Delta Airlines 2013 Annual Report Download - page 67

Frequent Flyer Program
The SkyMiles Program offers incentives to travel on Delta. This program allows customers to earn mileage credits by flying on Delta,
regional air carriers with which we have contract carrier agreements and airlines that participate in the SkyMiles Program, as well as through
participating companies such as credit card companies, hotels and car rental agencies. We sell mileage credits to non-airline businesses,
customers and other airlines.
The SkyMiles Program includes two types of transactions that are considered revenue arrangements with multiple deliverables. As discussed
below, these are (1) passenger ticket sales earning mileage credits and (2) the sale of mileage credits to participating companies with which we
have marketing agreements. Mileage credits are a separate unit of accounting as they can be redeemed by customers in future periods for air
travel on Delta and participating airlines, membership in our Sky Club and other program awards.
Passenger Ticket Sales Earning Mileage Credits. Passenger ticket sales earning mileage credits under our SkyMiles Program provide
customers with two deliverables: (1) mileage credits earned and (2) air transportation. We value each deliverable on a standalone basis. Our
estimate of the selling price of a mileage credit is based on an analysis of our sales of mileage credits to other airlines and customers, which is re-
evaluated at least annually. We use established ticket prices to determine the estimated selling price of air transportation. We allocate the total
amount collected from passenger ticket sales between the deliverables based on their relative selling prices.
We defer revenue for the mileage credits related to passenger ticket sales and recognize it as passenger revenue when miles are redeemed and
services are provided. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize these amounts in
passenger revenue when we provide transportation or when the ticket expires unused.
Sale of Mileage Credits. Customers may earn mileage credits through participating companies such as credit card companies, hotels and car
rental agencies with which we have marketing agreements to sell mileage credits. Our contracts to sell mileage credits under these marketing
agreements have multiple deliverables, as defined below.
Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. Our agreements
with American Express provide for joint marketing, grant certain benefits to Delta-American Express co-branded credit card holders
("Cardholders") and American Express Membership Rewards Program participants and allow American Express to market using our customer
database. Cardholders earn mileage credits for making purchases using co-
branded cards, may check their first bag for free, are granted access to
Delta SkyClub lounges and receive other benefits while traveling on Delta. These benefits that we provide in the form of separate products and
services under the SkyMiles agreements are referred to as "deliverables." Additionally, participants in the American Express Membership
Rewards program may exchange their points for mileage credits under the SkyMiles Program. As a result, we sell mileage credits at agreed upon
rates to American Express for provision to their customers under the co-brand credit card program and the Membership Rewards program.
In September 2013, we and American Express modified our SkyMiles agreements. This modification required that we use a different
accounting standard for recording SkyMiles sold. Prior to the modifications, we allocated consideration we received from selling miles to
American Express among two primary deliverables: credit redeemable for future travel and marketing deliverables. We deferred revenue related
to the portion of mileage credits redeemable for future travel based on the rate at which we sell mileage credits to other airlines. We calculated
the value of the marketing component based on the residual method and recognize it as other revenue as related marketing services are provided.
The September 2013 modifications introduced new deliverables and modified existing deliverables. Because these modifications were
material to the SkyMiles agreements, we are required to use a different accounting standard that allocates the consideration received from selling
miles to all deliverables based on their relative standalone sales price. Accordingly, we determined our best estimate of selling prices by
considering discounted cash flows analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and
number of miles redeemed, (2) the rate at which we sell mileage credits to other airlines, (3) published rates on our website for baggage fees,
access to Delta SkyClub lounges and other benefits while traveling on Delta and (4) brand value. The effect of this change in accounting
standard lowered the deferral rate we use to record miles sold under the agreements, which increases revenue we will record in future periods.
The revenue impact of the SkyMiles agreement modifications was insignificant for 2013 and is expected to increase 2014 revenue by
approximately $100 million . Additionally, upon application of this accounting standard, we were required to adjust the recorded value of miles
currently deferred in our Frequent Flyer Liability that originated through the American Express programs. Accordingly, we adjusted the liability
in the September 2013 quarter by less than $10 million .
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