Components of Aircraft Acquisition Cost, Associated Depreciation and Impairment Testing in the Global Airline Industry TRANSPORT

Transcription

1 Components of Aircraft Acquisition Cost, Associated Depreciation and Impairment Testing in the Global Airline Industry TRANSPORT

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3 Introduction 3 Components of aircraft acquisition cost 4 General requirements 4 Key considerations for the passenger airline industry 4 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 15 rates and residual values disclosed by airlines

4 2 Components of Aircraft Acquisition Cost

5 Components of Aircraft Acquisition Cost 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.

6 4 Components of Aircraft Acquisition Cost 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

7 Components of Aircraft Acquisition Cost 5 the aircraft purchase, prior to it being brought into use the date a decision is taken not to exercise the option. (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. 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. (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 (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:

8 6 Components of Aircraft Acquisition Cost 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

9 Components of Aircraft Acquisition Cost 7 can qualify as borrowing costs while the remaining fair value change (excluding accrued interest) cannot be capitalised. (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 assistance with aircraft introduction costs provision of a maintenance free period 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 loss 1. (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 criteria 2 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. 1 KPMG s Disclosure Handbook: Accounting and Financial Reporting in the Global Airline Industry, page 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.

10 8 Components of Aircraft Acquisition Cost 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 constructed 3. (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 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. 3 Refer to IAS 16 paragraph 14.

11 Components of Aircraft Acquisition Cost 9

12 10 Components of Aircraft Acquisition Cost 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 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)

13 Components of Aircraft Acquisition Cost 11 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. Depreciation methods 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. Residual values 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. 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. 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. 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.

14 12 Components of Aircraft Acquisition Cost 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. Impairment testing should be performed on the smallest group of assets that work together to generate independent cash flows (i.e. CGUs). 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 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 Considering impairment on an individual aircraft asset basis Allocating aircraft assets to individual routes or route groups. Different airlines' circumstances will be the critical factor determining the asset groupings for impairment testing.

15 Components of Aircraft Acquisition Cost 13 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.

16 14 Components of Aircraft Acquisition Cost Disclosures The following types of disclosures relating to aircraft cost, depreciation and impairment testing appear in the annual IFRS financial statements of airlines: the basis of determining the components of cost including, if material, the treatment of: options manufacturers' credits capitalised finance costs embedded maintenance modifications the valuation policy the depreciation policy, by main aircraft type and model, distinguishing: key components of cost together with useful lives method of applying policy 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 depreciation charge the details of revaluation, including qualification of valuer and basis of valuation, including disclosure of the carrying value under the historic cost basis, if the revaluation method is applied the amount of finance costs capitalised during the year within aircraft assets the method of impairment testing the amount, if any, of impairment charges. For a full list of required disclosures refer to IAS 16 and IAS 36.

17 Components of Aircraft Acquisition Cost 15 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. GAAP 1 and September 30, 2005 half year under IFRS as adopted by the European Union IFRS as adopted by the European Union, U.S. GAAP 1 Alitalia Linee Aeree Italiane S.p.A Annual report December 31, 2005 IFRS as adopted by the European Union IFRS as adopted by the European Union AMR Corp/American Airlines Inc British Airways plc 10k December 31, 2005 U.S. GAAP Annual report and 20F March 31, 2005 UK GAAP, U.S. GAAP 1 and IFRS as adopted by the European Union financial information release for year ended March 31, 2005 (issued July 2005) U.S. GAAP IFRS as adopted by the European Union, U.S. GAAP 1 Cathay Pacific Airways Ltd Annual report December 31, 2005 Hong Kong Accounting and Financial Reporting Standards Hong Kong Accounting and Financial Reporting Standards (IFRS based) Continental Airlines Inc Delta Air Lines Inc Deutsche Lufthansa AG 10k December 31, 2005 U.S. GAAP 10k December 31, 2005 U.S. GAAP Annual report December 31, 2005 IFRS as adopted by the European Union U.S. GAAP U.S. GAAP IFRS as adopted by the European Union 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) IFRS as adopted by the European Union Iberia Lineas Aereas de Espara, S.A Annual report December 31, 2004 IFRS as adopted by the European Union

