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Author: TourDeFarce Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2818  
Subject: Re: Accounting Question Date: 6/23/2006 11:32 PM
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Matthew,

Thank you for the analysis. I just got done combing through a couple of annual reports hoping that I'd find information there and, sure enough, found success.

Both UAL and AA appear to use the marginal/incremental cost for valuing the liability associated with frequent flyer miles. Here's what UAL 2005 annual report (http://tinyurl.com/f986b) actually says:

When a travel award level is attained by a Mileage Plus member, we record a liability for the estimated incremental cost to United of providing the related future travel, based on expected redemption. For award redemptions expected to occur on United, United's incremental costs are estimated to include variable items such as fuel, meals, insurance and ticketing costs, for what would otherwise be a vacant seat. The estimate of incremental costs does not include any indirect costs or contribution to overhead or profit. A change to these cost estimates, such as a significant change in jet fuel prices, could have a significant impact on our liability in the year of change as well as in future years, since underlying variable cost factors can differ significantly from period to period. A hypothetical 1% change in the cost of jet fuel has approximately a $783 thousand effect on the liability.

In 1998 I was in a Toronto hotel room and, while getting ready to visit a customer, listened to a high level UAL marketing manager speaking on a TV program. He said that UAL aimed to pretty much break even on their flights and that the real money was in selling mailing lists.

TDeF
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