...Harvard Business School 9-192-040 Rev. June 22, 1993 Accounting for Frequent Fliers By 1991, almost all U.S. airline companies offered frequent flier programs to their passengers. Under these programs, passengers could become members of a program where the miles they flew would be recorded and accumulated to earn free future flights. The proliferation and growth of frequent flier programs created concerns about the proper way to account for and report them in financial reports. The airlines, the Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA), and the Financial Accounting Standards Board (FASB) had each voiced concerns about measuring the expenses and reporting airlines’ obligations under frequent flier programs. The percentage of revenue passenger miles (the number of miles flown by revenue passengers including free-flight-award passengers; computed by multiplying the number of revenue passengers by the miles they have flown) flown under free travel awards was less than 5% for all U.S. airlines combined. However, on some routes for some airlines (U.S. mainland to Hawaii, for example) the percentage of revenue passenger miles represented by free flights exceeded 12%. And there was some evidence that the problem was growing. Background of Frequent Flier Programs American Airlines first introduced frequent flier programs in 1981. Initially the program was meant to be a promotional gimmick designed to attract more customers...
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...(FFP: Frequent Flier Program) The case deals with the problem of estimating cost and obligations of the United Air Lines frequent flier program. The major accounting issue with FFPs is how an airline accounts for their economic value. Since FFPs represent a present obligation for an airline to provide customers with air travel at a later date, they are considered a liability. Incremental Cost Approach: One approach can be to estimate the value of points that are going to be redeemed and the timing of redemption, with the cost being based only on the variable costs associated with the redemption of points, i.e. meal, drinks, ticketing. The provision for the variable costs is then recorded as a liability, moving to an expense once the points have been redeemed. A provision can be created for these liabilities based on the present value of the incremental cost estimate, net of any points that are deemed likely to expire. The provision is reduced as members redeem points from which it is recorded to expenses. This 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. The incremental cost approach is designed to maximize profitability and minimize provisioning levels, and so an airline using the incremental cost approach needs to be able to prove that flights flown by frequent flyers represent excess capacity and are incidental to the...
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...Harvard Business School 9-192-040 Rev. June 22, 1993 Accounting for Frequent Fliers By 1991, almost all U.S. airline companies offered frequent flier programs to their passengers. Under these programs, passengers could become members of a program where the miles they flew would be recorded and accumulated to earn free future flights. The proliferation and growth of frequent flier programs created concerns about the proper way to account for and report them in financial reports. The airlines, the Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA), and the Financial Accounting Standards Board (FASB) had each voiced concerns about measuring the expenses and reporting airlines’ obligations under frequent flier programs. The percentage of revenue passenger miles (the number of miles flown by revenue passengers including free-flight-award passengers; computed by multiplying the number of revenue passengers by the miles they have flown) flown under free travel awards was less than 5% for all U.S. airlines combined. However, on some routes for some airlines (U.S. mainland to Hawaii, for example) the percentage of revenue passenger miles represented by free flights exceeded 12%. And there was some evidence that the problem was growing. Background of Frequent Flier Programs American Airlines first introduced frequent flier programs in 1981. Initially the program was meant to be a promotional gimmick designed to attract more customers...
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...Q. How do you believe United Airlines should account for the program in its published financial statements? Explain and support your chosen method and why you rejected other approaches? They should account for the Frequent flier program based on the Incremental Cost Method in its financial statements. Excess capacity of around 64-67% throughout the years 1986-1990. The load factor is equal to the breakeven load factor. This results in only an incremental cost incurred of serving a passenger and not the loss of revenue on assigning a seat to a free flier when that seat can be filled by a passenger who travels without redeeming any points. Q: What are the various methods United might use to measure the costs of its frequent flier program? What are the potential differences in dollars of the cost measured by each method? Deferred Revenue Consider 6% as the percentage of total revenue passenger From Exhibit 2, Average Yield per Revenue passenger mile = 12.60 cents Total Revenue passenger mile = 76137 millions Deferred revenue as a result of Frequent fliers = (Total Revenue passenger miles)*(Average Yield per Revenue Passenger mile)*(0.06) Deferred revenue as a result of Frequent fliers 575595720 = $ 575,595,720 = $ 575.6 million Incremental Method According to Exhibit 2, it is seen that the Cost per available seat mile is 9.60 cents. Total travel awards redeemed by members is 1.2 million free trips Therefore the total cost = (Total...
