Carriers are facing a fair value hit as they are forced to put a higher cost on their frequent flyer
liabilities, and advisers from KPMG believe many may choose to find some way of getting the schemes off the balance sheet.

The threat has come from IFRIC 13, a new interpretation of existing standards. Where previously airlines had booked the cost of a frequent flyer flight according to its marginal cost ­ effectively the cost of a meal or wash-pack, since frequent flyers are often only making up the numbers on existing flights ­ they will now have to book the cost of the flight on the open market.

‘It’s part of a trend towards fair value,’ said Viral Desai, a corporate finance partner at KPMG.
The effect could be significant. When other airlines adopted fair value approaches to their frequent flyer schemes, there were substantial jumps in liability.

‘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, a corporate finance partner at KPMG.

Airlines need to be pro-active in warning investors of the changes, KPMG says, and some may even seek to pre-empt them by moving the schemes off balance sheet.

Outsourcing or selling could have a number of advantages, KPMG says. A major third party owned FFP operator established by combining a number of programmes would become an airline’s single largest customer, with all the benefits and negotiating power this would entail.

It could also bring cash inflow from the sale of the FFP.

But McPhee adds: ‘Outsourcing or selling the FFP could mean the airline loses control over premium passengers and key suppliers. Airline partners might find it difficult to agree a common purpose and goal within the FFP operator.’