When you tell someone unfamiliar with the airline industry that a sale is not revenue you get one of three reactions. Surprise and a request to find out more. “You are talking nonsense” is another reaction and a few even look at you as if you have two heads! This blog is for people who want to find out more.
It does make sense after thinking about it. When buying goods or services for immediate consumption a sale is revenue. The business has earnt it as a result of delivering the goods or providing the service. In the airline industry, when the consumer buys a fare it is for travel in the future and the airline only earns the revenue when it provides the transportation service. Until that happens the airline is holding the customers money and it has a liability to the customer until that liability is extinguished by delivery of the service or other event such as a refund.
But what about non-refundable fares that have become more prevalent today? The airline doesn’t have a liability. Well actually it does. The aircraft needs to take off with the seat the customer paid for and arrive at its destination even if the customer chooses not to sit in it. If the airline defaults on its part of the contract the customer is entitled to their money back. Of course, some airlines put terms and conditions in small print that make it difficult to get money back and the nature of the default is a factor too. But the basic principle is that the customer is handing over their money in consideration for a service and the airline has a liability until it fulfils their part of the bargain.
So, what are these liabilities called? There is no standard across the industry, although the most commonly used and understood terms are ‘Forward sales’, ‘Sales-in-advance-of-carriage’ and ‘Air traffic liabilities’. To be different, the low-cost carrier community tend to use other terms such as ‘Customer Prepayments’ and ‘Deferred Income’. Ryanair call it ‘Unearned Revenue’.
Absolutely no one knows the total amount of these liabilities carried by the industry at any point in time, but we can have an educated guess at their magnitude. Many airlines disclose their forward sales liabilities on their balance sheet, others include them under current liabilities with other items and you have to hunt through the detail in the notes to the accounts to find them, whilst others choose not to disclose them at all. Some airlines choose only to disclose the amount in their final report and accounts for the year. Then there is the curve ball of seasonality, which results in substantial fluctuations in the level of liabilities throughout the year and each region has a different profile.
‘Forward sales days’ is a common ratio used to understand these liabilities. It is the ratio of forward sales liabilities to revenue, which is then converted into days for the period being analysed. For airlines that disclose these liabilities we know that forward sales days range from between 20 days to 100 days, with few outliers. That’s a huge variation across the industry and within an airlines’ own business cycle. Ryanair had 86 forward sales days as at 30th September 2019, on liabilities of €2.1bn
In December 2019, IATA estimated 2019 industry passenger revenues of $567bn. Assuming an average 45 forward sales days throughout the year for all airlines this would equate to total industry forward sales liabilities of $69.9bn on fares alone. If we include estimates for ancillary revenues such as baggage and travel taxes collected on behalf of governments the estimated liabilities would rise to circa $89bn. To put that into perspective it is the equivalent of Sri Lanka’s GDP in 2019 with a population of 21 million people, larger than the GDP of the smallest 47 countries combined and larger than the individual GDP of 142 countries, including 9 EU member states! Ryanair’s liabilities as at 30th September 2019 were larger than the individual 2019 GDP of 29 counties and the combined GDP of the 9 smallest island states.