North-South Airline In January 2011, Northern Airlines merged with Southeast Air

Question

North-South Airline

In January 2011, 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 air­ craft 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 com­ pany was maintenance costs. It was commonly surmised in the airline industry that maintenance costs rise with the age of the aircraft. Ruth quickly noticed that historycally there had been a significant difference in the reported B727-300 maintenance ce costs both in the airframe and engine areas between Northern Airlines and Southeast Airline s, with Southeast having the newer fleet.

On February 7, 20 11, Ruth called Peg Young, vice president

for operations and maintenance, into his office and asked her to study the issue. Specifically, Ruth 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. Young was to re­ port back by February 21 with the answer, along with quantitate­ tive and graphical descriptions of the relationship.

Young's first step was to have her staff construct the aver­

age age of Northern and Southeast B727-300 fleets, by quarter,

since the introduction of that aircraft to service by each airline in late 2003 and early 2004. The average age of each fleet was calculated by first mult i-plying the total number of calendar day 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 to­ tal fleet hours flown at September 30, 20 I 0, 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 hour 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 quar­ ter, average fleet age was calculated at the same points in time. The fleet data are shown in the table below.

Discussion Questions

Prepare Peg Young 's response to Stephen Ruth.

NORTHERN AlRLlNE DATA                                                      SOUTHEAST A IRLlNE DATA

AlRFRAME COST

PER A lRCRAFf

ENGINE COST PER AIRCRAFT

AVERAGE

AIRFRAME COST

PER AIRCRAFT

ENGINE COST

PER AIRCRAFT

AVERAGE

YEAR

(THO USAN DS)

(THOU ANOS)

AGE (HOU RS)

(THOUSAN DS)

(THOUSANDS)

AGE (HOURS)

2004

$51.80

$43.49

6,5 12

$ 13.29

$18.86

5.107

2005

$54.92

$38.58

8,404

$25.15

$31.55

8.145

2006

$69.70

$5 1.48

11,077

$32.18

$40.43

7,360

2007

$68.90

$58.72

11,717

$31.78

$22.10

5,773

2008

$63.72

$45.47

13,275

$25.34

$19.69

7,150

2009

$84.73

$50.26

15,2 15

$32.78

$32.58

9,364

2010

$78.74

$79.60

1 8,390

$35.56

$38.07

8,259

AlRFRAME COST

PER A lRCRAFf

ENGINE COST PER AIRCRAFT

AVERAGE

AIRFRAME COST

PER AIRCRAFT

ENGINE COST

PER AIRCRAFT

AVERAGE

YEAR

(THO USAN DS)

(THOU ANOS)

AGE (HOU RS)

(THOUSAN DS)

(THOUSANDS)

AGE (HOURS)

2004

$51.80

$43.49

6,5 12

$ 13.29

$18.86

5.107

2005

$54.92

$38.58

8,404

$25.15

$31.55

8.145

2006

$69.70

$5 1.48

11,077

$32.18

$40.43

7,360

2007

$68.90

$58.72

11,717

$31.78

$22.10

5,773

2008

$63.72

$45.47

13,275

$25.34

$19.69

7,150

2009

$84.73

$50.26

15,2 15

$32.78

$32.58

9,364

2010

$78.74

$79.60

1 8,390

$35.56

$38.07

8,259

Explanation / Answer

Maintenance cost is kept to keep an item in good condition in this case it's aircraft. As mentoined in the article "Ruth 's first concern in creating a financially solid com­pany was maintenance costs. "

Peg young response would have been as follow:

First considering Northern Airline Data :-

As per the table the average airframe cost of northern airline would be:

(51.80+54.92+69.70+68.90+63.72+84.73) / 7(no.of years) = $67.50

And Average Engine cost of northern airline would be :

(43.49+38.58+51.48+58.72+45.47+50.26+79.60) / 7 = $52.51

And at the end the average Age (hours) = (6512+8404+11077+11717+13275+15215+18390) / 7 = 10655.7

So basically at an average cost of (67.50+52.51) 120.01 it gives an average of 10655.7 hrs yearly

Whereas When we take a look for South east airline :

Average Airframe cost :(13.29+25.15+32.18+31.78+25.34+32.78+35.56) / 7 = $28.011

Average Engine cost :(18.86+31.55+40.43+22.10+19.69+32.58+38.07) / 7 = $29.04

Average Age (Hours) : (5107+8145+7360+5773+7150+9364+8259) / 7 = 7308.2

When you compare the Average Age (Hours) between two airlines , northern airlines has higher hours but the important thing you need to consider is the cost involved in it.

Northern airlines spends an average of $120.01 for an average of 10655.7 hrs yearly .

Southern Airlines Spends an average of 57.051 for an average of 7308.2 hrs yearly.

So for Northern airlines it is 88.79 hrs per dollar and for South east Airlines it is 128.09 hrs per dollars which means that south east airlines is low cost maintenace airline .

Which goes to show that Peg Young would suggest to have more south east aircraft and more air fleet compared to northern aircraft.

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