1. a. Delta Airlines Depreciation Method Depreciation MethodSalvage ValueFor every $100 milDepreciatedAnnual Depreciation Prior to 1986Straight-line, 10 years10%100-(. 1*100)=9090/10=9$9 mil 1968 – 1993Straight-line, 15 years10%100-(. 1*100)=9090/15=6$6 mil After 1993Straight-line, 20 years5%100-(. 05*100)=9595/20=4. 75$4. 75 mil b. Singapore Airlines Depreciation Method Depreciation MethodSalvage ValueFor every $100 milDepreciatedAnnual Depreciation Prior to 1989Straight-line, 8 years10%=$10100-(. 1*100)=9090/8=11. 5$9 mil After 1989Straight-line, 10 years20%=$20100-(. 2*100)=8080/10=8$6 mil 2. Both use a straight line depreciation method to depreciate the value of the fleet on the Balance Sheet. However, as noted in the computations above, Singapore depreciates the value of its fleet twice as fast. Additionally, they assume a much higher salvage value of the total purchase price of the asset. The estimation of depreciation and salvage value are both assumptions of the company’s management. There are several reasons to drive the company’s choice of depreciation schedule.
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Delta may have wanted to reduce depreciation expense recorded on the Balance Sheet and therefore increase the depreciation period to reduce the annual expenditure. As noted in the case text, Delta was reporting losses in other areas and wanted to improve their overall earnings through lessening the affect of fleet depreciation expense. Currently Delta depreciates over 20 years and Singapore depreciates over 10; a significant difference. Some of the differences in the method chosen for depreciation can be based on the use and maintenance schedule of the fleet.
In the case, it states that Delta gleaned 21% of its revenues from international travel. In contrast, 56% of Singapore’s revenues are for travel outside of Asia, and it can also be inferred that while 44% of its revenue come from Asia, not all of those are inner continental. If you assume that longer distance flights lead to a reduction in serviceable life of an aircraft, this explanation may account for some of the difference in depreciation schedule between Delta and Singapore. Additionally, it may be inferred that climate and weather may affect the life of an aircraft and this too may account for the difference between Delta and Singapore.
Here Singapore’s fleet is presumably exposed to a wider array of climate vis-a-vis its extensive international routes. Taken these assumptions as given, it would be proper to have different depreciation schedules for the two companies. 3. Difference in Annual Depreciation between Delta and Singapore Total AssetsAssets including Capital LeaseCalculations Avg value of flight equipment in ’93 avg of the past 2 years9216. 00=Expense Singapore-Delta Annual depreciation expense before ‘86 542. 58 552. 96 =Asset Value/100*6. 00 Annual depreciation expense after ‘93 429. 54 33. 8 =Asset Value/100*4. 75 Expense reduction in ’93 113. 04 519. 78 =Expense before ’86 + after ‘93 Using Singapore’s method 723. 44 737. 28 =Asset Value/100*6. 00 Savings compared to Singapore 293. 90 704. 10 =Expense Singapore-Delta 4. Singapore Gains: There is a tax benefit to depreciating assets more rapidly through lowering the net income annually. Lower tax liability is a benefit of the more aggressive depreciation schedule. If one assumes planes are sold or retired after they are fully depreciated, then Singapore can increase their next income upon sale of its retied fleet.
This salvage value is more significant that Delta’s. If this is not true and the planes stay in service, the company can also expect a future increase in net income as the asset has been fully expensed. Singapore Losses: The aggressive depreciation lowers the net income which is typically not ideal for stock value. It is noted in the case that Singapore’s stock value is highly monitored since it is partially government owned. The rapid depreciation schedule and relatively high salvage value may be due to ???
Analysis: The overall strategy of Singapore Airlines may be related to their commitment to maintaining their high rankings for customer service amongst business commuters. Here having current technology in the airplanes may be relevant to Singapore Airlines in implementing this strategy. To maintain current technologies in aircrafts, it may be more cost effective to truncate the serviceable life of aircrafts and purchase new aircrafts versus allowing the fleet’s amenities – i. e. telecommunication capability for passengers or flat screen televisions in every seat – to become outdated or choose to retrofit the aging aircrafts. . Average age can be computed as a ratio of accumulated depreciation divided by the annual depreciation expense. Here age is a function of the depreciation rules in place by the company. As stated in the case, it is difficult to compare over airlines within the industry due to different depreciable lives and fleet ages. Most specifically when analyzing average age of a fleet as relative to annual depreciation expenses the case states: “There is no necessary connection, however, between the average age of an airline’s fleet and the assumption it made regarding the fleet’s depreciable life. In the chart below, you will see the amount of total asset value that has been depreciated as of 1993. This value is similar for both companies. However, this result is deceiving because it only considers the total assets relative to that year. All things held the same in 1994 Singapore will have a much higher percentage depreciated than Delta since their annual depreciation expense is much greater relative to their total assets. AirlineAvg AgeDepreciationTotal AssetsCalculations% of Total Assets Depreciated ‘93 Delta8. 8 years20 years, 5%9043=9043*(1-. 05)*(8. 8/20)41. 8% Singapore5. 1 years10 years, 20%9224=9224*(1-. 2)*(5. 1/10)40. 8%