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Threw Major Costs for Airlines; Older vs Newer Planes

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New-model commercial airplanes are much more fuel-efficient than older models. How is it possible for airlines flying older models to make money when its competitors are flying newer planes.
This could be explained by depreciation. Airlines flying older models are likely paying fewer taxes on depreciation. It's possible the older models might even be fully depreciated at this point, in which case the airlines wouldn't be paying any taxes on depreciation. The tax reduction improves the airlines cash flows, allowing it to remain competitive against airlines with new models. New models might have lower operating costs due to fuel-efficiency, but this could be initially offset by the tax on depreciation.
1. What are the top 3 costs besides depreciation by airlines do you think and do you think all of these would be better (lower) with newer airplanes?

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The top 3 costs would be installment payments on leases/purchases of planes, fuel and maintenance and lastly amount of ...

Solution Summary

An expert examines the three major expenses airlines face and explains why some are less expensive for airlines with newer fleets and why some are in fact likely more expensive.

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Depreciation at Delta Airlines: The "Fresh Start"

Estimating depreciation for matching with revenues during an accounting period requires determination of the cost, estimation of the life and residual value, and selecting a pattern for reporting depreciation over the life of the asset. Aircraft used by commercial airlines are expensive, have a finite life, and are sold and resold in a worldwide market to knowledgeable buyers. All major U. S. airlines use the straight-line method of depreciation.
Delta Air Lines has changed its assumptions about aircraft lives and residual values four times in the last 30 years or so. In the most recent changes, Delta adopted fair value accounting as part of its "fresh start" emergence from bankruptcy. The result of each of these policy changes has affected future asset values and present and future income.

1. What are some of the possible reasons why Delta Air Lines may have extended the lives of flight equipment and changed the residual values for depreciation purposes four times since 1986?

2. Assume that Delta Air Lines purchased the following six aircraft (see attached Exhibit). What was the residual value of each aircraft and the first-year depreciation for each aircraft? (Use 25 years and residual values of 5% for 1993 through 2006 and 30 years and 10% of cost for 2007.) The useful life table in the attached document does call for a 20 year useful life for planes purchased in 1993, but please use 25 years).
Exhibit is attached.

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