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. What are some examples of a deferred tax liability?

    Learn why deferred tax liability exists, with specific examples that illustrate how it arises as a result of temporary differences. Read Answer >>
  2. Why Is Deferred Revenue Treated As A Liability?

    Deferred revenue is listed as a liability on the balance sheet because, under accrual accounting, the revenue recognition ... Read Answer >>
  3. What is the difference between legal liability and public liability?

    Discover the differences between a general legal liability, a specific public liability and a professional indemnity in the ... Read Answer >>
  4. Are accounts payable an expense?

    Learn about how to differentiate between liability accounts and expense accounts, and see why accounts payable is considered ... Read Answer >>
  5. What items on the balance sheet are most important in fundamental analysis?

    Read about which balance sheet items are considered most important for fundamental analysis, including cash, current liabilities ... 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. Insights

    Airline Stocks Rally (DAL, AAL)

    Airline stocks are up today thanks to reports that the industry is doing "OK."
  3. Investing

    Watch Airline Stocks For Takeoff Potential (AAL, DAL)

    Airline stocks have taken a hit but they show potential for takeoff as a result of low fuel prices, reduced competition and an improving economy.
  4. Personal Finance

    Why Is My Seatmate's Ticket So Much Cheaper Than Mine?

    How some travelers get their tickets for much less than others.
  5. Financial Advisor

    The Incredible Shrinking U.S. Airline Industry

    The U.S. hasn’t had a new scheduled passenger airline since 2007. Some blame a lack of financing while others say government approval has gotten too tough.
  6. 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.
  7. 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.
  8. Personal Finance

    Top New Trends In Airline Travel

    Learn more about the newest policies and procedures of America's airlines, and find out how these changes are affecting profit margins.
  9. Investing

    How Weak Oil Prices Affect Airline Profits

    Oil prices are a bit like the weather. This is an opportunity for airlines to invest the higher revenue back into the business.
RELATED TERMS
  1. Total Liabilities

    Total liabilities are the aggregate of all debts an individual ...
  2. Liability

    A liability is defined as a company's legal financial debts or ...
  3. Adjusted Liabilities

    Adjusted liabilities are used in the insurance industry to show ...
  4. Current Liabilities

    Current liabilities are a company's debts or obligations that ...
  5. Liability Management

    Liability management is the use of customer deposits and borrowed ...
  6. Balance Sheet

    A balance sheet reports a company's assets, liabilities and shareholders' ...
Trading Center