Depreciation at Delta Air Lines and Singapore

Airlines

A Case Study sincrerely presented by Group 5

Group members

徐丰义 3035618090_19250690226
王乐 3035618973_19250690286
闵琼君 3035600603_18250690178
谭宁 3035617890 19250690314
田琳 3035618040_19250690294
孙澄 3035619214_19250690199
洪戈 3035618234_19250690278
1. Delta Airlines V.S. Singapore Airlines in Annual Depreciation Expenses

The principle formula is as follows:

Historical Cost−Residual value
Annual Depreciation in value =
useful life of asset

For Delta Airlines

Before FY1987
100−(100∗10%)
Annual Depreciation = $ = $9
10
From FY1987 to the end of the Q3 in FY1993
100−(100∗10%)
Annual Depreciation = $ = $6
5
From FY1993Q4
100−100∗5%
Annual Depreciation = $ = $4.75
20

To illustrate the calculation process, we compile this following table.

Before FY1987 From FY1987 to From FY1993Q4
FY1993Q3
Residual Value 10 10 5
Useful lifetime 10 15 20
Annual 9 6 4.75
Depreciation

For Singapore Airlines

Before FY1989Q4
100−(100∗10%)
Annual Depreciation = $ = $11.25
8
From FY1989Q4 to the end of FY1993
100−(100∗20%)
Annual Depreciation = $ = $8
10
From FY1994
100−100∗20%
Annual Depreciation = $ = $8
10

To illustrate the calculation process, we compile this following table.

 Before FY1989Q4 From FY1989Q4 From FY1994
to the end of
FY1993
Residual Value 10 20 20
Useful lifetime 8 10 10
Annual 11.25 8 8
Depreciation

2. We contend that the difference between these two airlines’ annual depreciation is
significant.

While they all use the straight-line depreciation assumption, they make different
salvage value and aging time assumptions.

Take their depreciation assumption from April 1st 1993 for example, Delta Airlines has
a residual of 5% while Singapore Airlines 20%; useful life is 20 years for Delta Airlines
while 10 years for Singapore Airline’s airplanes.

This will give them, respectively, 4.5 million dollar annual depreciation and 8 million
dollar annual depreciation for 100 million worth of airplanes.

We think airlines have different strategies concerning their depreciation in useful

lifespan and residual value for a variety of reasons.

A． Facing severe competition and negative profit, Delta has to decrease its
depreciation expense and therefore decrease its total cost.
B． Maybe Delta has higher quality of maintenance which in turn leads to longer
useful life of its planes.
C． Singapore Airlines’ planes have a relative higher usage frequency compared to
Delta Airlines’ planes.

We think their different treatments are proper given their circumstances respectively.
3. From Exhibit 2 we can tell that the total depreciation from FY1993 to FY1992
increases by 3559-3213 = 346 million dollars，and the depreciation covered in lease
is 128-112=16million dollars, the total is 346+16=362million dollars
Considering this time period covers two different polices, we should calculate this
depreciation in two part and presume that the total asset value before this FY’s
depreciation is X.

The old policy covered 3Qs that gives us

𝑋 − 𝑋 × 10%
× 75% = 0.045X
15
The new policy covered 1Q that gives us
𝑋 − 𝑋 × 5%
× 25% = 0.011875𝑋
20
362=0.056875X
X=6364.875million dollars, that is the total asset at the beginning of FY1993.

If Delta didn’t implement this new policy from the beginning of FY1993 Q4, using old
policy for the entire year will give a depreciation value of

6364.875 ∗ 0.9
= 381.89𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑑𝑜𝑙𝑙𝑎𝑟𝑠
15
The difference is 381.89-362=19.89million dollars.

If Delta were to use Singapore Airline’s depreciation assumption (20 useful lifetime
and 10% residual value),

6364.875 × 0.8
= 509.19million dollars
10
It would be much more than the reality by 509.19-362=147.19million dollars.

4. Singapore’s choice

Lighten your fixed cost

By reducing PP&E depreciation lifetime, Singapore Airlines can sell its “old” planes
faster and get capital gain more quickly when its “old” planes residual values equal to
zero, which can relive their pressure on future debt as the case said, moreover they can
lease more airplanes to expand their service and meet more chances with their expecting
total recovery in the business cycle.(According to the Exhibit2, Delta have similar
number of owned and leased planes, but the flight equipment under capital leases is
much lower than their airplanes’ accumulated depreciation) Besides, they can always
lease their planes with a higher lease rate to other smaller airlines to reorganize their
fund.

Embrace the future

By increasing depreciation salvage value and reducing lifetime, a company can have a
competitive advantage because their assets (airplanes) can always be the most cutting-
edge ones, especially with regard to technology.

Tax evasion
With higher depreciation expense, Singapore Airlines will have a lower NI. Compared
to Delta Airlines’ negative profit, Singapore Airlines has much more space to maneuver
its profit. If Singapore Airlines want to evade high income tax, to increase depreciation
expense is a regular move.