input		Quantitative Inputs Used
Equipment under operating leases & Assets held for sale or re-lease	$	25	Market approach		Aircraft value publications	$24 - $53(1) Median $35
					Aircraft condition adjustments	$(10) - $0(2) Net $(10)

⁽¹⁾  The range represents the sum of the highest and lowest values for all aircraft subject to fair value measurement, according to the third party aircraft valuation publications that we use in our valuation process.

⁽²⁾  The negative amount represents the sum for all aircraft subject to fair value measurement, of all downward adjustments based on consideration of individual aircraft attributes and condition. The positive amount represents the sum of all such upward adjustments.

The following table presents the carrying values and estimated fair values of our financial instruments for which we did not elect the fair value option:

	September 30, 2012						December 31, 2011
	Carrying Value			Fair Value Level 2			Carrying Value			Fair Value
Assets
Notes and other	$	552	(1)	$	610		$	594	(1)	$	639
Liabilities
Debt, excluding capital lease obligations	$	(2,532	)	$	(2,708	)	$	(3,357	)	$	(3,497	)

⁽¹⁾ At September 30, 2012 and December 31, 2011, net of allowance for losses of $24 and $27.

Items not included in the above disclosure are cash (Level 1), time deposits (Level 2), and accounts payable (Level 2). The carrying value of those items approximate their fair value at September 30, 2012 and December 31, 2011 as reflected in the Consolidated Balance Sheets.

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

Notes and other. The fair value of our variable rate notes that reprice frequently approximate their carrying values. The fair value of fixed rate notes is estimated using discounted cash flows analysis using interest rates currently offered on loans with similar terms to borrowers of similar credit quality.

Debt. A significant portion of our debt is traded in the secondary market and the fair value of such debt is based on current market yield. For our remaining debt that is not traded in the secondary market, the fair value is estimated using discounted cash flows analysis using our indicative borrowing cost derived from dealer quotes.

Financing commitments. It is not practicable to estimate the fair value of future financing commitments because the amount and timing of funding those commitments are uncertain.