Components of Aircraft Acquisition

Components of Aircraft Acquisition
Cost, Associated Depreciation and

Impairment Testing in the Global
Airline Industry
T R A N S P O RT
Introduction
Components of aircraft acquisition cost
General requirements
Key considerations for the passenger airline industry
Depreciation and residual values
10
Useful life
10
Depreciation methods
11
Residual values
11
Impairment testing
12
Aircraft revaluation
13
Disclosures
14
Appendix 1 Useful lives, depreciation

rates and residual values disclosed
by airlines
15
2 C o m p o n e n t s o f A i r c r a ft Ac q u i s i t i o n C o s t
C o m p o n e n t s o f A i r c r a ft Ac q u i s i t i o n C o s t 3
Introduction
The airline industry has contended with several significant events in
recent times that have led to major losses, bankruptcy or bankruptcy
protection of a number of major airlines.
This has included the terrorist attacks in New York and London, SARS,
the Iraq war, Bali bombings and avian flu. These events have impacted the
secondary aircraft market and consequently the valuation of aircraft assets
in financial statements. Aircraft and aircraft-related assets are high-cost
assets. The list price of a new wide-bodied aircraft may be in the hundreds
of millions of dollars. Accounting for such high value and complex assets
involves consideration of several factors.
The acquisition of aircraft and related fixed assets whether financed by lease
or purchased outright represents the single most critical channel of investment
for most, if not all airlines. Acquisitions of assets can be structured under a
variety of terms which, although imposing similar economic obligations on
the airline, offer potential for disparate accounting treatments.
Many airlines only provide summarised published information in regard to
aircraft acquisition costs on such issues as useful lives and residual values which
can make it difficult to determine how certain acquisition costs are treated.
The principal objective of this publication is to outline accounting
considerations in relation to components of aircraft costs, associated
depreciation and impairment testing under International Financial Reporting
Standards (IFRS).
This publication is not intended to provide guidance on the circumstances in
which an interest in an aircraft should most appropriately be dealt with either
on or off balance sheet, and in particular it does not address the classification
between operating and finance leases. Classification of leases and related
lease accounting is addressed in a separate KPMG publication Accounting
for Leases of Aircraft Fleet Assets in the Global Airline Industry.
Components of aircraft cost
General requirements
IAS 16 Property, Plant and Equipment
sets out the accounting treatment and
disclosure requirements for property,
plant and equipment. IAS 16 requires
major component parts of assets to
be capitalised and appropriate
depreciation policies applied to
each identified component.
Property, plant and equipment
comprises tangible assets held by
an entity for use in the production
or supply of goods or services, for
rental to others, or for administrative
purposes, that are expected to be
used for more than one period.
Property, plant and equipment is
recognised if, and only if, it is
probable that future economic
benefits associated with the item
will flow to the entity and its cost
can be measured reliably. Property,
plant and equipment is recognised
initially at cost.
Cost includes the purchase
price, including import duties and
non-refundable purchase taxes, after
deducting trade discounts, rebates
and all expenditure directly attributable
to bringing the asset to a working
condition for its intended use.
Intended use means being capable
of operating in the manner intended
by management. This will include
purchase-right payments and may
also include capitalised borrowing

costs where the funds are borrowed
specifically or a notional allocation of
general indebtness for an aircraft that
is deemed to be a qualifying asset.
A qualifying asset is one that
necessarily takes a substantial
period of time to be made ready
for its intended use or sale.
Currently, under IFRS there is a
choice as to whether borrowing
costs relating to a qualifying asset
are expensed or capitalised. In March
2007 the IASB issued revised IAS 23
Borrowing Costs, which is effective
for annual periods beginning on or
after 1 January 2009; earlier
application is permitted. The revised
IAS 23 removes the option to
expense borrowing costs associated
with the acquisition, construction or
production of a qualifying asset.
Thus entities have to capitalise
borrowing costs directly attributable
to the acquisition, construction or
production of a qualifying asset as
part of the cost of that asset.
Key considerations for

the passenger airline
industry
Aircraft assets generally comprise
a number of components, the major
ones include:
airframe
engines
modifications including In-Flight
Entertainment (IFE) and Buyer
Furnished Equipment (BFE)
rotable assets parts which are
normally maintained and reused
repairables parts which are
capable of being repaired and
reused, but which can only
be repaired a limited number
of times.
Although individual components are
accounted for separately, the
financial statements continue to
disclose a single asset. An airline
generally would disclose aircraft as
a class of assets.
In relation to the purchase of new
aircraft, the following particular
issues have been chosen for more
detailed consideration:
(1) option payments and
refundable deposits
(2) capitalisation of interest
on advance payments and
incremental costs of deferring
delivery dates
(3) capitalisation of foreign
exchange gains and losses
arising from the financing of
the aircraft purchase, prior to

