Airline accounting: the key IFRS issues

Why is airline accounting different?

Airlines are capital intensive, with fleets that dominate the balance sheet, and operationally geared, with high fixed costs and thin margins. They receive cash from passengers before providing the service, so the liability for unflown tickets is one of their largest. Aircraft, many leases and much of the fuel bill are priced in US dollars, so airlines reporting in other currencies carry large foreign currency exposures. And the industry is exposed to shocks, from fuel price spikes to the groundings of 2020, that test impairment, going concern and hedge accounting judgements.

Which IFRS issues matter most in airline accounting?

How are aircraft leases accounted for?

Under IFRS 16, an airline recognises a right-of-use asset and a lease liability for nearly all its aircraft leases. The lease term includes extension periods the airline is reasonably certain to use, and variable payments, such as maintenance reserves based on flight hours, are left out of the liability unless they are fixed in substance. A US dollar lease liability is a monetary item, retranslated at each closing rate with exchange differences in profit or loss, while the right-of-use asset stays at the historical rate, so airlines with other functional currencies often hedge or designate dollar revenues against these liabilities. Wet leases, where the lessor also provides crew, maintenance and insurance, need analysis of whether they contain a lease, and many are short-term. See IFRS 16 lessee accounting and lease term.

How is aircraft maintenance accounted for?

For owned aircraft, the cost of a heavy maintenance check or engine overhaul is capitalised as a component and depreciated until the next one, while routine line maintenance is expensed. When an aircraft is acquired, part of its cost is identified as the maintenance condition at that date and depreciated over the period to the first check. For leased aircraft, airlines often pay maintenance reserves to the lessor, which reimburses them when qualifying maintenance is done: the part expected to be reimbursed is an asset, and any part not expected to be recovered is a lease cost. Leases also require aircraft to be returned in a specified condition; airlines recognise these return obligations as the aircraft is used, under IAS 37 or within the lease accounting, and practice varies. Major checks on leased aircraft are often capitalised and depreciated over the shorter of the period to the next check and the remaining lease term.

How are aircraft depreciated?

IAS 16 requires significant parts with different useful lives to be depreciated separately: the airframe, often over 20 to 25 years to a residual value, engines, cabin interiors, maintenance components and spare engines and rotable parts. Residual values and useful lives are reviewed every year, and early retirement of a fleet type or weaker secondary market values can shorten lives or reduce residuals. Pre-delivery payments to manufacturers are recognised as assets under construction, with borrowing costs capitalised under IAS 23. See component depreciation.

How are tickets and frequent flyer miles recognised?

Tickets sold in advance are a contract liability, often called the air traffic liability or unearned transportation revenue, and become revenue when the flight takes place. Non-refundable tickets that are expected to go unused are breakage: many airlines recognise it at the scheduled flight date, based on historical patterns, if a significant reversal is highly unlikely. Refundable tickets and vouchers issued for cancelled flights remain liabilities until used, refunded or expired.

Miles earned on flights give the passenger a material right, so part of the ticket price is allocated to them on relative stand-alone selling prices, taking into account the expected redemption rate, and recognised when the miles are redeemed or expire. Miles sold to partners such as credit card issuers usually come with a brand licence and marketing services, which are separate performance obligations, and awards provided by other airlines or retailers raise principal or agent questions. See loyalty programmes.

How do airlines hedge fuel?

Jet fuel is one of an airline's largest costs, and its price is volatile. Because jet fuel derivatives are less liquid, airlines often hedge with crude oil or gasoil swaps and options. IFRS 9 allows a risk component, such as the crude oil element of jet fuel, to be designated as the hedged item if it is separately identifiable and reliably measurable, which makes hedge accounting far more achievable than under IAS 39. Effective gains and losses on cash flow hedges are held in equity and released into fuel cost when the fuel is used; for options, the time value can be treated as a cost of hedging. Airlines also hedge the US dollar cost of fuel and aircraft. See IFRS 9 hedge accounting and, for the producer's side of the same trade, oil price hedging.

Why are sale and leasebacks common?

Many airlines finance new aircraft by selling them to a lessor on delivery and leasing them back. If the transfer is a sale under IFRS 15, the airline recognises a right-of-use asset for the part of the aircraft it keeps and a gain only on the rights transferred to the lessor, adjusting for any off-market terms. If it is not a sale, for example because the airline has a substantive repurchase option, the proceeds are a financial liability. See IFRS 16 sale and leaseback.

What other issues arise?

Impairment testing turns on the cash-generating unit, often the whole network or a fleet type, because aircraft are shared across routes and connecting traffic links them; groundings, early fleet retirements and demand shocks are triggers. See IAS 36 impairment. Ancillary revenue from bags, seat selection and change fees is usually part of the flight and recognised when it is flown, while hotels and car hire sold on the airline's website are usually agency sales. Emissions schemes for aviation, such as the EU ETS and the CORSIA offsetting scheme, create obligations covered in emissions allowances. More detail is in the guides on aircraft leases, maintenance reserves and checks, aircraft components, frequent flyer programmes, unused tickets and breakage, fuel hedging, aircraft sale and leaseback and lease return conditions. Impairment and revenue beyond the fare are covered in airline impairment testing and ancillary revenue.

This guide is general information. It is not tax or legal advice for your situation.