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Delta Sirlines And Singapore Airlines Essay

1634 words - 7 pages

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 ...view middle of the document...

On January 1, 1998 Continental Airlines, Inc. (“CAL”) was the first of CFRA’s studied universe of 10 major airline companies to change its depreciation policy. Specifically, CAL extended the depreciable lives of certain newer generation aircraft to 30 years from 25 and increased the estimated residual values of those aircraft to 15% from 10%. Following suit were Delta Air Lines, Inc. (“DAL”) and America West Holdings Corporation (“AWA”) during 1998 and Southwest Airlines Company (“LUV”), AMR Corporation (“AMR”), and UAL Corporation (“UAL”) during 1999, while Alaska Airgroup Inc. (“ALK”), Northwest Airlines Corporation (“NWAC”), Trans World Airlines, Inc. (“TWA”), and US Airways Group, Inc. (“U”) have all apparently made no recent changes in their policies. CFRA is especially concerned about these changes in depreciation estimates as many of the companies have recently recorded write-downs or incurred losses on the disposition of certain aircraft. These write-downs and losses indicate that prior estimates of useful lives and residual values were overly ambitious as the current recorded book value of aircraft exceeded the fair market value and thus a lower useful life and residual value might be the more appropriate change as opposed to a higher useful life and residual value. Of the ten companies examined, CFRA believes U and ALK use the most conservative depreciation policies while CAL and TWA appear to employ the most aggressive depreciation policies. Below is a company-by-company analysis of each company’s depreciation policy ranked by those who have enacted recent changes to their policy.

©1999 by the Center for Financial Research and Analysis, Inc. (CFRA), 6001 Montrose Road, Suite 902, Rockville, MD, 20852; Phone: (301) 984-1001; Fax: (301) 984-8617. ALL RIGHTS RESERVED. This research report may not be reproduced, stored in a retrieval system, or transmitted, in whole or in part, in any form or by any means, without the prior written permission of CFRA. The information in this report was based on sources believed to be reliable and accurate, principally consisting of required filings submitted by the Company to the Securities and Exchange Commission; but no warranty can be made. No data or statement is or should be construed to be a recommendation for the purchase, retention, or sale of the securities of the company mentioned.

Overview of Airline Industry Depreciation Policies (12/22/99)
©1999 by the Center for Financial Research and Analysis, Inc. (CFRA)

Airline Companies which have Recently Changed Depreciation Policies: Continental Air Lines, Inc. (“CAL”) – CAL increased its estimated useful life on certain new generation aircraft and increased the residual value on all aircraft on January 1, 1998. Specifically, CAL changed to an estimated useful life of 30 years from 25 years on newer model planes the Company has recently purchased. Furthermore, CAL increased its estimated residual value on all aircraft to 15% from 10%. CAL...

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