...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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...(American Airline Annual Report, 2016) Refer to appendix for table E to view on the different components American Airlines looks at when calculating the statement of cash flow. Efficiency Measurement Operating statistics data is shown for the years 2014, 2015 and 2016. The first efficiency measurement component for airlines is revenue passenger mile (RPM), and it looks at the sales volume when multiplying the number of passengers in a flight by the number of miles they are traveling. Also, one of the measures of production is available seat mile (ASM), when multiplying the number of seats in a flight by number of miles the aircraft will travel. The total mainline and regional RPM for the years 2014, 2015, and 2016 are 217,870, 223,010, and...
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...transportation office. Because of the limited number of seats available, the planes almost always fly full, at least in the nonwinter months. Excess demand for seats is assigned by executive rank within the firm. The executive’s budget is charged for the flight at the end of the month. The charge is based on the jet’s total operating expenses during the month (including fuel, pilot’s salary and fringes, maintenance, licensing fees, landing fees, and 1/12 of the annual accounting depreciation) divided by the actual passenger miles logged in the month. This rate per passenger mile is multiplied by each passenger’s mileage flown in the month. Required: a. Describe the formula being used to calculate the cost per passenger mile flown. - The allocation of corporate costs is in form of transfer pricing within the firm. Since most cost allocation problems involve transfer pricing problems, in this problem, the formula being used consists of monthly expenditures for both fixed and variable costs divided by actual miles flown. b. As passenger miles flown increases, what happens to the cost per passenger mile? - The average price charged falls with the rising numbers of passenger miles. Therefore, the variable costs will increase while the fixed cost is fixed, resulting in the decrease in average price charged. c. Describe what causes the monthly charge per passenger mile flown to fluctuate. - The fluctuation of monthly charge per passenger mile flown is the consequence of the number of plane...
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...September 24, 2012 Memorandum U.S. Department of Transportation Office of the Secretary of Transportation Office of Inspector General Subject: INFORMATION: Aviation Industry Performance: A Review of the Aviation Industry, 2008–2011 Controlled Correspondence No. 2012-029 Calvin L. Scovel III Inspector General The Secretary Acting Federal Aviation Administrator Assistant Secretary for Aviation and International Affairs Date: September 24, 2012 From: To: Since its inception, the aviation industry has undergone significant transformations as a result of technological developments, economic pressures, and other factors. Most recently, economic recession and recurrent high fuel costs have challenged U.S. airlines, which have taken a number of actions to lower costs and increase revenue—including capacity reductions, fare increases, baggage fees, and mergers. Beginning in 2002, the Office of Inspector General has issued periodic reports regarding the performance of the aviation industry. This report, the 11th in the series, focuses primarily on industry performance during the 2008–2011 period and summarizes long-term trends since 2000. This report also highlights issues related to changes in airlines’ business environment, the industry’s reactions to those changes, and the impact of these actions on the traveling public. Finally, this report includes exhibits with more than 40 statistical charts (or metrics) organized in five areas: airline finances, air traffic...
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...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 travel awards redeemed) * (Cost per available seat mile)*(Average Flight Length) = 1.2 million * 9.60 cents*912 = $ 105062400 = $ 105.06million What method should United Airlines use to measure the cost of its frequent flier program...
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...a net income $97 million in 2010. The airline continues to pursue its goal of becoming ―the Americas‘ Favorite Airline‖ and aims attainting positive free cash flow and long term sustainable growth while maintaining adequate liquidity position. Financially, the airline was far better than after the Valentine day fiasco in February 2007 and subsequent loss of $84 million in 2008. It focuses on controlling costs, maximizing unit revenues, managing capital expenditures and aims at achieving disciplined growth (see Exhibit 1).1 However, in the recent years, JetBlue appears to be moving away from its core strategy, in quite interesting ways, of being a low-cost player providing the distinctive ―JetBlue experience.‖ In its efforts to boost revenues, the airline began charging $10 to $20 for seats with extra legroom, doubled its ticket-change fee to $100, and introduced refundable tickets that cost more than nonrefundable ones. Further, the airline began charging $7 for a pillow-and-blanket kit, an amenity usually provided free of charge by other airlines.2 Breaking another low-cost rule, JetBlue moved away from ticket sales through its own Web site and signed up with travel agencies and the Galileo and Sabre global distribution systems in August 2006 and with online travel agencies such as Orbitz in January 2008. Further, it sold approximately 42.6 million shares of common stock to Deutsche Lufthansa, the German carrier, in January 2008 which indicates a move away from its ‗growing...
