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.
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