FAIR VALUE MEASUREMENTS

In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.

Fair Value of Financial Instruments on a Recurring Basis

As of September 30, 2018, total cost basis for all marketable securities was $1.2 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

Fair values of financial instruments on the consolidated balance sheet (in millions):



September 30, 2018	Level 1		Level 2			Total
Assets
Marketable securities
U.S. government and agency securities	$	338	$	—		$	338
Foreign government bonds	—		29			29
Asset-backed securities	—		209			209
Mortgage-backed securities	—		79			79
Corporate notes and bonds	—		559			559
Municipal securities	—		9			9
Total Marketable securities	338		885			1,223
Derivative instruments
Fuel hedge—call options	—		54			54
Interest rate swap agreements	—		15			15
Total Assets	$	338	$	954		$	1,292

Liabilities
Derivative instruments
Interest rate swap agreements	—		(3		)	(3		)
Total Liabilities	$	—	$	(3	)	$	(3	)



December 31, 2017	Level 1		Level 2			Total
Assets
Marketable securities
U.S. government and agency securities	$	328	$	—		$	328
Foreign government bonds	—		43			43
Asset-backed securities	—		209			209
Mortgage-backed securities	—		99			99
Corporate notes and bonds	—		726			726
Municipal securities	—		22			22
Total Marketable securities	328		1,099			1,427
Derivative instruments
Fuel hedge—call options	—		22			22
Interest rate swap agreements	—		9			9
Total Assets	$	328	$	1,130		$	1,458

Liabilities
Derivative instruments
Interest rate swap agreements	—		(8		)	(8		)
Total Liabilities	$	—	$	(8	)	$	(8	)

The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses represent other-than-temporary impairments based on its evaluation of available information as of September 30, 2018.

Maturities for marketable securities (in millions):



September 30, 2018	Cost Basis		Fair Value
Due in one year or less	$	126	$	126
Due after one year through five years	1,094		1,072
Due after five years through 10 years	26		25
Total	$	1,246	$	1,223

Fair Value of Other Financial Instruments

The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash, Cash Equivalents and Restricted Cash: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates fair value.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The adjustment is amortized over the life of the associated debt. All other fixed-rate debt is carried at cost. To estimate the fair value of all fixed-rate debt as of September 30, 2018, the Company uses the income approach by discounting cash flows using borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

Fixed-rate debt on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):



	September 30, 2018		December 31, 2017
Fixed-rate debt at cost	$	703	$	956
Non-recurring purchase price accounting fair value adjustment	3		3
Total fixed-rate debt	$	706	$	959

Estimated fair value	$	700	$	959

Assets and Liabilities Measured at Fair Value on Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. No material impairment charges were taken in the three and nine months ended September 30, 2018 and September 30, 2017.