Alaska Airlines and Horizon Air 2014 Annual Report Download - page 142

At December 31, 2014, we had approximately 146 billion miles outstanding, resulting in an aggregate
liability and deferred revenue balance of $730 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 these estimates; therefore, different assumptions
could 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 related to services sold through non-airline partners:
We defer sales proceeds under two accounting methodologies: the relative selling price method, which
represents approximately 94% of sold miles, and the residual accounting method, which represents the
remaining 6%. For contracts that were modified after the effective date of Accounting Standards Update
2009-13, “Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task
Force” (ASU 2009-13), we determined our best estimate of selling price by considering multiple inputs
and methods including, but not limited to, the estimated selling price of comparable travel, discounted
cash flows, brand value, published selling prices, number of miles awarded and the number of miles
redeemed. We estimated the selling prices and volumes over the terms of the agreements in order to
determine the allocation of proceeds to each of the multiple deliverables. This relative allocation is
evaluated annually and updated according to changes in the assumptions of the volume of related
deliverables. A 1% shift between the allocation of cash proceeds to travel deliverables from marketing
deliverables would defer the timing of revenue recognition by approximately $4 million.
For remaining contracts that continue to be accounted for under the residual method, as our estimates
of selling price change, the amount we defer changes, resulting in the recognition of a higher or lower
portion of the cash proceeds to commission revenue in any given period. A 10% increase in the
estimated selling price of travel (and related deferral rate) would decrease commission revenue by
approximately $2 million in the period cash is received. 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 estimate of
the number of miles that will not be redeemed (breakage) considers historical activity in our members’
accounts and other factors. Based on statistical analysis of historical data, our current breakage rate is
17.4%. A hypothetical 1% change in our estimate of breakage has approximately a $6 million effect on
the liability.
3. The number of miles used per award:
We estimate how many miles will be used per award. For example, our members may redeem credit for
award 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 award redemption patterns.
4. The number of awards redeemed for travel on our airlines versus other airlines:
The cost for us to carry an award passenger is typically lower than the cost we will pay to our travel
partners. We estimate the number of awards that will be redeemed on our airlines versus on our travel
partners, and accrue the estimated costs based on historical redemption patterns. If the number of
awards redeemed on our travel partner is higher or lower than estimated, we may need to adjust our
liability and corresponding expense.
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