United Airlines 2012 Annual Report Download - page 58

Table of Contents
Co-branded Credit Card Partner Mileage Sales. United also has a significant contract to sell frequent flyer miles to its co-branded credit card partner,
Chase. In June 2011, this contract was modified and the Company entered into the Co-Brand Agreement with Chase. The Company identified five revenue
elements in the Co-Brand Agreement: the air transportation element represented by the value of the mile (generally resulting from its redemption for future air
transportation); use of the United brand and access to frequent flyer member lists; advertising; baggage services; and airport lounge usage (together, excluding
“the air transportation element”, the “marketing-related deliverables”).
The fair value of the elements is determined using management’s estimated selling price of each element. The objective of using the estimated selling price based
methodology is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. Accordingly, we determine
our best estimate of selling price by considering multiple inputs and methods including, but not limited to, discounted cash flows, brand value, volume
discounts, published selling prices, number of miles awarded and number of miles redeemed. The Company estimated the selling prices and volumes over the
term of the Co-Brand Agreement in order to determine the allocation of proceeds to each of the multiple elements to be delivered.
The estimated selling price of miles calculated is generally consistent with the methodology as described above in  .
United calculates its estimated selling price for miles based on the rate at which we sell miles to our Star Alliance partners participating in reciprocal frequent
flyer programs as the estimated selling price for miles. Management prospectively applied this change in estimate effective January 1, 2012. The financial
impact of this change in estimate in 2012 was substantially offset by the Company’s change in estimate of its breakage for a portion of its miles, which were
previously not subject to an expiration policy. UAL accounts for miles sold and awarded that will never be redeemed by program members, which we referred
to as “breakage,” using the redemption method. UAL reviews its breakage estimates annually based upon the latest available information regarding redemption
and expiration patterns. The revised estimates to breakage in 2012 increased the estimate of miles in the population that are expected to ultimately expire.
The Company’s estimate of the expected expiration of miles requires significant management judgment. 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 programs.
The Company records passenger revenue related to the air transportation element when the transportation is delivered. The other elements are generally
recognized as other operating revenue when earned.
The annual impact of adopting ASU 2009-13 on operating revenue will decrease over time. Our ability to project the annual decline for each year is
significantly impacted by credit card sales volumes, frequent flyer redemption patterns, and other factors.
The following table summarizes information related to UAL’s and United’s frequent flyer deferred revenue liability:
Frequent flyer deferred revenue at December 31, 2012 (in millions) $5,120
% of miles earned expected to expire or go unredeemed 24%
Impact of 1% change in outstanding miles or weighted average ticket value on deferred revenue (in millions) $79
Goodwill and Indefinite-lived Intangible Assets. Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment
annually, as of October 1, or more frequently if events or circumstances indicate that the asset may be impaired. Long-lived assets are amortized over their
estimated useful lives and are reviewed for impairment whenever an indicator of impairment exists.
Goodwill represents the excess purchase price over the fair value of Continental’s assets acquired and liabilities assumed in the Merger. All goodwill and other
purchase accounting adjustments have been pushed down to Continental’s financial statements.
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