it being brought into use
(4) manufacturers' credits
(5) embedded maintenance.
Consideration is also given to the
treatment of aircraft modification
costs, (which might more commonly
be an issue either affecting aircraft
already in use, or aircraft acquired
under an operating lease) and the
acquisition of second hand aircraft.
Each of the above issues are dealt
with in paragraphs below.
(1) Option payments and
refundable deposits
Airlines frequently acquire options to
purchase aircraft in the future, the
commercial rationale being to keep
aircraft acquisition capacity as flexible
as possible as well as establishing a
position in the manufacturer's
production queue. The options are
usually effectively aircraft deposits. If
the option is subsequently exercised,
it is appropriate to capitalise the option
expenditure as part of the total cost of
acquiring the aircraft. Conversely the
cost should be written off to the profit
and loss account at the earlier of:
the date the option lapses
the date a decision is taken

not to exercise the option.
Common place today is the payment

of refundable deposits, where cash
deposits are paid to the manufacturer
and held against future aircraft
purchases. These allow for
acquisition flexibility, providing the
ability to transfer deposits over
individual aircraft types and obtain a
refund on amounts deposited where
a decision is made not to take
delivery. These amounts should
be capitalised into the aircraft
acquisition costs when the relevant
aircraft is acquired.
(2) Capitalisation of interest on
option and advance payments
and incremental costs of
deferring delivery dates
The capitalisation of interest on
option and advance payments to
manufacturers is relatively common
practice in the airline industry. Given
the interrelationship between the level
of any advance payments and the
ultimate purchase price of an aircraft,
interest on advance payments can be
regarded as a cost directly attributable
to bringing the asset to working
condition. With regard to the method
of calculating the capitalised interest,
two methods are:
identifying the actual interest cost

of the specific borrowings used to
finance advance payments
determining a weighted average
or incremental cost of general
borrowings, based on the airline's
borrowing profile to be applied to
the advance payments.
Clearly the first alternative can only
be applied where specific borrowings
exist, in which case the actual
borrowing cost should be used.
The second option seeks to identify
the opportunity cost to the airline
of funding advance payments in
circumstances where no specific
borrowings can be identified.
The point at which the capitalisation
of interest under IAS 23 ceases
should be the date on which the
asset is substantially complete.
Certain airlines might interpret this
as meaning that capitalisation should
cease at the date of delivery, whilst
others would select the date the
aircraft comes into service. The
appropriate date will be impacted
by the level of work required post
delivery to bringing the aircraft into
service. However, where an airline
delays bringing an aircraft into service,
it would not be appropriate to
continue capitalising interest beyond
the planned service entry point.
Delivery dates are subject to change

due to the requirements of both buyer
and seller. The reasons for the deferral
will determine the appropriate date
at which interest capitalisation
ceases. For example, a delay in the
manufacturing process would usually
indicate it is appropriate to continue
to capitalise interest. However, all
contract terms require consideration
in determining the appropriate
accounting treatment.
(3) Capitalisation of foreign
exchange gains and losses
arising from the financing of
the aircraft purchase prior to it
being brought into use
With the aircraft market largely
denominated in United States dollars,
many airlines are required to fund
advanced payments in foreign currency.
Borrowing costs as defined in
IAS 23 may include foreign exchange
differences arising on long-term
currency borrowings financing aircraft
fixed assets to the extent that these
differences are regarded as an
adjustment to interest costs. There is
no further guidance on the conditions
under which foreign exchange
differences may be capitalised
and in practice there are different
views about what is acceptable.
In KPMG's view, foreign exchange

differences on borrowings can be
regarded as an adjustment to interest
costs only in very limited
circumstances. Exchange differences
should not be capitalised if a
borrowing in a foreign currency is
entered into to offset another currency
exposure. Interest determined in a
foreign currency already reflects the
exposure to that currency. Therefore
the foreign exchange differences to
be capitalised should be limited to the
difference between interest accrued
at the contractual rate and the interest
that would apply to a borrowing with
identical terms in the entity's
functional currency. Any foreign
exchange differences arising from the
notional amount of the loan should be
recognised in profit or loss.
When exchange differences qualify
for capitalisation, in KPMG's view
both exchange gains and losses
should be considered in determining
the amount to capitalise.
If an entity changes the currency
exposure of future interest payments
in a foreign currency using a cross
currency interest rate swap, then
in KPMG's view it would not be
appropriate to treat all changes in
the fair value of the derivative as a
borrowing cost. However, in KPMG's
view, the interest accrued on the
liability and the hedging instrument
can qualify as borrowing costs while

the remaining fair value change
(excluding accrued interest) cannot
be capitalised.
assistance with aircraft

introduction costs
provision of a maintenance
free period
(4) Manufacturers' credits

