Gary Leff: SEC filing - AAdvantage devaluation hurt AA profits
Apr 21, 2017, 8:38 am
#136
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However, it is not a good business decision for a number of reasons. The main reason for it being a poor business decision is because blocking saver awards and requiring double or triple miles for the same seat angers loyal customers. Customers have responded to AA's severe devaluation by flying other carriers, not using the higher award redemptions and canceling or not using AA sponsored credit cards.
Even on the day of departure, AA continues to block saver awards on countless flights. Consequently, roughly one third of business or first seats go out empty because customers are not willing to redeem them for a higher amount of miles required for those empty seats (anytime award rates).
The decision to allow business and first seats to go out empty while not releasing saver awards does not seem logical. It is a text book example of a poor business decision. The available business and first seats that go out empty, could increase AA's revenue as a saver award, thus reducing AA's deferred income. Refusal by AA to release saver awards when there are empty seats available at the time a flight departs is inexplicable.
I realize this explanation is complex, but, the flyertalk member being quoted above did ask for an explanation.
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Even on the day of departure, AA continues to block saver awards on countless flights. Consequently, roughly one third of business or first seats go out empty because customers are not willing to redeem them for a higher amount of miles required for those empty seats (anytime award rates).
The decision to allow business and first seats to go out empty while not releasing saver awards does not seem logical. It is a text book example of a poor business decision. The available business and first seats that go out empty, could increase AA's revenue as a saver award, thus reducing AA's deferred income. Refusal by AA to release saver awards when there are empty seats available at the time a flight departs is inexplicable.
I realize this explanation is complex, but, the flyertalk member being quoted above did ask for an explanation.
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I'm absolutely not saying they're making all the correct decisions, there are clearly competing interests that need to be balanced. The pendulum has probably swung too far in one direction, but I don't think it's nearly as clear-cut as you make it out to be.
Apr 21, 2017, 8:44 am
#137
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I think this analysis is a little bit short-sighted and only works in a vacuum. If the airline were to consistently release unsold seats to Mile Saver awards close to departure (or frankly, sell them at a discount), this creates the dis-incentive for people to pay higher fares (in money or in miles--i.e., Anytime awards).
I'm absolutely not saying they're making all the correct decisions, there are clearly competing interests that need to be balanced. The pendulum has probably swung too far in one direction, but I don't think it's nearly as clear-cut as you make it out to be.
I'm absolutely not saying they're making all the correct decisions, there are clearly competing interests that need to be balanced. The pendulum has probably swung too far in one direction, but I don't think it's nearly as clear-cut as you make it out to be.
Apr 21, 2017, 9:19 am
#138
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WARNING - BORING (BUT ACCURATE) ANSWER TO QUESTION ASKED
It is a convoluted computation when "miles" are recorded in financial statements of airlines.
Clearly, miles have an impact on airline profits.
One simple way to look at the situation is when AA sells a ticket (ignoring sales of miles to banks and others).
A small part of the ticket price (roughly 2% or less) is allocated for future miles redemptions as a liability or deferred income (rather than current income) in the financial statements. When miles get used, the deferred income is reduced, proportionately, and income is recognized in the financial statements. There are other elements of the miles recognition but this is one simple way to explain the matter. Said succinctly, as miles get used, AA recognizes income for that portion of the miles. As a sidenote, there really isn't any "free" ticket. "Award" tickets are mileage tickets that passengers (or banks) have paid in advance (in some form) to the airline.
When AA blocks saver awards and requires "anytime" awards, more revenue is recognized from those customers who exchange a higher number of miles for the "anytime" award ticket.
It is a convoluted computation when "miles" are recorded in financial statements of airlines.
Clearly, miles have an impact on airline profits.
One simple way to look at the situation is when AA sells a ticket (ignoring sales of miles to banks and others).
