Introduction
Frequent flyer loyalty programs are a valuable marketing tool for airlines, however accounting for frequent flyer points (FFPs) is not a straight forward process (Bowman 1995). The aim of this assignment is to examine the concept of how FFPs should be accounted for according to the Framework, compare how Qantas Airways Limited (Qantas) and Virgin Blue Holdings Limited (Virgin) account for FFP's, and determine the potential consequences of different accounting treatments.
Accounting procedure for frequent flyer points according to the principles of the Framework
The major accounting issue with FFPs is how an airline accounts for their economic value (Bowman 1995). Although FFPs have a relatively low estimated value
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Virgin, unlike Qantas, uses the deferred revenue approach to account for FFPs sold to third parties as well as for accounting for the direct accumulation of reward points by frequent flyer members (Virgin 2006). The amount that is deferred is calculated based on assumptions as mentioned previously and includes an amount to cover expected costs as well as an adequate amount of profit (Virgin 2006). Virgin records theses provisions under current and non current liabilities as unearned revenue until the points are redeemed where it becomes revenue and recognised in the Income Statement (Virgin 2006).
Analysis of the two approaches
The approaches used by Qantas and Virgin to account for FFPs differ considerably but are both justifiable. Qantas' approach can be justified in that customers are redeeming their points for excess capacity on flights an activity that is incidental to the process of generating revenue from passengers and hence the incremental cost accounting approach is appropriate (IATA & KPMG 2005, Qantas 2006). Virgin on the other hand allows frequent flyer passengers to use their points to access any seat at any time, which means the deferred revenue approach is appropriate (IATA & KPMG 2005, Virgin 2006).
The main issue associated with the deferred revenue approach is that it results in higher provisioning levels, as the full value of providing air travel to a customer has to be accounted
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.
Loyalty programs include frequent flier miles or points systems associated with credit card offers that can be used only with the original company, creating a perceived loss or cost when switching to a competitor. Most programs are able to get consumers to spend more money just to get to free or bonus item.
Accounting is commonly described as the language of business. It is very important for all business owners to have very good understanding of their finances. Having the knowledge of your business finance, you will know where the money is going. Every business owner should have a good understanding of finance. To have a good understanding business owners needs to understand basic accounting steeps, how does accounting play a role in their business, how to define a financial statement and how the omission of any of these steps would affect the success of a business. Once you have an understanding of accounting/finance and the how it plays
INCLUDES SOLUTIONS INCLUDES MARKERS’ REPORTS This is a three (3) hour paper. You have ten (10) minutes reading time. There are seven (7) questions. There are eight (8) pages, including this one. You must answer all parts of all questions. The questions are not of equal value. All answers must be written in blue or black ink. Show all relevant working.
By using strategies like Fuel hedging in order to turn a variable cost into a fixed cost means that qantas can lock in a certain price for fuel (via contract) and save money if the price of fuel increases. Qantas’ future in efficiency looks to be very promising as an increase in use of E commerce, more efficient planes, and improved economies of scale all work in favour to ensure qantas’ ability to
Revenue is the gross inflow of economic benefits during the period arising in the ordinary course of activities. Revenue should be recognized when the future economic benefits that will flow to the entity can be measured reliably. The new standard will significantly change how companies recognize revenue. It creates a whole new codification in a new era of revenue recognition by replacing hundreds of pages of guidance that are specific for each industry to a single comprehensive standard applicable to virtually all industries. The recognition criteria are usually applied separately to each transaction, but sometimes and under specific circumstances, it is necessary to apply the recognition criteria to the separate recognizable parts or of a single transaction in order to reflect the substance of the transaction. In aviation industry, the revenue transaction or events takes a significant period of time in order to complete because of the nature of product delivering against the sum of money. The five‐step revenue recognition process for this transaction are as follows:
Note to students: This is a closed-book exam, containing 3 questions, worth 30 marks in total. Apart from sundry writing materials (pens, pencils and the like), no examination aids are permitted
The purpose of this memorandum is to address the profitability issues at Continental Airlines and to estimate the costs for 2009 to forecast the future outlook of the company. To address these issues, I used regression analysis to observe what effect the 11% reduction in flying capacity would have on the firm’s future operating costs. I also used the results from the regression analysis to verify the costs that, if reduced, would further comply with the implementation of cost-cutting initiatives and operational efficiencies that the company is striving for. Lastly, I consolidated the data to forecast Continental’s financial outlook for 2009, then provided insight
Revenue is the gross inflow of economic benefits during the period arising in the ordinary course of activities. Revenue should be recognized when the future economic benefits that will flow to the entity can be measured reliably. The recognition criteria are usually applied separately to each transaction, but sometimes and under specific circumstances, it is necessary to apply the recognition criteria to the separate recognizable parts or of a single transaction in order to reflect the substance of the transaction. In aviation industry, the revenue transaction or events takes a significant period of time in order to complete because of the nature of product delivering against the sum of money. The five‐step revenue recognition process for this transaction are as follows:
However there are several cost drivers that could break the airline and cause a large loss of income. A few are; excess flight
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
CNBC estimated that over 15 trillion frequent flyer miles were outstanding as of May 2011 (Whitman, 2011). Today, major U.S. airlines employ one of two methods to account for FFP liabilities for mileage credits earned by paying passengers: either the Deferred Revenue Method or the Incremental Cost Method. The Deferred Revenue Method recognizes a liability for the fair value of the outstanding mileage credits (with “fair value” defined under International Financial Reporting Standards (IFRS) as “the amount for which the award credits could be sold separately”) (KPMG, 2008). The Incremental Cost Method recognizes a liability for the marginal cost of providing air transportation to eligible award passengers (i.e. the cost of taxes, fuel, food, etc. to fly one additional passenger on a seat that otherwise would have been empty—generally a nominal amount). Incremental cost accounting has been subject to scrutiny several times throughout the history of FFPs. Within the past few years airlines have reduced seating capacity due to high fuel prices and weaker travel demand during the global economic recession, causing flights to be fuller on average and increasing the chance that, for any given seat, a passenger flying on redeemed frequent flyer miles could displace a fare-paying passenger (notwithstanding the fact that many airlines limit the number of seats eligible to be reserved using FFP
We have analyzed the existing booking policy of TransAtlantic Airlines and identified potential cost saving.
result of this, no other airline in the industry’s history has enjoyed the customer loyalty and