[quote]<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by lensman:
[B] Actually, no, deferred revenue winds up as a liability on the balance sheet until it is taken into revenue.

I have no reason to question Randy's objectivity, though his position does suggest a lack of independance from the airlines' status quo.

However, I have yet to see anyone really take on award availability and cost with the same sort of left-brain, hard-hitting analysis that Inside Flyer built its reputation on years ago in comparing earning benefits. There's too many miles out there unredeemed and someone's going to do it, whether it's IF or someone else.


[This message has been edited by Mountain Trader (edited 10-12-2003).]

So the cash from sales ends up as cash (an asset), the deferred revenue itself ends up as a (balancing) liability, and this liability disappears when the revenue is recognized?

I remember this article. The author was anticipating a massive devaluation. I looked online and found it in the 4 May 2002 issue. Unfortunately, it is "premium content" at Economist.com, so you have to pay to read.

You can search on "frequent flyer" on economist.com; this link was given for the monetarist argument. It appears that there was another article on the subject in that same issue, although I don't remember having read it.

From the economist.com search page:

and

I was impressed with the argument in the former; as I recall, it was pretty much the same as gleff's.

fiat_owner

[edited for a better search URL]

[This message has been edited by fiat_owner (edited 10-12-2003).]

Re: issuing miles for non-flight activity. Was at Wal-Mart today (yep, I'm a low-rev) and saw that DL is doing a tie-in with Coca-Cola in several southern states where you get 5 SkyMiles per 2-liter Coke bottle (by entering a code on the cap over the Internet; there's a cap on miles you can earn).

What product could be more ubiquitous than Coke? And as for hard numbers on non-flight miles issued, the fact that they are so hard to come by should be an additional red flag.

Maybe a news outlet like the New York Times or WSJ should devote some serious investigative resources into finding out how much revenue that Leo, Gordo and others are looking for from these non-flight miles that are looking more and more like raffle tickets.

[quote]<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by lensman:
[b] Exactly. Think of it this way: If you prepay a one year newspaper subscription, the paper should record 1/12 of your cost as revenue each month. If they stop publication after 9 months, they owe you 25% of what you paid. This illustrates why unearned (deferred) revenue is a liability.

[This message has been edited by Mountain Trader (edited 10-13-2003).]

[This message has been edited by Mountain Trader (edited 10-13-2003).]

All of the points above are fascinating reading to a new member like me. I'm far from new to collecting, however, and I have always assumed that each year many millions of miles are taken to the grave unspent by their owners who prefer to hoard and gloat (like me)! If I'm right, that ought to be good news for those who do redeem and for airlines too. Somewhere there must be an allowance made for "dead" miles - I feel certain that this is already factored in to loyalty program equations. PS I do realise that many programs allow miles to be transferred on death but imagine it is seldom done.

try this

http://www.arcotect.com/crmloyalty

then scroll halfway down and look on the left side of the page for

http://www.arcotect.com/crmloyalty/E...FlyerMiles.pdf

[This message has been edited by OB one (edited 10-13-2003).]

Thanks!

For some good stats

http://www.webflyer.com/company/pres...cumulation.php

http://www.webflyer.com/company/pres...ts/top_ten.php

The number of miles awarded has increased at a geometric mean rate of 19% per year while the miles redeemed have increased at only a 10% rate. Note the big increase in miles awarded in 1995 as partners fully entered the picture.

In the early years of FF programs, miles often expired thus you used them or lost them. Now few programs have expiration dates, thus hoarding (saving) for retirement is possible, but clearly the trend seems to be that P, the number miles needed for redeeming, is higher.

The data show that the redemptions, Q, actually fell slightly from 1998 to 2002. I would argue that this may not have been only the airlines award holding inventory constant but the smart use of miles by consumers. If a transcon costs $198 in coach and Transatlantic costs $400, why bother using miles? As domestic prices rise, the use of miles will increase.

Moreover, I watched many FTers transfer miles to Hilton via reward exchange, but alas only AA is left there as a US partner.
As the expectation of P rising increases, consumers will rush to get their miles out, increasing V, but if Q is fixed, which I don't think it is, P must rise. Otoh, I foresee more consumers using their miles for award tickets to easy to get routes, those with excess capacity and less popular. Overall, I think both P and V will rise.

As for WSJ and New York Times looking into this. The airlines are losing billions of dollars a year collectively and selling miles is one bright spot for them. You can't open the Journal without hitting an article gleaned from the pages of FlyerTalk, and the Times has not missed this news either. They have published articles very similar to the Economist's article but customer relationship programs are still working the bugs out as firms try to increase profits and consumers, especially the gamers on FT, use the system to their best personal advantage.

Don't like the term "gamers"? That is what CRM programs call people who fly all around the world just to collect miles, who open credit cards just for the bonus miles, and read the fine print just the way WC Fields read the Bible "looking for loopholes."

Thanks "OB One" My head is spinning with stats but the line "Due to trends in award activity, we estimate that 16-34% of all awards will go unredeemed. This includes expirations." seems to confirm my thoughts on the matter (which I now see as "old hat" for a discussion at this level)I'll back off now & leave it to the experts....still morbidly curious about what % of miles are buried with their owners!