A small part of the ticket price (roughly 2% or less) is allocated for future miles redemptions as a liability or deferred income (rather than current income) in the financial statements. When miles get used, the deferred income is reduced, proportionately, and income is recognized in the financial statements. There are other elements of the miles recognition but this is one simple way to explain the matter. Said succinctly, as miles get used, AA recognizes income for that portion of the miles. As a sidenote, there really isn't any "free" ticket. "Award" tickets are mileage tickets that passengers (or banks) have paid in advance (in some form) to the airline.
When AA blocks saver awards and requires "anytime" awards, more revenue is recognized from those customers who exchange a higher number of miles for the "anytime" award ticket.
FASB Accounting Standards Update ("ASU") No. 2014-
09, "Revenue from Contracts with Customers" Topic 606, will become effective for periods beginning after December 15, 2017, and is not how AA currently accounts for flight award miles.
Until next year, AA is (and always has) accounting for flight award miles using the incremental cost method as described in the 10-K:
We use the incremental cost method to account for the portion of our loyalty program liability incurred when AAdvantage members earn mileage credits by flying on American, any oneworld airline or other partner airlines. We have an obligation to provide future travel when these mileage credits are redeemed and therefore have recorded a liability for mileage credits outstanding.
The incremental cost liability includes all mileage credits, even mileage credits for members whose account balances have not yet reached the minimum level required to redeem an award. Mileage credits are subject to expiration. The liability for outstanding mileage credits is valued based on the estimated incremental cost of carrying one additional passenger. The estimated incremental cost primarily includes unit costs incurred for fuel, food and insurance as well as fees incurred when travel awards are redeemed on partner airlines. In calculating the liability, we estimate how many mileage credits will never be redeemed for travel and exclude those mileage credits from the estimate of the liability. Estimates are also made for the number of miles that will be used per award redemption and the number of travel awards that will be redeemed on partner airlines.
These costs and estimates are based on our historical program experience as well as consideration of enacted program changes, as applicable. Changes in the liability resulting from members earning additional mileage credits or changes in estimates are recorded in the consolidated statements of operations as a part of passenger revenue.
As of December 31, 2016 and 2015, the liability for outstanding mileage credits accounted for under the incremental cost method was $669 million and $657 million, respectively, and is included on the consolidated balance sheets within loyalty program liability.
A change to certain estimates used in the calculation of incremental cost could have a material impact on the liability. A one percentage point increase or decrease in the percentage of travel awards redeemed on partner airlines would have an approximate $38 million impact on the liability as of December 31, 2016. A 10% increase or decrease in the assumed price per gallon of fuel would have an approximate $9 million impact on the liability as of December 31, 2016.
The incremental cost liability includes all mileage credits, even mileage credits for members whose account balances have not yet reached the minimum level required to redeem an award. Mileage credits are subject to expiration. The liability for outstanding mileage credits is valued based on the estimated incremental cost of carrying one additional passenger. The estimated incremental cost primarily includes unit costs incurred for fuel, food and insurance as well as fees incurred when travel awards are redeemed on partner airlines. In calculating the liability, we estimate how many mileage credits will never be redeemed for travel and exclude those mileage credits from the estimate of the liability. Estimates are also made for the number of miles that will be used per award redemption and the number of travel awards that will be redeemed on partner airlines.
These costs and estimates are based on our historical program experience as well as consideration of enacted program changes, as applicable. Changes in the liability resulting from members earning additional mileage credits or changes in estimates are recorded in the consolidated statements of operations as a part of passenger revenue.
As of December 31, 2016 and 2015, the liability for outstanding mileage credits accounted for under the incremental cost method was $669 million and $657 million, respectively, and is included on the consolidated balance sheets within loyalty program liability.
A change to certain estimates used in the calculation of incremental cost could have a material impact on the liability. A one percentage point increase or decrease in the percentage of travel awards redeemed on partner airlines would have an approximate $38 million impact on the liability as of December 31, 2016. A 10% increase or decrease in the assumed price per gallon of fuel would have an approximate $9 million impact on the liability as of December 31, 2016.