A common feature of aircraft
purchase contracts are the offering
of manufacturer or engine 'credits' to
airlines as an incentive to purchase a
manufacturer's aircraft or engine.
These credits are in substance
rebates or discounts from the
purchase price of the asset and
are typically deducted from the
acquisition cost of the asset
capitalised on the balance sheet.
Manufacturers' credits generally form
a significant component of aircraft
acquisition agreements and can take
a number of forms, including:
rebate against purchase price
guaranteed trade-in values
spare parts support at reduced
or zero charge
marketing support
training support at reduced
or zero charge
contribution towards cost of

disposing of existing aircraft as a
result of a manufacturer inducing
an aircraft change.
Such credits might fall into two
broad categories; the first comprises
contributions from the manufacturer
which in substance represent a
discount against the aircraft purchase
price; the second comprises other
forms of credit which are typically
designed to ameliorate incremental
expenditure arising from the
introduction of the new asset.
IFRS requires that both categories
of credits be offset against the cost
of the aircraft asset rather than
recognised immediately as income
in the profit and loss account. The
financial statements of airlines
surveyed in KPMG's Disclosure
Handbook in 2006 indicated that
the vast majority of these rebates
are offset against the cost capitalised
in respect of the aircraft and not
recognised as revenue in the profit
or loss1.
(5) Embedded maintenance

Repairs and maintenance of owned
assets cannot be provided for since
these are costs associated with the
future use of the assets. These costs
generally are expensed as incurred.
However as per IAS 16 Property,
Plant and Equipment (paragraph 14)
major inspections and overhauls are
identified and accounted for as
a separate component if that
component is used over more than
one period. Therefore upon initial
recognition of the aircraft asset,
an estimate of the 'embedded'
maintenance is required to be
recognised as a separate
component of the aircraft cost.
When each major inspection is
performed, its cost is recognised in
the carrying amount of the item of
property, plant and equipment as a
replacement if the recognition
criteria2 are satisfied and depreciated
over the period to the next major
maintenance 'event'. Hence an airline
will hold an asset relating to the
deferred maintenance expenditure,
which should be shown as part of
the fixed asset balance to which
the maintenance expenditure relates.
KPMGs Disclosure Handbook: Accounting and Financial Reporting in the Global Airline Industry, page 14.
As per IAS 16 par. 7 the cost of an item of property, plant and equipment is recognised if, and only if, it is probable that future economic benefits associated with the item will flow to the entity and its cost can be
measured reliably.
Any remaining carrying amount of

the cost of the previous inspection
(as distinct from physical parts) is
derecognised. This occurs regardless
of whether the cost of the previous
inspection was identified in the
transaction in which the item was
acquired or constructed. If necessary,
the estimated cost of a future similar
inspection may be used as an
indication of what the cost of the
existing inspection component
was when the item was acquired
or constructed3.
(6) Aircraft modification costs
As per IAS 16 (paragraph 7 and 12)
subsequent expenditure on an item
of property, plant and equipment is
recognised as part of its cost only
if it meets the general recognition
criteria (i.e. it is probable that future
economic benefits associated with
the item will flow to the entity and
the cost of the item can be measured
reliably). As noted above, costs of
the day-to-day servicing of property,
plant and equipment are recognised
in profit or loss as incurred.
These principles can readily be
applied to modifications to owned
aircraft or other aircraft assets such
as engines. Each modification should
Refer to IAS 16 paragraph 14.
be considered individually to ensure

that the economic benefits expected
to be derived exceed the cost
capitalised. In particular, modifications
should be distinguished from
expenditure on short cycle repairs and
maintenance, which should generally
be expensed immediately. The
treatment of on-going maintenance
is a complex area which has not been
covered in this publication.
It is common place for certain types of
expenditure associated with the fitting
out of the aircraft to be incurred a
number of times throughout the
aircraft life. Examples include, cost
of replacing seats, galleys and
in-flight entertainment systems.
The capitalisation of such equipment
is clearly justifiable provided that the
depreciation policies are set to ensure
the write-off of their costs over the
period of their useful life, rather than
that of the aircraft itself.
For operating leased aircraft assets
consideration is required on how
modifications to these assets should
be treated. In many circumstances
the modification represents the
addition of assets and are effectively
leasehold improvements (e.g. new
seats or in-flight entertainment
systems) the cost of which is to be
recovered against revenue streams

generated by the aircraft prior to its
return. In this case capitalisation of
this expenditure is clearly justified.
(7) Second hand aircraft
Some of the issues affecting the
acquisition cost of new aircraft
would not be expected to occur
when an airline purchases a second
hand aircraft (e.g. advance payments
to manufacturers). However, the
treatment of modification expenditure
is likely to become a more prominent
issue. In addition a further area
requiring careful analysis will be
the extent to which the maintenance
condition of, say, a second hand
aircraft and its engines has had a
bearing on the purchase cost of the
aircraft. In that regard, initial
maintenance may have to be
incurred to bring the aircraft
to a condition of being capable of
entering service and such initial
maintenance should be capitalised.
These costs and a component of
the purchase price that together
represent the value of the maintenance
benefit to the airline are generally
amortised over the period until the
next maintenance check.
1 0 C o m p o n e n t s o f A i r c r a ft Ac q u i s i t i o n C o s t
Depreciation and
residual values
Two of the most basic but

