Accounting for frequent flyer programs on corporate balance sheets is getting tricky. There’s some pressure to book mileage liability at the market value of the rewards they can be redeemed for, rather than at the marginal cost of carrying an additional passenger on a flight.

Historically, airline yield management was able to restrict ‘saver’ level awards to seats that would have otherwise flown empty. So an airline would ‘sell’ the seat to its frequent flyer program at roughly cost, so order of magnitude perhaps $25 for a US domestic ticket. Of course that wasn’t the only element of redemption, or balance sheet liability. There are rulebuster type of awards which come at a higher cost, premium cabin awards, partner awards, etc. But to a pretty good approximation, mileage programs would sell miles at a huge accounting profit because the redemption side was so cheap.

There’s accounting rules pressure on the practice, and there’s also the reality of record load factors. There just aren’t that many otherwise-unsold seats. And rather than growing capacity at the rate at which mileage balances are growing, several airlines are cutting capacity. So there’s a greater likelihood than ever before that a redemption seat could be displacing a marginal low-fare but still paying passenger. So the presumed cost to the airline and its program is really higher than the old accounting practices would suggest.

One way out of the accounting conundrum is to sell the mileage program, or otherwise move it “off balance sheet.” If the frequent flyer program is a separate company, or something which resembles a separate company, then the price that frequent flyer program is paying an airline for seats is presumably the real market price and actual cost it’s incurring. There’s no need for accountants to make up a hypothetical cost to value mileage liability. They can use actual cost figures.

Now, in my view it would be a shame if an accounting rules change was the driving force behind loyalty program spinoffs. There are real reasons why airlines might consider such a move (although I’m increasingly skeptical that it would happen of its own accord in the current business environment, sure it could generate cash to avoid bankruptcy but avoiding the spinoff might be the best way to shield the program from current creditors if there’s a real bankruptcy risk.. Boy could that ‘prediction’ come back to bite me with you reader folk!).

But at the same time there’s a real conundrum out there in airline world. The current value proposition of frequent flyer redemption is predicated on booking passengers into otherwise unsold seats. What happens when those seats disapear? Programs still have members to satisfy. There’s also been a growing trend towards ‘miles as money’ with any seat available and miles worth a fixed amount (usually a cent). That solves the capacity control frustrations, but only by massively reducing the value of miles to the point that they’re no longer a preferred currency for things other than flying.

Mileage programs are a multibillion dollar business. The underlying profitability of some air carriers is dependent almost entirely on mileage sales from their frequent flyer programs. Alaska sells a couple hundred million dollars in miles to Bank of America each year, and on average their profit or loss as an entire company can be measured in the low tens of millions. United sees its mileage program subsidiary UAL Loyalty Services as the only consistently profitable part of its portfolio. Just to name two examples. And the biggest single component of the outside mileage sales business is credit card partnerships. But if a United mile earned from the Chase co-branded credit card is worth one penny, why not put your spending on a Citibank Thank You Rewards credit card instead — earning 3 to 5 points per dollar for certain cards, currently redeemable at 2 to 3 cents per point via their fixed redemption chart? That’s 6 to 15 cents a point, compared to just one. Boom. Value proposition over.

I’m not sure where all this goes, though certainly there’s a trend mirrored in the accounting rules towards handling frequent flyer programs as an arms length business and that makes the really high value redemptions tenuous. I have no great crystal ball, but I know it’s always best to redeem miles in the near term rather than holding onto them for an uncertain future.

That isn’t to say go on a redemption binge. Don’t use your miles unwisely. But if there’s an international first class trip you want to take, book it. Don’t put it off for a fre years. If you would normally book a business class redemption, why not consider first class instead? Enjoy the miles now, earn more, and enjoy them later. But don’t put off the dream redemptions for a future time.