18 16 Components of Aircraft Acquisition Cost 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 Northwest Airlines Corporation Qantas Airways Limited Ryanair Holdings plc 10k December 31, 2005 U.S. GAAP 10k December 31, 2005 U.S. GAAP December 31, 2005 half year, IFRS Annual report and 20F March 31, 2005 Irish, UK GAAP and U.S. GAAP 1 and IFRS as adopted by the European Union explanation of the financial impact for the year ended March 31, 2005 (issued August 2005) U.S. GAAP U.S. GAAP IFRS IFRS as adopted by the European Union, U.S. GAAP 1 SAS Group Annual report December 31, 2005 IFRS as adopted by the European Union IFRS as adopted by the European Union Singapore Airlines Limited South African Airways Annual report March 31, 2005 Singapore Financial Reporting Standards Annual report March 31, 2005 South African GAAP Singapore Financial Reporting Standards (IFRS based) South African GAAP (IFRS based) Southwest Airlines Co. Swiss International Airlines (Group) United Airlines UAL Corporation U.S. Airways America West Holdings Corporation 10k December 31, 2005 U.S. GAAP Half-year report June 30, 2005 IFRS 10k December 31, 2005 U.S. GAAP 10k December 31, 2005 U.S. GAAP U.S. GAAP IFRS U.S. GAAP U.S. GAAP Virgin Blue Holdings Limited Annual report September 30, 2005, Australian GAAP Australian equivalents to IFRS 1 Securities and Exchange Commission (SEC) Foreign Private Issuer in the U.S.

19 Components of Aircraft Acquisition Cost 17 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) Annual depreciation rate Residual value Aircraft Air France KLM Aircraft 20 * nil Alitalia Long haul (B777, B767, MD11) 20 5% 10%a Alitalia Short-medium haul aircraft (A321, A320, A319, MD80, ERJ145) % 5-10% Alitalia Turboprop aircraft (ATR 72) % 0% Alitalia Heavy maintenance 5.5 to 8 * * American Airlines Jet aircraft and engines 20 to 30 * 5-10% British Airways Boeing and * 3.7% 1 * British Airways Boeing and * 4.7% 1 * British Airways Airbus 321, A320, A319, Boeing * 4.9% 1 * British Airways Embraer RJ145, British Aerospace 146 * 4.8% 1 * Cathay Pacific Passenger aircraft * * 0-10% Cathay Pacific Freighter aircraft 20 * 0-20% Continental Airlines Jet aircraft and simulators 20 to 27 * 15% Delta Owned flight equipment 10 to 25 * 5-40% easyjet Aircraft 7 * * easyjet Aircraft improvements 3 to 7 * * easyjet Aircraft pre-paid maintenance 3 to 7 * * Iberia Airlines Aircraft cells 22 * * Iberia Airlines Aircraft components 4 to 7 * * Japan Airlines Aircraft Useful life of * * aircraft type 2

20 18 Components of Aircraft Acquisition Cost Asset category Airline Asset category Useful life (years) Annual depreciation rate Residual value Aircraft Jetblue Airways Aircraft 25 * 20% Jetblue Airways Aircraft parts fleet life * 10% Lufthansa New aircraft 12 * 15% Qantas Jet aircraft and engines 20 * 0-20% Qantas Non-jet aircraft and engines 10 to 20 * 0-20% Qantas Major aircraft inspections Inspection life * * Ryanair Boeing * 5 00,000 Ryanair Boeing * 15% Ryanair Embedded maintenance Period to next check (8-12 B ) * nil SAS Group Aircraft 20 * 10% Singapore Airlines New passenger aircraft 15 * 10% Singapore Airlines New freighter aircraft 15 * 20% Singapore Airlines Training aircraft 5 * 20% Singapore Airlines Used freighter aircraft 15 less age of aircraft * 20% Singapore Airlines Used passenger aircraft 15 years less age of aircraft * 10% South African Passenger aircraft * 4% * Southwest Airlines Aircraft and engines 23 to 25 * 15% United Airlines Aircraft 25 to 30 * * Virgin Blue Airframe, engines and landing gear * 10-25% * Swiss Airlines Aircraft 10 to 15 * 5% - 20% Heavy maintenance 3 to 5 * * Improvements to leased aircraft Term of lease up to 10 years * * U.S. Airways Passenger aircraft 5 to 25 * * Engines Lufthansa Spare engines 5 to 20 * * SAS Group Reserve engines 20 * 10% SAS Group Engine components 8 * * Singapore Airlines Spare engines 15 * 10% Swiss Airlines Spare engines 10 to 15 * *

