Accounting and Frequent Flyer Programs

Alaska Air made a $5.2 million accounting error in the third quarter related to its frequent flyer program.

They sold a bunch of bonus miles to their partners and booked the revenue. That turns out to have been the problem — because their accounting practices require them to book revenue when the miles are redeemed rather than sold.

That simple item may offer a window into the behavior of airlines offering award sales and alternative redemption options. In the case of award sales, customers are encouraged to book award flights they otherwise wouldn’t — allowing the airline to recognize revenue. In the case of alternative redemption options (such as magazines for miles or even points exchanges), the airline gets to book revenue even though it also has a cash cost. In this latter case the airline may not be fundamentally financially better off, at least from a cashflow perspective, but appears to be better off in their financial statements. In the strange world of FASB, this may be a case of accounting rules driving redemption options.

Hat tip to Chris Elliott.

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, 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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