Accrued Frequent Flyer Report

Southwest Airlines is a company that is known for its low ticket prices and profitability despite the highly risky industry in which it operates. This essay examines the cost behavior, cost volume profit (CVP), activity based costing (ABC), budgeting process, costing and decision making policies of the firm. The essay will discuss how the airline integrates these concepts in its daily operations.

By Thomas Ahrens (London School of Economics), and Christopher Chapman (University of Oxford), from The Contemporary Accounting Research Vol. 21 No. 2 (Summer 2004) pp. 271–301.

expanding across the lower 48 and to Hawaii during the 2000’s. Also, harking back to Mac

Kimmel,Paul D,Weygand, J, Donald E. Kieso (2008). Accounting. 3rd ed. New York : George Hoffman. Page 1010.

“The Customer Loyalty report clearly shows, membership in Classic Rewards is down nearly 20%” (UOP (A), 2012, p. 3). The same report also reflects members point redemption for flights down 20% from the previous year. Overall membership in the program fell by 10% between 2002 and 2004 with new membership falling nearly 75% in the same period. According to the monthly financials, operating expenses increased significantly from 2003 to 2004 reducing net income from $71 million in 2003 to $10 million in 2004. The review of these reports prompted the Board of Directors to set challenging goals to save the airline.

Since Continental already locked in their fuel prices for the year I believe that a reduction in the available seat miles per flight would see a large drop in fuel costs. According to the regression results, there is a high correlation between available seat miles and fuel. The regression yielded a cost of about $ .08 for each available seat mile flown. I again used a 10% decrease and the overall costs savings were quite significant. I would expect Continental to incur a fuel expense of $ 499,238,476 in the first quarter and $2,333,641,754 for the year. By comparing these results to the prior estimated fuel costs, there is a cost savings of approximately $ 921,611,677 for 2009. Reducing these available seat miles should not be reasonable difficult considering the potential it has for immense cost savings.

Small business customers and leisure travelers were the ones benefited the most from American’s new fare structure. Previously, small business customers who does not have the power and volume to negotiate with airline companies for discounted deals had to pay higher rates for first-class or coach tickets. American’s new cost structure reduced the full coach fares which allowed small business customers to purchase flight tickets at cheaper prices more conveniently. Leisure travelers, unlike business travelers, have more flexibility in terms of travel dates, thus allowing them to take advantage of the advance-purchase discounts and Saturday-night stay discounts under the new fare system.

However there are several cost drivers that could break the airline and cause a large loss of income. A few are; excess flight

The other program we offer to our customers is our rapid rewards program. Currently our customers are able to earn points off which they can convert to free flights based off of how frequently they fly and also how often they purchase things with our partners such as the restaurants they choose as well as their hotel stays.

Piedmont Airlines recently invested over $1 million in state of the art equipment and employee development in order to forecast and analyze the appropriate amount of discounted fares to offer per flight. The company discovered that by offering several discounted flights to consumers willing to book their travel well in advance of their departure date left many options available for the business traveler who needed to book much closer to the actual departure date. The analysis was the task of the Revenue Enhancement Department (RED) managed by Marilyn Hoppe. While this state of the art equipment was a step in the right direction, Marilyn believed that there were still a lot of subjective decisions being made and

The Airline industry has experienced continual problems with rising costs with both fuel and maintenance which has caused them to increase their fees to the consumers to pay for those rising costs. This paper will help explain what an airline such as Delta does to help alleviate such costs without forcing its consumers to flip the bill through high fees that consist of tickets, baggage fees and food. The costs of doing business in aviation today have spiraled out of control making it very expensive for both airlines and the

This proposal addresses the needed steps to be taken in order for Southwest Airlines to see continued growth in the airline industry. Southwest Airlines has been able to remain one of the most profitable airlines in the industry for an extended period of time. Even with the hindrance of the 2001 terrorist attacks involving airplanes and the U.S recession of 2008, Southwest has continued to see strong revenue growth. Meanwhile, other companies were experiencing major losses and in some cases folding. Southwest Airlines has capitalized on the company’s strength of being the top low cost

Airlines use a formula of combining their yield and inventory costs to determine ticket prices. While it is imperative to focus on the idea of being profitable, the focus is to maximize the cost of the flight revenue. One huge factor that encourages an increase in the cost of tickets relates to a customer ordering a ticket close to the departing date, define this as a risk factor because they need to make up for all unsold seats. A high percentage of the revenue is dedicated to overhead costs such as fuel and labor. When a ticket price is higher with one airline than the other, the customer interprets this as being an excessive cost. The demand is greatly affected by the external market

We have analyzed the existing booking policy of TransAtlantic Airlines and identified potential cost saving.

The author thanks Professors Martha Howe, Donna McConville, Ari Yezegel, participants at the 2013 North American Case Research Association Annual Conference, the 2013 American Accounting Association Northeast Region Annual Meeting, and 2014 American Accounting Association Annual Meeting for their comments and suggestions on the earlier versions of the case. Comments and suggestions of the editor, associate editor, and two anonymous reviewers are also gratefully acknowledged. Supplemental material can be accessed by clicking the links in Appendix A.