Accounting Case

The company launched a frequent flyer program in January 2001; this is the item that concerns me the most. As of December 31, 2006, there was approximately $1.5 million (at retail value) of unaccrued obligations, while at December 31, 2007 this had increased to $3.2 million. The program has been, apparently, highly successful, to the extent that the company has had to "bump" regular (paying) customers off certain flights in order to fulfil frequent flyer obligations. With ever-increasing competition and the need to control costs, this program will be expanded considerably, according to Samuel Jett. "Retaining and building customer loyalty is a prime objective", according to Mr. Jett.

The program has, according to management, been a major influence in increasing the company's load factor (or the percentage of seats occupied on flights) from 60 % in 2006 to 70 % in 2007. Awards granted under the program are earned by program members when they fly a specified number of kilometres with AirJett:

• the right to free travel on AirJett or on a particular airline,

• the right to purchase tickets at discounts,

• the right to non-travel awards, such as discounts on hotel rooms.

The company's policy is not to account for this program as the awards are earned by passengers, on the grounds that it is a marketing cost of the period in which the paid flight takes place. A memo record is kept on the company's computer of each program member's cumulative eligible travel totals, and a special quarterly report is prepared for top management which indicates the free travel earned (at retail), based upon the threshold level that customers have exceeded. This total amount is used extensively in AirJett's advertising -- the value itself is overstated since it assumes that-