How Long Can Airplanes Fly?
Airline A depreciates its airplanes over a 15 year period and estimates a salvage value of 10% of the cost of the plane. At the same time, Airline B depreciates identical airplanes over a 25 year period and provides for a 15% salvage value. These different assumptions resulted in markedly different operating results. For example, if one airplane costs $10 million, Airline A would depreciate $260,000 more per year for 15 years than would Airline B. Which company’s estimate of useful life more closely reflects reality? Would you feel comfortable as a passenger in an airplane that is 25 years old? Does the fact that Airline B subsequently went out of business provide any information as to why its estimates were so substantially different from those of financially sound Airline A?