Vikram Rathi

Section B Depreciation at Delta Air Lines and Singapore AirLines

PGP2011939

Q1. A) Delta Air Lines: Prior to 1986 100 10 90 10 9 1986-1993 100 10 90 15 6 1993-later 100 5 95 20 4.75

Cost of Aircraft Less: Estimated Salvage Value Depreciable Cost Depreciable Life Annual Depreciation

B)

Singapore Airlines Prior to 1989 100 10 90 8 11.25 1989-later 100 20 80 10 8

Cost of Aircraft Less: Estimated Salvage Value Depreciable Cost Depreciable Life Annual Depreciation

Q2: We can see from above that Delta Air Lines is depreciating its aircrafts at a lower rate whereas Singapore Airlines is depreciating its assets at 68% higher rate. This difference is very significant since each of the airline has fixed asset in billions of dollars. Factors affecting depreciable life and salvage value: 1. Advanced technology aircrafts: Latest state-of-the-art technology air crafts have higher salvage value and higher life. We can also see that Singapore AL has more percentage share of A310-300 and B747 in its fleet whereas Delta AL has more % share of B727, B757 and L1011-1 in its fleet. 2. Aircraft Usage: Singapore AL was using its carriers for mostly international flights. Comfort and technology were the key points. Avg. Passenger trip length was 2720 miles. Hence, it was using its aircrafts more excessively. Hence depreciable life was less. Delta AL had only 21% of its revenues from international flights. For domestic flights, cost is more important issue than comfort. Avg. Passenger trip length was 969 miles only. Since it was not using its aircrafts very rigorously, depreciable life was more. 3. Maintenance: Some airlines spend more on maintenance and increase useful life and salvage value of their air crafts. This different treatment is proper because useful life and salvage value is subject to above mentioned parameters. Flexibility and judgement is required to account for these issues. Q3: Deltas avg. fixed assets in 1993: (9043+173+8354+173)/2 = 8872 ($ million)

Vikram Rathi

Section B

PGP2011939

Difference: if used prior depreciation assumptions: 8872 *(0.06-0.0475) = 111 ($ million) Difference: if used prior depreciation assumptions: 8872 *(0.08-0.0475) = 288 ($ million) Q4: Singapore AL is making continuous profit for past five years. In the same period Delta AL lost money in its operations. With its aggressive depreciation strategy, Singapore AL can manage its accounting profit to be in the constant range and can go for less depreciation during low revenue times. We can also see that since Singapore AL keeps its carriers at a new state, its earnings from Sale of Flight equipment is a significant part of its net profit. Newer aircrafts have become a part of Singapore ALs strategy which makes it much more comfortable and hence, it might be preferred by customers for international flights. Q5: It can be seen that higher age will lead to lower depreciation expense since depreciable value is divided into more number of periods. In case of Delta, life is higher which will lead to lower depreciation expense each year. From question 1, we can see that its 40% lower than that of Singapore ALs.