Depreciation at Delta Air Lines and Singapore Airlines

Depreciation at Delta Air Lines (“Delta”) and Singapore Airlines (“SIA”)

Part A

Question One

Delta Airlines |

  | Prior to July 1986 | July 1986 to April 1993 | Post April 1993 |

Fixed Assets | $ 100 | $ 100 | $ 100 |

Residual Value | 10% | 10% | 5% |

Years of Depreciation | 10 | 15 | 20 |

Value of annual depreciation per $100 of gross aircraft value | $ 9.00 | $ 6.00 | $ 4.75 |

Singapore Airlines |

  | Prior to April 1989 | Post April 1989 |

Fixed Assets | $ 100 | $ 100 |

Residual Value | 10% | 20% |

Years of Depreciation | 8 | 10 |

Value of annual depreciation per $100 of gross aircraft value | $ 11.25 | $ 8.00 |

Question Two

Delta and SIA are similar in that they rely on straight line depreciation for their depreciation policy. However, the useful life and salvage value differ. The differences in depreciation between SIA and Delta are significant and even more so after the respective change in useful life and salvage value in 1993 for Delta.

There are various reasons for the difference in depreciation policy.

1. Usage and maintenance. With reference to Figure 1, from 1989 to 1993, SIA had a higher average capacity utilization rate of 75.4% and average passenger life of 2,779 miles than Delta (60.7%, 913 miles). The higher utilization rate and average passenger life is due to SIA being one of the most international airlines and Singapore being a transit destination for the region. Higher usage could potentially be the reason why SIA’s useful life is shorter than Delta. Whilst there is no information on the maintenance schedule of the airlines, regular maintenance provides management with justification for a longer useful life of the aircraft.

2. Type of aircraft. If the fleet comprises primarily of new and more technologically advanced models with longer useful lives, it will provide the airline the reason to depreciate its fleet over a longer useful life. Notably, 18 out of 57 of SIA’s aircraft is B747-400,...