Delta Airlines 2007 Annual Report Download - page 80

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Table of Contents
Index to Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SkyMiles Program. We have a frequent flyer program offering incentives to increase travel on Delta. This program allows participants to earn mileage
credits by flying on Delta, Delta Connection Carriers and participating airlines, as well as through participating companies such as credit card companies,
hotels and car rental agencies. We also sell mileage credits to other airlines and to non-airline businesses. Mileage credits can be redeemed for free or
upgraded air travel on Delta and participating airlines, for membership in our Crown Room Club and for other program awards.
As a result of the adoption of fresh start reporting upon emergence from bankruptcy, we revalued our SkyMiles frequent flyer award liability to
estimated fair value. The fair value of our SkyMiles frequent flyer award liability was determined based on the estimated price that third parties would require
us to pay for them to assume the obligation for miles expected to be redeemed under the SkyMiles Program. This estimated price was determined based on the
weighted average equivalent ticket value of a SkyMiles award redeemed for travel on Delta or a participating airline. The weighted average equivalent ticket
value contemplates differing classes of service, domestic and international itineraries and the carrier providing the award travel. At April 30, 2007, we
recorded deferred revenue equal to $0.0083 for each mile we estimate will ultimately be redeemed under the SkyMiles Program.
Upon emergence from bankruptcy, we changed our accounting policy to a deferred revenue model for all frequent flyer miles. We now account for all
miles earned and sold as separate deliverables in a multiple element revenue arrangement as prescribed by EITF 00-21, "Revenue Arrangements with Multiple
Deliverables."
We use the residual method for revenue recognition of mileage credits. The fair value of the mileage credit component is determined based on the low
end of the range of the prices at which we sell mileage credits to other airlines, which price is currently $0.0054 per mile and will be re-evaluated annually.
Under the residual method, the portion of the revenue from the sale of mileage credits that approximates fair value is deferred and recognized as passenger
revenue when miles are redeemed and services are provided based on the weighted average price of all miles that have been deferred. The portion of the
revenue received in excess of the fair value, the marketing premium, is recognized in income currently when the related services are provided and classified as
other, net revenue.
For mileage credits which we estimate are not likely to be redeemed ("Breakage"), we recognize the associated value proportionally during the period
in which the remaining mileage credits are expected to be redeemed. The estimate of Breakage is based on historical redemption patterns. A change in
assumptions as to the period over which mileage credits are expected to be redeemed, the actual redemption activity for mileage credits or our estimate of the
fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years.
Prior to the adoption of fresh start reporting, we accounted for frequent flyer miles earned on Delta flights on an incremental cost basis as an accrued
liability and as operating expense, while miles sold to airline and non-airline businesses were accounted for on a deferred revenue basis. For SkyMiles
accounts with sufficient mileage credits to qualify for a free travel award, we recorded a liability for the estimated incremental cost of flight awards that were
earned and expected to be redeemed for travel on Delta or other airlines. Our incremental costs included (1) our system average cost per passenger for fuel,
food and other direct passenger costs for awards to be redeemed on Delta and (2) contractual costs for awards to be redeemed on other airlines. We
periodically recorded adjustments to this liability in other operating expense on our Consolidated Statements of Operations and other accrued liabilities on our
Consolidated Balance Sheets based on awards earned, awards redeemed, changes in our estimated incremental costs and changes to the SkyMiles Program.
Regional Affiliates Revenue. As of December 31, 2007, we had contract carrier agreements with 10 regional air carriers ("Contract Carriers"), including
our wholly owned subsidiary, Comair. These agreements are structured as either (1) capacity purchase agreements whereby we purchase all or a portion of the
Contract
F-20