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.
UPES Solved Assignments
UPES Semester 1 Solved Assignments for MBA/BBA
Quantitative Techniques for Management Applications
Assignment 2
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
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