United Airlines’ Frequent Flyer Program, Case Study Example

Most recently, United Airlines has been experiencing troubles with reporting the costs of the Frequent Flyer Program (FFP) as a result, this has led to the inability to effectively plan and record the costs associated with the FFP. This information is crucial in determining the cost management techniques of the company. I have drawn up this document to highlight the options that United Airlines has in terms of the recording of the costs of the FFP.

United Air Lines Inc. can measure the cost of its frequent flier programs in either of two ways that are generally accepted in accounting.

Method 1: The Deferred Revenue Method

This method identifies the outstanding mileage credits as a liability and considers the fair value of these mileage credits. Under IFRS (International Financial Reporting Standards) fair value is the value of the credits if they were to be sold separately. It treats the values of the initial and original sale and the costs of fair value of awarding the mileage credits as separate figures and entries in the financial reporting procedures. (Franklin)

Method 2: The Incremental Cost Method

This method identifies also identifies the outstanding mileage credits as a liability, however, it considers the marginal liability that is associated with the production air transportation to those passengers that are eligible to be awarded. This marginal cost is defined by the cost of fuel, food, taxes etc. that is associated with flying an extra passenger on a seat that would be unoccupied. This amount is usually nominal. (Dorotic, Bijmolt and Vrhoef)

I believe that the most efficient method of calculating the cost of the frequent flier program would be the Deferred Revenue Method. This is calculated using the following formula

(Available Seat Miles x Average Yield per RevenuePassenger Mile) – (Revenue Passenger Miles x Average Yield per RevenuePassenger Mile)

For the Year 1990 the cost of the Frequent Flyer Program was:

(114,995,000,000 x $0.126) – (76,137,000,000 x $0.126) = 14,489,370,000 –9,593,262,000 = 4,896,108,000

Accounting for the Frequent Flyer Program

The accounting techniques that should be employed for the frequent flyer program may prove to be challenging as the above mentioned method all have their own specific merits and demerits. However, the most efficient method is the Deferred Revenue Method. This is because this method is required by the IFRIC (International Financial Reporting Interpretations Committee) Interpretation Number 13, the Customer Loyalty Programs (Franklin). This is because the fundamental concept of the deferred revenue technique is that future rewards in terms of mileage are distinct commodities that the customers are inherently paying for.

In using this accounting concept to record the costs of the frequent flyer program the company will have to split the revenues from sales obtained from transactions in which there are mileage credits issued into two components. These two components will be, firstly, the original value of the sale that the company made to the customer and secondly, the subsequent mileage credits that the customer has been awarded as a result of this transaction. The value of the first allocation representing the actual sale is denoted as the actual revenue while the value of the second allocation, the fair value of the awarded mileage credits, is then deferred as a liability. This liability will remain until the point when the company fulfils its obligation to act on the mileage credits.

Works Cited

Dorotic, Matilda, Tammo Bijmolt and Peter C. Vrhoef. “Loyalty Programmes: Current Knowledge and Research Directions.” International Journal of Management Reviews 14.3 (2012): 217-237. Print.

Franklin, Brian J. Accounting for Airline Frequent Flyer Programs: Management Incentives and Financial Reporting Impacts. Anchorage: Unniversity of Alaska Anchorage, 2012. Print.