Delta Sirlines and Singapore Airlines
Business and Management
Submitted By dramit123
Overview of Airline Industry Depreciation Policies, 12/22/99 CFRA believes that certain airline companies have recently obtained an earnings boost by extending the depreciable lives and increasing the residual values relating to operating aircraft. In addition, some airlines have recently recorded one-time write-downs and losses on the sale of aircraft, leading to questions about the proper depreciable life of aircraft. Typically, an airline’s aircraft depreciation expense is derived by initially estimating both the useful life and the residual value -- or the perceived fair market value of the aircraft at the end of its estimated useful life. To determine the periodic depreciation expense -- which reduces the value of the aircraft on the company’s balance sheet while increasing operating expenses -- the total cost of the aircraft is reduced by the estimated residual value and that sum is divided by the estimated useful life. By increasing the estimated residual value and extending the estimated useful life of its aircraft, an airline company would prospectively record a lower depreciation expense on its income statement and a higher value for each aircraft on its balance sheet. Consequently, the airline would receive a boost to earnings in all future periods and a boost to earnings growth during the four quarters following the change, as prior financial statements are not restated. While near term earnings would be boosted by the reduced depreciation expense, future earnings may be adversely impacted from this change as the reduced depreciation expense leads to higher reported aircraft values and, if upon disposition of the aircraft the book value is in excess of the realizable value, losses will be incurred. Prior to 1998, most major airlines’ depreciable lives for a majority of their aircraft hovered around 20 years with an estimated residual value of generally 5%...