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.

1. DEPRECIATION AT DELTA
& SINGAPORE AIRLINE
PRESENTED BY :
ABHISHEK KYAL
UNIVERSAL BUSINESS SCHOOL

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. 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. 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. 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. 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. 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. 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. THANK YOU