Case Study NorthSouth Airline

In January 2008, Northern Airlines merged with Southeast Airlines to create the fourth largest U.S. carrier. The new NorthSouth 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.

Stephens 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) both in the airframe and engine areas between Northern Airlines and Southeast Airlines, with Southeast having the newer fleet.

On February 12, 2008, Peg Jones, vice president for operations and maintenance, was called into Stephens 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.

Pegs first step was to have her staff construct the average age of 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 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, 2007, 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.

Discussion Question

Prepare Peg Joness response to Stephen Ruth.

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

NorthSouth Airline Data for Boeing 727-300 Jets

	NORTHERN AIRLINE DATA			SOUTHEAST AIRLINE DATA
YEAR	AIRFRAME COST PER AIRCRAFT($)	ENGINE COST PER AIRCRAFT($)	AVERAGE AGE (HOURS)	AIRFRAME COST PRE AIRCRAFT($)	ENGINE COST PER AIRCRAFT($)	AVERAGE AGE (HOURS)
2001	51.80	43.49	6,512	13.29	18.86	5,107
2002	54.92	38.58	8,404	25.15	31.55	8,145
2003	69.70	51.48	11,077	32.18	40.43	7,360
2004	68.90	58.72	11,717	31.78	22.10	5,773
2005	63.72	45.47	13,275	25.34	19.69	7,150
2006	84.73	50.26	15,215	32.78	32.58	9,364
2007	78.74	79.60	18,390	35.56	38.07	8,259