Delta Airlines 2008 Annual Report Download - page 82

Table of Contents
Index to Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Taxes and Fees. We are required to charge certain taxes and fees on our passenger tickets, including U.S. federal transportation taxes, federal security
charges, airport passenger facility charges and foreign arrival and departure taxes. These taxes and fees are legal assessments on the customer for which we
have an obligation to act as a collection agent. Because we are not entitled to retain these taxes and fees, we do not include such amounts in passenger
revenue. We record a liability when the amounts are collected and reduce the liability when payments are made to the applicable government agency or
operating carrier.
Frequent Flyer Programs. We have a frequent flyer program (the "SkyMiles Program") offering incentives to increase travel on Delta. This program
allows participants to earn mileage credits by flying on Delta, regional air carriers ("Contract 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.
In the Merger, we assumed Northwest's frequent flyer program (the "WorldPerks Program"). We are consolidating the SkyMiles and WorldPerks
Programs, which will ultimately provide for the combining of miles from each program at a one-to-one ratio. The WorldPerks Program is accounted for under
the same methodology as the SkyMiles Program.
Upon emergence from bankruptcy, we changed our accounting policy to a deferred revenue model for all frequent flyer miles. As a result, we account
for all miles earned and sold as separate deliverables in a multiple element revenue arrangement as prescribed by Emerging Issues Task Force Issue No.
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 prices at
which we sell mileage credits to other airlines, currently $0.0054 per mile and is re-evaluated at least 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 when the related marketing 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.
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