Delta Airlines Inc. is a household brand not only the United States but also in 64 other countries around the world. The company was founded on May 30, 1924, marking a 91 years reign since it first opened doors as a crop dusting operation, Huff Daland Dusters, in Macon, Georgia. Delta started providing passenger services on June 17, 1929, making it one of the oldest airlines in the world. In 2013, Delta Airlines Inc. was reported to be the world's largest airline based on the number of scheduled passengers. The company was the second largest concerning the revenue passenger kilometers and capacity. This information simply indicates that Delta, as it is famously known, was simply the company that flew the highest number of passengers in the year 2014 (Delta Airlines, 2014).
According to information published on the company’s financial statements for the years 2012 and 2013, Delta Airlines Inc. has its products and service lines under passengers and cargo transportation both internationally and in the United States. The company also provides other services, including advertising services, aircraft maintenance and repair services, and the overhaul services for other players in the aviation industry. Additionally, the company offers staffing services, professional security for business and other state travelers, assorted aviation solutions, vacation and holiday packages, and lastly, there are also aircraft charters. Looking at the portfolio or products and services that Delta Airlines offers, it would be prudent to indicate here that the company offers highly diversified services that protect it from shocks affecting any single area of its business. It explains why Delta Airlines has managed to outlive majority of the players in the industry. Many players in the industry fall out of business as soon as one or a few of the costs of operations rise. Using this information as a preamble, this paper focuses on the analysis of the financials of Delta Airlines focusing specifically on the elements of the balance sheet and more so the property, plant, and equipment components (Delta Airlines, 2014).
The airline business is a capital intensive business with most of this capital being invested in the acquisition of assets and more specifically the acquisition of the fleet. The analysis of Delta Airlines’ financial reports indicates that the company holds the assets (property, plant, and equipment) in both freehold or ownership, and leasing under both the capital and operating leases. Consequently, the company must recognize, measure, and report depreciation on the financial reports (Delta Airlines, 2014).
Analysis of the financial statements of Delta Airlines revealed that the company applies the straight-line method in the measurement and reporting of the depreciation and amortization charged to the operating expenses in each year. Consequently, the amount of depreciation on PPE or long-lived assets including the fleet was recognized at approximately $1.4 million for the two years in focus. The method of depreciation comes with simplicity both in the computation process and the reading of the financial statements. For instance, it is easy to tell that the depreciation for 2014, 2015, and even 2016 is highly likely to be at the same amount save for any extraneous factors such as the discontinuation of operations and changes in the lives of the property, plant, and equipment. The method charges the same amount of depreciation over the life of the asset (Delta Airlines, 2014). However, there are also other methods that the company could employ, and some of these methods are briefly discussed below.
One method that the company could employ in the depreciation of its assets is the reducing balance method. The method charges a constant rate of depreciation such as 10% depreciation amount for the life of the asset. If an asset is worth $100,000 in the first year, the depreciation amount would be $10,000 in the first year and $9,000 in the second hence the reducing balance concept. The implications of this method are that the amount of depreciation expense reduced over the year until the entire amount is depreciated (Kieso, Weygandt & Warfield, 2012).
The second alternative is the use of the sum of years' digits and in this method, the amount depreciation charge reduces by a constant amount as the life of the asset continues. If the asset has a life of five years, an accelerated amount of depreciation gets charged in the first year at the rate of 5/15 and in the final year the amount will be at 1/15 multiplied by the value of the asset at the time. The method, therefore, charges higher amounts when the asset is new and lower amounts when the asset is old (Kieso, Weygandt & Warfield, 2012).
The last option is the units of activity method of depreciation. The depreciation and amortization amount charged varies on the level of activity hence an appropriate method in the understanding of the direct operating costs. If an airplane were used for 1000 hours in the first year and 3000 hours in the second year, then the amount of depreciation charged would be proportionate to the activity of the airplane. This method is appropriate where the determination of the direct costs or variable costs is appropriate considering that no depreciation is charged when the assets are not in use (Kieso, Weygandt & Warfield, 2012).
Considering the several methods of depreciation herein explained, this analysis recommends the application of the units of activity method of depreciation in the recognition, measurement, and reporting of depreciation amounts on the assets of Delta Airlines Inc. The method requires that Delta approximates the life of the aircraft and other assets under PPE in measurable units such as hours and then bases on that, the company should determine the amounts of depreciation to charge. In its PPE the company has Boeing 787 model. If these aircraft are designed to travel for not more than 100,000 hours, then the company can track the amount or hours that the airplanes fly every year and then charge the depreciation amounts based on those numbers. The process of using the activity units method can be a tedious method, but it ensures the more precise method of charging depreciation. However, this may require the company to specifically elect an accountant to work on the depreciation of the property, plant, and equipment assets (Spiceland, Sepe, Nelson, Tan, Low & Low, 2013).
Based on the analysis of PPE information and notes to financial statements as provided herein, it is recommended that the company consider providing additional information on the way it depreciates the capitalized software assets. It is assumed that the capitalized software assets are materially different from other tangible assets of the company, and the verifiability of these assets is difficult. It creates the need for the company to create an additional entry for the capitalized software assets and other PPE to ensure that the amount of PPE and net accumulated amount for depreciation and amortization is understood by investors and creditors for informed decision-making.
References
Delta Airlines. (2014, Feb.). Annual SEC Filings: Form 10-K. Retrieved from http://d1lge852tjjqow.cloudfront.net/CIK-0000027904/8cf5e608-14a8-4829-ad66-bc72e5908eee.pdf
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2012). Intermediate Accounting. Jonh Wiley & Sons.
Spiceland, J. D., Sepe, J. F., Nelson, M. W., Tan, P. H. N., Low, B., & Low, K. Y. (2013). Intermediate Accounting: IFRS Edition.
