Spirit Airlines 2015 Annual Report Download - page 70

Notes to Financial Statements—(Continued)
70
Frequent Flier Program
Flown Miles. The Company records unrecognized revenue for mileage credits earned by passengers under its FREE
SPIRIT program, including mileage credits for members with an insufficient number of mileage credits to earn an award, based
on the estimated incremental cost of providing free travel for credits that are expected to be redeemed. Incremental costs
include fuel, insurance, security, ticketing and facility charges reduced by an estimate of fees required to be paid by the
passenger when redeeming the award.
Affinity Card Program. During the second quarter of 2015, the Company extended its agreement with the administrator of
the FREE SPIRIT affinity credit card program, which was scheduled to expire in April 2016. The renegotiated program was
extended through 2022. As part of the new agreement, the Company received a $10.7 million signing bonus that is being
deferred over the contract term and has been reflected in the table below as consideration received from credit card mileage
programs in 2015. This extension is considered a material change and thus at the inception of this new arrangement, the
Company evaluated all deliverables in the arrangement to determine whether they represent separate units of accounting using
the criteria as set forth in ASU No. 2009-13. Under the Company's affinity card program, funds received for the marketing of a
co-branded Spirit credit card and delivery of award miles are accounted for as a multiple-deliverable arrangement. At the
inception of the arrangement, the Company evaluated all deliverables in the arrangement to determine whether they represent
separate units of accounting. The Company determined the arrangement had three separate units of accounting: (i) travel miles
to be awarded, (ii) licensing of brand and access to member lists and (iii) advertising and marketing efforts. Arrangement
consideration was allocated based on relative selling price. At inception of the arrangement, the Company established the
estimated selling price for all deliverables that qualified for separation. The manner in which the selling price was established
was based on a hierarchy of evidence the Company considered. Total arrangement consideration was then allocated to each
deliverable on the basis of the deliverable’s relative selling price. In considering the hierarchy of evidence, the Company first
determined whether vendor specific objective evidence of selling price or third-party evidence of selling price existed. It was
determined by the Company that neither vendor specific objective evidence of selling price nor third-party evidence existed due
to the uniqueness of the Company’s program. As such, the Company developed its best estimate of the selling price for all
deliverables. For the award miles, the Company considered a number of entity-specific factors when developing the best
estimate of the selling price including the number of miles needed to redeem an award, average fare of comparable segments,
breakage, restrictions and other charges. For licensing of brand and access to member lists, the Company considered both
market-specific factors and entity-specific factors including general profit margins realized in the marketplace/industry, brand
power, market royalty rates and size of customer base. For the advertising element, the Company considered market-specific
factors and entity-specific factors, including the Company’s internal costs (and fluctuations of costs) of providing services,
volume of marketing efforts and overall advertising plan. Consideration allocated based on the relative selling price to both
brand licensing and advertising elements is recognized as revenue when earned and recorded in non-ticket revenue.
Consideration allocated to award miles is deferred and recognized ratably as passenger revenue over the estimated period the
transportation is expected to be provided which is estimated at 14 months. The Company used entity-specific assumptions
coupled with the various judgments necessary to determine the selling price of a deliverable in accordance with the required
selling price hierarchy. Changes in these assumptions could result in changes in the estimated selling prices. Determining the
frequency to reassess selling price for individual deliverables requires significant judgment. As of December 31, 2015, there
have been no changes in either the selling price or the method or assumptions used to determine selling price for any of the
identified units of accounting that would have a significant effect on the allocation of consideration.
The following table illustrates total cash proceeds received from the sale of mileage credits and the portion of such
proceeds recognized in revenue immediately as marketing component:
Consideration received
from credit card mile
programs
Portion of proceeds
recognized immediately
as marketing component
Year Ended (in thousands)
December 31, 2015 . . . . . . . . . . . . . . . . . $ 58,005 $ 35,938
December 31, 2014 . . . . . . . . . . . . . . . . . 33,819 28,140
December 31, 2013 . . . . . . . . . . . . . . . . . 28,496 23,124
Total unrecognized revenue from future FREE SPIRIT award redemptions and the sale of mileage credits was $14.9
million and $2.8 million at December 31, 2015 and 2014, respectively. These balances are recorded as a component of air
traffic liability in the accompanying balance sheets.
Non-ticket Revenue Recognition