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...Chapter 2 Chapter 2 Strategy Analysis Discussion Questions 1. Judith, an accounting major, states, “Strategy analysis seems to be an unnecessary detour in doing financial statement analysis. Why can’t we just get straight to the accounting issues?” Explain to Judith why she might be wrong. Strategy analysis enables the analyst to understand the underlying economics of the firm and the industry in which the firm competes. There are a number of benefits to developing this knowledge before performing any financial statement analysis. 1. Strategy understanding provides a context for evaluating a firm’s choice of accounting policies and hence the information reflected in its financial statements. For example, accounting policies (such as revenue recognition and cost capitalization) can differ across firms either because of differences in business economics or because of differences in management’s financial reporting incentives. Only by understanding differences in firms’ business strategies is it possible to assess how much to rely on a firm’s accounting information. 2. Strategy analysis highlights the firm’s profit drivers and major areas of risk. An analyst can then use this information to evaluate current firm performance and to assess the firm’s likelihood of maintaining or changing this performance based on its business strategy. 3. Strategy analysis also makes it possible to understand a firm’s financial policies and whether they make sense. As discussed later in the...
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...fifth largest airline in the world with a fleet of more than 375 jets that serve over 240 cities with over 2,300 daily flights. Since it was incepted 25 years ago, the airline has grown to 32,000 employees. Though currently profitable, Classic has not gone unscathed by the challenges faced by the airline industry. Financially, increased uncertainty about flying has resulted in a 10% decrease in Classic’s stock prices. Operationally, the airline is suffering from waning consumer confidence. The airline’s rewards program has lost 19% of its members and the flights booked by the remaining members have decreased 21%. Rising costs, particularly in the area of fuel and labor, have limited the airlines ability to compete for the high value frequent flier. Classic’s board of directors has mandated a 15% cost reduction in all departments over the next 18 months to protect the profitability of the company (University of Phoenix, 2012, Classic Airlines Scenario). Financial success is dependent upon marketing. Without marketing to generate the demand for a product, the company cannot make a profit (Koller & Keller, 2006). Classic’s Chief Executive Officer (CEO), Amanda Miller, has tasked the new Chief Marketing Officer (CMO), Kevin Boyle and his team comprised of the Senior Vice President of Customer Service, Renee Epson and the Senior Vice President of Human Resources, John Hartman, with the challenge of reviving the rewards program, which she believes is the key to Classic’s success...
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...as travel industry continuing to face challenging times. Consumers budgets are tight and cutting back on unnecessary expenses and in most cases finding an alternative in which they are can buy cheaper seats and better customer service. Classic Airlines is facing the challenges on how to win back the members of the classic rewards that the company offer and how to keep the frequent fliers customers that they have retained to choose Classic over the competitor. This paper will explain some of the marketing concepts to beef up Classic’s frequent flier program with methods that will demonstrate a measurable return on investment (ROI), the marketing challenges it faces, and its current corporate value. Marketing is an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefits the organization and its stakeholders. Marketing deals with identifying and meeting human and social needs (Kotler & Keller, 2006). Financial success often depends on marketing ability. Finance, operations, accounting, and other business functions will not matter if there is not sufficient demand for products and services so the company can make profits. Classic Airlines Chief Executive Officer (CEO) Amanda Miller, expressed her concern about the declining membership in Classic Rewards which is down by 20% from prior year, which translates to more than 160,000 supposedly loyal customers...
