In recent years, the airline industry has dominated headlines. Consumers are shopping Priceline.com and other Internet sites for the lowest rates. The airlines have also lured customers with frequent-flyer programs, which award free flights to passengers who accumulate specified miles of travel. Unredeemed frequent-flyer mileage represents a liability that airlines must report on their balance sheets, usually as Air Traffic Liability.
Southwest Airlines, a profitable, no-frills carrier based in Dallas, has been rated near the top of the industry. Southwest controls costs by flying to smaller, less expensive airports; using only one model of aircraft; serving no meals; increasing staff efficiency; and having a shorter turnaround time on the ground between flights. The fact that most of the cities served by Southwest have predictable weather maximizes its on-time arrival record.
With a partner or group, lead your class in a discussion of the following questions, or write a report as directed by your instructor answering the following questions:
Frequent-flyer programs have grown into significant obligations for airlines. Why should a liability be recorded for those programs? Discuss how you might calculate the amount of this liability. Can you think of other industries that offer incentives that create a similar liability?