We also sell loyalty program mileage credits to participating airline partners and non-airline business partners. Sales of mileage credits to non-airline business partners is comprised of two components, transportation and marketing. We account for mileage sales under our agreements with non-airline business partners in accordance with Accounting Standards Update (ASU) No. 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements.” In accordance with Topic 605, we allocate the consideration received from the sale of mileage credits based on the relative selling price of each product or service delivered.
In 2016, American entered into new co-branded credit card program agreements with Citi and Barclaycard US. We identified the following revenue elements in these co-branded credit card agreements: the transportation component; the use of the American brand including access to loyalty program member lists, advertising and other travel related benefits (collectively, the marketing component).
The transportation component represents the estimated selling price of future travel awards and is determined using historical transaction information, including information related to customer redemption patterns. The transportation component is deferred based on its relative selling price and is amortized into passenger revenue on a straight-line basis over the period in which the mileage credits are expected to be redeemed for travel. As of December 31, 2016 and 2015, we had $2.1 billion and $1.5 billion, respectively, in deferred revenue from the sale of mileage credits recorded within loyalty program liability on our consolidated balance sheets.
A change to certain estimates used in the allocation of consideration received from the sale of mileage credits could have a material impact on the liability. A 10% increase or decrease in the relative selling price of the transportation component would have an approximate $81 million impact on the liability as of December 31, 2016.
The services under the marketing component are provided periodically, but no less than monthly. Accordingly, the marketing component is considered earned and recognized in other revenues in the period of the mileage sale. For the years ended December 31, 2016, 2015 and 2014, the marketing component of mileage sales and other marketing related payments included in other revenues was approximately $1.9 billion, $1.7 billion and $1.6 billion, respectively.
In 2016, American entered into new co-branded credit card program agreements with Citi and Barclaycard US. We identified the following revenue elements in these co-branded credit card agreements: the transportation component; the use of the American brand including access to loyalty program member lists, advertising and other travel related benefits (collectively, the marketing component).
The transportation component represents the estimated selling price of future travel awards and is determined using historical transaction information, including information related to customer redemption patterns. The transportation component is deferred based on its relative selling price and is amortized into passenger revenue on a straight-line basis over the period in which the mileage credits are expected to be redeemed for travel. As of December 31, 2016 and 2015, we had $2.1 billion and $1.5 billion, respectively, in deferred revenue from the sale of mileage credits recorded within loyalty program liability on our consolidated balance sheets.
A change to certain estimates used in the allocation of consideration received from the sale of mileage credits could have a material impact on the liability. A 10% increase or decrease in the relative selling price of the transportation component would have an approximate $81 million impact on the liability as of December 31, 2016.
The services under the marketing component are provided periodically, but no less than monthly. Accordingly, the marketing component is considered earned and recognized in other revenues in the period of the mileage sale. For the years ended December 31, 2016, 2015 and 2014, the marketing component of mileage sales and other marketing related payments included in other revenues was approximately $1.9 billion, $1.7 billion and $1.6 billion, respectively.
The marketing component of mileage sales taken into revenue during 2016 was $1.9 billion.
Based on the information we have, I don't see any motivation for AA to play games with award availability because those games somehow (allegedly) might inflate AA's revenue from AAnytime awards. Sure, flushing more miles per award has the benefit of minimizing that $669 million outstanding liability for flight award miles - but that's nothing new. Arpey used to say that flyers should stop complaining about low availability of saver awards because he offered an unlimited number of AAnytime awards offering last seat availability on each and every AA flight at just double the price (now, of course, the AAnytime awards are often much more than double).
Thank you, dgcpaphd.
This could indeed explain why no one at AAL HQ is bothered by the OP's report: income is replaced by "inflated" (relatively speaking) award redemption rates, should also apply to other carriers who have devalued award programs over the past couple of years.