important accounting estimates
airline management make are the
useful lives and residual values of
aircraft. These estimates determine
effective depreciation rates. Useful
lives and residual values of existing
aircraft fleets are increasingly being
impacted by 'new generation'
aircraft. These aircraft have reduced
operating costs and are adversely
impacting the values of older aircraft
in the secondary market. When
decisions are made to retire aircraft
earlier than anticipated, accelerated
depreciation may need to be applied
prospectively to reduce the carrying
value of aircraft. Aircraft-related,
asset depreciation policies and
residual value assumptions vary
across airlines based on differing
practice and expectations. This may
cause significant differences in
periodical profitability and impact
the comparability of businesses
within the industry.
Appendix 1 summarises the individual
asset type, useful lives, depreciation
rates and residual values of various
airlines taken from the relevant
publicly available regulatory reports
noted in Appendix 1. Generally aircraft
assets are depreciated over 15-25
years to residual values of between
0-20 percent. The straight-line method
of depreciation is the most commonly
used. Airline disclosures demonstrate
that a small change in estimate can

have a large impact on profit or loss.
Appendix 1 shows that there is
significant divergence in depreciation
assumptions. In our experience this
is likely to reflect the different flying
patterns of each airline as well as
differing ailrines views on this matter.
Useful life
As per IAS 16 (paragraph 6) 'useful
life' is the period over which an asset
is expected to be available for use by
an entity; or the number of production
or similar units expected to be obtained
from the asset by an entity.
As a general principle, depreciation
should be charged to the profit and
loss account in order to reflect the
consumption of an airline's investment
in aircraft assets over the period of
their useful lives. Thus depreciation
should usually commence from the
date that the aircraft is available to
enter into service.
Factors which are likely to require
careful consideration in determining
the useful lives of aircraft assets are
as follows:
the estimates of economic
repair lives provided by aircraft
manufacturers and other specialist
organisations (e.g. aircraft valuers)
the fleet deployment plans of the

airline in question including timing
of fleet replacements this
should ensure that estimated
lives are set by reference to the
particular use to which an aircraft
is being put, bearing in mind that
differing route structures and
rotation patterns might have
a material bearing on the
appropriate rate of aircraft
depreciation
the likelihood of technological
change or obsolescence, including
the impact of regulatory matters
such as environmental constraints
the overall development of the
portfolio of aircraft assets - for
example, there might be a risk that
significant levels of older generation
aircraft spares will remain on hand
at the time aircraft replacement has
been substantially achieved
the repair and maintenance
policy of the airline
aircraft operating cycles
(long-haul aircraft may have a
different depreciation profile to
high cycle short haul aircraft)
legal constraints on the use of an
asset (e.g. the expiry of leases
relating to aircraft assets)
C o m p o n e n t s o f A i r c r a ft Ac q u i s i t i o n C o s t 1 1
aircraft-related fixed asset

depreciation rates, for example,
rotables and repairables may
reflect the airline's ability to use
common components across
different aircraft types.
Within the airline industry, both the
initial assessment of the useful life
of aircraft assets and any subsequent
review will in practice be dealt with
alongside an assessment of residual
values. Residual values are
considered more fully below.
Airlines review periodically (at least
at each financial year-end) whether
the useful lives attributed to aircraft
assets have been appropriately set.
If the estimated useful life is changed,
the depreciation rate is adjusted for
the current and subsequent periods,
with disclosure of the financial effect
of any such change in rate, if material,
in accordance with IAS 8 Accounting
Policies, Changes in Accounting
Estimates and Errors as a change
in accounting estimates.
and mentions the straight-line

method, the diminishing (or reducing
balance) method and the sum-of-theunits (or units-of-production) method.
Across a range of industries, a
variety of depreciation methods are
applied. For airlines, it appears that
the straight-line method is that most
commonly adopted.
Whilst you can use different
depreciation methods for different
components, whichever depreciation
method is used for aircraft, the same
method should be used for related
spares and engines.
Aircraft may be replaced for a

variety of reasons, for example,
due to planned operating needs,
changes in market conditions or
technological development. These
factors will impact on operators in
different ways and hence it would
not be unexpected for estimates
of residual values for the same
piece of equipment to vary from
carrier to carrier. Other factors
which will influence residual value
estimates are the average length
of flights, number of cycles, the
cost of maintenance, prevailing
market prices and the trend in
price of second hand and
replacement aircraft.
Residual values
Depreciation methods
As per IAS 16 (paragraph 53) an

asset's depreciable amount is its cost
less its residual value. Residual value
is the amount that an entity could
receive for the asset at the reporting
date if the asset were already of the
age and in the condition that it will be
in when the entity expects to dispose
of it. Residual value does not include
expected future inflation.
The method of depreciation

