OlderGeek

The following is from the SEC filing of Delta in February of this year.

"Passenger Ticket Sales Earning Mileage Credits. Passenger ticket sales earning mileage credits under our SkyMiles Program provide customers with two deliverables: (1) mileage credits earned and (2) air transportation. Effective January 1, 2011, we began applying the provisions of Revenue Arrangements with Multiple Deliverables ("ASU 2009-13") to passenger tickets earning mileage credits. Under ASU 2009-13, we value each deliverable on a standalone basis. Our estimate of the standalone selling price of a mileage credit is based on an analysis of our sales of mileage credits to other airlines and customers and is re-evaluated at least annually. We use established ticket prices to determine the standalone selling price of air transportation. We allocate the total amount collected from passenger ticket sales between the deliverables based on their relative selling prices.

We defer revenue from the mileage credit component of passenger ticket sales and recognize it as passenger revenue when miles are redeemed and services are provided. We record the portion of the passenger ticket sales for air transportation in air traffic liability and recognize these amounts in passenger revenue when we provide transportation or when the ticket expires unused. The adoption of ASU 2009-13 did not have a material impact on the timing of revenue recognition or its classification with regard to passenger tickets earning mileage credits. A hypothetical 10% increase in our estimate of the standalone selling price of a mileage credit would decrease passenger revenue by approximately $50 million, as a result of an increase in the amount of revenue deferred from the mileage component of passenger ticket sales.

Prior to the adoption of ASU 2009-13, we used the residual method for revenue recognition. Under the residual method, we determined the fair value of the mileage credit component based on prices at which we sold mileage credits to other airlines and then considered the remainder of the amount collected to be the air transportation deliverable."

Considering the recent adoption of ASU 2009-13 resulted in a deferral of income based upon mileage credit, it would stand to reason that Delta would consider a reduction in credit for low cost tickets. Considering that the deferral is based upon the value of the credit, it stands to reason Delta would reduce the value of its miles. Interestingly, they have now removed the accounting connection between the sale price of miles to others and their accounting for value.

What this all means to me is that Delta is now free to sell miles for whatever it can, reduced their actual value to flyers, and book the reduced value as income. Enron would be proud. (Reducing the value of Skymiles offers $4.5 billion in net income potential. Wow. What is the easiest way to make $225 million - reduce the value of Sky miles 5%!!))