It is - read through LemonThrower's post. AMR does the same thing:

"In making the estimate of free travel awards, American has excluded mileage in inactive accounts, mileage related to accounts that have not yet reached the lowest level of free travel award, and mileage in active accounts that have reached the lowest level of free travel award but which are not expected to ever be redeemed for free travel on American." (Sorry - I had to retype it. AMR's 10-K was in PDF format).

My issue is that whatever the allowance is (they don't tell you), is it possible that it's understated? Three things concern me:

1) Some time ago I posted a personal theory that people who earn FF miles from credit cards are more likely to redeem a greater percentage of miles than those that those that got them only from flying. Two reasons: (a) if these people weren't going to use the miles, then they wouldn't get a mileage earning card in the first place; they'd get a CC with a different perk; (b) there are a lot of people that take on or two trips a year that don't care about which airline they fly, they go with the cheapest ticket. I could see where, historically, there would be a lot of dormant/expiring miles in these accounts.

2) Miles don't expire like they used to, as OB one noted.

3) People are becoming more savvy about collecting FF miles. I read an article that said FF miles are now what S&H green stamps used to be 40-50 years ago. I think that as people get smarter about their miles, you'll see a fewer percentage of miles that really belong in the allowance category.

So if the airlines "allowance" is based on historical data, and you believe that the circumstances have changed with regard to the way people handle their FF accounts, then, possibly, the allowance is overstated, and AMR's estimate of 9.3 million free travel awards (and the $1.2B liability) is understated. By how much? Who knows?

It's only a liability if the holder of that debt has a reasonable chance of collecting on it.

lensman's view is more on target than any comparison to an open monetary system. The airlines have created an artificial currency that may not be easily transferred, bartered or sold, and control all redemptions into services. Unlike US Dollars, you can't take it and move it into alternative outlets.

As I have mentioned before in these types of discussions, a redemption that is refused ("yes, the flight will be departing with empty seats available, but they are not for award travel") by the airline really isn't a liability.

If the government allowed me to print up and hand out $1,000,000 worth of Tino currency annually, while only having to honor $500,000 of redemptions a year, am I making money? The accountant would say no - there is a liability building up. What does logic tell you?

The value of a mile has already plunged and will continue to do so. Every joker that quotes their "2 cent mantra" gets a response from me offering as many as they want at that price. No takers so far!

I laugh at those who must value their precious hours on earth at less than minimum wage to sit on a plane and accumulate even more of this funny money.

Tino makes some good points which I don't disagree with.

singlemalt lists many of the factors that concern me about the explosion in the number fo miles outstanding and how this devalues our miles.

Tinos' point is that this does not necessariliy make the accounting wrong, because the airline controls the redemptions. I agree.

However, it does make the accounting shady IMHO. This is because the airlines are trying to induce you to fly their airline in exchange for these points, and they don't disclose how hard it is to redeem awards or how hard it will be in the future to redeem awards.

What they fail to disclose is the number of miles outstanding. They take this number, apply certain assumptions which seem reasonable, and then disclose (in DL's case) that they expect 10 million award flights to be redeemed, and they value the cost of those flights at $22.80 each. Its impossible to gauge the reasonableness of their assumptions without knowing the missing data. For example, DL concludes 10 million awards will be redeemed. If you assume 25K miles per award, thats 250 billion miles. But is this figure half of the total outstanding? One -tenth? Who knows how agressive the airline is at applying its assumptions.

What I would like to know is the number of miles outstanding and the growth trend on my carrier. From what I can see, I expect redemptions to get increasingly more difficult. And with respect to Randy, I don't think his view is the be-all end-all, in part because the airlines are his customers. Perhaps he's just an optimist and doesn't believe they'll kill the goose that lays the golden egg, but I'm not so optimistic.

Do you know enough about his business to say that consulting revenue is a significant part of his income? I don't.

Besides, it isn't clearly relevant to me.

Randy has made arguments about loyalty programs, on the whole, doing a good job satisfying their members. I hope I haven't oversimplified or mischaracterized his claims in my original post. (I didn't go back to original sources or quotes.)

I think that I, for one, offered arguments that run counter to Randy's position.

All of that is substantive dialogue. Motives don't play a role in it. And we should be able to judge the arguments on their merits, without respect to hypothesizing about why one might be making a particular argument.

Such hypothesizing about motive can be appropriate in limited circumstances. One that comes to mind is when the claims at issue are ones where a reader is insufficiently expert to distinguish the correct answer on their own. Then they have to judge how likely they are to believe the speaker. But if the arguments can be independently evaluated (as I suspect arguments about redemptions likely can be here on Flyertalk) then motive seems an unlikely way to dispose of an argument.

Earlier in the thread someone referenced Randy being overly tied to the airlines as evidenced by the lack of an Airtran forum (suggesting he was therefore in Delta's pocket). That's kind of a weird claim, since Randy has been very very supportive of the SaveSkyMiles campaign. He is personally the largest donor and has given technical expertise and web support as well -- not to mention featuring the campaign as part of a larger article in InsideFlyer.

Ultimately
- We can judge Randy's arguments (and really all arguments about award redemption, I think) on their merits. I happen to disagree, but that's substantive. Why even speculate about motive?
- When motive discussions do come up, I think they require great care. One doesn't question integrity lightly....

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