components of aircraft acquisiion cost, assoicated depreciation and impairment testing in the global

TRANSPORT

Components of Aircraft AcquisitionCost, Associated Depreciation andImpairment Testing in the GlobalAirline Industry

Introduction 3

Components of aircraft acquisition cost 4General requirements 4

Key considerations for the passenger airline industry 4

Depreciation and residual values 10Useful 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

2 Components of A i rcraft Acquis i t ion Cost

Components of A i rcraft Acquis i t ion Cost 3

Introduction

The airline industry has contended with several significant events inrecent times that have led to major losses, bankruptcy or bankruptcyprotection 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 thesecondary aircraft market and consequently the valuation of aircraft assets in financial statements. Aircraft and aircraft-related assets are high-costassets. 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 assetsinvolves consideration of several factors.

The acquisition of aircraft and related fixed assets whether financed by leaseor purchased outright represents the single most critical channel of investmentfor most, if not all airlines. Acquisitions of assets can be structured under avariety of terms which, although imposing similar economic obligations onthe airline, offer potential for disparate accounting treatments.

Many airlines only provide summarised published information in regard toaircraft acquisition costs on such issues as useful lives and residual values whichcan make it difficult to determine how certain acquisition costs are treated.

The principal objective of this publication is to outline accountingconsiderations in relation to components of aircraft costs, associateddepreciation and impairment testing under International Financial ReportingStandards (IFRS).

This publication is not intended to provide guidance on the circumstances inwhich an interest in an aircraft should most appropriately be dealt with eitheron or off balance sheet, and in particular it does not address the classificationbetween operating and finance leases. Classification of leases and relatedlease 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 Equipmentsets out the accounting treatment anddisclosure requirements for property,plant and equipment. IAS 16 requiresmajor component parts of assets tobe capitalised and appropriatedepreciation policies applied to each identified component.

Property, plant and equipmentcomprises tangible assets held by an entity for use in the production or supply of goods or services, forrental to others, or for administrativepurposes, that are expected to beused for more than one period.Property, plant and equipment isrecognised if, and only if, it isprobable that future economicbenefits associated with the itemwill flow to the entity and its costcan be measured reliably. Property,plant and equipment is recognisedinitially at cost.

Cost includes the purchaseprice, including import duties andnon-refundable purchase taxes, afterdeducting trade discounts, rebatesand all expenditure directly attributableto bringing the asset to a workingcondition for its intended use.‘Intended use’ means being capableof operating in the manner intendedby management. This will includepurchase-right payments and may

also include capitalised borrowingcosts where the funds are borrowedspecifically or a notional allocation ofgeneral indebtness for an aircraft thatis deemed to be a ‘qualifying asset’.A qualifying asset is one thatnecessarily takes a substantial period of time to be made ready for its intended use or sale.

Currently, under IFRS there is achoice as to whether borrowingcosts relating to a ‘qualifying asset’are expensed or capitalised. In March2007 the IASB issued revised IAS 23Borrowing Costs, which is effectivefor annual periods beginning on orafter 1 January 2009; earlierapplication is permitted. The revisedIAS 23 removes the option toexpense borrowing costs associatedwith the acquisition, construction orproduction of a ‘qualifying asset’.Thus entities have to capitaliseborrowing costs directly attributableto the acquisition, construction orproduction of a qualifying asset aspart of the cost of that asset.

Key considerations forthe passenger airlineindustry

Aircraft assets generally comprise a number of components, the majorones include:

• airframe

• engines

• modifications including In-FlightEntertainment (IFE) and BuyerFurnished Equipment (BFE)

• rotable assets – parts which arenormally maintained and reused

• repairables – parts which arecapable of being repaired andreused, but which can only be repaired a limited number of times.

Although individual components areaccounted for separately, thefinancial statements continue todisclose a single asset. An airlinegenerally would disclose aircraft as a class of assets.

In relation to the purchase of newaircraft, the following particularissues have been chosen for moredetailed consideration:

(1) option payments andrefundable deposits

(2) capitalisation of interest on advance payments andincremental costs of deferringdelivery dates

(3) capitalisation of foreignexchange gains and lossesarising 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 thetreatment of aircraft modificationcosts, (which might more commonlybe an issue either affecting aircraftalready in use, or aircraft acquiredunder an operating lease) and theacquisition of second hand aircraft.

