North–South Airline In January 2012, Northern Airlines merged with Southeast Airlines to create the fourth largest

North–South Airline
In January 2012, Northern Airlines merged with Southeast Airlines to create the fourth largest
U.S. carrier. The new North– South Airline inherited both an aging fleet of Boeing 727-300
aircraft and Stephen Ruth. Stephen was a tough former Secretary of the Navy who stepped in as
new president and chairman of the board.
Stephen’s first concern in creating a financially solid company was maintenance costs. It was
commonly surmised in the airline industry that maintenance costs rise with the age of the
aircraft. He quickly noticed that historically there had been a significant difference in the
reported B727-300 maintenance costs (from ATA Form 41s) in both the airframe and the engine
areas between Northern Airlines and Southeast Airlines, with Southeast having the newer fleet.
On February 12, 2012, Peg Jones, vice president for operations and maintenance, was called into
Stephen’s office and asked to study the issue. Specifically, Stephen wanted to know whether the
average fleet age was correlated to direct airframe maintenance costs and whether there was a
relationship between average fleet age and direct engine maintenance costs. Peg was to report
back by February 26 with the answer, along with quantitative and graphical descriptions of the
relationship.
Peg’s first step was to have her staff construct the average age of the Northern and Southeast
B727-300 fleets, by quarter since the introduction of that aircraft to service by each airline in late
1993 and early 1994. The average age of each fleet was calculated by first multiplying the total
number of calendar days each aircraft had been in service at the pertinent point in time by the
average daily utilization of the respective fleet to determine the total fleet hours flown. The total
fleet hours flown was then divided by the number of aircraft in service at that time, giving the
age of the “average” aircraft in the fleet.
The average utilization was found by taking the actual total fleet hours flown on September 30,
2011, from Northern and Southeast data, and dividing by the total days in service for all aircraft
at that time. The average utilization for Southeast was 8.3 hours per day, and the average
utilization for Northern was 8.7 hours per day. Because the available cost data were calculated
for each yearly period ending at the end of the first quarter, average fleet age was calculated at
the same points in time. The fleet data are shown in the following table. Airframe cost data and
engine cost data are both shown paired with fleet average age in that table.
Data is found on the next page.
Northern Airlines Data Southeast Airlines Data
Airtime Cost
per Aircraft
($)
Engine Cost
per Aircraft
($)
Average
Age
(Hours)
Airtime Cost
per Aircraft
($)
Engine Cost
per Aircraft
($)
Average
Age
(Hours)
2001 51.80 43.49 6512 13.29 18.86 5107
2002 54.92 38.58 8404 25.15 31.55 8145
2003 69.70 51.48 11077 32.18 40.43 7360
2004 68.90 58.72 11717 31.78 22.10 5773
2005 63.72 45.47 13275 25.34 19.69 7150
2006 84.73 50.26 15215 32.78 32.58 9364
2007 78.74 79.60 18390 35.56 38.07 8259
Case Study Table of Contents
Content What to write
I. Point of View
Identify who will make the decisions in the company.
If the name is not available, you may write the
position.
II. Objectives What are the protagonist’s objectives?
III. Key Facts Write down all the important facts from the case.
IV. Alternatives To achieve the objectives, what must the decision
maker do? List as many valid alternatives as possible.
V. Methodology
Identify the variables and label them as independent
or dependent, which variables will be studied
together
Perform regression analysis. Show the regression
model only and interpret the results.
VI. Assessment of Alternatives
Given the alternatives and the regression analysis
results, which alternative would best satisfy most, if
not all, of the objectives?
VII. Conclusion and
Recommendation
What is the final decision?
As the consultant in this case, what do you
recommend to the company?


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