Depreciation and Amortisation Explained: What Looks Like an Expense But Isn't Quite

Open almost any profit and loss statement and you’ll find a line that reads “depreciation” or “amortisation”—or both. It reduces the reported profit. It looks like a cost. It appears alongside real cash costs like salaries, fuel, and insurance. But it behaves fundamentally differently from all of those, and understanding how is one of the more useful pieces of financial literacy a business owner or investor can have.

Depreciation isn’t a payment you make. It’s an accounting recognition of something that already happened: the purchase of an asset. The cash left your bank account on the day you bought the aircraft, the equipment, or the property. What depreciation does is spread the accounting recognition of that outflow across the useful life of the asset—turning a single large cash event into a series of smaller accounting charges spread over years.

This sounds technical. The implications, however, are very practical—especially in capital-intensive businesses like aviation, where assets are expensive, long-lived, and central to the financial model.

The mechanics: how depreciation works

When a business buys a long-lived asset—an aircraft, a hangar, a simulator, a vehicle—it doesn’t expense the full purchase price in the year of purchase. Instead, it records the asset on the balance sheet at cost and then systematically reduces that value over the asset’s useful life, recognising a depreciation charge each year.

A simple example:

An ATO buys a Cessna 172 for €80,000. It expects to use it for 10 years, after which it expects to sell it for approximately €20,000 (the residual value). The depreciable amount is €80,000 − €20,000 = €60,000. Over 10 years using straight-line depreciation, the annual depreciation charge is €6,000.

Each year for 10 years, the P&L shows a €6,000 depreciation expense. The asset value on the balance sheet (the “net book value”) decreases by €6,000 per year, from €80,000 down toward €20,000 at year ten.

But here is the key point: no cash changes hands during this process. The €6,000 is an accounting charge, not a payment. The cash left the business on day one, when the aircraft was purchased. Everything that happens afterwards is an accounting allocation.

Straight-line vs. accelerated depreciation

The example above uses straight-line depreciation—the simplest method, where the same amount is charged each year. It’s the most common approach for most fixed assets.

There are alternatives. Accelerated methods (like declining balance) charge more depreciation in the early years and less later. The logic is that many assets lose value faster when new and slow down later—a car, for example, depreciates more in year one than in year five.

For aircraft, the choice of method matters. An aircraft that depreciates on an accelerated basis will show lower profits (higher depreciation charges) in early years and higher profits later. The total depreciation over the asset’s life is the same either way—it’s a question of timing, not total amount.

Tax authorities often specify which depreciation methods are permitted for tax purposes, and these don’t always match the accounting methods a business uses internally. This is one reason why “accounting profit” and “taxable profit” can differ.

Amortisation: the same logic, different assets

Amortisation is the same concept applied to intangible assets rather than physical ones. Where depreciation covers aircraft, buildings, and equipment, amortisation covers things like:

Operating licences and regulatory approvals acquired as part of a business purchase
Software
Customer lists or contracts with assigned value
Goodwill in some accounting frameworks (though the treatment of goodwill varies significantly between standards)

The mechanics are the same: the cost of the intangible asset is spread across its useful life as an annual amortisation charge. Like depreciation, it’s a non-cash charge.

In practice, for most small and medium-sized aviation businesses, depreciation is more relevant than amortisation—because the dominant assets are physical (aircraft, equipment, facilities) rather than intangible. Amortisation becomes more significant in acquisition contexts, where the purchase price of an acquired business often includes goodwill and other intangibles that get amortised post-acquisition.

Why EBITDA strips depreciation out (and why it matters)

If you’ve read the article on EV/EBITDA multiples in this series, you know that EBITDA specifically excludes depreciation and amortisation. The reason is exactly what we’ve discussed: D&A are non-cash charges that reflect past capital expenditure rather than current operational performance.

By removing D&A, EBITDA attempts to capture what the business generates from its current operations before historical investment decisions cloud the picture. Two businesses with identical operations but different asset ages—one with largely depreciated old aircraft, one with recently purchased new aircraft—will show very different EBIT figures but similar EBITDA figures, because EBITDA neutralises the accounting effect of their different depreciation charges.

This is useful for comparison. But it creates a real risk: EBITDA can flatter businesses with high capital replacement needs.

A flight school running a 15-year-old fleet has low or zero depreciation on those aircraft (they’re fully written off). Its EBITDA looks strong. But those aircraft will need to be replaced—and the cost of replacement is very real, even if the accounting doesn’t reflect it yet. An investor or buyer who values the business on EBITDA alone, without adjusting for the imminent fleet replacement cost, is making an expensive mistake.

This is why sophisticated analysis in capital-intensive businesses moves from EBITDA to something like EBITDA minus maintenance CapEx, or from EBIT (which includes depreciation) to a cleaner measure of operational cash generation.

The relationship between depreciation and capital expenditure

Depreciation and capital expenditure (CapEx) are related but distinct:

Depreciation is the accounting spread of past CapEx over time. It appears in the P&L.
CapEx is the actual cash outflow when you buy or replace an asset. It appears in the cash flow statement.

