One question related to miles/instruments from corp financial/accounting standpoint
Feb 24, 2014, 9:12 pm
#1
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One question related to miles/instruments from corp financial/accounting standpoint
This is for my own education: from the corporate accounting standpoint, what are miles and upgrade instruments for an airline? Are they liability/loan or something else?
What purely for the balance sheet/bottom line would be best for an airline:
- people accumulate miles but not use them (or let them expire)
- people accumulate miles and use them for award/upgrades
- people use/do not use upgrade instruments?
When someone books an award flight would UA consider this a revenue or loss? the same question about using upgrade instrument - when someone uses GPU/RPU would UA consider this as loss from the standpoint that they are selling F/C seat for much less?
I have a feeling that airline accounting is quite close to Hollywood Accounting...
What purely for the balance sheet/bottom line would be best for an airline:
- people accumulate miles but not use them (or let them expire)
- people accumulate miles and use them for award/upgrades
- people use/do not use upgrade instruments?
When someone books an award flight would UA consider this a revenue or loss? the same question about using upgrade instrument - when someone uses GPU/RPU would UA consider this as loss from the standpoint that they are selling F/C seat for much less?
I have a feeling that airline accounting is quite close to Hollywood Accounting...
Feb 24, 2014, 9:14 pm
#2
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Miles are a liability on the balance sheet. When miles expire, they are gone from the balance sheet, which is probably the sole reason programs have mileage expiration policies. I've never seen a line item for upgrade instruments on a balance sheet, so I either missed them or they're accounted for in a different way (if at all).
Feb 24, 2014, 9:28 pm
#3
Moderator: United Airlines
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Interesting academic paper on
Accounting For Airline Frequent Flyer Programs: Management Incentives And Financial Reporting Impacts
Accounting For Airline Frequent Flyer Programs: Management Incentives And Financial Reporting Impacts
Feb 24, 2014, 10:13 pm
#4
Join Date: May 2008
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I can't imagine how an upgrade could be a balance sheet item. An airline would definitely not be able to take a loss when an upgrade is used because there is no actual cost to the airline for that seat that it doesn't already expense. The FA's salaries are already an expense, the food is already an expense, the fuel is already an expense, etc... So while physically moving someone up from coach to first may actually cost the airline more money, it doesn't cost them more than they already have accounted for.
This is exactly the same as an airline not being able to expense a plane leaving with an empty seat. Sure, it's possible they could've received revenue for that seat, but they didn't and there is no additional cost they can account for.
To analogize it to another situation, a hotel sells a ballroom for a charitable event for $1,000 when they usually charge $30,000. For simplicity let's assume the hotel doesn't incur additional expenses over the $1,000 for the charity's use of the ballroom. The hotel doesn't get to deduct $29,000 as a charitable contribution just because it offered the ballroom for less than they may have been able to get (even if they have a bid from another company that says they will pay $30,000 for the ballroom). Forfeiting potential income is not an expense for tax purposes.
This is exactly the same as an airline not being able to expense a plane leaving with an empty seat. Sure, it's possible they could've received revenue for that seat, but they didn't and there is no additional cost they can account for.
To analogize it to another situation, a hotel sells a ballroom for a charitable event for $1,000 when they usually charge $30,000. For simplicity let's assume the hotel doesn't incur additional expenses over the $1,000 for the charity's use of the ballroom. The hotel doesn't get to deduct $29,000 as a charitable contribution just because it offered the ballroom for less than they may have been able to get (even if they have a bid from another company that says they will pay $30,000 for the ballroom). Forfeiting potential income is not an expense for tax purposes.
Feb 24, 2014, 10:41 pm
#5
Moderator: Manufactured Spending
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I can't imagine how an upgrade could be a balance sheet item. An airline would definitely not be able to take a loss when an upgrade is used because there is no actual cost to the airline for that seat that it doesn't already expense. The FA's salaries are already an expense, the food is already an expense, the fuel is already an expense, etc... So while physically moving someone up from coach to first may actually cost the airline more money, it doesn't cost them more than they already have accounted for.
Feb 25, 2014, 7:39 am
#6
Join Date: Feb 2003
Posts: 116
One question related to miles/instruments from corp financial/accounting standpoint
Upgrades have no incremental cost to the network but due to potential list value if sold out their is probably a standard rate applied to upgrade vouchers and just wrapped into reward program liabilities on the balance sheet. As they expire they do increase the airlines bottom line and I bet maybe only 30% of all miles and rewards are ever really claimed.