United Airlines 2012 Annual Report Download - page 89

Table of Contents
The Company adopted Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging
Issues Task Force (“ASU 2009-13”) on January 1, 2011. In accordance with ASU 2009-13, the Company determines the estimated selling price of
the air transportation and miles as if each element is sold on a separate basis. The total consideration from each ticket sale is then allocated to each
of these elements individually on a pro rata basis. The Company revised the estimated selling price of miles as a prospective change in estimate,
effective January 1, 2012, and it is based on the price we sell miles to Star Alliance partners in our reciprocal frequent flyer agreements as the best
estimate of selling price for these miles. Any changes to the composition of Star Alliance airline partners may result in the existing estimated selling
price of air transportation miles no longer being representative of the best estimate of selling price and could result in a change to the amount and
method we use to determine the estimated selling price. On February 14, 2013, US Airways announced an agreement to merge with AMR
Corporation and its intent to exit Star Alliance as a result of such merger. We are currently unable to estimate the timing or amount of any changes to
estimated selling price as a result of this merger.
Prior to 2011, the Company accounted for the sale of air transportation by deferring the fair value of miles and recognizing the residual amount of
ticket proceeds as passenger revenue at the time the air transportation was provided. The fair value of miles was based on an equivalent ticket value
that was a weighted average ticket value of each outstanding mile, based upon projected redemption patterns for available award choices when such
miles were consumed.
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United also has a significant contract to sell frequent flyer miles to its co-branded credit card partner, Chase Bank USA, N.A. (“Chase”). On
June 9, 2011, this contract was modified and the Company entered into The Consolidated Amended and Restated Co-Branded Card Marketing
Services Agreement dated June 9, 2011 (the “Co-Brand Agreement”) with Chase.
The Company has 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 is based on the contractual rate at which we sell miles to our Star Alliance partners participating in reciprocal
frequent flyer programs as the best estimate of selling price for these miles, which is generally consistent with the methodology described in 
, above. Management prospectively applied this change in estimate effective January 1, 2012. The financial
impact of this change in estimate 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. The revised estimates to breakage increased the estimate of miles in the population that are
expected to ultimately expire.
The transition provisions of ASU 2009-13 required the Company’s existing deferred revenue balance be adjusted retroactively to reflect the value of
any undelivered element remaining at the date of contract modification as if we had been applying ASU 2009-13 since the initiation of the Co-Brand
Agreement.
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