A:

Airline revenue adjustments for air traffic liability are simply part of the accrual accounting method that airlines commonly use. Revenues are adjusted at the time of ticket sales in recognition of the fact that the airline has thereby incurred the liability of providing the service paid for – the flight.

Air traffic liability is part of the revenue recognition process for airline companies. The airline industry typically operates on relatively small profit margins, so revenue recognition is one of the most important practices for airlines. The manner in which passenger and freight revenues are recorded in accounting is generally consistent among the various airlines. The guiding principle in regard to air traffic liability is that revenues are only recognized in accounting when the airline's service is actually provided.

Airline tickets or freight bills are commonly sold and issued well in advance of the flight, making the money received for them at that point in time unearned revenue. The common accounting practice in the industry is to defer this revenue and initially designate it as a liability on the airline's balance sheet. When the flight service is eventually provided, the revenue then becomes earned revenue recognized in the airline's profit and loss. At the point when revenue is recognized in profit and loss, air traffic liability is correspondingly reduced.

The balance of air traffic liability fluctuates seasonally and according to the amount of ticket sales. In addition to representing tickets and freight bills for future flights, air traffic liability adjustment includes an estimate for possible future ticket refunds for past flights. This air traffic liability aspect involves some subjective judgment by the airline in its estimation, since it is impossible to know precisely in advance what amount of tickets will be refunded or exchanged.

The estimates are commonly based on the airline's historical experience and on seasonal patterns. Estimates are also made in regard to the number of unused tickets that will eventually be forfeited. Because unused tickets are often eligible for exchange for an extended time period, revenues received for them must remain part of the air traffic liability calculation until the time period for exchanges has expired and the tickets are recognized as forfeited.

Taxes and fees that airlines have to pay are another element in the air traffic liability equation. Airline ticket prices typically include such things as transportation taxes, fees for airport facility and security charges, and taxes related to foreign travel. Because the airline company only acts as a collection agent for these taxes and fees, and it does not retain them, the airline does not record them as revenue. Instead, they are initially recognized as a liability at the time a ticket is sold. When the airline renders payment to the appropriate entity, the liabilities are accordingly reduced in the airline's accounting records.

RELATED FAQS
  1. How does government regulation impact the aerospace sector?

    Learn more about how government regulation impacts airlines and aerospace manufacturers. Find out how American deregulation ... Read Answer >>
  2. How can I use the load factor as an indicator for the profitability of the airline ...

    Learn more about how investors and airlines use load factor. Find out about some of the major expenses of airlines and how ... Read Answer >>
  3. How much revenue in the airline industry comes from business travelers compared to ...

    Learn more about what business and leisure travelers contribute to airline revenue and profits. Find out how airlines remain ... Read Answer >>
  4. What are some examples of current liabilities?

    Examine some common examples of current liabilities a company may owe within a year or less in order to accurately assess ... Read Answer >>
  5. Why is there a negative correlation between quantity demanded and price?

    Learn what the law of demand is, the basic assumption of the law of demand and why there is a negative correlation between ... Read Answer >>
  6. What is the average debt/equity ratio of airline companies?

    Find out more about the average long-term debt to equity ratio of companies in the airlines sector and the importance of ... Read Answer >>
Related Articles
  1. Insights

    TripAdvisor Ranks the World's Best Airlines

    Travel review portal TripAdvisor has provided a ranking for leading airlines at global and regional levels.
  2. Personal Finance

    Top 4 Best Value Airlines

    Plane tickets can be pricey, they don't have to be! With this handy guide you can save your hard-earned money for when you're on the ground.
  3. Investing

    Who Are American Airlines’ Main Competitors? (DE, JBLU)

    Understand what makes American Airlines a good company and what sets it apart in the industry. Learn about the top four competitors to American Airlines.
  4. Insights

    4 Reasons Why Airlines Are Always Struggling

    Why is the airline industry synonymous with ongoing losses and insolvency? We list four reasons.
  5. Personal Finance

    Ever-Higher Airline Fees: Will Congress Save Us?

    Democratic senators want to crack down on high fees the airlines charge for things like changing flights. The airlines say this would end cheap airfares.
  6. Personal Finance

    Surprising Way to Save on Two or More Airline Tickets

    A quirk in the reservations system can make you pay extra if you don't use this special technique for buying multiple tickets online.
  7. Investing

    Why Europe Has The Cheapest Airfare

    Airline deregulation, more airport choices and number of flights all affect how much flights cost.
  8. Investing

    3 Best Airline ETFs for 2018

    These ETFs have high potential for gains in 2018 with increased interest in the airlines category.
  9. Investing

    American Airlines Trades Ex-Dividend Wednesday (AAL)

    The company is adjusting to an environment where there are more seats available across the industry than demand, which forces airliners to cut prices.
  10. Personal Finance

    Will Airlines Keep Flying High in 2016?

    Learn why the airline industry has such a unique set of variable and fixed costs that makes it very difficult to forecast its performance each year.
RELATED TERMS
  1. Airline Industry ETF

    A sector exchange-traded fund (ETF) that invests in stocks of ...
  2. Average Ticket

    Average ticket is a metric that provides details on the average ...
  3. Revenue Seat Miles

    The number of miles a plane flies multiplied by the number of ...
  4. Deal Ticket

    A deal ticket is a record of all the terms, conditions, and basic ...
  5. Long-Term Liabilities

    In accounting, a section of the balance sheet that lists obligations ...
  6. Other Long-Term Liabilities

    Other long-term liabilities are a balance sheet item that lumps ...
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center