It's actually a little more complicated!
An aircraft is made up of many parts, all of which are valued and depreciated at different rates. For example after 12 years an engine on a 747 may have a depreciated value of 15% of its original cost. When that engine is overhauled the engine is re-valued and depreciated based upon the overhaul cost and the new life expectancy of the engine.
In this example the engine would only be written off once it was determined it was surplus to requirements and/or it had no value in secondary markets.
For the A380's QANTAS decided the aircraft were over valued based upon the fact they were purchased when the Australian dollar was lower. As such they probably used an economic valuation to re-value these aircraft. As there is no established secondary market for these aircraft it would have been difficult to use a market valuation.
We also have to remember that re-valuing aircraft is not as easy as a flick of a pen! Often aircraft are encumbered or there are covenants based upon aircraft valuations. To write down an aircraft can result in a airline being in breach of its financing covenant requirements.
If we consider the 747, its spare parts inventory and dedicated maintenance facilities, there was a fair amount of value in these assets. It was not until the maintenance facilities were closed, aircraft removed from the fleet and (I assume) spare part inventories sold off that QANTAS were able to write down the value of these assets.
If we throw into the mix many of the 747's were still on lease, some of those leases had to brought out and penalties paid, the valuation of the 747 assets may have actually been higher than fair market value simply because of these added costs.
If we throw into the mix new interiors, upgrades to avionics and even a new coat of paint, these assets could have had relatively high values.
I'd suggest just getting to a stage where QANTAS could write down the 747 assets was a very large undertaking in itself.
Generally the markets do not like companies writing down the value of assets. It makes their jobs as analysts a lot more difficult. Markets will generally value a company on a price / earnings ratio with asset values used to determine the final rate. A write down can quickly over value a stock.
If we look at the share price of QANTAS two years ago, the markets valued the company at close to a third of it asset value. In this instance the assets were undervalued as QANTAS as a business was unable to extract an effective return on capital invested. This is why we often hear the term Return on Invested Capital (ROIC).
There are other international accounting rules as a result of the Enron scandal that need to be adhered to. For instance USA based lessors leasing aircraft to QANTAS would value their aircraft differently to that of QANTAS in Australia. As such valuations have to consider multiple factors. It is not a simple affair.
At the end of the day assets have to be properly managed. As I mentioned in my previous post, I don't think QANTAS have a good track record of managing their assets. If we look at the Aviation Partners take over, it was largely based upon extracting as much value out of QANTAS's sleeper assets. If I remember correctly part of the takeover was to be funded by selling off QANTAS's, at the time considerable aircraft assets. They obviously had a higher market valuation at the time or some poor leasing company was going to be dumped with some really expensive old (, but well maintained) aircraft.
I think is is fair to say QANTAS has to a large degree now got its book in order. Interestingly the market is still valuing QANTAS at 75% of its asset value. This suggests QANTAS still has a way to go before the markets value the company on its asset values.
In other words the $975 million profit was good, but we want to see you keep this up before we give you any more ticks!