Each of the above issues are dealtwith in paragraphs below.

(1) Option payments andrefundable deposits

Airlines frequently acquire options topurchase aircraft in the future, thecommercial rationale being to keepaircraft acquisition capacity as flexibleas possible as well as establishing aposition in the manufacturer'sproduction queue. The options areusually effectively aircraft deposits. Ifthe option is subsequently exercised,it is appropriate to capitalise the optionexpenditure as part of the total cost ofacquiring the aircraft. Conversely thecost should be written off to the profitand 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 paymentof ‘refundable deposits’, where cashdeposits are paid to the manufacturerand held against future aircraftpurchases. These allow foracquisition flexibility, providing theability to transfer deposits overindividual aircraft types and obtain arefund on amounts deposited wherea decision is made not to takedelivery. These amounts should be capitalised into the aircraftacquisition costs when the relevantaircraft is acquired.

(2) Capitalisation of interest onoption and advance paymentsand incremental costs ofdeferring delivery dates

The capitalisation of interest onoption and advance payments tomanufacturers is relatively commonpractice in the airline industry. Giventhe interrelationship between the levelof any advance payments and theultimate purchase price of an aircraft,interest on advance payments can beregarded as a cost directly attributableto bringing the asset to workingcondition. With regard to the methodof calculating the capitalised interest,two methods are:


• identifying the actual interest costof the specific borrowings used tofinance advance payments

• determining a weighted average or incremental cost of generalborrowings, based on the airline'sborrowing profile to be applied tothe advance payments.

Clearly the first alternative can onlybe applied where specific borrowingsexist, in which case the actualborrowing cost should be used. The second option seeks to identifythe opportunity cost to the airline of funding advance payments incircumstances where no specificborrowings can be identified.

The point at which the capitalisationof interest under IAS 23 ceasesshould be the date on which theasset is substantially complete.Certain airlines might interpret thisas meaning that capitalisation shouldcease at the date of delivery, whilstothers would select the date theaircraft comes into service. Theappropriate date will be impacted by the level of work required postdelivery to bringing the aircraft intoservice. However, where an airlinedelays bringing an aircraft into service,it would not be appropriate tocontinue capitalising interest beyondthe planned service entry point.

Delivery dates are subject to changedue to the requirements of both buyerand seller. The reasons for the deferralwill determine the appropriate date at which interest capitalisationceases. For example, a delay in themanufacturing process would usuallyindicate it is appropriate to continue to capitalise interest. However, allcontract terms require consideration in determining the appropriateaccounting treatment.

(3) Capitalisation of foreignexchange gains and lossesarising from the financing ofthe aircraft purchase prior to itbeing brought into use

With the aircraft market largelydenominated in United States dollars,many airlines are required to fundadvanced payments in foreign currency.

Borrowing costs as defined in IAS 23 may include foreign exchangedifferences arising on long-termcurrency borrowings financing aircraftfixed assets to the extent that thesedifferences are regarded as anadjustment to interest costs. There isno further guidance on the conditionsunder which foreign exchangedifferences may be capitalised and in practice there are different views about what is acceptable.

In KPMG's view, foreign exchangedifferences on borrowings can beregarded as an adjustment to interestcosts only in very limitedcircumstances. Exchange differencesshould not be capitalised if aborrowing in a foreign currency isentered into to offset another currencyexposure. Interest determined in aforeign currency already reflects theexposure to that currency. Thereforethe foreign exchange differences to be capitalised should be limited to thedifference between interest accrued at the contractual rate and the interestthat would apply to a borrowing withidentical terms in the entity'sfunctional currency. Any foreignexchange differences arising from thenotional amount of the loan should berecognised in profit or loss.

When exchange differences qualify for capitalisation, in KPMG's viewboth exchange gains and lossesshould be considered in determiningthe amount to capitalise.

If an entity changes the currencyexposure of future interest paymentsin a foreign currency using a crosscurrency interest rate swap, then in KPMG's view it would not beappropriate to treat all changes in the fair value of the derivative as aborrowing cost. However, in KPMG'sview, the interest accrued on theliability and the hedging instrument


can qualify as borrowing costs whilethe remaining fair value change(excluding accrued interest) cannot be capitalised.

