They record revenue from a milage redemption based on what they actually sell these tickets for.
So if I am understanding this correctly, say 10k miles redeems a $8k value revenue ticket, they would have earned $8k of revenue on their books.
So where is the loss on this aspect?
The loss would seem to be in potential revenue that they would have otherwise made.
I’m pretty sure they sell the miles to the cc company at a preset rate, recognizing the revenue when the miles are used. So if for example AA sells a block of 100 million miles to citi at .02 a mile ($2 million) when all the miles that will do not expire, go unused etc. are redeemed for let’s say $1.2 million in airfare they will recognize revenue of $800,000 from the sale of the points, as well as 1.2 million in airfare revenue.. They will also recognize as revenue a portion of the miles which historically will mever be redeemed.
Sounds like an easy $800,000 revenue from the sale of the miles, in addition to $1.2 million in airfare that was used by the credit card holders for seats that might have been unsellable anyway. However, if out of the $1.2 million in airfare, $800.000 was redeemed by brokers for passengers who would have otherwise paid cash for their tickets, the true net gain of the mileage agreement with citi was $1.2 million, or $800,000 less than they appear to have benefited from the arrangement.
Am I getting the process right?