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...Some areas addressed by management control systems may include accounting methods, employee incentive programs and performance measurement. Accounting methods are often implemented and evaluated as part of a management control system. To control financial activities within a company, the area may be broken down into financial and managerial accounting. Financial accounting generally focuses on internal issues, such as reporting sales costs, while managerial accounting may focus on methods for determining product costs. While both areas cover business accounting issues, their methods of application generally differ, and separate systems implemented by a management control system may aid in ensuring reports remain accurate and impartial. Managerial accounting is typically responsible for providing management with information on controlling costs and improving the production process. Managerial accountants may also provide cost information on new products, make pricing decisions and monitor actual and budgetary costs. General financial accounting within management control systems aims to focus on a company's internal accounting issues. Financial accounting typically handles payroll and human resource issues affecting employees within the company. Accounts in this area may also manage employee costs and reimbursements under a control system. Management control and management accounting Management accounting and management control are closely related. Yet, they are not...
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...practices;will talk about the core values and conclude the presentation. Introduction: Southwest Airlines Co. (NYSE:LUV) is an American airline based in Dallas, Taxas. Southwest is the largest airline in the United States, based on domestic passengers carried, as of June 30, 2010. Southwest operates more than 3400 flights a day, as of March 2011, utilizing a fleet of 547 Boeing 737 aircraft. Southwest Airlines has been a strong growth company over the last 35 years. Low cost is the key to its success. The Southwest’s execution of its low-cost/no frills/low fares strategy is underpinned by some critically important policies, procedures, operating practices, and core values. Southwest Airlines’ key policies are low costs, low fares, frequent flights and fast expansion into new cities. The company has also been favored because it has entered into hedge contracts for low cost fuel. This has been falling. The company has the operating practices of efficient operations, lower costs and attention to customer service. The core velues of Southwest Airlines controls costs, gets top-ranking customer service ratings, and using path breaking technology in online booing and electronic ticketing. Southwest Airlines has implemented its low cost/no frills strategy though a high degree of teamwork, communications and coordination among functions. It is the people that have been the key to...
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...Fixed costs do not vary with the scale of operations, and will be incurred even if the flight is cancelled. Examples of fixed cost are the rental cost of leased planes, which is time- but not operations-sensitive, and general administrative costs such as salaries. Constant costs, which cease if the flight is cancelled but are invariant to the volume of traffic carried, are also high. Examples of constant costs are the subsistence allowance paid to the cabin crew, and landing fees, which do not depend on the number of passengers, but will not be incurred if the flight is cancelled. Variable costs, which vary with the volume of traffic carried, have traditionally been quite low in the airline industry. They include ticket commissions, baggage handling, and cabin amenities including food and beverages, among other passenger-related costs. With the recent spate of cost cutting, where ticket commissions to travel agents have been eliminated by the major airlines (with the exception of Southwest Airlines), a cap of $100 commission on international flights, and drastic reductions in the quantity and quality of meals, variable costs have gone down. To counter the effects of the September 11, 2001 terrorist attacks, U.S. airlines have reduced fares to lure back lost passengers. As a result, load factors for 2002 are estimated to be around 72 percent, but the breakeven passenger load factor has risen to 81 percent, so losses for 2002 are estimated at $9 billion. (3) Thus there is...
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...Issues Usually revenue is recognized at the point of sale because most of the uncertainties related to the earning process are removed and the exchange price is known. But, the earning process itself is not defined precisely anywhere in the authoritative literature. More importantly, an entity's earnings process(es) is (are) determined by its business model(s) and the number of business models can grow without limit. Ex: Walt Disney Co. As a result, more than 200 pieces of guidance on revenue recognition are in effect in US, each one intended to address the two issues of culmination of an earnings process and realized/realizable revenues. Some examples of the US GAAP and SEC guidance applicable to revenue-recognition accounting include: • SAB 104 – “Revenue Recognition” (an amendment...