(4) Manufacturers' credits

A common feature of aircraftpurchase contracts are the offering of manufacturer or engine 'credits' toairlines as an incentive to purchase amanufacturer's aircraft or engine.These credits are in substancerebates or discounts from thepurchase price of the asset and are typically deducted from theacquisition cost of the assetcapitalised on the balance sheet.

Manufacturers' credits generally forma significant component of aircraftacquisition agreements and can takea 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 aircraftintroduction costs

• provision of a maintenance free period

• contribution towards cost ofdisposing of existing aircraft as aresult of a manufacturer inducingan aircraft change.

Such credits might fall into two broad categories; the first comprisescontributions from the manufacturerwhich in substance represent adiscount against the aircraft purchaseprice; the second comprises otherforms of credit which are typicallydesigned to ameliorate incrementalexpenditure arising from theintroduction of the new asset.

IFRS requires that both categories of credits be offset against the cost of the aircraft asset rather thanrecognised immediately as income in the profit and loss account. Thefinancial statements of airlinessurveyed in KPMG's DisclosureHandbook in 2006 indicated that the vast majority of these rebates are offset against the cost capitalisedin respect of the aircraft and notrecognised as revenue in the profit or loss1.

(5) Embedded maintenance

Repairs and maintenance of ownedassets cannot be provided for sincethese are costs associated with thefuture use of the assets. These costsgenerally are expensed as incurred.However as per IAS 16 Property,Plant and Equipment (paragraph 14)major inspections and overhauls areidentified and accounted for as a separate component if thatcomponent is used over more thanone period. Therefore upon initialrecognition of the aircraft asset, an estimate of the 'embedded'maintenance is required to berecognised as a separate component of the aircraft cost.

When each major inspection isperformed, its cost is recognised inthe carrying amount of the item ofproperty, plant and equipment as areplacement if the recognitioncriteria2 are satisfied and depreciatedover the period to the next majormaintenance 'event'. Hence an airlinewill hold an asset relating to thedeferred maintenance expenditure,which should be shown as part of the fixed asset balance to which the maintenance expenditure relates.

1KPMG’s Disclosure Handbook: Accounting and Financial Reporting in the Global Airline Industry, page 14.

2 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 bemeasured reliably.


Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) isderecognised. This occurs regardlessof whether the cost of the previousinspection was identified in thetransaction in which the item wasacquired or constructed. If necessary,the estimated cost of a future similarinspection may be used as anindication of what the cost of theexisting 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 isrecognised as part of its cost only if it meets the general recognitioncriteria (i.e. it is probable that futureeconomic benefits associated withthe item will flow to the entity andthe cost of the item can be measuredreliably). As noted above, costs ofthe day-to-day servicing of property,plant and equipment are recognisedin profit or loss as incurred.

These principles can readily beapplied to modifications to ownedaircraft or other aircraft assets suchas engines. Each modification should

be considered individually to ensurethat the economic benefits expectedto be derived exceed the costcapitalised. In particular, modificationsshould be distinguished fromexpenditure on short cycle repairs andmaintenance, which should generallybe expensed immediately. Thetreatment of on-going maintenance is a complex area which has not beencovered in this publication.

It is common place for certain types ofexpenditure associated with the fittingout of the aircraft to be incurred anumber of times throughout theaircraft life. Examples include, cost of replacing seats, galleys and in-flight entertainment systems. The capitalisation of such equipmentis clearly justifiable provided that thedepreciation policies are set to ensurethe write-off of their costs over theperiod of their useful life, rather thanthat of the aircraft itself.

For operating leased aircraft assetsconsideration is required on howmodifications to these assets shouldbe treated. In many circumstancesthe modification represents theaddition of assets and are effectivelyleasehold improvements (e.g. newseats or in-flight entertainmentsystems) the cost of which is to be

recovered against revenue streamsgenerated by the aircraft prior to itsreturn. In this case capitalisation ofthis expenditure is clearly justified.

