L02 13-2 Frequent Flier 1

L02 13-2 Frequent Flier 1 - Accounting for an Albatross...

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Accounting for an Albatross. Frequent Flyer Coupons and Airline Accounting Systems Source: Forbes, 13 June 1988 TEXAS AIR CORP.'S financials look bad enough: $5 billion in long-term debt, coupled to 1987 losses of $466 million--all piled atop a mere $252 million in shareholder equity. Worse may lie ahead. That's be- cause accountants have proposed new bookkeeping rules that would require the carrier to add as much as $200 million in liabilities to its balance sheet. What are these new liabilities? Unredeemed frequent- flier coupons, the bright promotional idea dreamed up first by American Airlines in 1981 and subse- quently copied by just about everyone else. The gimmick has acquired a life of its own and now has the look of an enormous albatross. Thanks to givea- way mileage, the industry owes passengers about 25 billion miles of free travel, according to John Hol- land, publisher of Business Flyer newsletter. This amounts to an industry-wide liability of about $500 million, based on current redemption rates of 30% of all miles flown. If all miles earned were
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This note was uploaded on 05/03/2010 for the course ACCT 202 taught by Professor Yang during the Spring '10 term at UPenn.

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