United Airlines 2009 Annual Report Download - page 91

Table of Contents
The Company measures its deferred revenue obligation using all awarded and outstanding miles, regardless of whether or not the customer has
accumulated enough miles to redeem an award. Eventually these customers will accumulate enough miles to redeem awards, or their accounts will
deactivate after a period of inactivity, in which case the Company will recognize the related revenue through its revenue recognition policy for expired
miles.
The Company recognizes revenue related to expected expired miles over the estimated redemption period. Management’s estimate of the expected
expiration of miles requires significant management judgment. In early 2007, the Company announced that it was reducing the expiration period for
inactive accounts from 36 months to 18 months effective December 31, 2007. The change in the expiration period increased revenues by $246 million in
2007. Current and future changes to expiration assumptions or to the expiration policy, or to program rules and program redemption opportunities, may
result in material changes to the deferred revenue balance, as well as recognized revenues from the program. In 2008, the Company updated certain of its
assumptions related to the recognition of revenue for expiration of miles. Based on additional analysis of mileage redemption and expiration patterns, the
Company revised the estimated number of miles that are expected to expire from 15% to 24% of earned miles, including miles that will expire or go
unredeemed for reasons other than account deactivation. In 2008, the Company also extended the total time period over which revenue from the expiration
of miles is recognized based upon the estimated period of miles redemption. This change did not materially impact the Company’s Mileage Plus revenue
recognition in 2009 or 2008.
See Note 16, “Advanced Purchase of Miles,” for additional information related to the Mileage Plus program.
(h) Deferred Gains (Losses)—Gains and losses on aircraft sale and leaseback transactions are deferred and amortized in future periods.
(i) Regional Affiliates—United has agreements under which independent regional carriers, flying under the United Express name, connect passengers to
other Regional Affiliates and/or United flights (the latter of which we refer to as “Mainline” operations, to distinguish them from Regional Affiliates
operations). The vast majority of Regional Affiliates flights are operated under capacity purchase agreements, while a relatively smaller number are
operated under prorate agreements.
Regional Affiliates operating revenues and expenses are classified as “Passenger—Regional Affiliates” and “Regional Affiliates,” respectively, in the
Financial Statements. Regional Affiliates expense includes both allocated and direct costs. Direct costs represent expenses that are specifically and
exclusively related to Regional Affiliates flying activities, such as capacity agreement payments, commissions, booking fees, fuel expenses and dedicated
staffing. The capacity agreement payments are based on specific rates for various operating expenses of the Regional Affiliates carriers, such as crew
expenses, maintenance and aircraft ownership, some of which are multiplied by specific operating statistics (e.g., block hours, departures) while others are
fixed per month. Allocated costs represent Regional Affiliates’ portion of shared expenses and include charges for items such as airport operating costs,
reservation-related costs, credit card discount fees and facility rents. For each of these expense categories, the Company estimates Regional Affiliates’
portion of total expense and allocates the applicable portion of expense to the regional carrier.
United has the right to exclusively operate and direct the operations of these aircraft and accordingly the minimum future lease payments for these aircraft
are included in the Company’s lease obligations. See Note 9, “Segment Information” and Note 14, “Lease Obligations,” for additional information related
to Regional Affiliates.
The Company recognizes revenue on a net basis for flights on Regional Affiliates covered by prorate agreements. The Company’s revenue from prorate
agreements is generally based on its proportional share of miles flown.
As of December 31, 2009, United has call options on 176 regional jet aircraft currently being operated by certain Regional Affiliates carriers. At
December 31, 2009, none of the call options were exercisable because none of the required conditions to make an option exercisable by the Company were
met.
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