should reflect the pattern in which
the benefits associated with the asset
are consumed, and must be reviewed
at least at each annual reporting date.
IFRSs do not require a specific
method of depreciation to be used,
For most airlines, it has historically

been the case that aircraft assets are
not retained throughout their entire
economic life and accordingly the
assessment of the residual value
of the asset is a critical feature of
the depreciation policy.
The residual value of an asset must

be reviewed at least at each annual
reporting date and changes in the
residual value are accounted for as
a change in accounting estimate.
As noted earlier, revision of useful
life estimates would implicitly give
rise to a need to re-assess residual
values at the revised anticipated
point of disposal.
Impairment testing
IAS 36 Impairment of Assets

prescribes the procedures that
an entity applies to test assets
for impairment and recognise
impairment losses.
The airline industry is highly
capital intensive. Many airlines
have hundreds of millions to billions
of U.S. dollars of tangible assets
capitalised on their balance sheet
representing aircraft and related
infrastructure and support assets.
Whilst capital investment is high,
earnings have historically been
volatile. The airline industry is
vulnerable to economic recession
and external demand shocks such
as those caused by terrorist acts,
pandemics or overseas conflicts.
The latest challenge being record
high fuel prices. The industry, in
particular the U.S., has lost billions
of dollars over the past five years.
Achieving an acceptable return on

capital is a constant challenge.
The directors and management
of airlines not meeting required
returns on capital or sufficient
levels of profitability are likely to
be regularly reviewing the carrying
value of aircraft assets. A review for
impairment must be undertaken
if events indicate that asset-carrying
amounts may not be recoverable.
appears that airlines have assessed

asset groups on a number of different
bases including:
Assessing that all aircraft assets
should be grouped for impairment
testing (based on economic
interdependencies)
Grouping assets on an aircraft
fleet type basis
Impairment testing should be

performed on the smallest group
of assets that work together to
generate independent cash flows
(i.e. CGUs).
Considering impairment on an
individual aircraft asset basis
Determining the appropriate asset

group to use as a basis for impairment
testing requires significant judgement.
The disclosure of asset groups is
limited in the reports surveyed in
KPMG's Disclosure Handbook. It
Different airlines' circumstances will

be the critical factor determining
the asset groupings for
impairment testing.
Allocating aircraft assets to

individual routes or route groups.
Aircraft revaluation
Under IAS 16 an entity may elect

to measure a class of property, plant
and equipment at fair value, if fair
value can be measured reliably. If
this accounting policy is chosen, then
revaluations must be kept up to date,
such that the carrying amount of an
asset at the reporting date does not
differ materially from its fair value.
Any surplus arising on the revaluation
is recognised directly in a revaluation
reserve within equity except to the
extent that the surplus reverses a
previous revaluation deficit on the
same asset recognised in profit or
loss, in which case the credit to
that extent is recognised
in profit or loss. Any deficit on
revaluation is recognised in profit
or loss except to the extent that it
reverses a previous revaluation
surplus on the same asset, in
which case it is taken directly to
the revaluation reserve. Therefore,
revaluation increases and decreases
cannot be offset, even within a
class of assets.
Disclosures
The following types of disclosures

relating to aircraft cost, depreciation
and impairment testing appear in
the annual IFRS financial statements
of airlines:
the depreciation policy,

by main aircraft type and
model, distinguishing:
key components of cost
together with useful lives
method of applying policy
the basis of determining the

components of cost including, if
material, the treatment of:
options
manufacturers' credits
capitalised finance costs
embedded maintenance
effective annual
depreciation rate
this will be a function of the
life over which the aircraft is
being depreciated and the
assured residual value
the amount of finance costs

capitalised during the year within
aircraft assets
the method of impairment testing
the amount, if any, of
impairment charges.
the depreciation charge
modifications
the valuation policy
valuation, including disclosure of

the carrying value under the
historic cost basis, if the
revaluation method is applied
the details of revaluation, including

qualification of valuer and basis of
For a full list of required disclosures

refer to IAS 16 and IAS 36.
Apendix 1
Useful lives, depreciation rates and residual values disclosed
by airlines
Sample disclosures of the following airlines have been reviewed:
Airline
Regulatory filing surveyed

and reporting GAAP
GAAP under which 2006

financial regulatory filing
will be prepared
Air France KLM Group
Annual report and 20F March 31,

2005 French GAAP, U.S. GAAP1 and
September 30, 2005 half year under
IFRS as adopted by the European Union
IFRS as adopted by the European

Union, U.S. GAAP1
Alitalia Linee Aeree Italiane S.p.A
Annual report December 31, 2005

AMR Corp/American Airlines Inc
10k December 31, 2005 U.S. GAAP
U.S. GAAP
British Airways plc
Annual report and 20F March 31, 2005

UK GAAP, U.S. GAAP1 and IFRS as
adopted by the European Union financial
information release for year ended
March 31, 2005 (issued July 2005)

Union, U.S. GAAP1
Cathay Pacific Airways Ltd

Hong Kong Accounting and Financial
Reporting Standards
Hong Kong Accounting and Financial