(7) Second hand aircraft

Some of the issues affecting theacquisition cost of new aircraft would not be expected to occurwhen an airline purchases a secondhand aircraft (e.g. advance paymentsto manufacturers). However, thetreatment of modification expenditureis likely to become a more prominentissue. In addition a further arearequiring careful analysis will be the extent to which the maintenancecondition of, say, a second handaircraft and its engines has had abearing on the purchase cost of theaircraft. In that regard, initialmaintenance may have to beincurred to bring the aircraft to a condition of being capable ofentering service and such initialmaintenance should be capitalised.These costs and a component of the purchase price that togetherrepresent the value of the maintenancebenefit to the airline are generallyamortised over the period until thenext maintenance check.

3 Refer to IAS 16 paragraph 14.


Depreciation and residual values

Two of the most basic but important accounting estimatesairline management make are theuseful lives and residual values ofaircraft. These estimates determineeffective depreciation rates. Usefullives and residual values of existingaircraft fleets are increasingly beingimpacted by 'new generation'aircraft. These aircraft have reducedoperating costs and are adverselyimpacting the values of older aircraftin the secondary market. Whendecisions are made to retire aircraftearlier than anticipated, accelerateddepreciation may need to be appliedprospectively to reduce the carryingvalue of aircraft. Aircraft-related,asset depreciation policies andresidual value assumptions varyacross airlines based on differingpractice and expectations. This maycause significant differences inperiodical profitability and impact the comparability of businesseswithin the industry.

Appendix 1 summarises the individualasset type, useful lives, depreciationrates and residual values of variousairlines taken from the relevantpublicly available regulatory reportsnoted in Appendix 1. Generally aircraftassets are depreciated over 15-25years to residual values of between 0-20 percent. The straight-line methodof depreciation is the most commonlyused. Airline disclosures demonstrate

that a small change in estimate canhave a large impact on profit or loss.Appendix 1 shows that there issignificant divergence in depreciationassumptions. In our experience this is likely to reflect the different flyingpatterns of each airline as well asdiffering ailrines views on this matter.

Useful life

As per IAS 16 (paragraph 6) 'usefullife' is the period over which an assetis expected to be available for use byan entity; or the number of productionor similar units expected to be obtainedfrom the asset by an entity.

As a general principle, depreciationshould be charged to the profit andloss account in order to reflect theconsumption of an airline's investmentin aircraft assets over the period oftheir useful lives. Thus depreciationshould usually commence from thedate that the aircraft is available toenter into service.

Factors which are likely to requirecareful consideration in determiningthe useful lives of aircraft assets areas follows:

• the estimates of economic repair lives provided by aircraftmanufacturers and other specialistorganisations (e.g. aircraft valuers)

• the fleet deployment plans of theairline in question including timingof fleet replacements – thisshould ensure that estimated lives are set by reference to theparticular use to which an aircraftis being put, bearing in mind thatdiffering route structures androtation patterns might have a material bearing on theappropriate rate of aircraftdepreciation

• the likelihood of technologicalchange or obsolescence, includingthe impact of regulatory matterssuch as environmental constraints

• the overall development of theportfolio of aircraft assets - forexample, there might be a risk thatsignificant levels of older generationaircraft spares will remain on handat the time aircraft replacement hasbeen substantially achieved

• the repair and maintenance policy of the airline

• aircraft operating cycles (long-haul aircraft may have adifferent depreciation profile tohigh cycle short haul aircraft)

• legal constraints on the use of anasset (e.g. the expiry of leasesrelating to aircraft assets)


• aircraft-related fixed assetdepreciation rates, for example,rotables and repairables mayreflect the airline's ability to usecommon components acrossdifferent aircraft types.

Within the airline industry, both theinitial assessment of the useful life of aircraft assets and any subsequentreview will in practice be dealt withalongside an assessment of residualvalues. Residual values areconsidered more fully below.

Airlines review periodically (at least at each financial year-end) whetherthe useful lives attributed to aircraftassets have been appropriately set. If the estimated useful life is changed,the depreciation rate is adjusted forthe current and subsequent periods,with disclosure of the financial effectof any such change in rate, if material,in accordance with IAS 8 AccountingPolicies, Changes in AccountingEstimates and Errors as a change in accounting estimates.

