Delta Analysis Case

There are a couple of reasons why companies extend the economic life of their assets and change its residual life. Consideration like physical or economic life, corporate strategy, planned uses, expected technological changes all have influence over such decision.

In the case for Delta Air Lines, the factors that lead to the extension of the economic live of their flight equipment and the change in the residual values can be attributed to corporate strategy, and technological change.

In the earlier years, passenger planes were powered by piston engines. Piston engine powered aircraft are more susceptible to more wear and tear due to destructive vibration. Companies in the airline industry use ten years as the economic life of planes for their depreciation policy.

As technology improves, planes evolved from piston engine powered to turbofan powered. Turbofan engines offers less wear and tear to the airframes of the plane, and their physical life was also longer. Planes became more efficient, and are able to operate for a longer period of time, and that was one of the reasons why Delta Air Lines extended its economic life and changed the residual values of its aircraft.

Other factors could be due to corporate strategy and the pressure from the emerging discount airline that influences the company decision to change its economic life and residual value to reflect a more positive bottom line. In 2007, Delta Air Lines has just emerged from bankruptcy and the pressure to reflect a more positive financial statement is even greater. By extending the fleet of aircraft economic life and changing its residual value, depreciation cost of Delta Air Lines decreased by $127 million for the year ended December 31, 2007. This substantial amount decrease in expenses helps to improve its overall profit.

In conclusion, it seems to suggest that the extension of the aircraft economic life and residual value from 1986 to 2007, to a large extent, was due to the improvement in aircraft technology where the extension of economic life was carryout throughout the industry. On the other hand, I believe that subsequent extension the aircraft economic life to 30 years in 2007 was mainly due to Delta Air Lines’s corporate strategy of achieving a more positive result in its financial statement.

Question 2

Year 1985

Residual Value = 10% * $33,000,000 = $3,300,000

First Year Depreciation = ($33,000,000 - $3,300,000) / 10 = $2,970,000

Year 1988

Residual Value = 10% * $39,000,000 = $3,900,000

First Year Depreciation = ($39,000,000 - $3,900,000) / 15 = $2,340,000

Year