Common ASC 606 Issues: Airline Entities


In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, later codified as Accounting Standards Codification (ASC) Topic 606. This major overhaul of revenue recognition (effective for fiscal years starting after December 15, 2017 for public companies) affects almost every industry, and airlines are no exception. The complex mileage-based loyalty programs and many ancillary service offerings that are common for airlines pose difficult issues under the new standard that can make application of the five-step revenue-recognition model very complicated.

The AICPA and the major accounting firms have assembled industry task forces to research the industry-specific accounting issues within ASC 606, and we will draw from the guides they have published as we provide a brief explanation of the key issues the airline industry faces. For more information on any of these issues, see:

We will also provide references to other RevenueHub articles for more detailed explanations of ASC 606 topics. For more general information on the basics of revenue recognition, see our RevenueHub article, The Five-Step Method.

The following are issues that companies in the airline industry commonly face:

1. Passenger tickets—breakage

Airlines receive payment for tickets before they provide the service of the flight. This performance obligation is normally recorded as a contract liability upon receipt of payment and is not recognized as revenue until the passenger has flown. However, in some instances, a purchased ticket will go unused—often referred to as passenger ticket breakage. Airlines still expect to receive some revenue from the breakage, because many tickets are nonrefundable, such that ticket breakage becomes similar to a variable consideration. Consequently, if the airline can reasonably predict the amount of ticket breakage, they may recognize as revenue a certain proportion of ticket breakage on the day of the flight.

Related RevenueHub Articles:

2. Change fees

Many airlines charge customers to make changes to their tickets. Under ASC 605, these fees were commonly recognized as passenger revenue when the change occurred, rather than when the travel actually took place. However, a change in ticket does not create a new and separate performance obligation; rather, it is simply a contract modification. Thus, the revenue from the fee should only be recognized when the original performance obligation—providing a flight—is satisfied.

3. Ancillary services (baggage, seat assignments, priority boarding, food, etc.)

Airlines normally provide a variety of ancillary services for purchase, such as baggage, priority seat assignments, priority boarding, food, etc. These ancillary services cannot be distinct from the performance obligation of the flight itself, because they cannot be provided for the customer unless they are in conjunction with the flight (see our article Distinct Within the Context of the Contract for more information about what is necessary for a contractual element to be distinct).

Under ASC 605, the revenue from these services was normally recognized in an “other revenue” category, but under the new revenue guidance this classification would not be appropriate. Because the ancillary services are not distinct performance obligations, they must be recognized in “passenger revenue” along with the revenue from airline tickets. In substance, they are contract modifications to the ticket purchase contract, rather than new contracts altogether. All of the revenue should be recognized when the travel occurs.

Related RevenueHub Articles:

4. Mileage loyalty programs

Most airlines have loyalty programs whereby members earn points for miles flown on the airline and purchases made from partner companies (e.g., using a co-branded credit card, staying at a partner hotel chain, using a rental car from a partner company, etc.). Under ASC 606, these loyalty credits create a performance obligation for the airline entity because they effectively represent a customer’s pre-payment for a future good or service (when she redeems the points), and so revenue must be deferred until the obligation is satisfied. When the airline allocates the transaction price from ticket sales, it needs to consider the standalone selling price of the mileage credits, which can be difficult to determine because mileage credit sales are rarely conducted through regular, standalone transactions.

ASC 606-10-32-34 gives three methods by which an entity can estimate a standalone selling price, but, according to EY, the best method for airlines is likely the adjusted market assessment approach. Under this approach, an airline could value mileage credits based on their redemption value relative to outright cash payments. For example, for tickets that can be purchased with either credits or cash, the airline could calculate the implied conversion rate to get a value for each mileage credit.

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5. Tier status affinity programs

Many airlines have a tier status affinity rewards program whereby customers can achieve a tier status based on the number of miles flown, purchases made, etc. This designation as a tier-member (e.g., Gold Member) affords a variety of benefits to the consumer, with benefits normally increasing along with spending/travel. These benefits are often in the form of discounts, free baggage, seat upgrades, etc. Some tier programs are similar to normal point loyalty programs where a separate performance obligation is incurred, but others are more appropriately designated as marketing incentives on future revenue transactions—with no separate performance obligation.

ASC 606-10-55-42 through -43 instructs that if a contract allows a customer to acquire additional goods or services that she would not receive without entering into that contract, a performance obligation exists that is effectively paid in advance. However, if the customer receives only the option to acquire an additional good or service at a price that reflects the standalone selling price, no material right is being granted, and that part of the contract is a marketing offer.

