Here’s How Much Partner Redemptions Cost US Airways Dividend Miles

Yesterday I shared the internal numbers from American AAdvantage — the number of members, how many miles they’re awarding, and how many unredeemed and unexpired miles are left. Most importantly, we can see how those have changed year-over-year for a long period to understand how the program is being managed.

US Airways doesn’t provide nearly as much detail as American does about their frequent flyer program’s economics.

That said, looking back at old SEC filings, I found that their 2010 10-K filing had much that was fascinating.

  • They assumed 11% of awards would be redeemed on partner airlines. (That contrasts with 16% for Alaska Airlines)
  • Each 1% of redemptions on partners was projected to cost US Airways $8 million.
  • US Airways believed the average mile earned was redeemed in 28 months.
  • There’s more recent data, and it’s a bit better, but in 2009 they redeemed only 800,000 tickets for travel on US Airways or 4% of their revenue passenger miles flown.

More recently, US Airways changed accounting methods for valuing outstanding mileage (presumably to conform to American’s accounting methodology as part of merging the two airlines) between 2012 and 2013, and now values expected redemptions at ‘fair value’ instead of ‘incremental cost’. As a result its accrued liability jumped from $177 million to $932 million.

I found the accounting methodology for how they treat income from the sale of miles to their co-brand credit card partner interesting. They split the price up into different buckets, thinking of part of the revenue being attributable to licensing their brand and providing lounge passes and free checked bags rather than just selling miles for future travel. That lets them recognize more revenue upfront.

Therefore, we applied the relative selling price method to determine the values of each deliverable. Under the relative selling price method, we identified five revenue elements for the co-branded credit card agreement with Barclays: the transportation component; use of our brand including access to frequent flyer member lists; advertising; lounge access; and baggage services (together excluding “the transportation component,” the “marketing component”).

The transportation component represents the fair value of future travel awards and is determined using historical transaction information, including information related to customer redemption patterns. The transportation component is deferred based on its relative selling price and amortized into passenger revenue on a straight-line basis over the period in which the mileage credits are expected to be redeemed for travel.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. I did a similar analysis last month. After the merger, the deferred revenues related to US RDM increased to 932M (changed from incremental cost method to fair value). Based on US 10-K filings from 2009-2012, the FFP Liabilities/RDM ratios are $130M/129.1B, 149M/132.4B,$164M/133.5B,$177M/133.6B. Assuming the BIS RDM for 2013 is 135.1B, then the fair value of RDM is $0.0069/mile ($932M/135.1B).

  2. @TRW
    Then the TIB at 0.7 cpm was probably the break even point for US
    🙂
    So they probably lost no money at all to us in 2009
    .
    I think if 1% redemption was $8M, then 100% was $800M
    That is total value of redemptions, so they must be selling at least as much in value of miles; 932M seems reasonably close
    If they sold miles at ~ 1c each to the larger customers like Banks
    then they were getting rid of 80 Bn miles each year by sales
    .
    In comparison, AA gets 2$ Bn a yr from AA miles, (and sells at least 200 Bn) so I guess the US program is about 40% of the size.

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