Depreciation at Deutsche Lufthansa AG

Depreciation at Deutsche Lufthansa AG

By
Anne Beyer, Jaclyn Foroughi
2015|Case No.A224| Length 14 pgs.

As one of the most highly capital-intensive industries, airlines require a substantial investment in physical assets to fund operations. These assets, characterized by property, plant, and equipment (PP&E) on the balance sheet, typically comprise more than half of the total assets of an airline. As a result, depreciation of these assets constitutes a major operating expense.

Although methods and estimates used for determining depreciation expense can differ across industries, it is not uncommon for similar divergence to occur among companies within the same industry as well. Aircraft-related depreciation expense is determined by estimating the useful life and the residual value of the aircraft. These estimates can vary widely amongst airlines as a result of many factors including differences in corporate strategy, flying patterns, and fleet composition. As a result, differing practices and expectations can have a significant impact on each airline’s reported financial results.

Learning Objective

Students are presented with an opportunity to analyze the impact of depreciation methods and assumptions, including how changes in assumptions related to depreciable lives and residual values impact depreciation expense.

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