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...began to operate in the now well known hub-and-spoke system, which allowed for efficient connections for passengers from small- and mid-sized cities, but it also has increased airline concentration at hubs. As a result, the net effect has been to increase the choice of carriers at non-hub cities and to increase the frequency of service but also to increase the market concentration at hub cities. According to Parkin, (2011) most governments use a mechanism for allocating airport boarding gates and facilities, in some cases it even allows for competitive bidding for boarding gates and landing rights thus encouraging competition among airlines, and it also might encourage airport authorities to increase supply when bid values are higher than costs. This has in part turned the industry to an oligopoly over the different markets in which it competes. Although many aspects of the airline industry have been deregulated for over 30 years now, many other aspects of the industry are still highly regulated. Perhaps the most influential is the...
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...major airlines, which in turn created opportunity for smaller more efficient carriers with cost advantages to enter a near oligopoly industry. The economic distress the airlines industry encountered was spawned from recession and a doubling of fuel prices during the Gulf War in 1991. Fuel, the second largest cost to the industry, an uncontrollable cost that raised havoc on this industry, unveiled unforeseen opportunities that allowed new competitors to break through barriers of entry. As a result of this economic climate new carriers were formed with more cost effective business structures and strategies. They took advantage of the cheap supply of aircrafts and personnel grounded by major carriers from 1989 to 1993. The point-to-point route system used by these start-ups were significantly more economical than the spoke-and-hub route system used by the larger carriers, this led to more efficiency to a once inefficient industry. QUESTION 2 HOW CAN THE “ECONOMICS” OF THE AIRLINE INDUSTRY BE USED TO EXPLAIN THE PERFOMANCE OF INDIVIDUAL AIRLINES AND THE INDUSTRY AS A WHOLE? The economics of the airlines industry has several underlying factors that contribute to the performance of an individual airlines and the industry as a whole. First off a majority of its cost structure are fixed. The larges cost, people, can be controlled to an extent with layoffs and tougher concessions, but this cost reduction strategy is not exactly public relations friendly. It is also heavily reliant...
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...economics behind the demand and its affect on dynamic pricing in the domestic airline industry in India, where both of these vary often with time and units available. Based on the learning gained during microeconomics course, this paper analyses the current pricing strategies and norms practiced by the airline industry. Managerial Economics Term Paper Demand in the Domestic Airline Industry of India CONTENTS 1. INDUSTRY OVERVIEW ............................................................................................................................................... 3 1.1 MARKET SHARE ................................................................................................................................... 3 1.2 INDUSTRY GROWTH ............................................................................................................................ 4 1.3 CAPACITY VS DEMAND ........................................................................................................................ 5 2. AIRLINE INDUSTRY CUSTOMERS ............................................................................................................................... 5 2.1 CUSTOMER SEGMENTS ....................................................................................................................... 5 2.1.3.1 LOW COST CARRIER BOOM ...................................................................................................... 7 2.2 SUBSTITUTES FOR CUSTOMERS...
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...………………………………………………………….. 12 Buyer Power …………………………………………………............... 13 Financial Analysis ………………………………………………….14 SWOT Analysis ………………………………………………………23 Strategic Issues and Recommendations …………………..25 References ……………………………………………………………30 Harkness Consulting 2 Executive Summary From its initial flight in February 2000, JetBlue emerged into the heavily competitive airline industry as the little airline that could. While legacy carriers declared bankruptcy, JetBlue trounced its competition by offering low‐cost, customer‐focused service. Under the direction of the energetic David Neeleman, JetBlue became a major player in the airline industry. Operating domestic flights on a point‐to‐point system, JetBlue primarily manages East‐West and Northeast‐Southeast routes. While this route structure initially proved profitable for the company, rising costs and heated price competition are currently threatening JetBlue’s market share. The company’s stock price has dropped drastically since reaching a high of over $30 in 2004. Currently priced at less than half its 52‐week high, JetBlue must take serious strategic action in order to reinvigorate its business. After working with low‐fare carrier Southwest, a touch‐screen airline reservation company, and a small upstart airline in Canada, David Neeleman...