Reporting Standards (IFRS based)
Continental Airlines Inc
U.S. GAAP
Delta Air Lines Inc
U.S. GAAP
Deutsche Lufthansa AG

easyJet plc
Annual report September 30, 2005

UK GAAP and IFRS as adopted by the
European Union financial information
release for the year ended September
30, 2005 (issued January 2006)
Iberia Lineas Aereas de Espara, S.A
Airline
Regulatory filing surveyed

and reporting GAAP
GAAP under which 2006

financial regulatory filing
will be prepared
Japan Airlines Corporation
Annual report March 31, 2005 Japanese

GAAP
Japanese GAAP
JetBlue Airways Corporation
U.S. GAAP
Northwest Airlines Corporation
U.S. GAAP
Qantas Airways Limited
December 31, 2005 half year, IFRS
IFRS
Ryanair Holdings plc
Annual report and 20F March 31, 2005

Irish, UK GAAP and U.S. GAAP1 and IFRS
as adopted by the European Union
explanation of the financial impact for the
year ended March 31, 2005 (issued
August 2005)

Union, U.S. GAAP1
SAS Group
Annual report December 31, 2005 IFRS

as adopted by the European Union
Singapore Airlines Limited
Annual report March 31, 2005 Singapore

Financial Reporting Standards
Singapore Financial Reporting

Standards (IFRS based)
South African Airways
Annual report March 31, 2005 South

African GAAP
South African GAAP (IFRS based)
Southwest Airlines Co.
U.S. GAAP
Swiss International Airlines (Group)
Half-year report June 30, 2005 IFRS
IFRS
United Airlines UAL Corporation
U.S. GAAP
U.S. Airways America West Holdings

Corporation
U.S. GAAP
Virgin Blue Holdings Limited
Annual report September 30, 2005,

Australian GAAP
Australian equivalents to IFRS
Securities and Exchange Commission (SEC) Foreign Private Issuer in the U.S.
Set out in this appendix are the useful lives, depreciation rates and residual values in relation to aircraft and aircraft
related assets. Unless otherwise noted, the method of depreciation used is on a straight line basis. Some airlines
have used estimated cycles to determine the useful life of the aircraft and note that the useful life may change if the
cycle assumptions are revised.
Asset
category
Airline
Asset category
Useful life
(years)
Aircraft
Air France KLM

Alitalia
Alitalia
Aircraft
Long haul (B777, B767, MD11)
Short-medium haul aircraft (A321, A320,
A319, MD80, ERJ145)
Turboprop aircraft (ATR 72)
Heavy maintenance
Jet aircraft and engines
Boeing 747 - 400 and 777 - 200
Boeing 767 - 300 and 757 - 200
Airbus 321, A320, A319, Boeing 737 - 400
Embraer RJ145, British Aerospace 146
Passenger aircraft
Freighter aircraft
Jet aircraft and simulators
Owned flight equipment
Aircraft
Aircraft improvements
Aircraft pre-paid maintenance
Aircraft cells
Aircraft components
Aircraft
20
20
*
5%
nil
10%a
18
14
5.5 to 8
20 to 30
*
*
*
*
*
20
20 to 27
10 to 25
7
3 to 7
3 to 7
22
4 to 7
Useful life of
aircraft type2
5.5%
7.14%
*
*
3.7%1
4.7%1
4.9%1
4.8%1
*
*
*
*
*
*
*
*
*
*
5 - 10%
0%
*
5 - 10%
*
*
*
*
0 - 10%
0 - 20%
15%
5 - 40%
*
*
*
*
*
*
Alitalia
Alitalia
American Airlines
British Airways
British Airways
British Airways
British Airways
Cathay Pacific
Cathay Pacific
Continental Airlines
Delta
easyJet
easyJet
easyJet
Iberia Airlines
Iberia Airlines
Japan Airlines
Annual
depreciation
rate
Residual
value
Asset
category
Airline
Asset category
Useful life
(years)
Jetblue Airways
Jetblue Airways
Lufthansa
Qantas
Qantas
Qantas
Ryanair
Ryanair
Ryanair
Aircraft
Aircraft parts
New aircraft
Jet aircraft and engines
Non-jet aircraft and engines
Major aircraft inspections
Boeing 737 - 200
Boeing 737 - 800
Embedded maintenance
SAS Group
Singapore Airlines
Singapore Airlines
Singapore Airlines
Singapore Airlines
Aircraft
New passenger aircraft
New freighter aircraft
Training aircraft
Used freighter aircraft
Singapore Airlines
Used passenger aircraft
South African
Southwest Airlines
United Airlines
Virgin Blue
Swiss Airlines
Passenger aircraft
Aircraft and engines
Aircraft
Airframe, engines and landing gear
Aircraft
Heavy maintenance
Improvements to leased aircraft
U.S. Airways
Lufthansa
SAS Group
SAS Group
Singapore Airlines
Swiss Airlines
Passenger aircraft
Spare engines
Reserve engines
Engine components
Spare engines
Spare engines
25
fleet life
12
20
10 to 20
Inspection life
20
23
Period to
next check
(8-12 B737-800)
20
15
15
5
15 less age
of aircraft
15 years less
age of aircraft
*
23 to 25
25 to 30
*
10 to 15
3 to 5
Term of lease
up to 10 years
5 to 25
5 to 20
20
8
15
10 to 15
Annual
depreciation
rate
Residual
value
Aircraft
Engines
*
*
*
*
*
*
*
*
20%
10%
15%
0 - 20%
0 - 20%
*
5 00,000
15%
*
*
*
*
*
nil
10%
10%
20%
20%
20%
*
4%
*
*
10-25%
*
*
10%
*
15%
*
*
5% - 20%
*
*
*
*
*
*
*
*
*
*
*
10%
*
10%
*
Asset
category
Airline
Asset category
Useful life
(years)
Annual
depreciation
rate
Residual
value
Air France KLM

