The Fresh Start of Delta Air Lines_ Team Centillion

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The “ fresh start” of Delta Air Lines Zibin Chen Kaung Khant Kyaw Qiutun Wang March 03, 2018 MBA550 Submitted to Dr. Paul Rossman

The “fresh start” of Delta Air Lines Depreciation of Delta Air Lines As the developing technology of airplane manufacturing, the life cycle of a new airplane is becoming longer and longer. Turbofan engines for jet-planes offer less wear and tear on the airframes compared with the piston engines. It means the norm of ten-years life in airline depreciation policies is out of date. Besides, as the backlogs of production and delivery for a new airplane, the assumption of offering new jet plane became less critical. Passengers pay more attention to the size of aircraft and the economy of operation when they select fleet rather than whether the aircraft is new or not. Finally, the deregulation in the airline industry brought other competition. Discount airlines emerged to challenge legacy Airlines Company. Therefore, all airlines extended lives of aircraft. All the factors above influence Delta accounting policies such as the depreciation on their financial report. To maintain their sustainability, Delta was forced to have a "fresh start" on their accounting. The adoption of the Fresh Start Accounting produced a new entity for financial reporting purposes in Delta. Consolidated Financial Statements on or after May 1, 2007, are not relative to financial statements before that date. Management combined the results of operations for eight months ended December 31, 2007, of the Successor; the four months ended April 30, 2007. For purposes of management's discussion and analysis of operations, Delta joined the outcomes of operations for the four months ended April 30, 2007, of the Predecessors with the eight months ended December 31, 2007, of the Successor. Also, Delta compared the combined results of operations for the year ended December 31, 2007, with the similar period in the prior year of the Predecessor and discussed significant Fresh Start Adjustments which affected comparability. 2

Analysis Given the useful life of the aircraft, Delta needs to update its residual value and depreciation. It requires a variety of estimates and assumptions, such as the long-term use of the equipment, the associated costs of maintaining the equipment, remaining life and salvage values, and economic conditions. Delta may extend some of the possible causes of flying equipment life. First, technology and industry enable these aircraft to last longer. With the new technology, the plane is better maintained and updated continuously. Continuous Improvement from Piston to Jet to New Software Several advances in the engine has enabled the aircraft to operate more efficiently with less wear and more time (PricewaterhouseCoopers, n.d.). Also, Delta's depreciation changes since 1986 have had a positive effect on the company's financial statements. Although depreciation will not affect cash flow or income, it will have an impact on revenue. By expanding depreciation, Delta will reduce depreciation expenses, resulting in higher net income (Antonetti & Grivetti, 2009). This is not only crucial for Delta but also for all airlines because of the intense competition, and deregulation industries are under pressure to deliver more profits and results. Delta achieves this by extending the useful life of your equipment and changing its residual value. This resulted in savings of $ 127 million in depreciation at the end of December 2007 (Ehsanbakhsh, 2013). A drawback of depreciation reduction is taxation. As depreciation decreases and net income increases, Delta's income tax increases. However, with higher net revenues, businesses can negotiate contracts better, reduce risk factors, pay higher salaries and bonuses, and have better positions in the industry. 3

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How Delta Airlines adopted Fresh Start Accounting For the depreciation, Delta revalued assets and equipment to fair value (IFRS, n.d.), which decreased the net value of the assets by $1.0 billion. Delta also adjusted the depreciable lives of flight equipment to reflect revised estimated useful lives (Antonetti & Grivetti, 2009). As a result, depreciation expense decreased by $127 million for the year ended December 31, 2007. Fresh Start Reporting is needed to revalue the assets and liabilities to fair value. Fair value is determined based on estimates and assumptions on the guidance prescribed by SFAS NO.157, "Fair Value Measurements" (FASB, n.d., SFAS NO.157). It defines fair amount, established a framework for measuring fair value and expands disclosure about fair value measurements. For the long-lived assets, Delta has recorded the flight types of equipment and other long- lived assets at $11.7 billion on Consolidated Balance Sheet at December 31, 2007. The value is based on various factors; including the assets estimated useful lives and their estimated salvage values (Houlihan Lokey, 2017). By SFAS No. 144 (FASB, n.d., SFAS No. 144), Delta has recorded impairments losses on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the expected future cash flows generated by those assets are less than their caring amounts (Cunningham, 2010). An impairment loss has been recognized as the carrying amount of the asset exceeds its estimated fair value. In this case, there are not too many details of what results of changing Delta accounting, but it indeed increases the company sustainability. Delta changed their accounting because the old standard was out of date. The remeasuring value is more accurate and practical for Delta and giving them vitality to expand their business. Besides, it also provides their investors and stakeholder’s confidence to invest or select their fleet. 4

Conclusion As one of the largest airline company in the world, Delta should be aware of the importance of depreciation and how to implement, because the depreciation expense takes the major percentage within in the company cost, and the significant part of company assets (aircraft, ground property, and equipment) have to be depreciated. Regarding of its depreciation method change in financial statement, it increased the useful life of aircraft and reduced the residual value, by increasing the estimated residual value and extending the estimated useful life of its aircraft, an airline company would prospectively record a lower depreciation expense on its income statement and a higher value for each aircraft on its balance sheet. In this case, Delta airline which filed for bankruptcy in 2005 to becoming with more international destinations the world by internal restructuring, which indicated how Delta to increase its sustainability. 5

References Antonetti, M. A., & Grivetti, J. A. (2009, August 25). After The Bankruptcy: Fresh Start Ac- counting - Accounting and Audit - United States. Retrieved from https://www.mondaq.- com/unitedstates/x/83990/After+The+Bankruptcy+Fresh+Start+Accounting Cunningham, C. (2010, June). Reorganizing? Take Advantage of Fresh Start Accounting | Com- pliance Week. Retrieved from https://www.complianceweek.com/blogs/colleen-cunning- ham/reorganizing-take-advantage-of-fresh-start-accounting Ehsanbakhsh, B. (2013, December). Delta Rev#1.0. Retrieved from https://prezi.com/je_bsoay- bcdw/delta-rev10/?webgl=0 FASB. (n.d.). SFAS No. 144 Accounting for the Impairment or Disposal of Long-lived Assests (Issued 8/01) Retrieved March 04, 2018, from http://www.fasb.org/summary/ stsum144.shtml FASB. (n.d.). SFAS No. 157 Fair Value Measurements Retrieved March 04, 2018, from http:// www.fasb.org/summary/stsum157.shtmlHoulihan Lokey. (2017, December 11). Fresh- Start Accounting Valuation | Houlihan Lokey. Retrieved from https://www.hl.com/us/ opinionadvisory/taxreportingvaluation/freshstartaccounting.aspx IFRS. (n.d.). IFRS 13 Fair Value Measurement. Retrieved March 04, 2018, from http://www.ifrs.org/issued-standards/list-of-standards/ifrs-13-fair-value-measurement/ PricewaterhouseCoopers. (n.d.). Crisis, restructuring and restatement – Accounting Services. Retrieved from https://www.pwc.com/us/en/services/audit-assurance/capital- markets/bankruptcy-reporting.html 6

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