# Singapore Airlines Case Summary

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Summary The case shows the differences in depreciation as the major operating expense in the examples of two airlines: Delta AL and Singapore AL. It also displays different practices in calculating the depreciation expense. Question 1: Calculate the annual depreciation expense that Delta and Singapore AL would record for each \$100 gross value of aircraft. For each airline, there are several periods with different asset life and residual values. Considering that: Depreciation = (Asset value – Residual Value) / Asset useful life, then Delta (Exhibits 4) Straight-line method Before July 1, 1986 July 1, 1986 – March 31, 1993 After April 1, 1993 Asset Useful life (years) 10 15 20 Residual Value (%) 10 10 5 Depreciation (\$) 9 6 4.75 Singapore…show more content…
As mentioned in the Exhibits 4 and 8, both companies are using the straight-line method of depreciation, thus, we see no the significant difference. Delta had a higher asset useful life in comparison to Singapore Airlines. The residual value index of Delta was less than Singapore Airlines. Why they use different depreciable lives and salvage values? Singapore may plan to use the equipment over fewer years as the estimate a higher residual value. Singapore Airlines is using a residual value of 20% over a relatively short useful life, compared to Delta Airlines over a 20 year useful life with 5 % residual value. There is a significant difference in the depreciation expense and this has an impact on comparing profitability of the companies. The company is changing the useful life of its aircraft from e.g. 15 to 20 years for Delta (April 1, 1193) to reflect in the aircraft replacement strategy. The change is reducing the depreciation expense and would reduce the expenses by a similar amount each year over the remaining life. This leads to an increased profitability due to an accounting…show more content…
Singapore Airlines’ strategy is focus on high level of customer service and business travelers as important market target. To support these high-level quality standards it is important to offer new aircrafts so the depreciation short term is fully aligned with this vision. Question 5 Does the difference in the average age of Delta’s and Singapore’s aircraft fleets have any impact on the amount of depreciation expense? If so, how much? Singapore Airlines have to renew their fleet more frequently than Delta Airlines, due to a shorter aging period for their aircrafts. At some point in time, Delta Airlines will end up with a bigger number of aircrafts, which would be older than the ones of Singapore Airlines. If we consider that the average age of Delta’s airplanes is 8.8 years, and of Singapore airlines is 5.1 (both: case - pgs. 2 and 3) then the difference in airplane ages will be 3.7 years. Using the average gross value (calculated in Q3) and assuming 3% of inflation before 1993, we can calculate the increased value of the fleet: Average gross value \$