Assignment Content

The North-South Airline

In 2002, 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 737-200 aircraft and Stephen Ruth. Ruth was a tough former secretary of the navy who stepped in as the new president and chairman of the board.

Ruth's first concern in creating a financially solid company was maintenance costs. In the airline industry, it was commonly believed that maintenance costs rise with the age of the aircraft. Ruth quickly noticed that, historically, there had been a significant difference in reported B737-200 maintenance costs (from ATA Form 41s) both in the airframe and engine areas between Northern Airlines and Southeast Airlines, with Southeast having the newer fleet.

On November 12 2002, Ruth assigned Peg Young, Vice President for operations and maintenance, to study the issue. Specifically, Ruth wanted to know the following:

(1) Whether the average fleet age was correlated to direct airframe maintenance costs, and

(2) Whether there was a relationship between the average fleet age and direct engine maintenance costs.

Young was expected to report back with the answer, along with quantitative and graphical descriptions of the relationship, by November 26 2002.

First, Young had her staff construct the average age of Northern and Southeast B737-200 fleets, by quarter, since the introduction of the aircraft to service by each airline in late 1994 and early 1995. Each fleet's average age was calculated by first multiplying the total number of calendar days that each aircraft had been in service at the pertinent point in time by the average daily utilization of the respective fleet to the total fleet hours flown. The total number of 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 2001, from Northern and Southeast data, and dividing it 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, the average fleet age was calculated at the same points in time.

The fleet data is shown in the following table. Airframe cost data and engine cost data are both shown paired with the average fleet age.

Northern Airlines Data South-east Airlines Data

Year	Airframe cost per aircraft	Engine Cost per aircraft	Average age hours	Airframe cost per aircraft	Engine Cost per aircraft	Average age hours
1995	$51.80	$43.49	6512	$13.29	$18.86	5107
1996	54.92	38.58	8404	25.15	31.55	8145
1997	69.70	51.48	11077	32.18	40.43	7360
1998	68.90	58.72	11717	31.78	22.10	5773
1999	63.72	45.47	13275	25.34	19.69	7150
2000	84.73	50.26	15215	32.78	32.58	9364
2001	78.74	79.60	18390	35.56	38.07	8259

Dates and names of airlines and individuals have been changed in this case to maintain confidentiality. The data and issues described here are actual.

DISCUSSION QUESTION

Prepare Peg Young's response to Stephen Ruth