Delta Airlines 2012 Annual Report Download - page 47

Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. We defer revenue
related to the mileage credits sold to American Express based on prices at which we sell mileage credits to other airlines, and re-evaluate our deferral
rate at least annually. We allocate an amount to the marketing component in an amount equal to the excess of the amount received over the mileage
component. Under this approach (the "residual method”),
the deferred revenue from the mileage component is recognized as passenger revenue when
miles are redeemed and services are provided, while the portion of the revenue related to the marketing component is recognized as those marketing
services are provided. We will continue to use the residual method until our contract with American Express is materially modified. If we materially
modify this agreement, we will then be required to allocate the consideration received to the marketing and the mileage components based upon their
relative selling prices (“relative selling price method”). A material modification of this contract and the resultant change from the residual method to
the relative selling price method could impact our deferral rate or cause an adjustment to our deferred revenue balance, which could materially
impact our future financial results.
Breakage. 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. Management uses statistical models to estimate breakage
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, 2012, the aggregate deferred revenue balance associated with
the SkyMiles Program was $4.4 billion. A hypothetical 1% change in the number of outstanding miles estimated to be redeemed would result in a
$30 million impact on our deferred revenue liability at December 31, 2012.
Goodwill and Indefinite-Lived Intangible Assets
We assess our goodwill and indefinite-lived intangible assets under a qualitative or quantitative approach. Under a qualitative approach, we
consider many market factors, including those listed under Key Assumptions below. We analyze these market factors to determine if events and
circumstances have affected the fair value of goodwill and indefinite-lived intangible assets. If we determine that it is more likely than not that the
asset value may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment. Under a quantitative
approach, we calculate the fair value of the asset using the Key Assumptions listed below. If the asset's carrying value exceeds its fair value
calculated using the quantitative approach, we will record an impairment charge for the difference in fair value and carrying value.
When we evaluate goodwill for impairment using a quantitative approach, we estimate the fair value of the reporting unit by considering market
capitalization and other factors. When we perform a quantitative impairment assessment of our indefinite-lived intangible assets, fair value is
estimated based on (1) recent market transactions, where available, (2) a combination of limited market transactions and the lease savings method for
certain airport slots (which reflects potential lease savings from owning the slots rather than leasing them from another airline at market rates), (3) the
royalty method for the Delta tradename (which assumes hypothetical royalties generated from using our tradename) or (4) projected discounted
future cash flows (an income approach).
Key Assumptions. The key assumptions in our impairment tests include (1) our projected revenues, expenses and cash flows, (2) an estimated
weighted average cost of capital, (3) assumed discount rates depending on the asset and (4) a tax rate. These assumptions are consistent with those
hypothetical market participants would use. Since we are required to make estimates and assumptions when evaluating goodwill and indefinite-lived
intangible assets for impairment, the actual amounts may differ materially from these estimates. In addition, we consider the amount the intangible
assets' fair value exceeded their carrying value in the most recent fair value measurement using a quantitative approach.
Changes in certain events and circumstances could result in impairment. Factors which could cause impairment include, but are not limited to, (1)
negative trends in our market capitalization, (2) an increase in fuel prices, (3) declining passenger mile yields, (4) lower passenger demand as a result
of a weakened U.S. and global economy, (5) interruption to our operations due to an employee strike, terrorist attack, or other reasons and (6)
changes to the regulatory environment.
We assessed each of the above assumptions in our most recent impairment analyses. The combination of our most recently completed annual
results and our projected revenues, expenses and cash flows more than offset the impact of increasing fuel prices and other airline input costs. The
stabilizing operating environment for U.S. airlines has resulted in annual yields increasing along with load factors, leading to improved financial
results.
Goodwill. Our goodwill balance was $9.8 billion at December 31, 2012 . We determined that there was no indication that Goodwill was impaired
based upon our qualitative assessment of all relevant factors, including applicable factors noted in " Key Assumptions " above.
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