A hypothetical 10% increase in our estimate of the standalone selling price of a mileage credit would decrease passenger revenue by approximately $50 million, as a result of an increase in the amount of revenue deferred from the mileage component of passenger ticket sales.  

 

Sale of Mileage Credits. Customers may earn mileage credits through participating companies such as credit card companies, hotels and car rental agencies with which we have marketing agreements to sell mileage credits. Our contracts to sell mileage credits under these marketing agreements have multiple deliverables, as defined below.  

 

Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. In September 2013, we and American Express modified our SkyMiles agreements. This modification required that we use a different accounting standard for recording SkyMiles sold. Prior to the modifications, we allocated consideration received from selling miles to American Express among two primary deliverables: credit redeemable for future travel and marketing deliverables. We deferred revenue related to the portion of mileage credits redeemable for future travel based on the rate at which we sell mileage credits to other airlines. We calculated the value of the marketing component based on the residual method and recognize it as other revenue as related marketing services are provided.  

 

The September 2013 modifications introduced new deliverables and modified existing deliverables. Because these modifications were material to the SkyMiles agreements, we are required to use a different accounting standard that allocates the consideration received from selling miles to all deliverables based on their relative standalone sales price. Accordingly, we determined our best estimate of selling prices by considering discounted cash flows analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) the rate at which we sell mileage credits to other airlines, (3) published rates on our website for baggage fees, access to Delta SkyClub lounges and other benefits while traveling on Delta and (4) brand value. The effect of this change in accounting standard lowered the deferral rate we use to record miles sold under the agreements, which increases revenue we will record in future periods. The revenue impact of the SkyMiles agreement modifications was insignificant for 2013 and is expected to increase 2014 revenue by approximately $100 million . Additionally, upon application of this accounting standard, we were required to adjust the recorded value of miles currently deferred in our Frequent Flyer Liability that originated through the American Express programs. Accordingly, we adjusted the liability in the September 2013 quarter by less than $10 million .  

 

Breakage. For mileage credits that we estimate are not likely to be redeemed (“breakage”), we recognize the associated value proportionally during the period in which the remaining mileage credits are expected to be redeemed. Management uses statistical models to estimate breakage based