© 2000 John Petroff

4)- Depreciation, depletion and amortization

Depreciation should be indicative of the volume of fixed assets put to use and therefore operating leverage. But because of distortions, it does not convey this information accurately. Still, in RMA Annual Statements Studies, this is the second item highlighted from the income statement. To test how old the equipment is, one can look at accumulated depreciation if it is given, or if it is not given, one can calculate a ratio of depreciation to net fixed assets. A high ratio indicates that fixed assets have been already extensively depreciated and accumulated depreciation should also be large. The lower the ratio, the more recent the fixed assets.

There are other methods of judging quality of fixed assets from numbers in the income statement. One can compare repair and maintenance to fixed assets and energy consumption of companies in the same industry (under the assumption that similar equipment is used).

We continue with the five airlines. In Table T-13.8, depreciation, maintenance and aircraft rental expenses are compared in absolute amounts, as well as proportions of revenues and per available seat mile. Table T-13.8 Comparison of depreciation, maintenance and rental of five US air carriers in 1999 . Delta AMR UAL US Air Midway Revenues (in $ millions) 13,417 19,205 15,784 7,826 205 Available seat miles ASM (millions) 144,003 159,768 176,686 56,723 1,544 Depreciation (in $ millions) 961 1,287 867 318 6 % Depreciation/revenues 7.2 6.7 5.5 4.1 2.9 Depreciation per ASM ($) 0.67 0.81 0.49 0.56 0.39 Maintenance (in $ millions) 561 937 689 448 17 % Maintenance/revenues 4.2 4.9 4.4 5.7 8.3 Maintenance per ASM ($) 0.39 0.59 0.39 0.79 1.10 Aircraft rental (in $ millions) 590 569 876 440 30 % Aircraft rental/revenues 4.4 3.0 5.5 5.6 14.6 Rental per ASM ($) 0.41 0.36 0.50 0.78 1.94 Source: Annual Reports In Table T-13.8, we see that US Airways and Midway have lower depreciation expenses than the other airlines(4.1% and 2.9% of revenues, compared to 5.5% to 7.2% for the other airlines). This suggests that these two companies own fewer aircrafts. This is confirmed by the larger aircraft rental for these firms ($0.78 and $1.94 per available seat mile, compared with $0.36 to $.50 for the other three airlines). The maintenance expense is surprisingly higher for the same two airlines (5.7% and 8.3% compared to less than 5% for other three). Further investigation uncovered in Midways management analysis and discussion of financial condition and results of operation, indicates that "maintenance ... increased ... due to the return of the four relatively more maintenance efficient A320 to their lessor." This comment indicates that Midway is performing maintenance on the aircrafts it leases and that these aircrafts require much maintenance, which suggests that they may be old.

See review questions Q-13C4.1 and Q-13C4.2.

Previous: 3-Salaries

Last modified: Jun/01/01

Next: 5-General/administrative