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..."intensely competitive market." In recent years there has been an industry-wide shakedown will have far-reaching effects on the industry’s trend towards expanding domestic and international services. Originally, the airline industry was either partly or wholly government owned. This is still true in many countries, but in the United States all major airlines are private. This airline industry is classified into four categories by the Department of Transportation (DOT): International - 130+ seat planes that have the ability to take passengers just about anywhere in the world. Companies in this category typically have annual revenue of $1 Billion or more. National - usually these airlines seat 100-150 people and have revenues between $100 million and $1 billion. Regional - companies with revenues less than $100 million that focus on short-haul flights. Cargo - these are airlines whose main purpose is to transport goods. Airport capacity, route structures, technology, and costs to lease or buy the physical aircraft are significant in the airline industry. Other large issues are: Weather - The problem is that weather is variable and unpredictable. Extreme heat, cold, fog, and snow...
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...industry must: ² Be e±cient and technologically superior ² Have the ¯nancial strength to respond to rapid change and opportunity. ² E±ciently move people, products and services to markets, wherever they exist Airline industry in India is plagued with several problems. These include high aviation turbine fuel (ATF) prices, rising labor costs and shortage of skilled labor, rapid °eet expansion, and intense price competition among the players. But one of the major challenges facing Indian aviation industry is infrastructure constraint. Airline industry in India is plagued with several problems. These include high aviation turbine fuel (ATF) prices, rising labor costs and shortage of skilled labor, rapid °eet expansion, and intense price competition among the players. But one of the major challenges facing Indian aviation industry is infrastructure constraint. We present here the porter ¯ve force analysis of Civil Aviation Industry and hance try to ¯nd out whether it would be advantageous to enter into this industry or not. Keywords: Porter Analysis, Airline Industry , Available Seat Mile, Revenue Passenger Mile , Revenue per Available Seat Mile , Air Tra±c Liability , Load Factor , Threat of New Entrants , Bargaining Power of Suppliers , Bargaining Power of Buyers , Availability of Substitutes , Competitive Rivalry. Introduction Aviation Industry in India is one of the fastest growing aviation industries in the world. With the liberalization of the Indian aviation sector...
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...“We at FUNLINERS give a high value flying experience with extraordinary convenience and low cost.” In a pretty unattractive airline industry with a low return on investment, FUNLINERS can successfully do better than industry average by maximizing the RPM and minimizing the cost per RPM through economies of scope, flexibility in selecting markets and increasing the market share through increased capacity. This can be done by analyzing the factors that enable JetBlue to do well. JetBlue identifies markets that are overpriced and underserved to increase its market share. It then uses an operational model that occupies the sweet spot between the traditional model and low cost model to provide high value of products at a comparatively lower cost than traditional model. In top markets where there is over capacity due to high competition, JetBlue finds a way to be different to attract customer loyalty. Unlike traditional companies, JetBlue has selected a supplier other than Boeing and Airbus to have 3 different fleet types giving it a greater degree of flexibility in targeting markets. Once it successfully enters the market it adopts a two-fold strategy of low cost operation and high customer focus to retain and increase its customer base. The key factors of keeping operational cost low are newer efficient planes, a team devoted to manage fuel and outsourcing maintenance. It also retains talent by encouraging direct interaction of labor with leadership through Value committees rather...
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...Delta Song Case Analysis Possible cost drivers that will allow us to estimate a salary cost function for Delta are: available seat miles, number of departures, available ton miles, revenue passenger miles, and revenue ton miles. The two cost drivers we chose were revenue passenger miles and available ton miles. The salaries consist of payments to pilots, flight attendants and ticket agents. Their salaries are determined by the number of passengers and cargoes and the miles or hours flown. This is why we chose revenue passenger miles and available ton miles. After calculation we found that the R2 of revenue passenger miles is .1764, and the R2 of available ton miles is .5577. We used scatter plots to show this: The available ton miles scatter plot shows a more linear relationship between the two variables. Low point (3132, 1145), high point (4029, 1514) Salary=0.4114xavailable ton miles-143.50 The greatest advantage about this technique is that it only uses two data so it is convenient. The disadvantages are that the data is inefficient. This is because the data is based on cost function for only two periods, meaning it is less accurate. Simple Regression Using simpler regression to estimate the salary cost with available ton miles as the cost driver. These are the results: Coefficients Intercept X Variable 1 -682.643 0.551693 Standard deviation 282.6033 0.79698 Salary= 0.5517x available ton miles- 682.63 R2=0.5577, and the coefficients are larger than the deviations...
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