Depreciation at Delta Airlines and Singapore Airlines

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Depreciation at Delta Air Lines and Singapore Airlines (A)
Property, plant, and equipment (PP&E) is a significant asset category of most airline companies. PP&E usually constitutes more than 50% of the total assets of an airline, and depreciation of these assets is a major operating expense. However, unlike many expenses—for example, salaries, the cost of aircraft fuel, the cost of meals and beverages, all of which are significant operating expenses for airlines—depreciation of PP&E is different in that the methods and estimates used to determine the amount of this expense can vary widely among companies. Moreover, the methods and estimates used can have a significant impact on companies’ reported earnings. Thus, unless the user of financial statements sifts through the footnotes to sort out the details, comparability among companies within an industry can be problematic. Consider, for example, the depreciation practices of two major airlines—Delta Air Lines and Singapore Airlines—in 1993.

Delta Air Lines
Delta Air Lines was one of the major passenger airlines in the United States, with almost $12 billion in annual revenues. It served 161 cities in 44 states in the United States, and it also operated flights to 33 foreign countries. In terms of operating revenues and revenue passenger miles flown, 1 it was, in 1993, the third-largest U.S. airline. (American Airlines and United Airlines were the largest.) Delta had been expanding its international operations. In fiscal year 1990 it entered a partnership with Singapore Airlines that was meant to coordinate some of their scheduling and marketing efforts. In November 1991, Delta purchased most of the transatlantic route authorities of Pan Am, which had gone bankrupt. Thus in fiscal year 1993, revenues from international flights represented 21% of total operating revenues. This represented a large increase from earlier years, but it was still a smaller

1 “Revenue passenger miles” is a widely used measurement of traffic volume in the airline industry. It represents the number

of miles flown by all revenue-paying passengers. ____________________________________________________________

Resarch Associate Jeremy Cott prepared this case under the supervision of Professor William J. Bruns, Jr. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 1997 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.


Depreciation at Delta Air Lines and Singapore Airlines (A)

proportion of total revenues than what was the case for some other major carriers. (For example, in 1993, 38% of United’s revenues, and 26% of American’s, came from international flights.) Although Delta was the third-largest U.S. airline in terms of operating revenues and revenue passenger miles flown, it was the largest in terms of the number of airline departures and the number of passengers carried. Exhibit 1 shows key financial and operational data for Delta for the years 1989 through 1993. Delta was in the throes of difficulties affecting most American airlines. Deregulation of the industry in 1978 had led to increasing price competition; in the 1980s and early 1990s, airline fares didn’t even remotely keep pace with inflation. Major carriers like Delta—with high cost structures left over from an earlier,...
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