Case Study

Depreciation at Delta
Singapore Airlines.

Airline

Submission Date

16-Sep-2009

Class

EPGP 09-10

Subject

Financial Reporting and Analysis

and

Submitted by

Abhishek Pangaria
Mandeepak Singh
Rajendra Inani
Saravanan Logu
Tarandeep Singh
Vivek Edlabadkar

Table of contents
Objectives............................................................................................................................2
Depreciation in airline industry...........................................................................................2
Case Background.................................................................................................................2
Test Case Question 1............................................................................................................3
Test Case Question 2............................................................................................................4
Test Case Question 3............................................................................................................6
Test Case Question 4............................................................................................................7
Test Case Question 5............................................................................................................7

Case Study Depreciation at Delta Airlines and Singapore Airlines

Objectives
To understand the different depreciation methods used by Delta Airlines and Singapore
Airlines during the period of 1989-1993.

Depreciation in airline industry

Typically, an airlines aircraft depreciation expense is derived by initially estimating both
the useful life and the residual value or the perceived fair market value of the aircraft at
the end of its estimated useful life.
To determine the periodic depreciation expense that reduces the value of the aircraft on
the companys balance sheet while increasing operating expenses the total cost of the
aircraft is reduced by the estimated residual value and that sum is divided by the
estimated useful life. By increasing the estimated residual value and extending the
estimated useful life of its aircraft, an airline company would prospectively record a
lower depreciation expense on its income statement and a higher value for each aircraft
on its balance sheet.
Consequently, the airline would receive a boost to earnings in all future periods and a
boost to earnings growth during the four quarters following the change, as prior financial
Statements are not restated. While near term earnings would be boosted by the reduced
depreciation expense, future earnings may be adversely impacted from this change as the
reduced depreciation expense leads to higher reported aircraft values and, if upon
disposition of the aircraft the book value is in excess of the realizable value, losses will
be incurred.

Case Background
Delta Airline is one of the major passenger airlines in US, with almost $12 billion in
annual revenues. It changed its depreciation method in financial statement twice between
1989 and 1993. In both times it increased the useful life of aircraft and once decreased
the residual value.
Singapore Airlines a major passenger airline in Asia. It changed its depreciation
calculation method in 1989. It increases its aircrafts usage life and increased the residual
value. In this case study we are going to analyze there financial statements and figure out
the rational behind these changes.

Page 2 of 7

Case Study Depreciation at Delta Airlines and Singapore Airlines

Test Case Question 1

Calculate the annual depreciation expense that Delta and Singapore would record
for each $100 gross value of aircraft.
Depreciation =

(Asset value Residual Value) / Asset life

Fixed Asset Price

$100

Delta Airlines
Prior to
July 1,1986
Residual Value
Asset Life
Depreciation

10%
10
$9

Between
July 1,1986 and
March31, 1993
10%
15
$6

Singapore Airlines

Residual Value
Asset Life
Depreciation

Prior to
April 1, 1989
10%
8
$11.25

After
April 1, 1989
20%
10
$8

Page 3 of 7

April 1, 1993
Onward
5%
20
$4.75

Case Study Depreciation at Delta Airlines and Singapore Airlines

Test Case Question 2

Are the differences in the ways that two airlines account for depreciation expense
significant?
Both of the Airlines use Straight Line Method of Depreciation.
The Salvage value and Asset Life of both Delta and Singapore Airlines is different at
different point of times. On occasions and data provided in the case we can conclude that
Delta had much higher average asset life compared to Singapore Airlines. On the other
hand the residual value of Delta was much less than Singapore airlines.

Why would the companies depreciate aircraft using different depreciable lives and
salvage values? What reasons could be given to support their differences?
1. Various airlines have different depreciation methods based on type of fleet and
business objectives
2. Type of fleet There has been several technological advancements in airline
industry. Airbus and Boeing introduced aircrafts that they claimed to have higher
periods of operation compared to previous ones. The newer aircrafts added to fleet
of any airline can give them an option to depreciate the fleet over longer period of
time.
3. Usage and Maintenance - Based on the lesser usage and higher maintenance of an
aircraft, the company may decide to increase its average usage period and so
lower depreciation rate.
4. Another important reason prima facie is to show more profits due to less
depreciation. It needs to be noted that there has been more depreciation
assumption changes by airlines during rough or loss making times of airline
industry. (e.g. 1992-1993)

Page 4 of 7

Case Study Depreciation at Delta Airlines and Singapore Airlines

Is the different treatment proper?

Yes, Based on company's objective the treatment is proper. Every company may have its
own reasons to calculate depreciation on its own premises and rationales.
Example of recent changes
Continental Air Lines, Inc. increased its estimated useful life on certain new generation
aircraft and increased the residual value on all aircraft on January 1, 1998. It changed to
an estimated useful life of 30 years from 25 years on newer model planes the Company
has recently purchased.
Southwest Airlines Company: Effective January 1, 1999 extended the depreciable lives of
its 737-300/500 airplanes to 23 years from 20 years.
Some havent changed
Alaska Airgroup Inc. has maintained constant its depreciation policy at eight to 20 years for
aircraft, which ranks as one of the most conservative in the industry.

Page 5 of 7

Case Study Depreciation at Delta Airlines and Singapore Airlines

Test Case Question 3

Assuming the average value of flight equipment that Delta had in 1993, how much
difference do the depreciation assumptions it adopted on April 1, 1993 make ?
Depreciation value difference is of (6 4.75) at $100 value.
So for 9216 it will be 1.25/100 * 9216 = 115.2
Year
Value of Flight equipment
owned
Flight equipment under
capital leases
Total Equipment
Diff in depreciation value
Total change

1993
9043
173
9216
0.0125
115.2

How much more or less will its annual depreciation expense be compared to what it
would be were it using Singapores depreciation assumption?
Year

1993

Flight equipment owned

Flight equipment under
capital leases
Total Equipment
Diff in depreciation value
Total change

9043

Page 6 of 7

173
9216
0.0325
299.52

Case Study Depreciation at Delta Airlines and Singapore Airlines

Test Case Question 4

Singapore Airlines maintains depreciation assumptions that are very different from
Deltas. What does it gain or lose by doing so? How does this relate to companys
overall strategy?
1. There will be low net income as the depreciation amount is higher. Besides this,
there will be less tax because of low income. So savings on tax can be a gain.
2. They target to sell the aircraft at fair market value which will be obviously much
higher than 20% residual cost after 10 year.
How does this relate to companys overall strategy?
The above strategy of reselling the aircraft relates to the company's overall strategy of
maintaining newer aircraft in their feet. They sell a significant aircraft as can be seen
from Exhibit 1.
We can see that relative proportion of sale of flight equipments is higher for Singapore
Airlines as compared with Delta Airlines.

Test Case Question 5

Does the difference in the average age of Deltas and Singapores aircraft fleets have
any impact on the amount of depreciation expense?
No there is no direct relation of average age of Deltas and Singapores aircraft fleets and
amount of depreciation expense.

Page 7 of 7