Airline Economics · Loyalty

Accounting for points

Three ways to book a loyalty point, and IFRS 15 step by step.

A member who flies and earns points has bought two things at once: a seat today and an award later. How much of the fare belongs to the points, when it becomes revenue, and what sits on the balance sheet in between depends on the accounting method. This page follows one ticket through the books, entry by entry, compares IFRS 15 with the methods it replaced, then shows where the profit comes from and how the airline can move the value of a point in its favour.

Illustrative numbers: a stylised ticket and programme, not the figures or accounting policies of any airline.

1The fare is splitThe flight and the points are two separate promises. The fare is shared between them in proportion to what each would sell for on its own.
2The points wait as a liabilityTheir share is deferred revenue: cash received for something not delivered yet. It sits on the balance sheet next to the tickets sold but not yet flown.
3Revenue follows the awardsEach award releases its share of the liability into revenue, including a slice for the points expected never to be used (breakage).
The ticket and the points
Value per point is what a point is worth to the member; the cost is what an award seat costs the airline to fly (fees, fuel, catering), per point.

Follow one ticket through the books

The balance sheet after this step

What the airline owns (cash) on the left, and who has a claim on it on the right: members and passengers still owed something, then the owners. The two columns are always the same height.

The member's points

Journal entry
Income statement so far

Three methods, one ticket

Same cash, same profit, different timing

Revenue recognised, cumulative

Months after the ticket is sold. Every method ends at the ticket price.

Liability for the points

Deferred revenue, or the provision under incremental cost.

Points sold to a partner

Co-brand cards, hotels, car rental, retail

Many points are never earned in the air: banks and other partners buy them to reward their own customers. What a bank pays buys more than points: the airline's brand on the card, access to its members, advertising. Those are separate promises too, so the payment is split the same way a fare is. Only the points' share is deferred; the marketing share is revenue as those services are delivered.

Where the profit comes from

Collect at value, deliver at cost

Deferred revenue sounds like a burden, but it is cash the airline already holds. It is booked at what the points are worth to members, and the airline later settles it in seats, which often cost it very little. Four things turn that gap into profit.

1. The spreadEach point is deferred at its value to the member, but honoured with a seat that would often have flown empty, costing only fees, fuel and catering. The difference is margin on every award.
2. BreakagePoints that are never used were paid for in full and cost nothing to honour. Under IFRS 15 their value is released as revenue alongside the redemptions.
3. Partner salesBanks pay for the points and also for the brand, access to members and advertising. That marketing share is revenue straight away, with almost no cost attached.
4. The floatCash comes in when points are issued; awards are delivered a year or two later. The liability is interest-free funding, which is why United, Delta and American borrowed billions against their programmes in 2020 and 2021.

Points profit lab

What 1,000 points bring in, and what moving the value of a point does

The airline decides how many points an award costs, which seats are open to awards and who buys its points. Each choice changes what a point is worth to members and what it costs to honour, so the airline can tilt the economics in its favour. Move the levers and watch where the money from 1,000 points goes. The value per point, breakage and partner price come from the settings above and the partner section.

An award on a seat that would fly empty costs about 0.15¢ per point (fees, fuel, catering). One that displaces a paying passenger costs what that passenger would have paid, roughly the value of the points. Higher award prices make both cheaper per point, and push some members to give up, which raises breakage.

Where the money from 1,000 points goes

Cash received for 1,000 points, split into what the awards cost and the three sources of profit.

What the change does to a point

Award prices unchanged, against the lab's setting.

The levers on a point's value

And what each one does in the accounts
Award pricesRaising the points needed for an award (a devaluation, or dynamic pricing that follows cash fares) makes every point cheaper to honour. Points already issued keep their deferred value, so the saving is pure margin.
Award seat availabilityOpening awards mostly on flights that won't sell out keeps the cost of an award near the cost of an empty seat, and protects revenue from paying passengers.
Fees and surchargesCash taxes and carrier surcharges paid on top of the points cover part of the cost of the award, so the points themselves carry more margin.
Low-value redemptionsGift cards, merchandise or upgrades priced at under a cent a point release the same deferred value for less cost.
Expiry and inactivity rulesStricter rules raise breakage and the revenue released with each redemption. Removing expiry does the opposite, which is why it is expensive.
The value estimate itselfUnder IFRS 15 the airline estimates the standalone value of a point. A lower estimate defers less of each fare, so more is revenue on the day of the flight. The estimate must rest on evidence, such as what awards are worth on redemption, and auditors test it.

Every lever has a cost outside the accounts. A point that buys less is a weaker reason to fly the airline or use its card, banks reprice their contracts at renewal, and members who expect a devaluation burn their balances early, which cuts breakage. Regulators have started to look too: in 2024 the US Department of Transportation opened an inquiry into the four largest US programmes, including how they devalue points. Loyalty 101, chapter 05 covers inflation and devaluation from the member's side.

