1.0 Introduction

Depreciation is a non-cash expense that reduces the value of an asset over time. Depreciation is

taken on business assets to recognize the change in value of these assets as they age. In the

airlines industry the equipment expenses undertake more than half from the total assets and

involving depreciation which have the significant value in operating expenses. The amount of

depreciation estimated by an airline company is based on the cost of assets, estimates by assets

lives, and assumptions about residual values at the end of asset lives.

Delta Air lines requires to adjust a structure under the Bankruptcy (Chapter11 of the U.S.

Bankruptcy code) in September, 2005 and emerged as a new Company in April 30, 2007. Then

Delta Airlines adopted “fresh start’ accounting which is requires resetting the historic net book

value of assets and liabilities to fair value and becoming a new entity for financial reporting

purpose. Delta Air lines started in 2008 with more destination that more than another air lines in

the world, 321 Destinations in 58 Countries. In 2008 Delta merged with Northwest Airlines to

become the largest airline in the world.

The assumptions of economic life of aircraft has been changed by Delta Air Lines four times

since 1986, each time expected life by five years. The intense in the competition and

deregulation during this period invite the consideration of regular extension of aircraft lives. Its

motivated by desired to reduce the annual depreciation amounts in order to report higher net

income or reduce losses.

2.0 Statement of the problem

Delta airline changes their depreciation policy and extend the estimated useful life of the

equipment and adopting the ‘Fresh Start’

Delta had many problems and went to bankruptcy in 2005. It emerged from bankruptcy as a new

company in April 2007. Upon emergence from bankruptcy Delta adopted “Fresh Start "

accounting. Financial statements after May 1, 2007 are not comparable to those before that date.

The Fresh Start accounting requires resetting many things and causes many changes. Delta

airline has changes their depreciation policy a number of times over the past two decades.

Although there are a number of factors in the airline industry that could require a change in the

estimated useful life of the equipment the frequency observed in delta’s policy changes indicate

that the company might be doing so to boost its earnings.

The fresh start make an adjustment for property and equipment and also flight equipment. In

depreciation Delta’s property and equipment is revalued to fair value compared to historical cost

or net book value that have been used before. As the result the depreciation expenses decreased

for the year ended 31 December 2007. Using fresh start accounting the Delta doing their

financial reporting based on SFAS No. 157 which explaining on how to measure fair values and

expand disclosure about fair value measurements.

The fact that the company recently filed for bankruptcy indicate that the company must have

been facing lower earnings and had a motive to enhance earnings. Delta Air Lines changes their

deprecation policy and extend their estimated life for the asset because enable them to report the

higher earnings. Delta Air Lines also changes the assumptions of economic life of aircraft four

times since 1986 because of the airline industry that have intensive competition and competitive

pricing and introduction of “hub and spoke” route systems, the deregulation during this periods,

the reducing of annual depreciation to report higher income or reduce losses, and the physical

life of a modern jet-powered aircraft against powered by piston engines.

3.0 Causes of the problem

Company might be doing the changes in depreciation policy to boost its earningsIn estimating

depreciation for accounting purposes, Delta Air Lines has changed its assumptions about aircraft

lifespan and residual values four times in the last thirty years or so. In the most recent changes,

Delta adopted fair value accounting as part of its fresh start emergence from bankruptcy. Each of

these policy changes has affected future asset values as well as present and future income. By

extending the depreciation they seek to show more returns on their financial statements. The

Delta Air Lines made changes that they believed would maximize their profits.

The factor that affect estimated life cycle of commercial passenger airplanes

There is the variety of the factor that affect the life span of the commercial aircraft such as the

regularity of the maintenance for the flight equipment. So the flight might have the long span if

the maintenance was in periodically checked. Besides, the usage of the flight also is depend on

how much number of trip of the aircraft and the size of the plan. The less number of trip and the

bigger plane has the longest life span. Other that, the good technology that used to produce the

aircraft also can affect the life span of plane. So Delta Air Lines might choose to extend the

estimated life of the depreciation because of this factors of that affect the aircraft life cycle.

The uncertainty of the economic and political factors

Deregulation severely affected the airline industry in the United States in the late 1970’s. In

midst of the already rising inflation and energy costs, the airline industry was yet again hit by the

forces of a free market. Any large carriers prior to deregulation now had heavy infrastructures to

support in a new economic environment where price competition was intense. Delta would find

out that they would have to re think how they recognized their depreciation to remain

competitive so Delta Airlines announced that they would be adjusting the way they recognize

their depreciation.