Alaska Airlines and Horizon Air 2007 Annual Report Download - page 154

reduced our 2007 commission revenue by
approximately $2.4 million.
2. The number of miles that will not be
redeemed for travel (breakage):
Members may not reach the mileage
threshold necessary for a free ticket, and
outstanding miles may not always be
redeemed for travel. Therefore, based on
the number of Mileage Plan accounts and
the miles in the accounts, we estimate how
many miles will never be used (“breakage”),
and do not record a liability for those miles.
Our estimates of breakage consider activity
in our members’ accounts, account
balances, and other factors. We believe our
breakage assumptions are reasonable in
light of historical experience and future
expectations. A hypothetical 1.0% change in
our estimate of breakage (currently 12% in
the aggregate) has approximately a $7.2
million effect on the liability. Actual
breakage could differ significantly from our
estimates.
3. The number of miles used per award (i.e.,
free ticket):
We estimate how many miles will be
used per award. For example, our members
may redeem credit for free travel to various
locations or choose between a highly
restricted award and an unrestricted award.
If actual miles used are more or less than
estimated, we may need to adjust the
liability and corresponding expense. Our
estimates are based on the current
requirements in our Mileage Plan program
and historical redemptions on Alaska,
Horizon or other airlines.
4. The number of awards redeemed for travel
on Alaska or Horizon versus other airlines:
The cost for Alaska or Horizon to carry
an award passenger is typically lower than
the cost we will pay to other airlines. We
estimate the number of awards that will be
redeemed on Alaska or Horizon versus on
other airlines and accrue the estimated
costs based on historical redemption
patterns. If the number of awards redeemed
on other airlines is higher or lower than
estimated, we may need to adjust our
liability and corresponding expense.
5. The costs that will be incurred to provide
award travel:
When a frequent flyer travels on his or
her award ticket on Alaska or Horizon,
incremental costs such as food, fuel and
insurance are incurred to carry that
passenger. We estimate what these costs
will be (excluding any contribution to
overhead and profit) and accrue a liability. If
the passenger travels on another airline on
an award ticket, we often must pay the other
airline for carrying the passenger. The other
airline costs are based on negotiated
agreements and are often substantially
higher than the costs we would incur to carry
that passenger. We estimate how much we
will pay to other airlines for future travel
awards based on historical redemptions and
settlements with other carriers and accrue a
liability accordingly. The costs actually
incurred by us or paid to other airlines may
be higher or lower than the costs that were
estimated and accrued, and therefore we
may need to adjust our liability and
recognize a corresponding expense.
We review significant Mileage Plan assumptions
each quarter and change our assumptions if
facts and circumstances indicate that a change
is necessary. Any such change in assumptions
could have a significant effect on our financial
position and results of operations.
PENSION PLANS
We account for the defined-benefit pension plans
using SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R) (SFAS
158). SFAS 158 requires recognition of the
overfunded or underfunded status of an entity’s
defined-benefit pension and other postretirement
plan as an asset or liability in the financial
statements and requires recognition of the
funded status in other comprehensive income.
54