Alaska Airlines and Horizon Air 2013 Annual Report Download - page 135

of the multiple deliverables. This relative
allocation does not change over the term of
the agreements.
For remaining contracts which continue
to be accounted for under the residual
method, as our estimates of selling price
change, the amount we defer changes,
resulting in the recognition of a higher or
lower portion of the cash proceeds from the
sale of miles as commission revenue in any
given period. A 10% increase in the
estimated selling price of travel (and related
deferral rate) would decrease commission
revenue by an immaterial amount. This
amount would instead be recognized in a
future period when award travel takes place.
2. The number of miles that will not be
redeemed for travel (breakage):
The liability for outstanding Mileage Plan
mileage credits includes all mileage credits
that are expected to be redeemed, including
mileage credits earned by members whose
mileage account balances have not yet
reached the minimum mileage credit level to
redeem an award. Our estimate of the
number of miles that will not be redeemed
(breakage) consider historical activity in our
members’ accounts and other factors. In
2013, as part of the modification of our
affinity card agreement, we re-evaluated the
breakage rate based on a statistical analysis
of historical data, which refined our estimate
of the amount of breakage in the mileage
population. This new refinement enabled us
to better identify historical differences
between certain of our mileage breakage
estimates and the amounts that have
actually been experienced. As a result, we
increased our estimate of the number of
miles expected to expire unused from 12% to
17.4%. The effect of the 5.4% change in the
breakage estimate was approximately
$44 million, included as part of the Special
mileage plan revenue item, and
approximately $7 million for the second half
of 2013, included in Other-net revenue. A
hypothetical 1% change in our estimate of
breakage has approximately a $5 million
effect on the liability.
3. The number of miles used per award:
We estimate how many miles will be
used per award. For example, our members
may redeem credit for award travel to various
locations or choose between a highly
restricted award and an unrestricted award.
Our estimates are based on the current
requirements in our Mileage Plan program
and historical award redemption patterns.
4. The number of awards redeemed for travel
on our airlines versus other airlines:
The cost for us to carry an award
passenger is typically lower than the cost we
will pay to our travel partners. We estimate
the number of awards that will be redeemed
on our airlines versus on our travel partners,
and accrue the estimated costs based on
historical redemption patterns. If the
number of awards redeemed on our travel
partner 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 one of our airlines,
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.
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ŠForm 10-K