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...Walmart Customer Loyalty Program Save Money, Live Better, Reward Yourself! Travis Godderidge Rick Hayes Darrell Johnson Chad Mikels HBM 581 Services Management Section 2 Team 5 February 24, 2013 [Type text] Table of Contents Executive Summary Background Research Companies researched, program names and descriptions Description of the Proposed Program Company overview Target customers Suggested Program Names Features and Benefits Terms and Conditions Duration of the Program Initiating and Marketing Tracking Device for Customers Estimates costs to implement and sustain the loyalty program Summary and Recommendations References 1 2 3 8 9 9 9 10 11 12 13 14 15 16 Executive Summary In the fierce world of global discount retail competition, differentiation is critical to long term success and survival. Walmart was founded on the differentiating factor of the lowest prices for the highest quality products. While this has served Walmart well and will continue to do so with global sourcing and supply chain management to secure the best products at the best prices, an expansion of the services provided to the customer and the ability to obtain demographic spending information and trends will prove invaluable to Walmart’s continued success and rapid global expansion. Additionally, programs that help retain customers once the customer has entered the store will increase market share more rapidly and increase...
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...Strategic Alliance – Whirlpool Corporation and Inland Steel CASE Faced with intense competition, increasing expectations from customers, reduced product life cycles, and localized geographic markets, Whirlpool Corporation (a Fortune 500 manufacturer of appliances) realized that the need to achieve a competitive advantage from its sourcing and material efforts was greater than ever. Part of the strategy to achieve this advantage involved pursuing an alliance with a key steel supplier. Steel is a major component used across all of the company’s finished products (such as washing machines, dishwashers, refrigerators, and others). The purchasing managers at Whirlpool faced a number of questions with regard to their purchasing strategy: • What do we need to do to be competitive? • Who is best suited to be the primary steel supplier? • What do we need to know, and how do we get the information required to answer this question, especially with regard to our organizational culture, technological roadmap, and where both organizations are moving in the long term? • How do we implement a strategic alliance? • How do we establish a strategic alliance in terms of confidentiality agreements, termination agreements, and negotiation strategies? • How do we provide the supplier with evaluations to ensure that this alliance continues, with regard to continuous performance, goal achievement, and commitment? • What do we do if we do not meet our objectives—change the situation or simply...
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...A S I A JUNE 4, 2007 Malaysia’s 40 Richest Sleepover in Kuala Lumpur: Tune Hotels, with rooms costing as little as $3 a night, are Fernandes’ attempt to provide cheap, clean lodging. he boasts. “For others it’s a cost, but we made a $50,000 profit.” Fernandes, 43, relishes turning costs into cash. After all, he built a small fortune by being budget-conscious. Less than six years ago he and a partner paid a debt-ridden Malaysian company 27 cents for a troubled carrier and assumed its $11 million in debt. He relaunched AirAsia Berhad as Asia’s first low-fare airline and the region’s first carrier to allow customers to buy tickets online and through mobile phones. The no-frills outfit got rid of complimentary food and drinks, frequent-flier programs, airport lounges, even cleaning crews; flight attendants now clean the cabins after flights. Ads are sold on the airplanes’ overhead bins and tray tables. All this has helped AirAsia become one of the world’s lowest-cost carriers, according to ABN Amro, as measured by costs per seat flown: just 2 cents for each kilometer, about half what it costs U.S. airline Southwest. Its average ticket price is $37. Its net profits are expected to triple to $100 million on sales of $340 million for the fiscal year...
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...CHAPTER 1 The Changing Role of Managerial Accounting in a Dynamic Business Environment ANSWERS TO REVIEW QUESTIONS 1-1 The explosion in e-commerce will affect managerial accounting in significant ways. One effect will be a drastic reduction in paper work. Millions of transactions between businesses will be conducted electronically with no hard-copy documentation. Along with this method of communicating for business transactions comes the very significant issue of information security. Businesses need to find ways to protect confidential information in their own computers, while at the same time sharing the information necessary to complete transactions. Another effect of e-commerce is the dramatically increased speed with which business transactions can be conducted. In addition to these business-to-business transactional issues, there will be dramatic changes in the way managerial accounting procedures are carried out, one example being e-budgeting, which is the enterprise-wide and electronic completion of a company’s budgeting process. 2. Plausible goals for the organizations listed are as follows: (a) Amazon.com: (1) To achieve and maintain profitability, and (2) to grow on-line sales of books, music, and other goods. (b) American Red Cross: (1) To raise funds from the general public sufficient to have resources available to meet any disaster that may occur, and (2) to provide assistance to people who are victims of a disaster...
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