Alaska Airlines and Horizon Air 2009 Annual Report Download - page 147

MILEAGE PLAN
Our Mileage Plan loyalty program awards miles to
member passengers who fly on Alaska or Horizon
and our many travel partners. Additionally, we
sell miles to third parties, such as our bank
partner, for cash. In either case, the outstanding
miles may be redeemed for travel on Alaska,
Horizon or any of our alliance partners. As long
as the Mileage Plan is in existence, we have an
obligation to provide this future travel.
For awards earned by passengers who fly on
Alaska, Horizon or our travel partners, we
recognize a liability and the corresponding selling
expense for this future obligation. For miles sold
to third parties, the majority of the sales
proceeds are recorded as deferred revenue and
recognized when the award transportation is
provided. The commission component of these
sales proceeds (defined as the proceeds we
receive from the sale of mileage credits minus
the amount we defer) is recorded as other-net
revenue when the cash is received. The deferred
revenue is recognized as passenger revenue
when awards are issued and flown on Alaska or
Horizon, and as other-net revenue for awards
issued and flown on partner airlines.
At December 31, 2009, we had approximately
116 billion miles outstanding, resulting in an
aggregate liability and deferred revenue balance
of $691.7 million. Both the liability and the
deferred revenue are determined based on
several assumptions that require significant
management judgment to estimate and
formulate. There are uncertainties inherent in
estimates; therefore, an incorrect assumption
could greatly affect the amount and/or timing of
revenue recognition or Mileage Plan expenses.
The most significant assumptions in accounting
for the Mileage Plan are described below.
1. The rate at which we defer sales proceeds
from sold miles:
We defer an amount that represents our
estimate of the fair value of a free travel
award by looking to the sales prices of
comparable paid travel. As fare levels
change, our deferral rate changes, resulting
in the recognition of a higher or lower
portion of the cash proceeds from the sale
of miles as commission revenue in any
given quarter Because of the change in our
award structure in 2008 whereby more
miles are required to redeem an award, the
estimated fair value of each mile sold is
lower. This results in a lower amount
deferred for future travel and a higher
amount recorded as commission income
currently.
2. The number of miles that will not be
redeemed for travel (breakage):
Members may not reach the mileage
threshold necessary for a free ticket, and
outstanding miles may not always be
redeemed for travel. Therefore, based on
the number of Mileage Plan accounts and
the miles in the accounts, we estimate how
many miles will never be used (“breakage”),
and reduce the liability associated with
those miles. Our estimates of breakage
consider activity in our members’ accounts,
account balances, and other factors. We
believe our breakage assumptions are
reasonable in light of historical experience
and future expectations. A hypothetical 1.0%
change in our estimate of breakage
(currently 12% in the aggregate) has
approximately a $7.2 million effect on the
liability. Actual breakage could differ
significantly from our estimates.
3. The number of miles used per award (i.e.,
free ticket):
We estimate how many miles will be
used per award. For example, our members
may redeem credit for free travel to various
locations or choose between a highly
restricted award and an unrestricted award.
If actual miles used are more or less than
estimated, we may need to adjust the
liability and corresponding expense. Our
estimates are based on the current
requirements in our Mileage Plan program
and historical redemptions on Alaska,
Horizon or other airlines.
4. The number of awards redeemed for travel
on Alaska or Horizon versus other airlines:
The cost for Alaska or Horizon to carry
an award passenger is typically lower than
51
ŠForm 10-K