Alaska Airlines and Horizon Air 2007 Annual Report Download - page 153

eliminates the judgment and estimation needed
to determine overhaul versus repair allocations
in maintenance activities. Additionally, our
approved maintenance program for the majority
of our airframes now focuses more on shorter,
but more frequent, maintenance visits. We also
believe that the direct expense method is the
predominant method used in the airline industry.
Accordingly, effective January 1, 2005, we wrote
off the net book value of our previously
capitalized airframe and engine overhauls for all
aircraft resulting in a charge of $144.7 million
pretax ($90.4 million after tax). We do not
believe disclosing the effect of adopting the
direct expense method on net income for 2005
provides meaningful information because of
changes in our maintenance program, including
the execution of a “power-by-the-hour” engine
maintenance agreement with a third party in late
2004.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial
position and results of operations in this MD&A
is based upon our consolidated financial
statements. The preparation of these financial
statements requires us to make estimates and
judgments that affect our financial position and
results of operations. See Note 1 to the
consolidated financial statements for a
description of our significant accounting policies.
Critical accounting estimates are defined as
those that are reflective of significant judgment
and uncertainties, and that potentially may result
in materially different results under varying
assumptions and conditions. Management has
identified the following critical accounting
estimates and has discussed the development,
selection and disclosure of these policies with
our audit committee.
MILEAGE PLAN
Our Mileage Plan loyalty program awards miles to
member passengers who fly on Alaska or Horizon
and our many travel partners. Additionally, we
sell miles to third parties, such as our bank
partner, for cash. In either case, the outstanding
miles may be redeemed for travel on Alaska,
Horizon or any of our alliance partners. As long
as the Mileage Plan is in existence, we have an
obligation to provide this future travel. For
awards earned by passengers who fly on Alaska,
Horizon or our travel partners, we recognize a
liability and the corresponding selling expense
for this future obligation. For miles sold to third
parties, the majority of the sales proceeds are
recorded as deferred revenue and recognized
when the award transportation is provided. The
commission component of these sales proceeds
(defined as the proceeds we receive from the
sale of mileage credits minus the amount we
defer) is recorded as other-net revenue when the
cash is received. The deferred revenue is
recognized as passenger revenue when awards
are issued and flown on Alaska or Horizon, and
as other-net revenue for awards issued and flown
on partner airlines.
At December 31, 2007, we had approximately
114 billion miles outstanding, resulting in an
aggregate liability and deferred revenue balance
of $648.5 million. Both the liability and the
deferred revenue are determined based on
several assumptions that require significant
management judgment to estimate and
formulate. There are uncertainties inherent in
estimates; therefore, an incorrect assumption
could greatly affect the amount and/or timing of
revenue recognition or Mileage Plan expenses.
The most significant assumptions in accounting
for the Mileage Plan are described below.
1. The rate at which we defer sales proceeds
from sold miles:
We defer an amount that represents our
estimate of the fair value of a free travel
award by looking to the sales prices of
comparable paid travel. As fare levels
change, our deferral rate changes, which
may result in the recognition of a higher or
lower portion of the cash proceeds from the
sale of miles as commission revenue in any
given quarter. For example, due to the year-
over-year increases in average ticket prices,
our deferral rate increased in 2007,
resulting in lower commission revenue and
an increase in the amount of revenue
deferred for miles sold. Holding all other
assumptions constant, an additional 1%
increase in the deferral rate would have
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ŠForm 10-K