Depreciation at Delta Air Lines and Singapore Airlines

Adam El-Ali

2/15/2011

Depreciation at Delta Air Lines and Singapore Airlines

This case brought to light the classic accounting issues associated with the recognition of expenses. Theoretically, expenses shall be incurred when the service or product is consumed. This basic explanation can be in part blamed for the fact that there is a fair degree of variance in how different markets and organizations within those markets choose to interpret the accounting guidelines. Specifically this case brings up the difference between two large players in the airline industry and how they recognized depreciation.

In 1990, Delta Airlines formed a partnership with a highly valued international carrier, Singapore Airlines, in an attempt to gain a larger share of the market. Deregulation severely affected the airline industry in the United States in the late 1970’s. In part this government market tactic was thought to help America come out of a recession, arguably caused in part by the Oil Crisis. In midst of the already rising inflation and energy costs, the airline industry was yet again hit by the forces of a free market. Any large carriers prior to deregulation now had heavy infrastructures to support in a new economic environment where price competition was intense. Delta would find out that they would have to re think how they recognized their depreciation to remain competitive. In 1993, Delta and Singapore Airlines announced that they would be adjusting the way they recognize their depreciation.

Prior to their partnership both Delta and Singapore Airlines had adjusted the way they accounted depreciation individually. The adjustments seem to be trying to account for rising costs and the impact of recession. Once again, a few years later, they find themselves in the same spot together. In 1987, Delta had changed from depreciating on a straight line basis to residual values of ten percent over a ten year period from when the aircraft are entered into service to a...