Depreciation methods

The method of depreciation should reflect the pattern in which the benefits associated with the asset are consumed, and must be reviewedat least at each annual reporting date.IFRSs do not require a specificmethod of depreciation to be used,

and mentions the straight-linemethod, the diminishing (or reducingbalance) method and the sum-of-the-units (or units-of-production) method.

Across a range of industries, a variety of depreciation methods areapplied. For airlines, it appears that the straight-line method is that mostcommonly adopted.

Whilst you can use differentdepreciation methods for differentcomponents, whichever depreciationmethod is used for aircraft, the samemethod should be used for relatedspares and engines.

Residual values

As per IAS 16 (paragraph 53) anasset's depreciable amount is its costless its residual value. Residual valueis the amount that an entity couldreceive for the asset at the reportingdate if the asset were already of theage and in the condition that it will bein when the entity expects to disposeof it. Residual value does not includeexpected future inflation.

For most airlines, it has historicallybeen the case that aircraft assets arenot retained throughout their entireeconomic life and accordingly theassessment of the residual value of the asset is a critical feature of the depreciation policy.

Aircraft may be replaced for a variety of reasons, for example, due to planned operating needs,changes in market conditions ortechnological development. Thesefactors will impact on operators indifferent ways and hence it wouldnot be unexpected for estimates of residual values for the same piece of equipment to vary fromcarrier to carrier. Other factors which will influence residual valueestimates are the average length of flights, number of cycles, the cost of maintenance, prevailingmarket prices and the trend in price of second hand andreplacement aircraft.

The residual value of an asset mustbe reviewed at least at each annualreporting date and changes in theresidual value are accounted for as a change in accounting estimate. As noted earlier, revision of useful life estimates would implicitly giverise to a need to re-assess residualvalues at the revised anticipated point of disposal.


Impairment testing

IAS 36 Impairment of Assetsprescribes the procedures that an entity applies to test assets for impairment and recogniseimpairment losses.

The airline industry is highly capital intensive. Many airlines have hundreds of millions to billionsof U.S. dollars of tangible assetscapitalised on their balance sheetrepresenting aircraft and relatedinfrastructure and support assets.Whilst capital investment is high,earnings have historically beenvolatile. The airline industry isvulnerable to economic recessionand external demand shocks such as those caused by terrorist acts,pandemics or overseas conflicts. The latest challenge being recordhigh fuel prices. The industry, inparticular the U.S., has lost billions of dollars over the past five years.

Achieving an acceptable return oncapital is a constant challenge. The directors and management of airlines not meeting requiredreturns on capital or sufficient levels of profitability are likely to be regularly reviewing the carryingvalue of aircraft assets. A review forimpairment must be undertaken if events indicate that asset-carryingamounts may not be recoverable.

Impairment testing should beperformed on the smallest group of assets that work together togenerate independent cash flows(i.e. CGUs).

Determining the appropriate assetgroup to use as a basis for impairmenttesting requires significant judgement.The disclosure of asset groups islimited in the reports surveyed inKPMG's Disclosure Handbook. It

appears that airlines have assessedasset groups on a number of differentbases including:

• Assessing that all aircraft assetsshould be grouped for impairmenttesting (based on economicinterdependencies)

• Grouping assets on an aircraft fleet type basis

• Considering impairment on anindividual aircraft asset basis

• Allocating aircraft assets toindividual routes or route groups.

Different airlines' circumstances willbe the critical factor determining the asset groupings for impairment testing.


Aircraft revaluation

Under IAS 16 an entity may elect to measure a class of property, plantand equipment at fair value, if fairvalue can be measured reliably. Ifthis accounting policy is chosen, thenrevaluations must be kept up to date,such that the carrying amount of anasset at the reporting date does notdiffer materially from its fair value.Any surplus arising on the revaluationis recognised directly in a revaluationreserve within equity except to theextent that the surplus reverses aprevious revaluation deficit on thesame asset recognised in profit orloss, in which case the credit to that extent is recognised in profit or loss. Any deficit onrevaluation is recognised in profit or loss except to the extent that itreverses a previous revaluationsurplus on the same asset, in which case it is taken directly to the revaluation reserve. Therefore,revaluation increases and decreasescannot be offset, even within a class of assets.


