DEPRECIATION AT DELTA AIR LINES AND SINGAPORE AIRLINES (A)

Answer-1
a) Delta Air Lines
Gross Value of Aircraft = $100
Depreciation = (Gross Value – Residual Value)/ Asset Life

Prior to July 1, 1 July 1986 – Since April 1993

1986 March 1993
Residual Value 10% 10% 5%
Asset Life 10 years 15 years 20 years
Depreciation $9 $6 $4.75

a) Singapore Airlines
Gross Value of Aircraft = $100
Depreciation = (Gross Value – Residual Value)/ Asset Life

Prior to April 1, After April 1, 1989

1989
Residual Value 10% 20%
Asset Life 8 years 10 years
Depreciation $11.25 $8

Answer-2
Both the airlines have been using the Straight Line Method (SLM) of depreciation for their
fleet. However, the difference in depreciation expense for the 2 airlines is significant. This is
due to the fact that Delta has a higher average life (8.8 years) and asset life for its fleet than
Singapore (5.1 years). Also, the residual value is higher for Singapore. This contributes to a
higher depreciation expense for Singapore Airlines than Delta Air Lines.
The companies can use different salvage values and asset lives due to the following reasons-
a) They have different type of fleet, which has different characteristics. There can be a
difference in the quality of those assets. There can be technological advancement over
time when new aircrafts are added to the fleet, which increases the average life of the
fleet.
b) The depreciation also depends on the usage and maintenance. Regular spending on
maintenance and repairs can increase the average life. A higher usage, on the other
hand, can decrease the average life.
c) The difference can also be attributed to the management objectives. If the
management aims to provide a superior customer experience and facilities, they may
renew the fleet more frequently and charge higher depreciation.
 d) It can also be due to different authorities, which may require them to use some
specific metrics for the tax calculations.
e) The company, in order to a higher profit, can choose to large a low depreciation
expense by using a higher asset life and a higher salvage value.
Based on the evidence, it can be said that both the companies are accurate in treating their
depreciation expenses. The treatments vary due to numerous factors discussed above.

Answer-3

1993 1992
Owned Aircraft $9043 $8354
Leased Aircraft $173 $173
Gross Value $9216 $8527

Average Value = (9216 + 8527)/2 = $8871.5 ~ $8872

On $100 worth of aircraft, Delta charged depreciation of $6 before April 1993, and $4.75 since
April 1993.
So, the change was $1.25 on $100 worth of aircraft.
Actual change in depreciation = 0.0125*8872 = $ 110.9
Hence, the depreciation expense would reduce by $110.9.
Singapore Airlines was charging $8 depreciation on $100 worth of aircraft. So, if Delta had
doped the same assumptions, the difference would be $3.35.
Actual change in depreciation = 0.0325*8872 = $288.34
Hence, the depreciation expense would increase by $288.34.

Answer-4
The depreciation assumptions of Singapore Airlines help it in the following ways-
a) It helps them lower the tax expense. This is because they charge higher depreciation
which leads to reduced earnings. This gives them tax advantage.
b) They can recover a great proportion of the initial capital expense, by selling the aircraft
for a fair market value. Since the average life for their fleet is 5.1 years, the proceeds
from sale aid in more frequent purchases.
Although Singapore Airline’s higher depreciation expense leads to a reduced net income, it
still may be able to achieve several goals. It can sell its aircraft at a higher price and recover a
great proportion of its initial capital expenditure. This helps them purchase new aircrafts on
a frequent basis and offer better experience and quality to its customers. They can also charge
higher fares from the customers against this superior service. It is evident by the fact that the
airline is renowned for high level of customer service, and won awards from various trade
associations and travel magazines. It also helps in keeping low operational costs by minimizing
the expenses on repairs and maintenance.

Answer-5
The average life of aircrafts of Delta Air Lines is 8.8 years, while it is 5.1 years for Singapore
Airlines. Let’s calculate the depreciation expense over their lives.
Let’s assume aircraft value of $100000.
Delta Air Lines:
From Answer-1, we saw the depreciation was $4.75 per $100 of aircraft value.
Annual Depreciation expense = 0.0475 * 100000 = $4750
Accumulated depreciation over average life = 4750 * 8.8 = $41800

Singapore Airlines:
From Answer-1, we saw the depreciation was $8 per $100 of aircraft value.
Annual Depreciation expense = 0.08 * 100000 = $8000
Accumulated depreciation over average life = 8000 * 5.1 = $40800

The accumulated depreciation expense of Delta is greater the Singapore by $1000. This is also
due to a higher average life. But if we compare the annual depreciation expense, it is higher
for Singapore by $3250.

-SUBMISSION BY
AADIT AGGARWAL
PGP/25/311