Case Study

North-South Airline

In January 2012, Northern Airlines merged with Southeast Air-

lines 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 Secre-

tary of the Navy who stepped in as new president and chairman

of the board.

Stephen's first concern in creating a financially solid com-

pany 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 op-

erations 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 be-

tween 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,

North-South Airline Data for Boeing 727-300 Jets

YEAR

2001

2002

2003

2004

2005

2006

2007

AIRFRAME

COST PER

AIRCRAFT ($)

51.80

54.92

69.70

68.90

NORTHERN AIRLINES DATA

63.72

84.73

78.74

ENGINE

COST PER

AIRCRAFT ($)

43.49

38.58

51.48

58.72

45.47

50.26

79.60

AVERAGE

AGE (HOURS)

6,512

8,404

11,077

11,717

13,275

15,215

18,390

Bibliography

Berran, Mark L., David M. Levine, and Timothy C. Krehhiel Basic

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Now York: John Wiley & Sons, Inc., 1998.

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 calcu-

lated 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 Questions

1. Prepare Peg Jones's response to Stephen Ruth.

Note: Dates and names of airlines and individuals have been changed in this

case to maintain confidarialty. The data and is described here are real

AIRFRAME

COST PER

AIRCRAFT ($)

13.29

25.15

32.18

31.78

SOUTHEAST AIRLINES DATA

25.34

32.78

35.56

ENGINE

COST PER

AIRCRAFT ($)

18.86

31.55

40.43

22.10

19.69

32.58

38.017

AVERAGE

AGE (HOURS)

5,107

8,145

7,360

5,773

7,150

9,364

8,259

APPENDIX 4.1: FORMULAS FOR REGRESSION CALCULATIONS 145

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