American Airlines
Spare parts
Major rotable parts, avionics and
assemblies
3 to 20
life of
equipment
to which
applicable
5 to 25
25 to 30
10
8 to 10
18
8 to 273
15 to 20
15
Fleet life
N/D
5
10 to 20
12 to 14
10
10
3 to 12
Term or
useful life
(6 years)
6 to 10
6
3 to 10
2 to 65
8 to 27
12
3 to 10
Lease term
4 to 25
*
*
*
Rotables,
repairables
and spare
parts
Flight
simulators
Flight and
ground
equipment
U.S. Airways
Continental
easyJet
Iberia Airlines
Iberia Airlines
Japan Airlines
Qantas
Singapore Airlines
Southwest Airlines
Virgin Blue
Alitalia
Air France - KLM
Iberia Airlines
Singapore Airlines
Swiss Airlines
U.S. Airways
Rotables and repairables

Rotable spare parts
Aircraft spares
Spare parts - repairable
Spare parts - rotating
Spare parts
Aircraft spare parts
Spare parts
Aircraft parts
Rotables and maintenance parts (used)
Flight simulators and electronic equipment
Flight simulators
Flight simulators
Flight simulators
Simulators
Property and equipment - ground
Flight and ground equipment
Delta Airlines
Japan Airlines
Japan Airlines
Jetblue Airways
Jetblue Airways
Jetblue Airways
Northwest Airlines
SAS Group
Food service equipment

Surface transportation/ground equipment
Ground property and equipment
Ground property and equipment
Flight equipment
In-flight entertainment systems
Property and equipment - ground
Flight equipment leasehold improvement
Flight equipment
Workshop and aircraft servicing
equipment
*
*
*
*
*
*
*
*
*
*
20%
20%
*
*
*
*
5-10%
*
10%
nil
10
10-20%
0-20%
nil
4%
4%
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
nil
nil
*
*
*
nil
nil
nil
*
Asset
category
Fixtures,
fittings and
other
equipment
Computer
equipment
Plant and
equipment
Airline
Asset category
Useful life
(years)
Air France - KLM

American Airlines
British Airways
Cathay Pacific
easyJet
Iberia Airlines
Iberia Airlines
Iberia Airlines
Lufthansa
Northwest Airlines
SAS Group
Singapore Airlines
South African
Virgin Blue
Air France - KLM
American Airlines
Cathay
easyJet
Iberia Airlines
Japan Airlines
Virgin Blue
Alitalia
Lufthansa
United Airlines
Virgin Blue
Fixtures and fittings

Fixtures, fittings and other equipment
Equipment
Other equipment
Furniture, fittings and equipment
Furniture and fittings
Land transport items
Machinery, fixtures and tools
Office and factory equipment
Other property and equipment
Other equipment and vehicles
Other
Containers
Leasehold improvements
Equipment and tooling
Capitalized software
Software development
Computer software
Hardware and software
Data processing equipment
Software
Computer equipment
Plant, machinery, equipment and fittings
Maintenance and engineering equipment
Plant and machinery
Property, plant and equipment
Plant and equipment
8 to 15
3 to 10
3 to 25
3 to 7
3
10
7 to 10
10 to 15
3 to 10
3 to 32
3 to 5
1 to 12
*
*
5 to 15
3 to 10
< 4 years
3 to 10
3
4 to 7
5 to 7
*
10
8
10
3 to 15
*
Effective annual depreciation rate.