Therefore, in evaluating an airline’s tier status program, management must determine if the options being granted to tier status members are exclusive to that tier (earned based on past flights, purchases, etc.). If management determines that the tier status is being used more to attract new customers and incentivize future sales—such as a tier status given to a new customer before she even flies with the airline—then it is similar to other marketing efforts and would not be considered a separate performance obligation.

6. Co-branding arrangements

Financial institutions and airlines often form co-branded credit card arrangements to attract customers through travel incentives. In these arrangements, the airline typically provides the financial institution with access to its customer lists and permission to use its brand. In return, the financial institution buys mileage credits and other services, which it can subsequently award to its customers. These co-branded arrangements present a number of revenue recognition issues under ASC 606.

The airline must determine which parties in the arrangement are its customers and what elements constitute separate performance obligations. The airline may conclude that the credit card holders constitute customers because of the obligations the airline owes the card holders (such as loyalty benefits and other goods/services) and/or that the financial institution is a customer (because of the transfer of access to the customer list and other services). Once the customer(s) is identified, the airline needs to identify its separate performance obligations.

Some of the obligation owed by the airline to the financial institution may appropriately be bundled together, such as access to the airline’s customer list and use of the airline’s brand. However, the airline must determine whether these separate obligations significantly affect each other and are thereby not separately identifiable. Complicating the issue is the licensing that normally occurs as part of many agreements. Airlines normally license the use of the brand name, and so, must consider the FASB’s guidance on licensing arrangements starting in ASC 606-10-55-54, which requires that an entity assess whether a licensing agreement is distinct from other obligations.

Furthermore, because the purchases by the financial institution from the airline in co-branding arrangements are variable (normally occurring when customers reach mileage credit levels), they would be considered a usage-based royalty. The airline must then assess if the license of IP constitutes the predominant item in the contract, and then, if it is found to be predominant, recognize revenue from the royalties allocated to the branding agreement at the later of when usage occurs or the obligation is satisfied. If the branding element is not found to be predominant, the airline would estimate the transaction price and then select a measure of progress that accurately depicts the satisfaction of the performance obligation over time.

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7. Interline segments

When an airline sells a ticket with multiple connecting flights, each segment normally represents a separate performance obligation, because the individual flights are not interdependent and an airline sells tickets for the segments individually—thus making them distinct. Sometimes, one of the segments in a connecting flight is operated by an airline that is not the seller—an interline segment.

The ticket-selling airline must determine if it is a principal or agent in the interline segment arrangement. The selling airline is normally considered an agent because it does not operate the flight or have the right to redirect the flight’s use; consequently, only the revenue from the commission should be recognized (net basis). The flight-operating airline would normally be the principal in the arrangement and would consequently record revenue on a gross basis and recognize the commission paid to the selling airline as an expense.

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8. Ticket vouchers for flight volunteers

When a scheduled flight is overbooked, many airlines offer flight vouchers to passengers who willingly volunteer to give up their seat on the current flight to go on a later flight instead. Under ASC 606, this voucher performance obligation would generally be accounted for as a contract modification, such that the original contract between the airline and customer is terminated, and a new contract is created. This new contract has at least two performance obligations—the ticket for the new (later) flight and the travel voucher. The airline would allocate the consideration received for the original ticket between the new ticket and the voucher based on relative standalone selling prices. Based on prior experience, the airline could also estimate a percentage of the vouchers that will not be redeemed.

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9. Regional contracts—capacity purchase agreements

Capacity purchase agreements (CPA) are very common in the airline industry. In a CPA, a regional airline operates under the flight codes of a major airline, as the major airline purchases capacity from the regional provider. Additionally, as part of the agreement, regional airlines often provide maintenance, baggage handling, gate personnel, and other services. Regional airlines need to analyze their CPAs to see if the usage of the aircraft or terminals under contract with the major airlines constitutes a lease under ASC 840 or ASC 842.

If the regional airline finds that there is a lease, they must distinguish between the leasing and non-leasing goods or services and allocate consideration to either category on the basis of relative standalone selling price. The non-lease services fall within the scope of ASC 606, and must be evaluated by the five-step criteria to determine whether there are separate performance obligations as well as how to allocate and recognize revenue.


It is likely that many other issues and questions will arise within the airline industry as entities transition to the new revenue recognition standard—ASC 606. This article serves as a base reference point for your research into some of the focal issues anticipated by industry experts. Similar industry-specific issues discussions and resources are available on the RevenueHub site for major industries. Click on the following link for a list of these articles: Industry-Specific Issues.

Author Chapman Ellsworth

Chapman was born and raised in Boise, ID. He is studying accounting and chemistry, and will join L.E.K. Consulting after graduation. Chapman loves pick-up sports, playing the viola, and getting his heart broken by the Arizona Diamondbacks.

More posts by Chapman Ellsworth

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