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
‘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
‘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
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.’
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