Essay about Delta/Singapore Airlines

When contemplating investing in any industry, much less one as complex as the airline industry, one must take into account several factors, one of which is depreciation. It is especially important to look at depreciation, and the specific method of depreciation that a company uses, if that company has a considerable amount of fixed assets. This is because in that instance, the chosen method of depreciation will create a larger impact on that company’s apparent earnings. A company’s earnings and net asset values can be augmented on its financial statements due to the choice of depreciation assumptions, not necessarily due to improved business performance. This can be misleading, as a particular company may not be displaying strong long-term fundamentals. Companies can appear to generate more profit based on choosing either a straight-line depreciation method, or an accelerated depreciation method; whichever one creates a more favorable situation for the company. However, it is important to note that the chosen method does not make a difference in a company’s actual income. The true reasoning behind a company changing its depreciation is to appear more attractive to investors, nothing more.

Prior to the year 1986, Delta Airlines utilized a straight-line depreciation method, and estimated a useful life of ten years for its equipment. Delta’s planes also carried 10 percent residual value, meaning that the company would receive 10 percent of the purchase price of the plane once it was discarded or sold for scrap. For example, the depreciated value of a $1,000,000 plane would be $900,000; the annual depreciation expense in this instance would be $90,000. In the years between 1986 and 1993, however, Delta began to alter its depreciation practices, as the Airline adjusted the estimated useful life of its planes to 15 years, instead of 10. This has a significant impact on Delta’s financial statements, as a straight-line depreciation of $900,000 spread out over 15 years, rather than 10, lowers the company’s annual reported depreciation expense to $60,000. Finally, in the years since 1993, Delta’s planes have carried a residual value of 5 percent, which is half of the residual value its planes had carried in years prior. Additionally, Delta has adjusted the useful life of its planes even more, stating that its planes would last about 20 years. This unrealistic claim by Delta further lowers annual depreciation expense as seen on its financial documents to $47,500. So, although Delta was not actually paying less in terms of depreciation, the way the company stated depreciation in its financial documents made it appear as if Delta had more cash on hand than it actually did.

Before the year 1989, Singapore Airlines utilized a straight-line depreciation method, and estimated a useful life of eight years for its equipment. Singapore’s planes also carried 10 percent residual value, meaning that the company would receive 10 percent of the purchase price of the plane once it was discarded or sold for scrap. In this instance, the depreciated value of a $1,000,000 plane would be $900,000; the annual depreciation expense in this instance would be $112,500. In the years between 1989 and 1993, however, Singapore also began to alter its depreciation practices, as the Airline adjusted the residual value of its planes to 20 percent, twice what it had been previously. Singapore also increased the estimated useful life of its planes to 10 years, instead of 8. This had a significant impact on Singapore’s financial statements, as a straight-line depreciation of $800,000 spread out over 10 years, rather than 8, lowers the company’s annual reported depreciation expense to $80,000. Finally, in the years since 1993, Singapore has begun to practice two different policies when it comes to depreciation. For planes less than 5 years old, Singapore would estimate an additional 10 years of useful life; the $800,000 of depreciation spread

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