Business strategy using financial statements Depreciation at Delta Air Lines and Singapore Airlines(A) Case Analysis

residual value. life.Learning Objectives • How to understand the component of a depreciation policy--cost. and pattern for reporting depreciation • How to do the “compare and contrast” when the two airlines adopt significantly different accounting policy for depreciation of aircraft. Doing analysis should link accounting choices to financial reporting and business strategy. . • How to do analysis in the economic context where each airline operates.

00(c) $6.25(a) $8.Comparison of Depreciation Expense for Delta and Singapore Airlines Assumptions Depreciable Life for Aircraft (years) Singapore Prior to 4/1/89 4/1/89 to date of case Delta Annual Depreciation Salvage Value for Expense Per $100 Gross Aircraft(% of cost) Value of Air Craft 10% 20% 8 10 $11.00(d) $4.00(b) Prior to 7/1/86 7/1/86 to 3/31/93 4/1/93 to date of case (a) 100*(1-10%)/8 (d) 100*(1-10%)/15 10 15 10% 10% $9.75(e) 20 5% (b) 100*(1-20%)/10 © 100*(1-10%)/10 (e) 100*(1-5%)/20 .

. • Applying that to aircraft values of many billions of dollars is obviously going to have a very material impact on companies’ depreciation expense and therefore on their reported earnings.25—an enormous range.) • We can establish a analytic model by calculating the annual depreciation expense for each airline for each $100 in gross value of aircraft.75 to $11. • The annual depreciation expense for Delta and Singapore per $100 of gross aircraft value ranges from $4.Comparison of Depreciation Expense for Delta and Singapore Airlines(cont.

depreciable aircraft life for Singapore is only 10 years compared with Delta’s 15-20 years.8 years. • The useful. Singapore’s useful life is less than the average life of a several major American airlines(United airline. • The average age of aircraft for Singapore is only 5. Continental and TWA) .1 years compared with Delta’s 8.Useful life analysis • Singapore Airline is using very conservative depreciation assumptions compared with Delta liberal assumptions.

technologically less advanced aircraft. we can see that Singapore has more of the Boeing 747-400.) What factors would probably affect the useful. whereas the average passenger trip length for Singapore is about 2700 miles. depreciable life of aircraft?  The nature of the technology employed.  The specific use that aircraft is given The case indicates that Singapore is a much longer-haul carrier than Delta. the longer they are likely to last. Due to the existing maintenance standards for aircrafts we can assume that major airlines like Delta and Singapore both have good maintenance programs. The average passenger trip length for Delta is about 900 miles.  Maintenance The better maintained aircraft are.but Delta does n’t have any 747-400s. .Useful life analysis(cont. Technologically newer aircraft probably last longer than earlier. According to the exhibit3 and exhibit7.

.if just as insurance against a possible downturn in the future.Financial Considerations • The recent financial performances of these two airlines are dramatically different. • We can imagine that Delta want to reduce its reported expenses. while Singapore can afford to take a larger hit from depreciation expense. Delta lost $1.if at all possible. Meanwhile Singapore remains profitable in the same period and made $1.2 billion from 1991 to 1993.6 billion.

08-0.06-0.3 million from April 1. it reduced annual depreciation expense by $130 million. 8827*(0.) • (1) (2) How much of a different amount in depreciation expense. The average gross value of Delta’s flight equipment in 1993 (9043+173+8354+173)/2=8872 million Compared to Singapore’s depreciation assumptions.1993. (3) • (1) (2) . Delta can save about $111 million on an annual base. When Delta changed its depreciation assumptions in 1986.Financial Considerations(cont.0475)=$288 million Compared to Delta’s own depreciation assumptions prior to April 1.0475)=$111 million We can do a couple of reality checks on this Delta disclosed in its annual report that it reduced depreciation expense by $34. 1993. Delta can save about $288 million a year in depreciation expense. 8872*(0.

whereas Singapore’s average annual book gain on the sale of flight equipment was $134 million in Singapore dollars. Exhibit 1 and 5 of the case indicate that Delta’s annual book gain on the sale of flight equipment during 19891993 was about $30 million. dollar . $74 million in U. (2) In the book gains on the sale of flight equipment.Singapore’s Strategy • Why would Singapore employ depreciation assumptions that are so much more conservative than Delta’s? • The answer is that Singapore will get all of the difference in depreciation expense back (1) One way Singapore could get it back is by having much less depreciation expense in the future .S.

Singapore’s Strategy(cont.) How Singapore’s accounting practice relates to its overall business strategy. Singapore can afford to take a large hit in its depreciation expense because it knows that it can record large gains on their sale • Singapore can maintain its differentiation in the marketplace with a regular supply of new aircraft. We can see a likely consequence of this strategy from Singapore airline’s capacity utilization—over 70%. . • Singapore airline is renowned for its customer service and it gets the aircraft’s market price above book value • Singapore intends to sell its aircrafts from the very start when they are not so much “used”.

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