How does Fresh Start Accounting effect Mileage Plus

Let me preface this by acknowledging that I am not an Accountant, nor do I know the intricacies of "fresh start" accounting beyond how it was explained to me. After United emerged from bankruptcy last year we were required to account for Mileage Plus miles in a markedly different way than over the past 25 years.
When American and United created the modern-day frequent flyer programs in May 1981 they made their own rules. In effect both airlines, and all other loyalty programs since then, began printing their own currency. This wasn't necessarily a new thing, as Green Stamps had been around long before. Members earn miles or points for some form of activity and the airlines allows them to spend their miles for future travel. Now, before we get into "Why can't I redeem my miles to Hawaii over Christmas?", let me stop and say that the system isn't perfect, but it's what we have to work with right now. Fresh start accounting, however, may change that.
Since emerging from bankruptcy, United now considers all the Mileage Plus miles that members currently hold to be a financial liability. Yes, yes..they've always been some form of liability. After all, if every member tried to cash out their miles in one day, we'd have a serious problem. But now, unlike most US airlines, United is taking a genuine financial hit every time a mile is awarded...but...United benefits when miles are redeem. Yes! United now makes money if you redeem your miles. Wha, wha, what?!
This should be public knowledge in our financial records, so those of you with more accounting knowledge than I can feel free to correct me. Picture this scenario to further understand:
You purchase a ticket from United for $100. You fly and earn 500 miles. All other costs excluded United makes $100, right? No, United makes $100 MINUS the cost of the miles. Lets say a mile cost $0.02...that's $10 worth of miles. So on the day you fly, United makes $90 from your $100 ticket. Now the kicker, you redeem your 500 miles (plus a bunch more) for an award ticket. With fresh start accounting, United now makes that $10 when you redeem. Essentially, the cost of the miles are differed until you use your miles. So how does this change things?
First of all, Mileage Plus is now changing the mileage expiration policy from 36 months to 18 months. This has caused quite an uproar in some circles, but please, does anybody really need 3 years between activity. With the old policy, miles wouldn't expire as long as you did something within 3 years...yes, 3 years. For most frequent flyers this is a mute point. They're flying every month, every week or maybe even every day. The new policy gives you a year and a half to show us you're breathing. That doesn't mean you have to fly. No, just do something. Buy flowers for your mom from FTD.COM and earn miles in the process. Bam, you've got another year and half to sit on your hands watching your miles. Why would United do this? Well...since miles are now a legitimate liability, expiring miles means reducing our financial liability. And who does this hurt?
Occasional customers. Not frequent flyers. A 1K could care less.
Look for this new policy to go into effect on December 31, 2007...so if you haven't earned any miles since July 30, 2006, I'd suggest you buy some flowers because come New Years Day on January 1, 2008, your miles will have expired.
More about the effects of this new accounting; in the short term, fewer broad-based bonus mile offers. Large broad-based bonus mile offers to earn up to 25,000 bonus miles by flying from Chicago to Peoria will be too expensive to justify. True, all airlines utilize bonus miles to entice customers to fly new or weak routes. United will still do that. But, now the finances are real. In United's past, and all other US airlines present, miles are really "funny money." Think of it like playing Monopoly for 25 years. You'd probably run out of $500 bills after about the first few hours, so you reach into your old Monopoly box, with the vintage battleship and wooden houses, and grab some more $500 bills to use. Then, after a while, you'd just take the Monopoly money to work and Xerox a whole sheet, or ream of $500 bills. This is how we did it for 25 years, and all other US airlines are doing it still today. I say US airlines because currently Air Canada is also using fresh start accounting for their mileage currency as well.
So, "Why can't I redeem my miles to Hawaii over Christmas?" Well, for starters, there's a simple thing called supply and demand...but more importantly, there's a department called Revenue Management. Revenue Management, or RM for short, is the organization that determines how much each seat on each airplane will cost at any given time. Now, from my perspective their process might as well be magic. I know there are algorithms and programs that crunch most of the numbers for them, but why my seat in 12F cost $213, while your seat in 12E cost $1,560 is beyond me. It's an Econ 101 student's biggest nightmare, and an Econ professors wet dream. Now that I've painted that picture for you, I'll get back to it. In United's, and I'm assuming most airlines RM groups, award tickets are considered "free seats." Yes, you earned 25,000 miles and redeemed your miles for a "free seat". Right? Well...not exactly. Sure, you didn't pay for that seat today, but how did you earn those miles? They didn't just magically appear. You bought two tickets last year and charged your Christmas shopping on your Mileage Plus Visa. Over the course of time, you accumulated those miles by giving us money and for that, we gave you miles for a "free seat". Perhaps you've already connected the dots. With fresh start accounting, the seat isn't really free. In fact, United will make money when you redeem for that "free seat". Back to math, a United saver award ticket costs 25,000 miles. Again, assuming a mile is worth $0.02 each, that means your seat really cost $500. So RM now has the option of pricing a seat at $375 or opening it up for award inventory and getting the equivalent of $500 for it. What does that mean for you? More award seats! You will be able to go to Hawaii for Christmas...eventually. United's RM "magic hat" doesn't yet account for award seats in this way, but they will. Until them, award seat availability will be limited. But, given this basic analogy, it's now in United's financial interest to give you that award seat you wanted. Not to mention, you might like us more. Now let me disclose that I have no idea when, or if, RM will be ready to change that system. So, in the short term, look for more negatives than positives, like changing the expiration policy. We'll save big bucks by expiring the miles of those occasional travelers, and our frequent flyers will actually benefit. Some day, you and I might benefit, too. If the accountants figure out that a "free seat" is actually worth money, and that ultimately, is what its all about.