In a stable business where replacements happen at the same rate as depreciation, CapEx and depreciation will be roughly equal over time. In a growing business buying new assets, CapEx will exceed depreciation. In a business running down its asset base without replacement, depreciation will exceed CapEx.

The divergence between depreciation and CapEx is one of the most important signals in financial analysis. A business where CapEx consistently falls below depreciation is, in effect, consuming its asset base. The P&L may look profitable, but the business is hollowing itself out. Eventually, when the assets fail or require replacement, the financial reality catches up.

For aviation businesses, this dynamic is particularly common in periods of financial stress: maintenance is deferred, fleet replacement is delayed, and the P&L looks healthier than the physical reality of the operation. Recognising this requires looking at both the depreciation line and the actual CapEx, not just one or the other.

Practical implications for aircraft buyers and operators

When evaluating a business for acquisition:

Don’t stop at EBITDA. Understand the composition of the asset base being depreciated, the age of those assets, and the realistic CapEx required to sustain operations. A business that has deferred fleet investment will have suppressed CapEx and overstated EBITDA relative to its true earning power.

Ask: what is the annual CapEx this business needs to stay at its current operational standard—not what it has spent, but what it should spend? The difference between that number and current depreciation tells you whether the accounting is aligned with operational reality.

When financing an aircraft purchase:

Depreciation affects the P&L of the owning entity. For businesses that own aircraft and use them operationally, the depreciation charge reduces reported profit, which can affect tax obligations, dividend capacity, and covenant calculations tied to profitability metrics.

Understanding how depreciation interacts with your chosen depreciation method, your residual value assumptions, and your holding period is relevant both for financial planning and for the eventual sale of the aircraft. An aircraft depreciated aggressively (fast, to a low residual) will show a lower book value—which may create an accounting gain on sale if it sells above book value, with tax implications that vary by jurisdiction.

When comparing lease vs. buy decisions:

One often-overlooked aspect of the lease-vs.-buy comparison is the depreciation treatment. When you buy, you own the asset and record depreciation. When you lease (operating lease), you don’t own the asset and don’t record depreciation—but you record a lease expense instead. The two structures have different P&L appearances and different balance sheet implications, even if the economic cost is similar.

This is relevant when presenting financial statements to lenders, investors, or regulatory bodies who may be looking at specific line items.

When planning cash flow:

Because depreciation is non-cash, it doesn’t directly affect your bank account. But understanding it matters for cash planning in one important way: the aircraft depreciates regardless of whether you’re setting aside reserves for its eventual replacement.

A business that treats depreciation as the full picture of its future cost of assets—without a cash reserve programme for fleet renewal—will find itself unable to replace assets when needed, even though the P&L showed a reasonable profit throughout. The depreciation charge tells you the accounting cost of asset consumption. The cash reserve tells you whether you’re actually preparing for the economic consequence of that consumption.

The most financially disciplined aviation operators maintain explicit maintenance reserves—separate from operating cash flow—that build toward future engine overhauls, avionics upgrades, and fleet renewals. This is the cash discipline equivalent of what depreciation tries to signal in accounting terms.

A note on aircraft-specific depreciation

Aircraft depreciation has some characteristics that make it worth thinking through carefully:

Residual value estimation is genuinely difficult. Aircraft values depend on engine hours remaining, maintenance history, market conditions, and regulatory changes. A residual value assumption that seemed reasonable when the aircraft was purchased can diverge significantly from market reality ten years later—either because the market has softened or because the aircraft has held its value better than expected.

Useful life assumptions matter. If a school assumes an aircraft has a 10-year useful life but operates it for 15 years, the aircraft becomes fully depreciated (book value equals residual) five years before retirement. During those last five years, no depreciation charge appears—but the economic cost of operating an aging aircraft (higher maintenance, lower reliability, insurance considerations) continues.

Component-based depreciation. In some accounting frameworks, different components of an aircraft (airframe, engine, avionics) are depreciated separately over their different useful lives. This is more accurate economically—an engine with a 2,000-hour TBO and an airframe that will fly for 30,000 hours clearly have different consumption profiles—but adds complexity to the accounting.

Tax depreciation vs. accounting depreciation. Tax authorities in different jurisdictions allow different depreciation rates and methods for tax purposes. In some countries, accelerated depreciation is available as an investment incentive. This creates a difference between the depreciation charge in the financial statements and the deduction available for tax purposes—a “temporary difference” that gives rise to deferred tax accounting. For operators across multiple jurisdictions, this complexity can become significant.

Depreciation is one of those accounting concepts that seems dry in isolation but becomes strategically important in context. Whether you’re evaluating an acquisition, planning a fleet renewal, financing an aircraft, or simply trying to understand why your profitable business never seems to have enough cash—understanding what depreciation is, what it isn’t, and how it relates to the actual cash flows of your operation is genuinely useful.

If the numbers in your aviation business aren’t telling a story that matches the operational reality you’re experiencing, depreciation and its relationship to CapEx is often one of the first places to look.

Depreciation: What Looks Like an Expense But Isn't Quite