They're Cashing In

[mweiss]

i'm confused here......how can a large group of customers cash in their miles at a "freebie" if you will and not affect the total rev picture?

Because the hit on the balance sheet occurs when the miles are earned, not burned.

 

[BoeingBoy]

mweiss,

Here's where it could hurt the revenue picture...

"and denied boarding compensation" from my post above.

Admittedly, it's probably a small effect but an effect non-the-less.

Jim

 

[mweiss]

Jim, I agree with you, but as you noted it's a very small contribution...and one that is already incorporated in the book representation of the miles.

Because the miles are a liability, whenever they're used they reduce the liabilities of the company, with no corresponding change in assets. This improves profits when the miles are used, again provided that they're not being used to displace revenue of greater than the book liability of the miles.

 

[usair_begins_with_u]

Because the miles are a liability, whenever they're used they reduce the liabilities of the company, with no corresponding change in assets. This improves profits when the miles are used, again provided that they're not being used to displace revenue of greater than the book liability of the miles.

Wrong

Assets = Liabilites + OE

If a liability goes down, and no assets are decreased, then OE goes down. Hence, burning through FF miles does not effect profit. The only thing that comes into play with FF miles is that UAir must decide what % of FF miles are current vs. long term liabilities.. This will effect UAir's current and quick ratios, and other liquidity measures. If UAir played games here, it would be obvious! It's creditors would certainly frown upon that sort of behavior as UAir's liquidity measures are under a microscope right now.

 

[BoeingBoy]

usair begins with u,

I'm no economist, but math was my best subject.

If your equation is accurate, and the left side (assets) stays the same, then the right side (Liabilities + OE) must stay the same or the equation is no longer equal.

Given this, if liabilities go down, OE must go up to keep the sum the same.

Hence, lower liabilities with no change in assets equals higher OE.

Jim

 

[mweiss]

usair_begins_with_u, Jim has it right. Your equation is correct, but your analysis of the impact of a change in liabilities is incorrect.

I had a homework assignment on this very issue, back in the fall. 😉

 

[usair_begins_with_u]

This improves profits when the miles are used

Ok.. thats right.. OE should go up.. My bad, but I know you also can't liquidate Liabilities into earnings... decreasing an acrued liability (FF Miles) will not have any effect on net income, or profits.. If anything its dilutionary on earnings..

 

[Doc]

Keep cashing them in boys ..cause next year when we are still around you will be buying those tickets...........;-)

 

[BoeingBoy]

"you also can't liquidate Liabilities into earnings"

Again, I'm no expert here, but liquidating liabilities can result in "paper" earnings can't it? It's not cash in the bank, put the P&L looks better.

Jim

 

[RowUnderDCA]

I'm hoping to fly on a first class award ticket on another partner carrier...(not even star). I want to use 135,000 miles. Does this transaction take cash? Surely the other carrier needs something? I did this a couple of years ago, too.

 

[WorldTraveler]

Settlement between airlines usually takes place after the flight is flown and the coupon returned to the ticketing carrier for payment. ie. if a customer tickets a US award ticket on LH, LH will collect the ticket when the passenger flies and send it to US for payment. The risk is that in the event of a bankruptcy (7 or 11), carriers can cancel ticketing agreements; usually carriers plan on the amount of financial reserves necessary to maintain business relationships.

The dicussion about balance sheet impact of FF programs is correct but the hit comes on the earnings statement when customers who would otherwise pay for travel choose to use an award ticket. You'll recall that is exactly what happened at UA and is part of the reason they are showing very healthy RASM increases now - they had so many free tickets flying a year ago which have been converted to paying revenue. This cycle will undoubtedly occur for US this fall and will happen for any airline that the press chooses to paint as being unstable. Some people know the difference (as much as any company's intentions can be known) but other people will respond and burn miles.

 

[mweiss]

decreasing an acrued liability (FF Miles) will not have any effect on net income, or profits..

That's true.

If anything its dilutionary on earnings..

True. Of course, it had a corresponding concentration of earnings at the time that the liability was accrued.

 

[usair_begins_with_u]

Again, I'm no expert here, but liquidating liabilities can result in "paper" earnings can't it? It's not cash in the bank, put the P&L looks better.

No.. on the P&L you only have revenue and expenses... Liabilities do not show up on the P/L. A change in liabilities will have no effect on earnings as only expenses effect net income, (P&L). The reduction of a liability will increase the owners equity portion of assets, which is good for stock holders, and it will tighten-up those embarrasing liquidity ratios, but again, it will not effect earnings.

FF Miles are sort of a hidden expense in the fact that their redemption will not show up directly on the P&L. They do however show up indirectly on the P&L via standard variable costs, like costs of maintaining the FF program, the cost of booking the ticket, fuel, etc. It does so however with out any cooresponding revenue, because the ticket was "free".

 

[BoeingBoy]

Thanks, I stand corrected.

Jim

 

[TomBascom]

The key with a program like Dividend Miles is the undisputed fact that FF Programs are PROFIT CENTERS for every major airline. They sell miles to their "Partners" Like Avis.

To amplify Piney's comment a bit... so far this year I guess I've earned about 300,000 miles -- 75,000 or so with my butt in a seat, 225,000 via bonus and non-flying methods. (I'm too lazy to go through all my statements and pull the real numbers -- but these should be close enough.) That's 12 25,000 mile awards at $15 each -- liability to the airline is $180. Of those miles about 100,000 or so are BofA Visa miles. BofA pays US something for that -- I suspect it's about $0.02/mile (that would be in line with what the MCI bankruptcy filing revealed.) Quite a few of the rest are hotel and other partner miles -- again paid for by a 3rd party. All of which US has collects and holds well in advance of me "cashing in" any of those miles. My miles probably age 4 years before they get used.

Unless my numbers are very wrong Dividend Miles is, essentially, a cash cow.