Delta Air Lines is one of the largest airlines in the world. It provides scheduled passenger service, airfreight, mail, and other related aviation services. Selected balance sheet information from Delta’s 1997 annual report is given here along with Note 8 to the financial statements, describing Delta’s lease obligations.
Like most airlines, Delta leases the major portion of its assets. Most of these leases are structured to meet the FASB’s criteria for operating leases. Accounting standards require that the minimum annual rental commitments under both capital and operating leases be disclosed for the ensuing five years and in the aggregate for later years.
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Delta Air Lines, Inc. Selected Financial Information, 1997 Annual Report (Dollars in Millions) |
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|
Balance sheet |
|
|
Current assets |
$ 2,867 |
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Property and equipment |
6,109 |
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Other assets |
3,765 |
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Total |
$12,741 |
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Current liabilities |
$ 4,083 |
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Noncurrent liabilities and other credits |
5,651 |
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Total liabilities |
9,734 |
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Common stockholders’ equity |
3,007 |
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Total |
$12,741 |
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Net income |
$ 854 |
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Delta Air Lines, Inc. |
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Footnote Disclosures of Lease Obligations |
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1997 Annual Report |
Note 8. Lease Obligations:
The Company leases certain aircraft, airport terminal and maintenance facilities, ticket offices, and other property and equipment. Rent expense is generally recorded on a straight line basis over the lease term. Amounts charged to rental expense for operating leases were $0.9 billion in fiscal 1997 and fiscal 1996 and $1.1 billion in fiscal 1995.
At June 30, 1997, the Company’s minimum rental commitments under capital leases and non cancelable operating leases with initial or remaining terms of more than one year were as follows:
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Years Ending June 30 |
Capital Leases |
Operating Leases |
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(In Millions) |
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|
1998 |
$101 |
$ 860 |
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1999 |
100 |
860 |
|
2000 |
68 |
840 |
|
2001 |
57 |
830 |
|
2002 |
57 |
850 |
|
After 2002 |
118 |
9,780 |
|
Total minimum lease payments |
501 |
$14,020 |
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Less: Amounts representing interest |
117 |
|
Present value of future minimum |
|
|
capital lease payments |
384 |
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Less: Current obligations under |
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|
capital leases |
62 |
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Long term capital lease obligations |
$ 322 |
Required
a. Assume that for purposes of financial analysis, you wish to treat Delta’s operating leases as if they were capital leases. Develop an approximation of the capitalized value of Delta’s leases, based on the information provided in Note 8.
b. Show how your approximation of the capitalized values of Delta’s operating leases would affect your measurements of total assets, total liabilities, property and equipment, the ratio of liabilities to assets, the ratio of property, plant, and equipment to assets, net income, and the ratio of net income to total assets.