Delta Airline Essay

311 Words2 Pages
Question 1: What are some of the possible reasons why Delta may have extended the lives of flight equipment and changed residual values four times since 1986? Answer: Taking in consideration that calculating the life of an aircraft requires multiple estimations and assumptions such as the long-term usage of the equipment, the associated costs to maintain equipment, the residual life and salvage value, and economic conditions; it is clear that Delta, like all other airlines, needed to update the residual value and depreciation of the equipment. One of the reasons why Delta decided to extend the useful lives of flight equipment is because technology and the industry allowed for these aircrafts to simply last much longer. Aircrafts are better maintained and consistently updated with new technology. Advances such changing engines from piston to jet engines and new software allows aircrafts to function more efficiently with less wear and tear and for longer period of times. Additionally, Delta’s changes in depreciation from 1986 through 2006 had a positive effect on the company’s financial statements. Although depreciation does not affect cash flows or revenue, it does have an effect on the bottom line. By stretching out depreciation, Delta decreased its depreciation expense resulting in higher net income. This is very beneficial for Delta; the airline industry is always being pressure to show more profits and results. Delta achieved this by extending the life of its equipment and changing its residual values. It resulted in a savings of $127 million in depreciation expense for year-end December 2007. A downside to decreasing depreciation is taxes. With decreased depreciation and increased net income, Delta’s income taxes increase. However, with higher net income the company is in a better position to negotiate contracts, has a lower risk factor, can pay
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