Alaska Airlines and Horizon Air 2010 Annual Report Download - page 160

MILEAGE PLAN
Our Mileage Plan loyalty program awards miles to
member passengers who fly on our airlines and
many of our 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 our airlines or any
of our travel partners. As long as the Mileage
Plan is in existence, we have an obligation to
provide this future travel.
For miles earned by passengers who fly on us or
our travel partners, we recognize a liability and a
corresponding selling expense for the obligation
to provide travel in the future. 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 in the
period that miles are sold and represents
services provided by the Company to its
business partners and relates primarily to the
use of the Company’s logo and trademarks along
with access to the Company’s Mileage Plan
members. Commission revenue recognized for
the years ended December 31, 2010, 2009 and
2008 was $123.7 million, $96.8 million and
$57.0 million, respectively. The deferred revenue
is recognized as passenger revenue when
awards are issued and flown on one of our
airlines, and as other-net revenue for awards
issued and flown on partner airlines.
At December 31, 2010, we had approximately
117 billion miles outstanding, resulting in an
aggregate liability and deferred revenue balance
of $673.9 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 our estimates of
fair value change, the amount we defer
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 period. A 1% increase
in the estimated fair value of travel awards
(and related deferral rate) would decrease
commission revenue by approximately $2
million. This amount would instead be
recognized in a future period when award
travel takes place.
2. The number of miles that will not be
redeemed for travel (breakage):
The liability for outstanding Mileage
Plan mileage credits 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 to redeem an award. Our
estimates of the number of miles that will
not be redeemed (breakage) consider
historical activity in our members’ accounts
and other factors. A hypothetical 1.0%
change in our estimate of breakage
(currently 12% in the aggregate) has
approximately a $7.0 million effect on the
liability.
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.
Our estimates are based on the current
requirements in our Mileage Plan program
and historical travel redemption patterns.
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