ACCOUNTING FOR FREQUENT FLIERS 1
ACCOUNTING FOR FREQUENT FLIERS
INTRODUCTION: Accounting for frequent fliers had become a controversial topic since American Airlines in 1981 introduced them as a loyalty program. Loyalty programs provide members with benefits such as discounts and saving rewards, which make these programs popular among consumers (Liebermann, 1999). In this specific case, we define the Frequent Flier Program (FFP) as “the number of mileage credits and associated liabilities outstanding”. This program as we might see later on had unleashed protests in the airline industry, since organizations like IFRS and GAAP required them to account for the its liabilities incurred, since FFPs represent a present obligation for an airline to provide customers with air travel at a later date.
PART 1. THE COST OF UNITED’S FREQUENT FLIER PROGRAM
a) What are the various methods United might use to measure the costs of its frequent flier program? What are the potential differences in dollars of the cost measured by each method? In order to measure costs for FFP there are two major methods described in the bibliography (Franklin 2012). One of them is known as the Incremental Cost Method (ICM) and the other as the Deferred Revenue Method (DRM). Both methods are currently used by large Airline Companies.
THE INCREMENTAL COST METHOD – (ICM) The Incremental Cost Method is also called the Marginal Method or the Differential method. This approach is proposed because it represents the use of the excess of capacity in airplanes in order to respond to loyal customers free mileage redemptions. In other words, since airplanes count on several seats per trip, some of them are not occupied by travellers, so these available seats can be offered as for loyal customers willing to redeem their mileage accumulated. In this sense the redemption of FFP turns to be an incidental activity. For this reason and since the number of passengers are to be estimated, this method also implies the estimation and record of a
INTRODUCTION: Accounting for frequent fliers had become a controversial topic since American Airlines in 1981 introduced them as a loyalty program. Loyalty programs provide members with benefits such as discounts and saving rewards, which make these programs popular among consumers (Liebermann, 1999). In this specific case, we define the Frequent Flier Program (FFP) as “the number of mileage credits and associated liabilities outstanding”. This program as we might see later on had unleashed protests in the airline industry, since organizations like IFRS and GAAP required them to account for the its liabilities incurred, since FFPs represent a present obligation for an airline to provide customers with air travel at a later date.
PART 1. THE COST OF UNITED’S FREQUENT FLIER PROGRAM
a) What are the various methods United might use to measure the costs of its frequent flier program? What are the potential differences in dollars of the cost measured by each method? In order to measure costs for FFP there are two major methods described in the bibliography (Franklin 2012). One of them is known as the Incremental Cost Method (ICM) and the other as the Deferred Revenue Method (DRM). Both methods are currently used by large Airline Companies.
THE INCREMENTAL COST METHOD – (ICM) The Incremental Cost Method is also called the Marginal Method or the Differential method. This approach is proposed because it represents the use of the excess of capacity in airplanes in order to respond to loyal customers free mileage redemptions. In other words, since airplanes count on several seats per trip, some of them are not occupied by travellers, so these available seats can be offered as for loyal customers willing to redeem their mileage accumulated. In this sense the redemption of FFP turns to be an incidental activity. For this reason and since the number of passengers are to be estimated, this method also implies the estimation and record of a