Revenue displacement occurs when a passenger using a free travel award occupies a seat on a flight which would otherwise have been occupied by a paying passenger. This results in lost revenue for the airlines. This article reviews the accounting issues, the disagreement, and the outcome. Since the advent of free travel awards in 1981, airlines have been accounting for them in their financial statements. Moreover, the airline industry has weathered most of the 1980s without any specific accounting guidelines addressing free travel awards.
Most airlines use the incremental cost method to account for their free travel awards.
Once a program member accumulates the required number of miles or flights to qualify for free travel awards, then the incremental cost of providing these passengers free air transportation is recorded. A charge is made to the current passenger revenue account and a credit is made to the air traffic liability account in the amount of the incremental cost. When the airline provides the free transportation, the previously deferred amount is recognized as revenue. United Airlines utilizes a slightly different version of the incremental cost method to account for its free travel awards. United's variation involves an expense accrual and an accrued liability.