Depreciation At Delta Air Lines And Singapore Airlines A Case Solution

1. Depreciation expense can be calculated by applying the following formula:

Depreciation Expense=(Asset Value-Residual Value)/(Useful Life of Asset)

In the current scenario, the value of the asset (Flight equipment) is $100. The policies regarding the residual value and the useful life of the asset have changed in the past five 8 years. Delta Airlines managed to reform its depreciation policy two times, one in July 1986 and the other in March 1993. On the contrary, Singapore Airlines relied on only one policy change which occurred near April 1989. Hence, the depreciation expenses per $100 value of flight equipment have gradually witnessed a changing pattern. The following two tables depict the detailed calculations for the depreciation values of the two Airlines.

2. Both Airlines rely on the straight line depreciation method for the calculations of the depreciation expense. Hence, from this perspective, essentially there is no difference at all. On the other hand, the policies regarding the useful life and residual value of aircrafts are largely different. The Delta Airline’s policy regarding the useful life is fairly narrow. The average useful life of Delta Airlines is substantially greater than that of Singapore Airlines. Meanwhile, the residual values adopted Singapore Airlines are also slight greater than its counterpart. Different airlines have different depreciation policy because:

• The fleet type may differ. New Aircrafts have slightly longer useful life span.

• The maintenance regime at Airlines is also a factor that can influence the useful life.

• Above all, the firm-level policies (regarding the use of aircrafts, the number of flight hours, etc.) are also the causes for different airlines having diverging depreciation policies.

Under the accounting and other relevant regulations, the difference in treatment of depreciation expense is allowed provided that the Airline backs its policies with sound and realistic figures. However, in any circumstance, the differences in depreciation policy are bound to happen.

3. The calculations show that in the case of Delta Airlines, the depreciation amount (Per $100) changed from $6 to $4.75. This implies that for $100 flight equipment, depreciation has changed by $1.25. Currently, Delta Airlines possess flight equipment under two different schemes. Some of the flight equipment is owned by the airline while the rest is leased from a third party. The final figure of flight equipment comprises the values of both the leased and owned equipment. Hence, the total flight equipment amounts to $9216 million. If one considers that $1.25 reduction in depreciation is caused by $100 worth of flight equipment, than $9216 million flight equipment will render a decrease in depreciation amounting to $115.2 million. If one considers the change in depreciation of Singapore Airlines ($11.25-$8=$3), then the total reduction in depreciation expense amounts to $299.52 million.