QUESTION 1

CASE STUDY: THE NORTH-SOUTH AIRLINE

In 2010, 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 737200 aircraft and Stephen Ruth. Ruth was a tough former secretary of the navy who stepped in as new president and chairman of the board.

Ruth's first concern in creating a financially solid company was maintenance costs. It was commonly believed in the airline industry that maintenance costs rose with the age of the aircraft. Ruth quickly noticed that, historically, there has been a significant difference in reported B737200 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, 2010, Ruth assigned Peg Young, vice president for operations and maintenance, to study the issue. Specifically, Ruth wanted to know (1) whether the average fleet age was correlated to direct airframe maintenance costs and (2) whether there was a relationship between average fleet age and direct engine maintenance costs. Young was to report back with the answer, along with quantitative and graphical descriptions of the relationship, by November 26.

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 2001 and early 2002. The average age of each fleet 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 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 at September 30, 2010, from Northern and Southeast data, and dividing by 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.

Northern Airline Data Southeast Airline Data Airframe Cost Engine Cost Average Airframe Cost Engine Cost Average Year per Aircraft per Aircraft Age (hrs) Year per Aircraft per Aircraft Age (hrs) 2003 51.80 43.49 6,512 2003 13.29 18.86 5,107 2004 54.92 38.58 8.404 2004 25.15 31.55 8,145 2005 69.70 51.48 11,077 2005 32.18 40.43 7,360 2006 68.90 58.72 11,717 2006 31.78 22.10 5,773 2007 63.72 45.47 13,275 2007 25.34 19.69 7,150 2008 84.73 50.26 15,215 2008 32.78 32.58 9,364 2009 78.74 79.60 18,390 2009 35.56 38.07 8.259