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.

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