Depreciation at Delta Air Lines: The "Fresh Start"
Plant, property and equipment is one of the largest asset categories for airline companies. Flight equipment and ground property and equipment are often more than half of the total assets of an airline, and depreciation of those assets is a major operating expense. Depreciation is an exercise in cost allocation undertaken to match the cost of assets with the revenues earned during the periods that assets are used. Depreciation is not an attempt to measure the current value of assets. The amount of depreciation estimated by an airline company for each operating period is based on the cost of assets, estimates of asset lives, and assumptions ...view middle of the document...
Depreciation practices had been changed several times before as ﬂight equipment and industry conditions changed. Delta Air Lines began 2008 with more worldwide destinations than any other airline, with 321 destinations in 58 countries. Delta added more international capacity during 2(I]6 and 2007 than any other major U.S. In 2008 Delta merged with Northwest Airlines to become the largest airline in the world.
Depreciation at Delta Air Lines
A signiﬁcant number of factors can be considered in estimating the economic life of a commercial aircraft —physical or economic life, corporate strategy, planned uses, expected technological changes all come to mind. Delta Air Lines has changed assumptions of economic life of aircraft four times since 1986, each time extending the expected life by five years. Intense competition and deregulation during this period invite consideration of regular extension of aircraft lives. This is at least partly motivated by the desire to reduce annual depreciation amounts in order to report higher net income or reduce losses, but there may have been other factors that make extended lives make sense in the industry.
Consider the issue of physical life of the modern jet-powered aircraft. The ﬁrst commercial jet passenger planes were sold in 1957. Before that year the majority of commercial aircraft were powered by piston engines, which subjected airframes to destructive vibrations. Ten-year lives were the norm in airline depreciation policies and had been for some time. With no real experience with turbofan-powered planes, management was reasonable in assuming that the new generation of aircraft would be similar in life span to the old generation. Experience showed that the turbofan engines offered considerably less wear and tear on the airframes and that the physical life of aircraft powered by jet engines was considerably longer than that of piston-engine powered planes.
Furthermore, as the passenger airline industry converted fleets to jet-powered aircraft, the replacement cycle lengthened because of production and delivery backlogs. From a competitive strategy point of view, it was important for an airline to offer jet planes, but whether those planes were new or considerably older became less important. Size of planes and economy of operation became more important factors in fleet selection as experience with new aircraft showed that their physical lives were going to be longer than those of prior generations of airplanes. Passengers sought out jet planes whether they were new or older models.
Other changes were also taking place in the airline industry. Deregulation brought competitive pricing and the introduction of “hub and spoke" route systems. Discount airlines emerged to challenge legacy carriers. All airlines experienced more pressure on profitability, and longer depreciable lives meant lower depreciation and the possibility of higher incomes. All airlines extended lives of aircraft. Delta Air Lines was more...