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Depreciation at delta & singapore airline (HBR)

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solution on Depreciation at delta and Singapore airlines by HBR. This is a very famous case study about depreciation , changes in method and impact on Profit.

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Depreciation at delta & singapore airline (HBR)

  1. 1. DEPRECIATION AT DELTA & SINGAPORE AIRLINE PRESENTED BY : ABHISHEK KYAL UNIVERSAL BUSINESS SCHOOL
  2. 2. CASE BACKGROUND Delta Airline is one of the major passenger airlines in US, with almost $12 billion in annual revenues. It changed its depreciation method in financial statement twice between 1989 and 1993. In both times it increased the useful life of aircraft and once decreased the residual value. It 1990 Delta did partnership with Singapore airline. Singapore Air lines a major passenger airline in Asia. It changed its depreciation calculation method in 1989. It increases its aircrafts usage life and increased the residual value.
  3. 3. OBJECTIVE • To understand the different depreciation methods used by Delta Airlines and Singapore Airlines during the period of 1989-1993. • PP&E consists more than 50 % of total assets of an airline co. • Depreciation of these assets is a major operating expenses in an airline industry and affects the profitability of the co.
  4. 4. Q.1. CALCULATION OF DEPRECIATION Delta airlines before July 1,1986 between July 1986- march 1993 April 1, 1993 onwards Residual value 10.00% 10% 5% Life of asset 10 15 20 Depn $9 $ 6.00 $ 4.75 $ 1.25 Singapore airlines before July 1,1986 April 1, 1993 onwards Residual value 10.00% 20% Life of asset 8 10 Depn $ 11.25 $ 8.00 $ 3.25
  5. 5. Q.2. Are the differences in the ways that two airlines account for depreciation expense significant? Why would the companies depreciate aircraft using different depreciable lives and salvage values ? What reasons could be given to support their differences? Ans: The method for accounting depreciation expense in both airline companies is same that they are both using the straight-line basis. But the assumptions for salvage value and depreciation lives are different between Delta and Singapore airlines. Companies prefer to depreciate aircraft using different salvage value and depreciation lives because of the managerial decision /policies about the recording the depreciation expense. Singapore prefers to record their depreciation expense in short period so that they can decrease their profit to pay less tax. While they have enough net profit, it is beneficiary for them to follow this policy. While there are no fixed rules for the treatment, and it is decided by each company management, we can say that the treatment is proper as per their company policy.
  6. 6. Q.3. Assuming the average value of flight equipment that Delta had in 1993, how much difference do the depreciation assumptions it adopted on April 1, 1993 make? Ans : In April 1, 1993 hey change their rules for depreciation and as a result (fromQ.1 above) they started to record $4.75/year instead of $6/year per $100 of gross aircraft value, which makes 21% decrease in their depreciation expenses.
  7. 7. Q.4. Singapore Airlines maintains depreciation assumptions that are very different from Delta’s. What does it gain or lose by doing so? How does this relate to company’s overall strategy? 1. There will be low net income as the depreciation amount is higher. Besides this, there will be less tax because of low income. So savings on tax can be a gain. 2. They target to sell the aircraft at fair market value which will be obviously much higher than 20% residual cost after 10 year. Q. How does this relate to company’s overall strategy? The above strategy of reselling the aircraft relates to the company's overall strategy of maintaining newer aircraft in their fleet. They sell a significant aircraft as can be seen .We can see that relative proportion of sale of flight equiptments is higher for Singapore Airlines as compared with Delta Airlines.
  8. 8. Question 5 Does the difference in the average age of Delta’s and Singapore’s aircraft fleets have any impact on the amount of depreciation expense? Ans : No there is no direct relation of average age of Delta’s and Singapore’s aircraft fleets and amount of depreciation
  9. 9. THANK YOU

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