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I'm in an MBA program, and last semester we did an accounting project that analyzed three annual reports from a specific industry. My team had the airline industry, and this is how I understood that they handle the revenue for frequent flier miles.

At the time the miles are issued, the purchase of the ticket that triggered the awarding of the miles is not recorded at full revenue. What is recorded is the revenue minus the estimated value of the frequent flier miles awarded. That frequent flier amount is recognized as a liability (it is unearned income) until such time as the recipient of the FF reward redeems those miles. At that time, the revenue is recognized and the liability is taken off the books.

For example (and this is simplified - there is an incremental journal entry that I'm leaving out because it is irrelevant to this discussion): I buy a $500 ticket, and that ticket rewards me with 50 FF miles that are worth 12.6 * 50 = $6.30. At that time, the journal entry looks like:

Cash $500
Ticket Revenue $493.70
Unearned Revenue $6.30

Eight months later, I redeem those miles. At the time I take the flight, the journal entry looks like:

Unearned Revenue $6.30
Ticket Revenue $6.30

Expenses are figured however they are figured - and they are figured at actual rates, not "what would have been" rates. So your empty seat is expensed at actual cost when it actually flies empty.

They treat the FF miles as purchases where the delivery of the service purchased is delayed. They don't technically give the miles away - they reduce the price of your original ticket by the price of those miles.

Southwest, Airtran, and JetBlue all account for their FF miles this way.

Hope that helped and answered your question.


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