While it may be giving management WAAAAY too much credit, this is an effective method to deplete stockpiles accumulated by credit card churners and low revenue mileage runners, who are already being squeezed by the tightening of credit card requirements, recent move to revenue-based mileage and elite qualification. As others have suggested, the long-term hope is that the current drought will eventually lead to more saaver award availability to loyal, BIS customers - even if the "good old days" are long gone.
This could indeed explain why no one at AAL HQ is bothered by the OP's report: income is replaced by "inflated" (relatively speaking) award redemption rates, should also apply to other carriers who have devalued award programs over the past couple of years.
While it may be giving management WAAAAY too much credit, this is an effective method to deplete stockpiles accumulated by credit card churners and low revenue mileage runners, who are already being squeezed by the tightening of credit card requirements, recent move to revenue-based mileage and elite qualification. As others have suggested, the long-term hope is that the current drought will eventually lead to more saaver award availability to loyal, BIS customers - even if the "good old days" are long gone.
Apr 21, 2017, 9:34 am
#139
Join Date: Dec 2004
Posts: 7,903
I think there might also be a "big picture" factor here. When the AA/US DL/NW UA/CO mergers happened I felt like they would eventually stop caring about alliances and/or frequent flyer programs and reduce their dependence on both. With enough domination they need them less. I remember some CEO (Smisek?) referring to elites in some derogatory way about their entitlements.
Apr 21, 2017, 9:52 am
#140
Join Date: Dec 2003
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Posts: 6,433
Based on the information we have, I don't see any motivation for AA to play games with award availability because those games somehow (allegedly) might inflate AA's revenue from AAnytime awards. Sure, flushing more miles per award has the benefit of minimizing that $669 million outstanding liability for flight award miles - but that's nothing new. Arpey used to say that flyers should stop complaining about low availability of saver awards because he offered an unlimited number of AAnytime awards offering last seat availability on each and every AA flight at just double the price (now, of course, the AAnytime awards are often much more than double).
Ignoring timing issues and possible refunds, AA has revenue from the sale of miles (either for cash or as part of the purchase price for tickets) and has expenses from the use of miles (at the marginal cost of flying the passengers).
AA has recorded a liability for these future expenses and that liability is not material in light of the size of AA's total liabilities.
Those future expenses, when booked, will not be material in light of AA's revenues or profits.
Accordingly, AA should focus on the effect of AAdvantage on people's decision to do things which generate AA revenue (buy tickets, get credit cards, etc.) rather than play games with award availability.
How will FASB Accounting Standards Update ("ASU") No. 2014-
09, "Revenue from Contracts with Customers" Topic 606 affect any of this?
Apr 21, 2017, 10:05 am
#141
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An argument can be made to discourage people who find ways to game the system; I cannot understand the risk of alienating higher value, more loyal customers for the sake of a few award seats.
Apr 21, 2017, 10:52 am
#142
Join Date: Apr 2008
Posts: 2,358
No, it's not accurate.
FASB Accounting Standards Update ("ASU") No. 2014-
09, "Revenue from Contracts with Customers" Topic 606, will become effective for periods beginning after December 15, 2017, and is not how AA currently accounts for flight award miles.
Until next year, AA is (and always has) accounting for flight award miles using the incremental cost method as described in the 10-K
For miles sold by AA to Citi and other partners, the deferred revenue model is used to account for the revenue and the eventual liability of providing flight awards as discussed in the 10-K:
The liability for flight award miles redemptions was just $669 million at the end of 2016, a negligible figure compared to AA's total liabilities of $47.5 billion at 12/31/16.
The marketing component of mileage sales taken into revenue during 2016 was $1.9 billion.
Based on the information we have, I don't see any motivation for AA to play games with award availability because those games somehow (allegedly) might inflate AA's revenue from AAnytime awards. Sure, flushing more miles per award has the benefit of minimizing that $669 million outstanding liability for flight award miles - but that's nothing new. Arpey used to say that flyers should stop complaining about low availability of saver awards because he offered an unlimited number of AAnytime awards offering last seat availability on each and every AA flight at just double the price (now, of course, the AAnytime awards are often much more than double).
