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- Both Delta Air Lines and Singapore Airlines use straight line method of depreciation. The formula for calculating annual straight line depreciation is
Asset value-Residual valueLife of asset (in years)
In our case we start with the asset value of $ 100 for all cases.
- For Delta Air Lines, we have three cases –
Prior to July 1, 1986, the residual value was 10% of asset value and asset life was 10 years. Hence, annual depreciation was 100 – 1010 = $9.
After April 1, 1993, the residual value was 5% of asset value and asset life was 20 years. Hence, annual depreciation was 100-520 = $4.75
- For Singapore Airlines, we have two cases –
Prior to April 1, 1989, the residual value was 10% of asset value and asset life was 8 years. Hence, annual depreciation was 100-108 = $11.25
Post April 1, 1989, the residual value was 20% of asset value and asset life was 10 years. Hence, annual depreciation was 100-2010 = $8
- Both the airlines use straight line method of depreciation. However, they consider residual values and asset lives which differ substantially which is evident from the annual depreciation values calculated above.
Companies normally use different depreciation techniques as favorable to them. In this case, Delta Air Lines is suffering losses and would like to reduce the same and hence would show lower depreciation. Singapore Airlines, on the other hand, and could show higher depreciation to lower taxes. This theory is further vindicated on observing the depreciation rule changes exerted by the airlines. In the difficult economic period of late 1980s to early 1990s, both airlines altered their depreciation approach to decrease annual depreciation.
Reasons which can justify these differences are the use of the assets in question. In our case, Singapore Airlines conducts more international flights as opposed to Delta Air Lines which is evident from the differences in miles per passenger (~2700 to ~1000, respectively). Also, Singapore has a higher utilization across the years. Thus, Singapore would be justified in showing higher depreciation than Delta (Bruns).
Different depreciation treatments are proper as they are based on company’s use of assets and decided by the company.
- The average value of flight equipment for Delta Air Lines in 1993 is the total value of flight equipment minus the accumulated depreciation prior to 1993 i.e. 9043 – 3213 = $5830 Millions (Bruns). The difference in depreciation due to the 1993 changes is $1.25 (6 – 4.75) for every $100. This, therefore, amounts to $73 Million.
If Delta were using Singapore’s assumptions, the difference would be $3.25 (8 – 4.75) for every $100. This would amount to $189 Million.
- Singapore Airlines shows higher annual depreciation as compared to Delta. This will help in reducing taxes as it is currently making profits. In the future, Singapore Airlines is expecting a drop in business. In this case, it would be able to reduce its depreciation expense due to its already depreciated fleet and show higher profits. The company’s overall strategy is to provide the best customer experience. This would be facilitated by a young fleet. The faster depreciation for Singapore Airlines would be beneficial in this case as it would keep on renewing its airplanes. Singapore Airlines would also be able to show a higher gain in sale due to this approach.
- Since both Delta and Singapore Airlines use straight line method of depreciation, there is no impact of the current age of the fleets on depreciation expense. Depreciation is dependent only on the asset value, residual value and total life of asset. However, Delta might have a higher proportion of completely depreciated fleet which would then reduce its depreciation expense for the same total asset value.
Works Cited
Bruns, William J., Jr. Depreciation at Delta Air Lines and Singapore Airlines (A). Case Study. Boston: Harvard Business School, 2004. Print
