US Airways 2011 Annual Report Download - page 74

Table of Contents
Frequent Traveler Program
The Dividend Miles frequent traveler program awards mileage credits to passengers who fly on US Airways and Star Alliance carriers and certain other
partner airlines that participate in the program. Mileage credits can be redeemed for travel on US Airways or other participating partner airlines, in which case
we pay a fee. We use the incremental cost method to account for the portion of the frequent traveler program liability related to mileage credits earned by
Dividend Miles members through purchased flights. We have an obligation to provide future travel when these mileage credits are redeemed and therefore
have recognized an expense and recorded a liability for mileage credits outstanding.
The liability for outstanding mileage credits earned by Dividend Miles members through purchased flights includes all mileage credits that are expected
to be redeemed, including mileage credits earned by members whose mileage account balances have not yet reached the minimum mileage credit level
required to redeem an award. Additionally, outstanding mileage credits are subject to expiration if unused. In calculating the liability, we estimate how many
mileage credits will never be redeemed for travel and exclude those mileage credits from the estimate of the liability. Estimates are also made for the number
of miles that will be used per award redemption and the number of travel awards that will be redeemed on partner airlines. These estimates are based on
historical program experience as well as consideration of enacted program changes, as applicable. Changes in the liability resulting from members earning
additional mileage credits or changes in estimates are recorded in the statement of operations.
The liability for outstanding mileage credits is valued based on the estimated incremental cost of carrying one additional passenger. Incremental cost
includes unit costs incurred for fuel, credit card fees, insurance, denied boarding compensation, food and beverages as well as fees incurred when travel
awards are redeemed on partner airlines. In addition, we also include in the determination of incremental cost the amount of certain fees related to
redemptions expected to be collected from Dividend Miles members. These redemption fees reduce incremental cost. No profit or overhead margin is
included in the accrual of incremental cost.
As of December 31, 2011 and 2010, the incremental cost liability for outstanding mileage credits expected to be redeemed for future travel awards
accrued on the consolidated balance sheets within other accrued expenses was $164 million, representing 133.5 billion mileage credits, and $149 million,
representing 132.4 billion mileage credits, respectively.
A change to certain estimates used in the calculation of incremental cost could have a material impact on the liability. At December 31, 2011, we have
assumed 9% of future travel award redemptions will be on partner airlines. A 1% increase or decrease in the percentage of travel awards redeemed on partner
airlines would have an $11 million impact on the liability as of December 31, 2011. A 10% increase or decrease in the assumed price per gallon of fuel would
have an $8 million impact on the liability as of December 31, 2011.
We also sell frequent flyer program mileage credits to participating airline partners and non-airline business partners. Sales of mileage credits to
business partners is comprised of two components, transportation and marketing. We use the residual method of accounting to determine the values of each
component. The transportation component represents the fair value of future travel awards and is determined based on the equivalent value of purchased
tickets that have similar restrictions as frequent traveler awards. The determination of the transportation component requires estimates and assumptions that
require management judgment. Significant estimates and assumptions include:
• the number of awards expected to be redeemed on US Airways;
• the number of awards expected to be redeemed on partner airlines;
• the class of service for which the award is expected to be redeemed; and
• the geographic region of travel for which the award is expected to be redeemed.
These estimates and assumptions are based on historical program experience. The transportation component is deferred and amortized into passenger
revenue on a straight-line basis over the period in which the mileage credits are expected to be redeemed for travel, which is currently estimated to be
36 months.
Under the residual method, the total mileage sale proceeds less the transportation component is the marketing component. The marketing component
represents services provided by us to our business partners and relates primarily to the use of our logo and trademarks along with access to our list of
Dividend Miles members. The marketing services are provided periodically, but no less than monthly. Accordingly, the marketing component is considered
earned and recognized in other revenues in the period of the mileage sale.
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