According to the textbook, U.S. companies and foreign companies are affected by deprecation rules. When companies write off the cost of long-lived assets over a period of time, the term used is depreciation.
In order to complete this assignment, review Delta Airlines’ annual reports for the years 2012 and 2013, located at http://ir.delta.com/stock-and-financial/sec-filings/
Write a five to six (5-6) page paper in which you:
- Briefly outline Delta Airlines company’s history, products, and services, and identify the costs reported in the balance sheet for property, plant, and equipment.
- Prepare a horizontal analysis of Delta’s property, plant, and equipment for 2012 and 2013.
- Next, calculate the asset turnover ratio, return on asset ratio, and the debt to total assets ratio.
- Based on your calculations, indicate the conclusions that you can draw, based on the changes in property, plant, and equipment. Determine the method or methods of depreciation that Delta Airlines uses to depreciate its property, plant, and equipment.
- Suggest three (3) alternative methods that Delta Airlines could use in order to depreciate assets.
- Based on your suggestions, propose the method that Delta Airlines could use in order to improve the reporting of its property, plant and equipment. Provide a rationale for your response.
- Analyze the information disclosed in Delta Airlines’ notes to their financial statements on property, plant, and equipment. Recommend additional data that Delta Airlines could include that would be useful to potential investors and creditors.
The specific course learning outcomes associated with this assignment are:
Demonstrate, analyze, and explain the proper accounting for acquisition and valuation of property, plant, and equipment; valuation; costs subsequent to acquisition; and disposition of plant assets.
Demonstrate, analyze, and explain the proper accounting for depreciation, impairments, and depletion.
Use technology and information resources to research issues in intermediate accounting.
Write clearly and concisely about intermediate accounting using proper writing mechanics.
Solution
Delta Airlines | History
The company Delta Airline was originally known as the Huff-Daland Duster Company after its founders Huff and Daland. The company was founded in the year 1924. The airline was based in the state of Georgia, in Macon wits fleet of eighteen crop-dusting airplanes. The company, later on, was led by one of its employees, C.E. Woolman who assumed the company stewardship as the owner of the firm and started charter passengers’ airline in the slack season of the South American. By the year 1928, the new owner has given the company its new name Delta Airline and had its headquarters shifted to Monroe in Georgia. The company then eventually moved to Atlanta where it is still headquartered.
The history of the airline of Delta has been an up and down ride. It is because of the company efficient marriage of internal growth and acquisitions. The company through its immensely effective coordination of internal growth and acquisitions has emerged as a leading airline of the world. Of course, there have been some serious hiccups during its journey; the company was potentially heading for bankruptcy in 2004 and stave off its takeover by the US Airways in the year 2006 (Delta Airline, 2018).
Business | Products & Services
The company provides pre-scheduled air transportation for cargo and passengers from within the United States and for around the world. The route globally owned by the company provides it with the presence in potentially every main domestic as well as international market. The network of the route is centered on the hub as well as the international gateways which are operated in Atlanta, Amsterdam, Detroit, Cincinnati, New York, Minneapolis, Salt Lake, Paris, Tokyo, and Seattle. These all gateways gather and distribute the traffic and flights around the other market gateways. The fleet size of the airline enables it to enjoy varying ability and capacity providing flexibility for the network.
The company has international joint ventures with Air France-KLM in the transatlantic region and Alitalia and Virgin Atlantic in the same region as well. Its alliance is also established with other foreign airlines like the GOL and AeroMexico and membership in the SkyTeam. The company also has a marketing alliance with the Alaska Airlines on a domestic level and agreements with Delta Connection for regional carriers.
Regional Carriers
The company has regional alliances with regional carriers like
| Regional Airline | Subsidiaries of |
| Express Jet Airlines | SkyWest Inc |
| Chautauqua Airlines | Republic Airways |
| Compass Airlines | Trans States Holdings Inc |
| Endeavor Air Inc | Delta Airlines |
| Sky West Airlines | SkyWest Inc |
| Shuttle America Corporation | Republic Airways |
| Go Jet Airlines | Trans States Holdings Inc |
Monroe Fuel
The company wholly owns the subsidiary Monroe Energy which operates the Trainer Refinery and the linked assets in Pennsylvania for mitigating the inclining cost of refining that the company has to pay otherwise. The operations of the facility include refinery operation and transportation of fuel from facility to airline operations in Northeast US.
Cargo
The other businesses of the company include the cargo service which helps the company to connect the major freight gateways around the world. The company generates cargo revenues from its international as well as national operations on the scheduled passenger aircraft.
Other Businesses
The company also has many other businesses including the repair and overhaul and aircraft maintenance, the staffing services, private jet operations and the vacation operations. The company other businesses include Delta Private Jets, Delta Global Services, Delta TechOps and MLT Vacations.
