Delta Airlines 2009 Annual Report Download - page 48

Table of Contents
Legal Contingencies. We are involved in various legal proceedings relating to employment practices, environmental issues, bankruptcy matters, antitrust
matters and other matters concerning our business. We cannot reasonably estimate the potential loss for certain legal proceedings because, for example, the
litigation is in its early stages or the plaintiff does not specify the damages being sought.
Other Contingent Obligations under Contracts. In addition to the contractual obligations discussed above, we have certain contracts for goods and services
that require us to pay a penalty, acquire inventory specific to us or purchase contract specific equipment, as defined by each respective contract, if we
terminate the contract without cause prior to its expiration date. Because these obligations are contingent on our termination of the contract without cause
prior to its expiration date, no obligation would exist unless such a termination occurs.
For additional information about other contingencies not discussed above, as well as information related to general indemnifications, see Note 8 of the
Notes to the Consolidated Financial Statements.
Application of Critical Accounting Policies
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. We periodically
evaluate these estimates and assumptions, which are based on historical experience, changes in the business environment and other factors that management
believes to be reasonable under the circumstances. Actual results may differ materially from these estimates.
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, 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 Sky Club and for other program awards.
In the Merger, we assumed Northwest's frequent flyer program (the "WorldPerks Program"). In October 2009, we completed the consolidation of the
SkyMiles and WorldPerks Programs, which combined miles from each program at a one-to-one ratio. The WorldPerks Program was accounted for under the
same methodology as the SkyMiles Program.
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 and the mileage component of passenger ticket sales 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 of mileage credits sold 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 the estimated 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. At
December 31, 2009, the aggregate deferred revenue balance associated with the SkyMiles Program was $4.8 billion. A hypothetical 1% change in our
outstanding number of miles estimated to be redeemed would result in a $33 million impact on our deferred revenue liability at December 31, 2009.
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