Chinook Air (CA) is one of several major passenger airlines based out of Cascadia. CA serves over 35 million customers: Actuarial Science Course Work, NUS, Singapore

Chinook Air (CA) is one of several major passenger airlines based out of Cascadia. CA serves over 35 million customers annually and provides direct passenger service to over 200 destinations on five continents. CA has a fleet of over 400 jet airplanes of varying sizes and models and employs approximately 23,500 individuals on a full-time equivalent basis.

You, an actuary at CA, spend most of your working time on the employee benefits valuation. You are now assigned to work on several projects pertaining to CA’s frequent flyer program.

CA’s frequent flyer program allows customers of CA to earn Air Miles that may be redeemed for future flights. The customer’s airline miles are forfeited if their account has no activity for 36 consecutive months. When using Air Miles to purchase a flight, the number of Air Miles deducted from the customer’s account is equal to the number of miles of the flight. No partial redemptions are allowed (though Air Miles can be used for individual segments of one reservation). This program has been in place for many years with few changes or enhancements.

Recently, CDL Credit, a major credit card company, approached CA and its competitors with a request to use the airlines’ Air Miles in a promotion to its own customers. If CA is selected as CDL Credit’s partner, CDL Credit’s proposed rise will allow for its cardholders to earn CA Air Miles based on amounts charged on their credit cards.

Currently, CDL Credit’s customers receive cash back, but CA wants CDL Credit to provide an option to earn frequent flyer miles. CA Air Miles earned by CDL Credit card holders will be subject to the same redemption and forfeiture requirements as the current CA frequent flyer program. CDL Credit anticipates that this promotion will be ongoing. However, as this is a new venture, wishes only to enter an agreement with CA for one year.

It is known that CA is not the only airline that CDL Credit approached for a proposed deal. CA’s management has expressed interest in this venture provided that it meets its risk and profit requirements. CA’s primary profit measure is the present value of net profits as a percent of initial revenues.

Using the current reporting discount rate, management requires the present value of net profits as a percentage of initial revenues to be greater than 10%. Management is interested in this venture to help meet CA’s profit goals and manage earnings volatility. Given that, CA’s CFO is interested in risk measures such as VaR and CTE.

Two spreadsheets have been prepared to assist you with the questions. Further descriptions of the spreadsheets will be provided in the questions. You will be asked to upload both spreadsheets. Do not assume that graders will look at your spreadsheets, but they may choose to do so.