DELTA AIR LINES INC /DE/ | 2013 | FY | 3

FAIR VALUE MEASUREMENTS

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.

•
Level 1. Observable inputs such as quoted prices in active markets;

•
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

•
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on the valuation techniques identified in the tables below. The valuation techniques are as follows:

(a)
Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; and

(b)
Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models).

Assets (Liabilities) Measured at Fair Value on a Recurring Basis(1) 
(in millions)
December 31, 2013
Level 1
Level 2
Level 3
Valuation
Technique
Cash equivalents
$
2,487

$
2,487

$
—

$
—

(a)
Short-term investments
959

959

—

—

(a)
Restricted cash equivalents and investments
118

118

—

—

(a)
Long-term investments
109

80

29

—

(a)(b)
Hedge derivatives, net
 
 
 
 
 
Fuel hedge contracts
314

16

298

—

(a)(b)
Interest rate contracts
(67
)
—

(67
)
—

(a)(b)
Foreign currency exchange contracts
257

—

257

—

(a)
(in millions)
December 31, 2012
Level 1
Level 2
Level 3
Valuation
Technique
Cash equivalents
$
2,176

$
2,176

$
—

$
—

(a)
Short-term investments
958

958

—

—

(a)
Restricted cash equivalents and investments
344

344

—

—

(a)
Long-term investments
208

100

27

81

(a)(b)
Hedge derivatives, net
 
 
 
 
 
Fuel hedge contracts
249

27

222

—

(a)(b)
Interest rate contracts
(66
)
—

(66
)
—

(a)(b)
Foreign currency exchange contracts
123

—

123

—

(a)


(1) 
See Note 11, “Employee Benefit Plans”, for fair value of benefit plan assets.

Cash Equivalents, Short-term Investments and Restricted Cash Equivalents and Investments. Cash equivalents and short-term investments generally consist of money market funds and treasury bills. Restricted cash equivalents and investments primarily support letters of credit that meet certain projected self-insurance obligations and airport commitments and generally consist of money market funds and time deposits. These investments are recorded at cost, which approximates fair value. Fair value is based on a market approach using prices and other relevant information generated by market transactions involving identical or comparable assets.

Long-term Investments. Our long-term investments that are measured at fair value primarily consist of equity investments in Grupo Aeromexico, S.A.B. de C.V., the parent company of Aeromexico, and GOL Linhas Aereas Inteligentes, S.A, the parent company of GOL. Shares of the parent companies of Aeromexico and GOL are traded on public exchanges and we have valued our investments based on quoted market prices. The investments are classified in other noncurrent assets. In 2013, we sold our remaining auction rate securities, which were previously classified as Level 3 instruments.

Hedge Derivatives. Our derivative contracts are generally negotiated with counterparties without going through a public exchange. Accordingly, our fair value assessments give consideration to the risk of counterparty default (as well as our own credit risk).

•
Fuel Derivatives. Our fuel hedge portfolio consists of call options; put options; combinations of two or more call options and put options; swap contracts; and futures contracts. The products underlying the hedge contracts include crude oil, diesel fuel and jet fuel as these commodities are highly correlated with the price of jet fuel that we consume. Option contracts are valued under an income approach using option pricing models based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets. Volatilities used in these valuations ranged from 9% to 25% depending on the maturity dates, underlying commodities and strike prices of the option contracts. Swap contracts are valued under an income approach using a discounted cash flow model based on data either readily observable or derived from public markets. Discount rates used in these valuations vary with the maturity dates of the respective contracts and are based on LIBOR. Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.

•
Interest Rate Derivatives. Our interest rate derivatives consist primarily of swap contracts and are valued primarily based on data readily observable in public markets.

•
Foreign Currency Derivatives. Our foreign currency derivatives consist of Japanese yen and Canadian dollar forward contracts and are valued based on data readily observable in public markets.

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