This article discusses a problem that American Airlines had with its computer systems last Tuesday, April 16th. Due to the nationwide problem, AA was forced to ground all of its flights from midday until approximately 4:30PM. More than 400 flights were cancelled and many more were delayed. AA said that the problem was due to an inability to gain access to its electronic reservation system, called Sabre, commonly referred to as the “brains of an airline.” A spokesperson for Sabre stated that the problem did not come from its computer system. Sabre is responsible for the bookings and reservations made by customers, as well as other tasks such as printing boarding passes, ticketing, online check-ins, and tracking bags.
Such problems have happened in the past, especially when airlines merge. While AA and United Airways are about to merge once AA comes out of chapter 11 bankruptcy, their systems are not close to being integrated together. In response to the problems, officials from AA announced that they would waive fees for passengers wishing to change their reservations and would provide refunds to those people who wished to cancel their flights on Tuesday. AA is a service provider that uses the accrual basis of accounting. The decision by the AA officials, in light of the April 16th events, to refund tickets and allow schedule changes free of charge affects their accounts.
When AA receives money from a ticket sale for a flight on a later date, GAAP dictates that it records this as a liability account for the unearned revenue labeled “Air Traffic Liabilities.” By offering this refund, the “Air Traffic Liabilities” account would be debited, but not because the service was provided. Instead, cash would be credited because the money is being refunded to the customers. A slightly more complicated situation would arise if these tickets were non-refundable and if accounting policies mandated that these sales, since they are non-refundable, be recognized on the date of sale. In such a theoretical situation, the refund would cause the account for the recognized revenue to be debited.
Offering the free of charge schedule changes also affects their revenues but in a different way. It does not affect a specific account that was already adjusted due to a prior transaction. Instead, offering these free schedule changes decreases their potential net profit, as they are not getting paid for something they normally would be getting paid for. The expenses for each flight change transaction remains the same, since the same process is taking place, but there are no revenues to cover these expenses. As a result, AA’s potential net profit decreases.
Source: New York Times – http://www.nytimes.com/2013/04/17/business/american-airlines-cancels-flights-after-outage.html?_r=0