Property, Plant & Equipment | Horizontal Analysis
| Consolidated Balance Sheets | ||
| (in millions, except share data) | 2012 | 2013 |
| ASSETS | ||
| Property and Equipment, Net: | ||
| P Property and equipment, net of accumulated depreciation and amortization of $7,792 and $6,656 | 21,854 | 20,713 |
| on December 31, 2013, and 2012, respectively | ||
| Horizontal Analysis | ||
| ASSETS | ||
| Property and Equipment, Net: | 5.51% | 0.00% |
| Property and equipment, net of accumulated depreciation and amortization of $7,792 and $6,656 | ||
| on December 31, 2013, and 2012, respectively | ||
The horizontal analysis of the company shows that the company property plant and equipment value increased by 5.5% approximately in 2013 as compared to the year 2012 (Sultan, 2014). It can be analyzed by going through the following table:
| Property and Equipment | |||
| (in millions, except for estimated useful life) | Estimated Useful Life | 2012 | 2013 |
| Flight equipment | 21-30 years | $ 21,481 | $ 23,373 |
| Ground property and equipment | 3-40 years | $ 4,254 | $ 4,596 |
| Flight and ground equipment under capital leases | Shorter of the lease term or estimated useful life | $ 1,381 | $ 1,296 |
| Advance payments for equipment | $ 253 | $ 381 | |
| Less: accumulated depreciation and amortization(1) | $ 6,656 | $ 7,792 | |
| Total property and equipment, net | $ 20,713 | $ 21,854 | |
The table as per the 10K annual report of Delta Airline shows that the company increased its fleet equipment in 2013, and its ground property and equipment as well. The flight and the ground equipment that is under capital lease have however declined. The advance payments for the equipment have increased and the accumulated depreciation and amortization as well. Therefore, combined, the company property and equipment increased in 2013 by 5.5%.
Ratios
The ratios also show the picture of the company performance.
| Debt to Total Assets | ||
| 2012 | 2013 | |
| Total Debt | $ 46,681 | $ 40,609 |
| Average Total Assets | $ 48,401.00 | $ 48,401.00 |
| Debt to Total Assets | 0.96 | 0.84 |
The Debt to total assets ratio shows that the company debt dependency declined in 2013. It is also shown in the graph in which the total debt as compared to the average total assets declined in 2013 as compared to 2012. It shows that the company dependency on debt financing has decreased (Feng & Wang, 2000).
| Asset Turnover Ratio | ||
| Sales | $ 36,670.00 | $ 37,773.00 |
| Average Total Assets | $ 48,401.00 | $ 48,401.00 |
| Asset Turnover Ratio | 0.76 | 0.78 |
The asset turnover ratio shows how much effect the company has used its assets. The comparison in the graph shows that the company has increased its efficiency regarding asset utilization by improving its sales revenue converted from the use of its assets. The company asset turnover has increased from 0.76 to 0.78 in 2013 as compared to 2012 (Wang, 2008).
| Return on Assets | ||
| Net Income | $ 10,540.00 | $ 1,009.00 |
| Average Total Assets | $ 48,401.00 | $ 48,401.00 |
| Return on Assets | 0.22 | 0.02 |
The return on Assets value of the company is however increased in 2013 as compared to 2012. The company return on assets is calculated by using the net income. The net income improved substantially in 2013. The company had about 0.8 billion dollars of tax benefit this year because of the release of the tax valuation allowance. The company pre-tax profits had been 147% higher than its previous year. The customer satisfaction and the doubled domestic net promoter scores led the operating performance. The company also returned about $350 million to its shareholders through the dividends. The company revenue inclined due to the increment witnessed in the first class up-sell and the economy comfort products. These alone contributed more than $600 million to the sales company Delta Airline (Delta Airline, 2013, p. 27).
Depreciation |Disclosure
The expense of depreciation and amortization has increased year over year for Delta Airline mainly because of the investment in the purchase of new aircraft and because of the modifications to aircraft which upgraded the interiors of the aircraft and also enhanced the company product offerings (Delta Airline, 2013, p. 33). The depreciation expense for the company for each year of 2012 and 2013 has been $1.4 billion. The company has residual values for its aircraft and simulators from 5% to 10% of the cost. The company calculated depreciation for the flight and the ground equipment was around $657 million in 2013 and $653 million in 2012. The company uses the straight-line method of depreciation which helps it to write off the assets as per their estimated residual value across their useful life (Delta Airline, 2013, p. 60).
Recommendations
The company could be using the following three methods of depreciation for its healthy disclosure of accounting and reporting requirements.
- Sum of the year’s digits acceleration method
- Double declining acceleration method
These both methods help the company to lead faster depreciation in the first years of the asset’s life.
- Units of the activity method
This method of depreciation can be used by using a depreciation based on the predetermined criterion. In the case of Delta Airlines, it can be revenue per passenger mile or RPM.
For the disclosure standards the company can additionally use the following notes in its annual reporting:
- Techniques like the econometric analysis can be analyzed with the review of the actual physical fleet and through benchmarking. The charging of depreciation by estimating the residual value can be misleading
- Moreover, instead of arbitrarily changing the estimations in between, it would be better if the revision of these estimations is first analyzed in perspective of its impact on the key figures. Sensitivity analysis can aid in these scenarios. The reason for preference of one method over other should also be provided.
References
Delta Airline. (2013). Delta Ariline 10K 2013. Retrieved May 29, 2018, from https://www.sec.gov/Archives/edgar/data/27904/000002790414000003/dal1231201310k.htm
Delta Airline. (2018). Delta Airline. Retrieved May 29, 2018, from https://ir.delta.com/stock-and-financial/sec-filings/
Feng, C.-M., & Wang, R.-T. (2000). Performance evaluation for airlines including the consideration of financial ratios. Journal of Air Transport Management, 6(1), 133-142.
Sultan, A. S. (2014). Financial Statements Analysis – Measurement of Performance and Profitability: Applied Study of Baghdad Soft-Drink Industry. Research Journal of Finance and Accounting, 5(4), 49-56.
Wang, Y.-J. (2008). Applying FMCDM to evaluate financial performance of domestic airlines in Taiwan. Expert Systems with Applications, 34(3), 1837-1845.
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