Straight-line method used for all categories except Boeing 747 and DC 10's, where declining-balance method is used.
3 Declining balance method is used.
* Not disclosed.
1
2
Annual
depreciation
rate
*
*
*
*
*
*
*
*
*
*
*
*
5%
20-40%
*
*
*
*
*
*
*
33.30%
10%
*
*
*
20%
Residual
value
*
*
*
nil
*
*
*
*
*
*
*
nil
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
KPMGs Global Airline practice contacts

Martin Sheppard
Australia
Head of Aviation
+61 2 9335 8221
msheppard@kpmg.com.au
Dr Ashley Steel
United Kingdom
Global Chair Transport
+44 20 7311 6633
ashley.steel@kpmg.co.uk
Argentina
Norbeto Cors
+54 11 4316 5806
ncors@kpmg.com
Brazil
Manuel Fernandes
+55 21 3231 9412
mfernandes@kpmg.com
Canada
Steve Beatty
+1 416 777 3569
sbeatty@kpmg.ca
Egypt
Hossam Fahmy
+20 2 536 1581
hfahmy@kpmg.com
Finland
Solveig Tornroos-Huhtamaki
+358 9 6939 3733
solveig.tornroos-huhtamaki@kpmg.fi
France
Philippe Arnaud
+33 1 5377 3809
parnaud@kpmg.com
Germany
Ulrich Maas
+49 30 2068 4888
umaas@kpmg.com
Hong Kong
Andrew Weir
+852 2826 7243
andrew.weir@kpmg.com.hk
Hungary
Andrea Sartori
+36 1 887 7215
andreasartori@kpmg.com
Ireland
Sean OKeefe
+353 1 410 1241
sean.okeefe@kpmg.ie
South Africa
Tshidi Mokgabudi
+27 11 647 6735
tshidi.mokgabudi@kpmg.com.za
Italy
Marco Giordano
+39 06 80 96 13 47
mgiordano@kpmg.it
Spain
Miguel Angel Ibanez
+34 91 5550 132
maibanez@kpmg.es
Japan
Toshio Ikeda
+81 3 3266 1142
toshio.ikeda@jp.kpmg.com
Sweden
Roland Nilsson
+46 8 723 9309
roland.nilsson@kpmg.se
Korea
Peter C Kim
+82 2 2112 0880
pckim@kpmg.com
Switzerland
Roger Neininger
+41 1 249 21 25
rneininger@kpmg.com
Mexico
Hector A Ramirez
+52 55 5246 8545
hramirez@kpmg.com
Taiwan
Beryl Lin
+886 2 2715 9760
beryllin@kpmg.com.tw
Netherlands
Herman van Meel
+31 20 656 7222
vanmeel.herman@kpmg.nl
Thailand
John Sim
+66 2 677 2288
Jsim3@kpmg.com
New Zealand
Paul Herrod
+64 9 3675 323
pherrod@kpmg.com
United States
Chris Xystros
+1 757 616 7009
cmxystros@kpmg.com
Norway
Aage Seldal
+47 5157 8219
aage.seldal@kpmg.no
Peru
Jessica Oblitas
+51 1 9792 2440
joblitas@kpmg.com
Russia
Richard Glasspool
+7 095 937 4470
richardglasspool@kpmg.com
Singapore
Wah Yeow Tan
+65 6213 2503
wahyeowtan@kpmg.com.sg
kpmg.com.au
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Components of Aircraft Acquisition

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Components of Aircraft Acquisition

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Components of Aircraft Acquisition

Cost, Associated Depreciation and

Components of aircraft acquisition cost

Key considerations for the passenger airline industry

Depreciation and residual values

Appendix 1 Useful lives, depreciation

Components of aircraft cost

also include capitalised borrowing

Key considerations for

the aircraft purchase, prior to

the date the option lapses

the date a decision is taken

Common place today is the payment

identifying the actual interest cost

Delivery dates are subject to change

In KPMG's view, foreign exchange

can qualify as borrowing costs while

assistance with aircraft

(4) Manufacturers' credits

contribution towards cost of

(5) Embedded maintenance

Any remaining carrying amount of

Refer to IAS 16 paragraph 14.

be considered individually to ensure

recovered against revenue streams

Two of the most basic but

that a small change in estimate can

the fleet deployment plans of the

aircraft-related fixed asset

and mentions the straight-line

Aircraft may be replaced for a

As per IAS 16 (paragraph 53) an

The method of depreciation

For most airlines, it has historically

The residual value of an asset must

IAS 36 Impairment of Assets

Achieving an acceptable return on

appears that airlines have assessed

Impairment testing should be

Determining the appropriate asset

Different airlines' circumstances will

Allocating aircraft assets to

Under IAS 16 an entity may elect

The following types of disclosures

the depreciation policy,

the basis of determining the

the amount of finance costs

the depreciation charge

valuation, including disclosure of

the details of revaluation, including

For a full list of required disclosures

Sample disclosures of the following airlines have been reviewed:

Regulatory filing surveyed

GAAP under which 2006

Air France KLM Group

Annual report and 20F March 31,

IFRS as adopted by the European

Alitalia Linee Aeree Italiane S.p.A

Annual report December 31, 2005

IFRS as adopted by the European Union

AMR Corp/American Airlines Inc

10k December 31, 2005 U.S. GAAP

British Airways plc

Annual report and 20F March 31, 2005