21 Components of Aircraft Acquisition Cost 19 Asset category Airline Asset category Useful life (years) Annual depreciation rate Residual value Rotables, repairables and spare parts Air France KLM Spare parts 3 to 20 * * American Airlines Major rotable parts, avionics and life of * assemblies equipment * 5-10% to which applicable U.S. Airways Rotables and repairables 5 to 25 * Continental Rotable spare parts 25 to 30 * * easyjet Aircraft spares 10 * 10% Iberia Airlines Spare parts - repairable 8 to 10 * nil Iberia Airlines Spare parts - rotating 18 * 10 Japan Airlines Spare parts 8 to 27 3 * 10-20% Qantas Aircraft spare parts 15 to 20 * 0-20% Singapore Airlines Spare parts 15 * nil Southwest Airlines Aircraft parts Fleet life * 4% Virgin Blue Rotables and maintenance parts (used) N/D * 4% Flight Alitalia Flight simulators and electronic equipment 5 20% * simulators Air France - KLM Flight simulators 10 to 20 20% * Iberia Airlines Flight simulators 12 to 14 * * Singapore Airlines Flight simulators 10 * * Swiss Airlines Simulators 10 * * U.S. Airways Property and equipment - ground 3 to 12 * * Flight and Continental Airlines Flight and ground equipment Term or ground useful life equipment (6 years) * nil Continental Airlines Food service equipment 6 to 10 * Continental Airlines Surface transportation/ground equipment 6 * nil Delta Airlines Ground property and equipment 3 to 10 * * Japan Airlines Ground property and equipment 2 to 65 * * Japan Airlines Flight equipment 8 to 27 * * Jetblue Airways In-flight entertainment systems 12 * nil Jetblue Airways Property and equipment - ground 3 to 10 * nil Jetblue Airways Flight equipment leasehold improvement Lease term * nil Northwest Airlines Flight equipment 4 to 25 * * SAS Group Workshop and aircraft servicing equipment 5 * *

22 20 Components of Aircraft Acquisition Cost Asset category Airline Asset category Useful life (years) Annual depreciation rate Residual value Fixtures, fittings and other equipment Air France - KLM Fixtures and fittings 8 to 15 * * American Airlines Fixtures, fittings and other equipment 3 to 10 * * British Airways Equipment 3 to 25 * * Cathay Pacific Other equipment 3 to 7 * nil easyjet Furniture, fittings and equipment 3 * * Iberia Airlines Furniture and fittings 10 * * Iberia Airlines Land transport items 7 to 10 * * Iberia Airlines Machinery, fixtures and tools 10 to 15 * * Lufthansa Office and factory equipment 3 to 10 * * Northwest Airlines Other property and equipment 3 to 32 * * SAS Group Other equipment and vehicles 3 to 5 * * Singapore Airlines Other 1 to 12 * nil South African Containers * 5% * Virgin Blue Leasehold improvements * 20-40% * Air France - KLM Equipment and tooling 5 to 15 * * Computer American Airlines Capitalized software 3 to 10 * * equipment Cathay Software development < 4 years * * Continental Airlines Computer software 3 to 10 * * easyjet Hardware and software 3 * * Iberia Airlines Data processing equipment 4 to 7 * * Japan Airlines Software 5 to 7 * * Virgin Blue Computer equipment * 33.30% * Alitalia Plant, machinery, equipment and fittings 10 10% * Plant and Continental Airlines Maintenance and engineering equipment 8 * * equipment Lufthansa Plant and machinery 10 * * United Airlines Property, plant and equipment 3 to 15 * * Virgin Blue Plant and equipment * 20% * 1 Effective annual depreciation rate. 2 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.

23 KPMG s Global Airline practice contacts Martin Sheppard Australia Head of Aviation msheppard@kpmg.com.au Dr Ashley Steel United Kingdom Global Chair Transport ashley.steel@kpmg.co.uk Argentina Norbeto Cors ncors@kpmg.com Brazil Manuel Fernandes mfernandes@kpmg.com Canada Steve Beatty sbeatty@kpmg.ca Egypt Hossam Fahmy hfahmy@kpmg.com Finland Solveig Tornroos-Huhtamaki solveig.tornroos-huhtamaki@kpmg.fi France Philippe Arnaud parnaud@kpmg.com Germany Ulrich Maas umaas@kpmg.com Hong Kong Andrew Weir andrew.weir@kpmg.com.hk Hungary Andrea Sartori andreasartori@kpmg.com Ireland Sean O Keefe sean.okeefe@kpmg.ie Italy Marco Giordano mgiordano@kpmg.it Japan Toshio Ikeda toshio.ikeda@jp.kpmg.com Korea Peter C Kim pckim@kpmg.com Mexico Hector A Ramirez hramirez@kpmg.com Netherlands Herman van Meel vanmeel.herman@kpmg.nl New Zealand Paul Herrod pherrod@kpmg.com Norway Aage Seldal aage.seldal@kpmg.no Peru Jessica Oblitas joblitas@kpmg.com Russia Richard Glasspool richardglasspool@kpmg.com Singapore Wah Yeow Tan wahyeowtan@kpmg.com.sg South Africa Tshidi Mokgabudi tshidi.mokgabudi@kpmg.com.za Spain Miguel Angel Ibanez maibanez@kpmg.es Sweden Roland Nilsson roland.nilsson@kpmg.se Switzerland Roger Neininger rneininger@kpmg.com Taiwan Beryl Lin beryllin@kpmg.com.tw Thailand John Sim Jsim3@kpmg.com United States Chris Xystros cmxystros@kpmg.com

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