Why might the companies be using different depreciation methods? Average age of Delta’s aircraft = 8.8yrs; Average age of Sing Aircraft = 5.1yrs. The useful life of an airplane may be much less for Singapore since one of their competitive advantages is flying a modern fleet. How could you argue for Delta changing its depreciation assumptions? Against? Perhaps Delta changes its assumptions because technologically newer aircraft now tend to last longer than technologically older aircraft
Delta may be shifting its depreciation assumptions to help cover the losses on its balance sheet and appear more profitable (Delta has modified its assumptions a number of times over the years)
Why would Singapore employ depreciation assumptions that are so much more conservative than Delta’s? Singapore will get all of the difference in depreciation expense back. One way Singapore could get it back is by having much less depreciation expense in the future. Exhibit 1 and 5 of the case indicate that Delta’s annual book gain on the sale of flight equipment during 1989-1993 was about $30 million, whereas Singapore’s average annual book gain on the sale of flight equipment was $134 million in Singapore dollars, $74 million in U.S. dollar. This is a business model difference chosen by Singapore Air. Singapore can afford to take a large hit in its depreciation expense because it knows that it can record large gains on the sale of their aircraft. What are some differences between Delta’s business model v Sing business model? Sing expects to sell their after 5-6 years and make a tidy profit based on market value. Delta will be running their planes as long as possible and is not looking to make much profit when it sells the planes Delta leases many planes and does many more short trips whereas Singapore owns all of its planes and does on average much longer trips. Singapore can maintain its differentiation in the marketplace with a regular supply of new...
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