Disclosures

The following types of disclosuresrelating to aircraft cost, depreciationand impairment testing appear in the annual IFRS financial statementsof airlines:

• the basis of determining thecomponents of cost including, ifmaterial, 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 costtogether with useful lives

– method of applying policy

– effective annual depreciation rate

– this will be a function of thelife over which the aircraft isbeing depreciated and theassured residual value

• the depreciation charge

• the details of revaluation, includingqualification of valuer and basis of

valuation, including disclosure ofthe carrying value under thehistoric cost basis, if therevaluation method is applied

• the amount of finance costscapitalised during the year withinaircraft assets

• the method of impairment testing

• the amount, if any, of impairment charges.

For a full list of required disclosuresrefer to IAS 16 and IAS 36.


Apendix 1

Sample disclosures of the following airlines have been reviewed:

Useful lives, depreciation rates and residual values disclosed by airlines

Air France – KLM Group

Alitalia – Linee Aeree Italiane S.p.A

AMR Corp/American Airlines Inc

British Airways plc

Cathay Pacific Airways Ltd

Continental Airlines Inc

Delta Air Lines Inc

Deutsche Lufthansa AG

easyJet plc

Iberia Lineas Aereas de Espara, S.A

Annual report and 20F – March 31,2005 French GAAP, U.S. GAAP1 andSeptember 30, 2005 half year underIFRS as adopted by the European Union

Annual report – December 31, 2005IFRS as adopted by the European Union

10k – December 31, 2005 U.S. GAAP

Annual report and 20F – March 31, 2005UK GAAP, U.S. GAAP1 and IFRS asadopted by the European Union financialinformation release for year endedMarch 31, 2005 (issued July 2005)

Annual report – December 31, 2005Hong Kong Accounting and FinancialReporting Standards



Annual report – December 31, 2005IFRS as adopted by the European Union

Annual report – September 30, 2005UK GAAP and IFRS as adopted by theEuropean Union financial informationrelease for the year ended September30, 2005 (issued January 2006)

Annual report – December 31, 2004

IFRS as adopted by the EuropeanUnion, U.S. GAAP1

IFRS as adopted by the European Union

U.S. GAAP

IFRS as adopted by the EuropeanUnion, U.S. GAAP1

Hong Kong Accounting and FinancialReporting Standards (IFRS based)

U.S. GAAP

U.S. GAAP




Airline Regulatory filing surveyed and reporting GAAP

GAAP under which 2006financial regulatory filing

will be prepared


Japan Airlines Corporation

JetBlue Airways Corporation

Northwest Airlines Corporation

Qantas Airways Limited

Ryanair Holdings plc

SAS Group

Singapore Airlines Limited

South African Airways

Southwest Airlines Co.

Swiss International Airlines (Group)

United Airlines – UAL Corporation

U.S. Airways – America West HoldingsCorporation

Virgin Blue Holdings Limited

Annual report – March 31, 2005 JapaneseGAAP



December 31, 2005 half year, IFRS

Annual report and 20F– March 31, 2005Irish, UK GAAP and U.S. GAAP1 and IFRSas adopted by the European Unionexplanation of the financial impact for theyear ended March 31, 2005 (issuedAugust 2005)

Annual report – December 31, 2005 IFRSas adopted by the European Union

Annual report – March 31, 2005 SingaporeFinancial Reporting Standards

Annual report – March 31, 2005 SouthAfrican GAAP


Half-year report – June 30, 2005 IFRS



Annual report – September 30, 2005,Australian GAAP

Japanese GAAP

U.S. GAAP

U.S. GAAP

IFRS

IFRS as adopted by the European Union, U.S. GAAP1


Singapore Financial ReportingStandards (IFRS based)

South African GAAP (IFRS based)

U.S. GAAP

IFRS

U.S. GAAP

U.S. GAAP

Australian equivalents to IFRS

Airline Regulatory filing surveyed and reporting GAAP

GAAP under which 2006financial regulatory filing

will be prepared

1 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 aircraftrelated assets. Unless otherwise noted, the method of depreciation used is on a straight line basis. Some airlineshave used estimated cycles to determine the useful life of the aircraft and note that the useful life may change if thecycle assumptions are revised.

