The Aircraft Depreciation Dilemma
The Aircraft Depreciation Dilemma
The Aircraft Depreciation Dilemma
efficiency to display how each aircraft plays in the lease rates and
values within the market, can be requested by:
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Legal constraints.
Depreciation methods by the book include straight line (seldom the
case but most often used) and diminishing (reducing-balance)
method. While straight line is simply original amount minus residual
value all over asset life. The reducing balance takes into account
accelerated (or decelerated) rates of depreciation over time
contingent on the differences between net book values over the
period.
For airlines, the best way to go about facilitating greater profit
margins is to depreciate the aircraft, and accumulate tax credits and
breaks. The current methodology for aircraft in the US, in fact for all
manufactured capital assets used in business today, go back to the
days of the Reagan Administration and the Economic Recovery Act
of 1984. The law effectively eliminated the old 10% Investment Tax
Credit (some of you may still remember those days) as well as the
old longer term depreciation, with a new, more attractive shorter
recovery period, referred to as the Modified Asset Cost Recovery
System (MACRS). Generally speaking, the interpretation was and
still is that aircraft owned and operated pursuant to FAR Part 91
choose the five year schedule while those aircraft operated under
FAR Part 135 and commercially operated aircraft utilized the not
quite as attractive, seven year methodology. And by the way, the
schedules are not linear. The five year schedule, as an example,
does not recover at 20% per year. Instead, the code is set for the
following methodology:
Year Five 52 %
Meanwhile, both FedEx and UPS top up new 767 orders (old airframe optimized for cargo) from Boeing to replace their even older
DC-10, MD-11, A300 and A310 fleets (with approximately 10% lover
unit operating costs than the DC-10). This is thanks to cashorientation, maximization of current supply chain maturity in the
market, and full control of operations without strings pulled by
lessors/financiers.
crucial to retain the value and flexibly allow aircraft valuations. This
includes re-engines, re-winging, and pax-freighter conversions.