Deprecation at Delta Airlines and Singapore Air lines
Depreciation helps match the expense of using long lived assets with the revenues the assets helped to produce> what means is that Delta ns Singapore pole Air line depreciates one of its airplanes, it is trying to match the cost of air flight to the revenue that air craft helped to produce. Because air crafts can be an item used for more than one income statement period, Delta and Singapore Airlines don't recognize the air crafts entire cost as an expense immediately. Instead, the companies record them as assets on the balance sheet. Then, in each year of the assets useful life, the companies should recognize a portion of the Item's costs as an expense.
At the end of the useful life of fixed assets the businesses will dispose, and any amount received from disposal will represent its residual value. This may be difficult to estimate in practice. How ever, an estimate has to be made. If it is unlikely to be significant amount, a residual value of zero will be assumed. The cost of fixed assets less its estimated residual value represents the total amount to be depreciated over its estimated useful life.
Delta Air Line
Item Prior to July 1, 1986 July 1, 1986-march 31, 1993 April 1, 1993- present
Method Straight line Straight line Straight line
Residual Value 10% 10% 5%
Useful Life 10years 15years 20 years
Depreciation expense per $100 of gross air craft value( annually) $100 x 0.1 = $10
$100-$10 = $90
$90/10yrs= $9 per yr $100 x 0.1 = $10
$100-$10 = $90
$90/15yrs= $6 per yr $100 x 0.1 = $10
$100-$10 = $90
$90/20yrs= $4.75 per yr
Singapore
Item Prior to July 1, 1989 April 1, 1989- present
Method Straight line Straight line
Residual Value 10% 20%
Useful Life 8years 10years
Depreciation expense per $100 of gross air craft value( annually) $100 x 0.1 = $10
$100-$10 = $90
$90/8yrs= $11.25per yr $100 x 0.2 = $20
$100-$20 = $80
$90/10yrs= $8 per yr
The amount each company should recognize as expense is given in a given year depends on the following factors
Company estimate the assets useful life independently
Residual value
Depreciation methods
Delta and Singapore air line use the straight line method to calculate annual depreciation expenses, this allow each company to evaluate its residual value and useful life. For example April 1, 1989 Singapore Airline was paying almost double ($ 11.25 / year) in depreciation expanse to delta Air lines from July 1, 1986-march 31, 1993($ 6 / year), reason being is that
1. Estimation was based on low useful life (8-10 yr) compare to Delta air line 10-20 yrs.
...and the useful life of the machine should be calculated. Then, depending on the method used, the total cost of the machine is considered as a long term asset and depreciated over the life expectancy of the asset.
which posted half again as many revenue passenger miles in April 1996 as it did
... value, however, depreciation affects such values as operating profit and value of the company’s assets. If the depreciation is ignored, the Net Income calculations will be erroneous.
Delta Air Lines operates in a competitive industry. Amongst its competitors, its two largest were American Airlines and United. To survive in the industry it was necessary to employ and maintain technologically efficient and cutting edge systems. However, Delta systems of operations were mainly paper based; they still used pneumatic tubes to move information and they made little use of the internet. As a result, the company lacked a competitive edge. The technology it had was based on various departments independently purchasing the technology they needed and hiring their own IT staff. In 1996, Delta was still known for its expensive airfares, poor service, limited leg room on flights and use of out-dated inefficient processing systems.
Discounted Cash Flow Method takes the forecast free cash flows during forecasted horizon. Then we estimate the cost of capital (weighted average cost of capital) and estimate continuing value (value after forecast horizon). The future value is discounted to the present value. We than add back cash ($13 Million) and non-current assets and deduct total debt. With the information provided several assumptions had to be made to obtain reasonable values (life period of 30-years, Capital expenditures not to exceed $1 million dollars, depreciation to stay constant at $1.15 Million and a discounted rate of 10%). Based on our analysis, the company has a stand-alone value of $51 Million at the end of fiscal year end 1990 with a net present value of cash flows of $33 million that does not include the cash and non-current assets a cash of and non-current assets.
