AN ANALYSIS OF THE IMPACT ON JETBLUE

Overview of Revenue Sources and Revenue Recognition Policies

JetBlue was an American passenger carrier company that provided air transportation services across the United States, the Caribbean, and Latin America. JetBlue entered into several contracts with customers with the principal activity being traveling from one location to another. A single passenger revenue transaction could have contained three types of goods or services: the flight transportation, frequent flyer award miles, and ancillary services. Revenue for flight transportation was recognized either when transportation was provided or after the ticket or customer credit expired (where expiration of the ticket or credit without use was called breakage). If passengers did not show up to their flight, the ticket expired at the time of the flight. If passengers canceled a nonrefundable ticket prior to the flight, their flight credits were good for one year after the date of the flight. Tickets sold but not yet recognized as revenue and unexpired credits were included in air traffic liability on the consolidated balance sheets. JetBlue prepared its financial statements in accordance with U.S. GAAP (see Exhibit 2 for JetBlues 2015 financial statements).

Pricing Model

In June 2015, JetBlue launched its new pricing model, Fare Options. Customers could purchase tickets at one of three branded fares: Blue, Blue Plus, and Blue Flex. Each fare included different offerings such as free checked bags, reduced change fees, and additional TrueBlue points (see Customer Loyalty Program below), with all fares inclusive of free in-flight entertainment, snacks and non-alcoholic beverages. JetBlue also provided a premium product called Mint, which offered customers a business-class experience.

Customer Loyalty Program

Under JetBlues frequent-flyer program, points were awarded based on dollars spent on a flight. According to JetBlues 2015 annual report:

TrueBlue is JetBlues customer loyalty program designed to reward and recognize loyal customers. Members earn points based upon the amount paid for JetBlue flights and services from certain commercial partners. The points do not expire, the program has no black-out dates or seat restrictions, and any JetBlue destination can be booked if the TrueBlue member has enough points to exchange for the value of an open seat. Mosaic is an additional level for the most loyal customers who either (1) fly a minimum of 30 times with JetBlue and acquire at least 12,000 base flight points within a calendar year or (2) accumulate 15,000 base flight points within a calendar year. Over 1.4 million TrueBlue one-way redemption awards were flown during 2015, representing approximately 4 percent of the total revenue passenger miles.3

Prior to introduction of the new standard, JetBlue accounted for loyalty programs using the incremental cost method, whereby it did not consider the issuance of loyalty points to be a component of revenue. JetBlue recorded a liability for the estimated incremental cost (which was usually less than the standalone selling price) of outstanding points earned from JetBlue purchases that were expected to be redeemed.

Ancillary Services

Passenger revenue included seat revenue and revenue from ancillary product offerings. In addition to the flight itself, JetBlue offered several upgrades and additions for its customers to purchase.

EvenMoreTM Space

JetBlues largest ancillary product, the EvenMoreTM Space seats, generated approximately $228 million in revenue in 2015. The EvenMoreTM Space seats were available for purchase across all fleets, giving customers the opportunity to enjoy additional legroom, as well as early boarding access. Under prior revenue recognition guidance, fees paid to guarantee certain seat

assignments and fees paid for the ability to board early were recognized at the time of service (i.e., the flight) as part of Passenger Revenue.

Other Sources of Revenue

The primary components of Other Revenue were the fees from reservation changes and excess baggage charged to customers. JetBlue also included the marketing component of TrueBlue point sales, on-board product sales, charters, ground-handling fees of other airlines, and rental income.

Fly-FiTM Fly-FiTM was JetBlues Internet product and was available on all flights. Unlike other airlines, which typically charged customers for in-flight Internet, JetBlue offered free Wi-Fi to its customers. Under prior guidance, companies that charged a fee for in-flight Internet access recognized revenue at the time of service (i.e., the flight). Companies that did not charge fees for Internet access did not recognize revenue, and simply recognized the costs of providing in-flight Wi-Fi.

In-flight entertainment

JetBlue offered all of its customers 36 complimentary channels of DIRECTV. In addition, had the option to purchase JetBlue Features movies for $5 per movie on all domestic flights over 2 hours (there was no charge on all flights outside of the United States). Under prior guidance, companies who charged a fee for in-flight entertainment recognized revenue at the time of service (i.e., the flight). Companies that did not charge for these services did not recognize revenue, and simply recognized the costs of providing in-flight entertainment.

Onboard purchases

JetBlue offered snacks and non-alcoholic beverages to all its customers, and customers had the option to purchase premium beverage and food selections. JetBlue also provided its customers with the option to purchase additional products such as blankets, headphones, or pillows. Mint customers had access to complimentary premium food, premium beverages and products. Under prior guidance, companies that offered free snacks and beverages simply recognized the costs of the goods provided. Companies that charged for these items recognized revenue at the time of service (i.e., the flight).

Excess baggage charges

JetBlues fees for checked baggage varied by ticket purchased. Customers received two free checked bags with the Blue Flex fare, one free checked bag with the Blue Plus fare, and no free checked bags with the Blue fare. Additional checked bags over the allowed amount, overweight bags, and large bags all incurred additional fees. Under prior guidance, revenue was recognized for baggage fees at the time of service (i.e., the flight).

Change fees

Similar to baggage fees, JetBlues various fare options included the ability to change a reservation for free. Aside from the Blue Flex option, customers incurred a flat change fee and had to pay any difference in fare price. Under prior guidance, these fees were non-refundable and did not relate to the ticket price for any future change. Therefore, revenue was recognized at the time of service, which was the time the change was created, pre-flight.

1. How should Jet Blue account for upfront ticket purchases and payments?

2. How should Jet Blue account for revenue from its frequent flyer program?

3. Explain in your own words how Jet Blue should account for total fees and fees received from changing flight reservations