Reference no: EM132855122

In January 2008, 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 aircraft and Stephen Ruth. Stephen was a tough former Secretary of the Navy who stepped in as new president and chairman of the board.

Stephen's 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) in both 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 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 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.

Peg's 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 vailable 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.

North-South Airline Data for Boeing 727-300 Jets

Northern Airline Data

Year Airframe Cost Per Aircraft ($) / Engine Cost Per Aircraft ($) / Average Age (Hours)

2001 51.80 43.49 6,512

2002 54.92 38.58 8,404

2003 69.70 51.48 11,077

2004 68.90 58.72 11,717

2005 63.72 45.47 13,275

2006 84.73 50.26 15,215

2007 78.74 79.60 18,390

Southeast Airline Data

Year Airframe Cost Per Aircraft ($) / Engine Cost Per Aircraft ($) / Average Age (Hours)

2001 13.29 18.86 5.107

2002 25.15 31.55 8.145

2003 32.18 40.43 7.360

2004 31.78 22.10 5.773

2005 25.34 19.69 7.150

2006 32.78 32.58 9.364

2007 35.56 38.07 8.259

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