The vocabulary

The words in an airline's loyalty note
LiabilitySomething the company owes: cash, a service or, here, a seat. Points are a liability because members can claim flights with them.
Deferred revenueCash received for something not delivered yet. IFRS 15 calls it a contract liability. It turns into revenue when the promise is kept.
Advance ticket salesThe deferred revenue for tickets sold but not yet flown, also called the air traffic liability. Usually an airline's largest current liability.
Performance obligationA distinct promise in a contract. A ticket that earns points contains two: the flight, and the right to a future award.
Standalone selling priceWhat a promise would sell for on its own. For a point, roughly what it's worth when redeemed, reduced for the chance it is never used.
AllocationSharing one price among the promises in a contract, in proportion to their standalone selling prices.
BreakagePoints that will never be redeemed. When it can be estimated, its value is recognised in step with redemptions, not when points expire.
Change in estimateWhen expected breakage is revised, the balance is restated as if the new rate had always applied and the difference goes through revenue at once (the catch-up).
Current and non-currentThe part of the liability expected to be redeemed within twelve months is current; the rest is non-current.
ProvisionA liability of uncertain amount, measured at the expected cost of settling it. Under the incremental cost method, the points are a provision for the cost of the awards.
Principal or agentWhen a member redeems on a partner airline, the programme only arranges the flight, so it books revenue net of what it pays the partner.
Financing componentWhen cash arrives long before delivery, as with a multi-year prepayment from a card issuer, IFRS 15 may require interest to accrue on the liability.

How it works

The ticket

A member pays P for a ticket and earns N points, each worth v to the member. A share b of points is expected never to be used. The ticket is sold in month 0 and flown in month 2. The member redeems 60% of the points expected to be used in month 10 and the rest in month 28; the remaining points lapse in month 40. Each award costs the airline c per point redeemed to fly. The default ticket is the one in Loyalty 101, chapter 04: $500, 5,000 points, 1.3¢ a point and 15% breakage.

Points expected to be redeemed E = N × (1 − b) breakage points B = N − E Standalone value of the points SSP = N × v × (1 − b) IFRS 15 (relative) deferred D = P × SSP / (P + SSP) flight F = P − D Residual D = SSP (at most P) F = P − D Incremental cost F = P provision = E × c, expensed when the flight is flown

Under the two deferral methods, the points' share is released as awards are delivered:

Breakage with redemptions an award of R points releases D × R / E of which the award itself D × R / N, breakage D × R × (1/E − 1/N) Breakage when points lapse an award releases D × R / N; the last D × B / N when the points lapse

Under incremental cost, flying an award uses up the provision and doesn't touch revenue. Under the deferral methods, the cost of flying the award is an expense when the award is flown. The balance sheet leaves out the cost of the original flight and everything else in the airline, so equity is just the profit on this ticket so far.

The profit lab

Per 1,000 points issued, a share s is sold to partners at price p and the rest is earned on flights. Raising award prices by x divides the value of a point and the cost of an award per point by 1 + x, and adds the chosen number of breakage points per 10%. Partner prices are fixed by contract and don't move.

Value to members v' = v / (1 + x) breakage b' = b + slope × x / 10% Cost per point redeemed c' = [e × 0.15¢ + (1 − e) × v] / (1 + x) e = share of awards on empty seats Standalone value A = v' × (1 − b') Deferred per point flights: A partners: p × A / (A + m) m = marketing value per point Cash per point flights: the value before the change, A₀ (the fare doesn't move) partners: p Fare kept flights: A₀ − A, passenger revenue on the day of the flight Profit breakage (deferred × b') + spread (deferred × (1 − b') − redeemed × c') + marketing + fare kept Points already issued gain = old redeemed × old cost − new redeemed × new cost (their deferred value doesn't change)

The rules over time

Before 2008, IFRS had no specific rule and many companies treated points as a marketing cost, accruing only what the awards were expected to cost. IFRIC 13 Customer Loyalty Programmes, issued in 2007 and applied from 2008, required part of the sale to be deferred as revenue for the award credits at their fair value, without saying how to split the price, so both the relative and the residual approaches were used. IFRS 15 replaced it in 2018 and requires relative standalone selling prices; its guidance on customer options and unexercised rights (paragraphs B39–B47) is where breakage comes from. In the United States, ASC 606 took effect the same year with the same model. Before it, US airlines generally used incremental cost for miles earned on flights and multiple-element accounting for miles sold to partners.

Sources

Limitations

This is a personal project and isn't affiliated with any airline. For the business side, read Loyalty 101: Breakage & the Points Liability.