The explanation provided to you was incorrect. Does the correct info change your analysis?
FASB Accounting Standards Update ("ASU") No. 2014-
09, "Revenue from Contracts with Customers" Topic 606, will become effective for periods beginning after December 15, 2017, and is not how AA currently accounts for flight award miles.
Until next year, AA is (and always has) accounting for flight award miles using the incremental cost method as described in the 10-K
For miles sold by AA to Citi and other partners, the deferred revenue model is used to account for the revenue and the eventual liability of providing flight awards as discussed in the 10-K:
The liability for flight award miles redemptions was just $669 million at the end of 2016, a negligible figure compared to AA's total liabilities of $47.5 billion at 12/31/16.
The marketing component of mileage sales taken into revenue during 2016 was $1.9 billion.
Based on the information we have, I don't see any motivation for AA to play games with award availability because those games somehow (allegedly) might inflate AA's revenue from AAnytime awards. Sure, flushing more miles per award has the benefit of minimizing that $669 million outstanding liability for flight award miles - but that's nothing new. Arpey used to say that flyers should stop complaining about low availability of saver awards because he offered an unlimited number of AAnytime awards offering last seat availability on each and every AA flight at just double the price (now, of course, the AAnytime awards are often much more than double).
The explanation provided to you was incorrect. Does the correct info change your analysis?
In the opening section of my post I wrote:
It is a convoluted computation when "miles" are recorded in financial statements of airlines.
Reading from the above quote, I stated that the computation for miles is convoluted. I offered one example of how miles are recorded in financial statements of airlines.
I specifically said, "One simple way to look at the situation is when AA sells a ticket ignoring sales of miles to banks and others)."
You ignored my caveat when I said "ignoring sales of miles to banks and others" was my attempt to make a long explanation as short as possible.
My example was for non accounting readers showing a simple example of miles and some of the issues related to the severe devaluation AA made to its loyalty program.
I am a CPA and I have participated in the the annual audit of an airline (not AA).
I did not expect most readers to understand a long explanation concerning miles. I also did not expect that my simple and accurate example would be challenged.
Each airline can have a different method for recording miles. However, the end financial result will be substantially similar.
Your statement that my generic example is incorrect, is without merit.
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Last edited by dgcpaphd; Apr 21, 2017 at 10:59 am
Apr 21, 2017, 11:33 am
#143
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Apr 21, 2017, 11:59 am
#144
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Apr 24, 2017, 9:42 pm
#145
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There was some blog about this supposed special AMEX plat AA F/J fares who claimed a discounted way of going LAS-LAX-JFK in three cabin F. Theoretically, the idea was that AMEX has some sort of corporate fare. No one has been able to replicate it that I know of ... either on the AMEX website or calling an agent.
There is a thread here about that.
There is a thread here about that.
The commenters on that also express a similar level of skepticism.
Aug 7, 2017, 4:21 pm
#146
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I tweeted it, trying to flush out some confirmation-- tweets were:
"**Highly** unconfirmed: rumors that AA's long-delayed LAX-PEK may end up with a late-morning departure. Unconfirmed."
"starting to understand what that $200m investment in China Southern was all about! @:-) "
"**Highly** unconfirmed: rumors that AA's long-delayed LAX-PEK may end up with a late-morning departure. Unconfirmed."
"starting to understand what that $200m investment in China Southern was all about! @:-) "
LAX to PEK
Departure Time
11:10
Departure Time
11:10
Aug 7, 2017, 9:48 pm
#147
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I think there might also be a "big picture" factor here. When the AA/US DL/NW UA/CO mergers happened I felt like they would eventually stop caring about alliances and/or frequent flyer programs and reduce their dependence on both. With enough domination they need them less. I remember some CEO (Smisek?) referring to elites in some derogatory way about their entitlements.
Short post from what seems like an eternity ago....
http://liveandletsfly.boardingarea.c...s-as-entitled/