(ACN 301)

Delta Airlines and Singapore Airlines

Submitted By
Anwar Huda Shahaj- 1630712

1st December, 2019

School of Business
Independent University, Bangladesh
Depreciation at Delta Airlines and Singapore Airlines

QUESTION 1:

Depreciation expense = (Cost-Residual value)/Asset life

a) Delta Airlines’ annual depreciation expense:

 Prior to July 1, 1986,
($100-$10)/10years = $9 per year.
 From July 1, 1986 through March 31, 1993,
($100-$10)/15years= $6 per year.
 From April 1, 1993 onwards,
($100-$5)/20years= $4.75 per year.

b) Singapore Airlines’ annual depreciation expense:

 Prior to April 1, 1989,
($100-$10)/8years = $11.25 per year.
 From April 1, 1989 Onwards,
($100-$20)/10years=$8 per year.
QUESTION 2:

Both companies use the Straight Line depreciation method, but there are significant differences
in the salvage values (5% for Delta Airlines and 20% for Singapore Airlines) and in the lengths
of the asset life (20 years for Delta Airlines and 10 years for Singapore Airlines). Companies
would depreciate aircrafts using different depreciable lives and salvage values because of
differing needs and methods of operation. In this case, Delta Airlines was suffering from large
losses in 1993 and thus, was inclined to reduce expenses as much as possible. They therefore
significantly decreased their depreciation expense by extending the asset life of their aircrafts.
Singapore Airlines however was in good economic health and thus could afford the higher
depreciation expense. We could also consider the possibility that Singapore Airlines wanted to
resell their aircrafts and thus had a shorter asset life, while Delta Airlines planned on discarding
their aircrafts after using them, thus having a longer asset life. Different treatment is proper as
long as the companies follow proper accounting standards. Singapore Airlines had a higher
capacity utilization rate (71.3%) and average miles per passenger (2720 miles) in comparison to
Delta Airlines that had a capacity utilization of 62.3% and 969 average miles per customer. Thus,
due to the differing needs and operating policies of the airlines, the different treatment of
depreciation is proper.

QUESTION 3:
Average value of Delta Airlines’ flight equipment in 1993:
 = ($9043+$8,354)/2 +$173 = $8,871.5M
Difference due to depreciation assumptions on April 1, 1993:
 = ($6-$4.75)*8,871.5/$100=$110.894M
Difference in annual depreciation expense using Singapore Airlines assumptions:
= ($8-$4.75)*8,871.5/$100=$288.324M lower.
QUESTION 4:

Singapore Airlines maintains depreciation assumptions that cause it to have higher

depreciation expenses than Delta Airlines. Some advantages of this are that high depreciation
expenses lowers net income, thus leading to lower income taxes. Further, by having a shorter
asset life and higher salvage value, Singapore Airlines can then later resell its aircrafts for
higher profits than Delta Airlines can. However, lower profits also work as a disadvantage to
investors. Singapore Airlines’ strategy involves selling used aircrafts at relatively high prices
after using them for short periods of time (5.1 years as compared to Delta Airlines use for 8.8
years). This is reflected by the fact that the gain on the sale of flight equipment is
approximately $30.4M between 1989-1993 on average for Delta Airlines but SG$134M
(~USD102M) for Singapore Airlines. Singapore Airlines can then use these higher gains to
buy new aircrafts more regularly than Delta Airlines does. Singapore Airlines’ strategy is to
provide excellent customer service to business travelers. This requires frequently updating
aircrafts and using state-of-the-art models like the Boeing 747-400 MEGATOP. Singapore
Airlines has 18 of these models while Delta Airlines has none. Thus, perhaps the purchases
of these new aircrafts are partly funded by the gains from selling used aircrafts.

QUESTION 5:
The difference in the average age of Delta Airlines’ and Singapore Airlines’ aircrafts has no
impact on the amount of depreciation expense that the companies record. Since both companies
use the straight-line depreciation method, the depreciation expense depends only on the initial
cost of the asset, it’s residual or salvage value and the depreciable life of the asset. Thus, the
current age of the asset is not accounted for, except for in making sure that the asset is not
continued to be depreciated beyond its depreciable life.