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Notes to Financial Statements—(Continued)
82
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. The Company utilizes several valuation techniques in order to assess the fair value of the Company’s
financial assets and liabilities. The Company’s derivative contracts generally consist of jet fuel swaps and jet fuel options.
These instruments are valued using energy and commodity market data, which is derived by combining raw inputs with
quantitative models and processes to generate forward curves and volatilities.
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market
approach uses prices and other relevant information generated by market transactions involving identical or comparable assets
or liabilities.
Assets and liabilities measured at gross fair value on a recurring basis are summarized below:
Fair Value Measurements as of December 31, 2013
Total Level
1Level
2Level
3
(in millions)
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 530.6 $ 530.6 $ — $ —
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 530.6 $ 530.6 $ — $ —
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ —
Fair Value Measurements as of December 31, 2012
Total Level
1Level
2Level
3
(in millions)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 416.8 $ 416.8 $ — $ —
Jet fuel options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 — — 0.3
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 417.1 $ 416.8 $ — $ 0.3
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ —
Cash and cash equivalents at December 31, 2013 and December 31, 2012 are comprised of liquid money market funds
and cash. The Company maintains cash with various high-quality financial institutions. The company had no outstanding
derivatives as of December 31, 2013. The Company had no transfers of assets or liabilities between any of the above levels
during the years ended December 31, 2013 and 2012.
The Company did not elect hedge accounting on any of the derivative instruments, and as a result, changes in the fair
values of these fuel hedge contracts are recorded each period in fuel expense. Fair values of the instruments are determined
using standard option valuation models. The Company also considers counterparty risk and its own credit risk in its
determination of all estimated fair values. The Company offsets fair value amounts recognized for derivative instruments
executed with the same counterparty under a master netting arrangement. The Company determines the fair value of jet fuel
options utilizing an option pricing model based on inputs that are either readily available in public markets or can be derived
from information available in publicly quoted markets. The Company has consistently applied these valuation techniques in all
periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it
holds.
Due to the fact that certain inputs utilized to determine the fair value of jet fuel options are unobservable (principally
implied volatility), the Company categorizes these derivatives as Level 3. Implied volatility of a jet fuel option is the volatility
of the price of the underlying commodity that is implied by the market price of the option based on an option pricing model.
Thus, it is the volatility that, when used in a particular pricing model, yields a theoretical value for the option equal to the
current market price of that option. Implied volatility, a forward-looking measure, differs from historical volatility because the
latter is calculated from known past returns. At each balance sheet date, the Company substantiates and adjusts unobservable
inputs. The Company routinely assesses the valuation model's sensitivity to changes in implied volatility. Based on the
Company's assessment of the valuation model's sensitivity to changes in implied volatility, it noted that holding other inputs