Assetcategory

Airline Asset category Useful life(years)

Annualdepreciationrate

Residualvalue

Aircraft Air France – KLM Aircraft 20 * nilAlitalia Long haul (B777, B767, MD11) 20 5% 10%aAlitalia Short-medium haul aircraft (A321, A320,

A319, MD80, ERJ145) 18 5.5% 5 - 10%Alitalia Turboprop aircraft (ATR 72) 14 7.14% 0%Alitalia Heavy maintenance 5.5 to 8 * *American Airlines Jet aircraft and engines 20 to 30 * 5 - 10%British Airways Boeing 747 - 400 and 777 - 200 * 3.7%1 *British Airways Boeing 767 - 300 and 757 - 200 * 4.7%1 *British Airways Airbus 321, A320, A319, Boeing 737 - 400 * 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 type2


Assetcategory



Residualvalue

AircraftJetblue 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 737 - 200 20 * Û500,000Ryanair Boeing 737 - 800 23 * 15%Ryanair Embedded maintenance Period to

next check(8-12 B737-800) * 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 * *


Assetcategory



Residualvalue

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 * nilIberia Airlines Spare parts - rotating 18 * 10Japan Airlines Spare parts 8 to 273 * 10-20%Qantas Aircraft spare parts 15 to 20 * 0-20%Singapore Airlines Spare parts 15 * nilSouthwest 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 orground useful lifeequipment (6 years) * nil

Continental Airlines Food service equipment 6 to 10 *Continental Airlines Surface transportation/ground equipment 6 * nilDelta 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 * nilJetblue Airways Property and equipment - ground 3 to 10 * nilJetblue Airways Flight equipment leasehold improvement Lease term * nilNorthwest Airlines Flight equipment 4 to 25 * *SAS Group Workshop and aircraft servicing

equipment 5 * *


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.

Assetcategory



Residualvalue

Fixtures, fittings and otherequipment 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 * nileasyJet 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 * nilSouth 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% *

KPMG’s Global Airline practice contacts

Martin SheppardAustraliaHead of Aviation+61 2 9335 [email protected]

Dr Ashley SteelUnited KingdomGlobal Chair – Transport+44 20 7311 [email protected]

ArgentinaNorbeto Cors+54 11 4316 [email protected]

BrazilManuel Fernandes+55 21 3231 [email protected]

CanadaSteve Beatty+1 416 777 [email protected]

EgyptHossam Fahmy+20 2 536 [email protected]

FinlandSolveig Tornroos-Huhtamaki+358 9 6939 [email protected]

FrancePhilippe Arnaud+33 1 5377 [email protected]

GermanyUlrich Maas+49 30 2068 [email protected]

Hong KongAndrew Weir+852 2826 [email protected]

HungaryAndrea Sartori+36 1 887 [email protected]

IrelandSean O’Keefe+353 1 410 [email protected]

ItalyMarco Giordano+39 06 80 96 13 [email protected]

JapanToshio Ikeda+81 3 3266 [email protected]

KoreaPeter C Kim+82 2 2112 [email protected]

MexicoHector A Ramirez+52 55 5246 [email protected]

NetherlandsHerman van Meel+31 20 656 [email protected]

New ZealandPaul Herrod+64 9 3675 [email protected]

NorwayAage Seldal+47 5157 [email protected]

PeruJessica Oblitas+51 1 9792 [email protected] Glasspool+7 095 937 [email protected]

SingaporeWah Yeow Tan+65 6213 [email protected]

South AfricaTshidi Mokgabudi+27 11 647 [email protected]

SpainMiguel Angel Ibanez+34 91 5550 [email protected]

SwedenRoland Nilsson+46 8 723 [email protected]

SwitzerlandRoger Neininger+41 1 249 21 [email protected]

TaiwanBeryl Lin+886 2 2715 [email protected]

ThailandJohn Sim+66 2 677 [email protected]

United StatesChris Xystros+1 757 616 [email protected]

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© 2007 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated withKPMG International, a Swiss cooperative. All rights reserved. Printed in Australia.

KPMG and the KPMG logo are registeredtrademarks of KPMG International.

Liability limited by a scheme approved underProfessional Standards Legislation.

May 2007. NSW10404IM.

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavour to provide accurate andtimely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation.

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