Fair value hits 'free' flights

Airlines are set to bring the full cost of their frequent flyer programmes on to their balance sheets, in the latest indication of the turbulence affecting carriers’ accounting.

Under new accounting rules airlines will no longer be able to measure the cost of frequent flyer programmes by saying that the cost of an extra passenger is simply an extra meal or the minor costs associated with travelling.

Instead, they will have to apply a fair value to the cost, measuring it at how much the flight being ‘given away’ might be worth on the open market, say advisers from KPMG. Airlines that have been through the process have taken hits worth hundreds of millions of pounds.

‘When certain US carriers emerged from Chapter 11 and similar bankruptcy proceedings, they were required to mark to market their FFP liability in a similar way to that envisaged under IFRIC 13. In some cases, this resulted in the FFP liability increasing by over 400%,’ said Doug McPhee, corporate finance partner at KPMG.

KPMG believes that some airlines may opt to hive off their frequent flyer programmes to avoid the IFRIC hit. The rules will be introduced for next year’s numbers for most airlines.

Airlines are also set to bring the value of their landing slots on to balance sheets in the next few months, with British Airways’ numbers set to be closely scrutinised on Friday to see what changes have been made.