Many elements of Delta Airlines are described in detail, within this paper. There is a breakdown of the external and internal factors, using external and internal analysis. Porter’s Five forces are used to create the external analysis, and the key factors for Delta are power of buyers, and rivalry. Delta’s competitive advantages are identified as customer service, sustainability, brand image, strong strategic alliances, and corporate travel. Delta’s main issues are the low expansion in international markets, continuous changing of incentive program, and glitches within technology. Delta should expand more into the Chinese and African markets in order to gain market share within the airline industry.
Delta Air Lines is one of the many airlines in this industry that is trying to make profit in this competitive industry. A slow recovery from bankruptcy forced many of the U.S carries to join with other airlines in order to continue in this business. Like many airlines in this industry Delta Air Lines has been operating off a hub and spoke system. Having to place different hubs all over the country allows the company to efficiently provide scheduled air transportation for its passengers and cargo throughout the states and the world. Delta’s global route network and strategically placed hubs in different parts of the world allows them to make profit domestically and internationally. The company’s network is centered on a system
Maintenance cost- Maintaining the old aircrafts is the biggest weakness for the airlines as they have to spend a huge amount on their maintenance by which their additional overhead cost raises.
Delta Airlines has been a vibrant company in the airline industry, with great success over the years. Delta airlines started as a crops dusting company to serving more than 572 destinations, in 65 countries on six continents (Allan, H., David. H. ,2012). Delta airline moved its headquarters from Monroe, Louisiana to the city of Atlanta, Georgia. The great management strategies have portrayed from time to time to be fruitful even in the verge of a recession. With these consistency in delivery of services, it is clear that the company is out to outdo its competitors and turn out to be the greatest airline in the world.
...ciates its assets on a straight line basis. Both IAS 16 and GAAP, depreciates assets over its expected useful life.
The FAS has made changes throughout the years in the way to account for goodwill. Goodwill is when a company attempts to merge with another company to obtain the valuable intangible assets. These assets are anything that can 't be seen or touched. Valuable intangibles can be anything like a company name because it is well known. Many times companies will decide to merge because it can be beneficial to them to merge with well-known entities. This can also be less costly and less time-consuming versus building a brand new business on its own. On many occasions, gooodwill is amortized on accounting records. Amortization is not the most favorable approach for companies who are trying to attract investors. This because when amortization is not present in the books, it means that there aren 't high physical cash profits for shareholders.
When analyzing Delta, you do not have to search very far before quite possibly one its strongest attribute rears its head. Based on calendar 2000 data, Delta is the largest U.S. airline in terms of aircraft departures and passengers enplaned, and third largest as measured by operating revenues and revenue passenger miles flown. Delta is the leading U.S. airline in the transatlantic, offering the most daily flight departures, serving the largest number of nonstop markets and carrying more passengers than any other U.S. airline. Delta Air Lines transports more passengers worldwide than any other airline. Through a vast worldwide route system Delta has flown over 117 million passengers, more than any other airline in the world. Delta mainline, domestic and international service, Delta Express, Delta Shuttle, Delta Connection®, Delta Sky Team and Worldwide Partners operate 6,400 flights each day to over 450 cities in 98 countries.
In the year 2005, Malaysia Airlines reported a loss of RM1.3 billion. Revenue for the financial period was up by 10.3% or RM826.9 million, compared to the same period for 2004, driven by a 10.2% growth in passenger traffic. International passenger revenue increased by RM457.6 million or 8.4%, to RM5.9 billion, while cargo revenue decreased by RM64.1 million or 4.2%, to RM1.5 billion. Costs increased by 28.8% or RM2.3 billion, amounting to a total of RM 10.3 billion, primarily due to escalating fuel prices. Other cost increases included staff costs, handling and landing fees, aircraft maintenance and overhaul charges, Widespread Assets Unbundling (WAU) charges and leases. (Malaysia Airlines ,wikipedia)
When compared to the physical capital maintenance concept, the financial capital maintenance concept is the better choice for standard setting when distinguishing between a return of capital and a return on capital. The main argument in favor of physical capital maintenance is that it provides information that has better predictive value, confirmatory value, and is more complete. However, due to agency theory, prospect theory, and positive accounting theory, neutrality and completeness under physical capital maintenance would be impaired so gravely that predictive value and confirmatory value become inefficacious. As a result, financial capital maintenance, with its use of historical cost, is able to provide information to decision makers with stronger confirmatory value and predictive value.
2. Should the component costs be figured on a before tax or an after tax basis?