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Are Frequesnt Flier Miles And Asset Or Liability?  
User currently offlineOswegobag From United States of America, joined Oct 2008, 169 posts, RR: 0
Posted (5 years 1 month 2 weeks 17 hours ago) and read 3406 times:

I have a question that I have been wondering about for a very long time. Hopefully someone can provide an answer.

Per an article from the AP today and posted on Yahoo as quoted below:

"...AMR Corp. said it has obtained $2.9 billion in extra funding, including $1 billion in cash from an advance sale of frequent flyer miles to Citigroup..."

How can an airline sell frequent flier miles as an asset? Wouldn't the frequent flier miles actually be a liability because it is free flights and/or merchandise that the airline owes the customers?

Or is the media always mis-spoken, and the airlines are actually selling the entire credit card program but are retaining the accrued mileage as a liability?

Once the credit card is sold to another entity, does that entity pay the airline a price for each mile accrued on the customer's account and the airline hold the mileage as a liability?

Thanks for your insight!

3 replies: All unread, jump to last
 
User currently offlineAlias1024 From United States of America, joined Oct 2004, 2782 posts, RR: 2
Reply 1, posted (5 years 1 month 2 weeks 17 hours ago) and read 3374 times:

AA is not selling their credit card program, because it isn't theirs to sell. Citigroup owns the credit card program and issues the cards. Citigroup offers AA frequent flier miles as a reward for the cardholders, and purchases miles from AA in advance to give to the cardholders. When that happens, the cash from the sale shows up on the asset side of the balance sheet and the unused miles show up on the liability side.


It is a mistake to think you can solve any major problems with just potatoes.
User currently offlinePlaneAdmirer From United States of America, joined Jul 2009, 564 posts, RR: 0
Reply 2, posted (5 years 1 month 2 weeks 17 hours ago) and read 3362 times:

AMR is basically selling unearned miles in advance and presumably at a discount to Citi (they will attach them to their AAdvantage credit card products). Once sold, AMR now has a liability on it's books to cover the promises those miles entail. So essentially, the cash balance will go up by 1.0 billion and so will the liabilities for providing the benefits of those miles infer.

Citi is motivated to do it to help AMR since I would imagine that those credit cards are very profitable and have decent credit histories. This is the same thing that Chase did for UAL when UAL needed funding (don't remember if it was during the UAL bankruptcy or not).

The other advantage is that surely a bunch of miles will expire unused so that portion will essentially be forgiven.

Does this help?


User currently offlineOswegobag From United States of America, joined Oct 2008, 169 posts, RR: 0
Reply 3, posted (5 years 1 month 2 weeks 16 hours ago) and read 3272 times:

Thanks for your help everyone! You explained that very well and I fully understand the system now!

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