CASE 2A- The North-South Airlines PDF

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FAR EASTERN

Case: The North-South Airline

Operations Management MBA 703 FEU-Manila cvv

Submitted by:  Reporting Group  Reacting Group Candice Belza Monette Bragais Kate Cantos Abegaile Lim

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FAR EASTERN I. Case Background The Northern Airlines merged with Southeast Airlines to create the fourth largest U.S. carrier in 2010. The new airline, which is called the NorthSouth Airline acquired both an aging fleet of Boeing 737-200 aircraft and Stephen Ruth as the new president and chairman of the board.

Ruth’s 1st concern in creating a financially solid company was maintenance cost. Ruth noticed that there has been a significant difference in reported B737-200 maintenance costs both in airframe and engine areas between Northern Airlines and Southeeast Airlines, with Southeast Airlines having the newer fleet.

On November 12, 2010, Ruth assigned Peg Young as vice president for operations and maintenance to study the issue.

II. Statement of the Problem How will the age of inherited fleets affect long term maintenance cost of the company?

III. Assumptions 1. The two Airlines have outsourced two different companies for maintenance functions such as engine repair and airframe repair. 2. The routes or destination of the aircraft of Northern Airlines and Southern Airlines are different. 3. The two Airlines have different kinds of Boeing 737-200. 4. Mergers have increased in resources (financial, technical, managerial, personnel).

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FAR EASTERN 5. Booming tourism industry. 6. Emergence of budget airlines and low cost airfares. 7. Increasing jet fuel prices.

IV. Areas of Consideration

a. Human Resource and Development - Hired Stephen Ruth as the new president and chairman of the board -

Assigned Peg Young as vice president for operations and maintenance

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Acquired additional employees

b. Operations -

Maintenance costs rise with the age of the aircraft

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SE Airlines – newer fleet, shorter average utilization (8.3 hrs/day), lower maintenance cost

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Northern Airlines – older fleet, longer average utilization (8.7 hrs/day), higher maintenance cost

c. Finance -

The significant difference in reported B737-200 maintenance costs (airframe and engine)

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Northern Airlines is spending more in aircraft maintenance per year than SE Airlines

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V. Marketing -

Merging of the two Airlines to create the 4th largest U.S. carrier

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Decrease competition because of the merger

VI. IT / R & D Business Development etc. -

Merging of the two Airlines to create the 4th largest U.S. carrier

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Newer aircrafts have better technology and amenities

VII. Framework (e.g. SWOT, Porter’s etc) STRENGTHS -

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Merging of Northern Airlines and Southeast Airlines to be the 4th largest U.S. Carrier Southeast Airlines having newer fleet Low cost of maintenance in Southeast Airlines More aircrafts = more passengers could be accommodated Hired Ruth as the new president and chairman of the board OPPORTUNITIES

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WEAKNESSES -

Northern Airlines having older aircrafts High cost of maintenance in Northern Airlines

THREATS

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Since the two airlines are in aviation industry for a long time, credibility is known. Booming tourism industry could lead to increase consumer demand Decreased competition because of the merger

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Deregulation of supply (more competition among airlines)

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Competition from low cost carriers, high aviation fuel prices, high maintenance costs Buying preference of the passengers and their capacity to pay Competitors having newer aircraft Safety issues in having old aircrafts People or social groups who advocate flying green

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Before we could make our alternative courses of action, we should analyze the problem first. We have to know the maintenance cost: 1. whether the average fleet age is correlated to direct airframe maintenance costs and; 2. whether there is a relationship between average fleet age and direct engine maintenance costs.

Graph 1. Airframe Cost vs Average Age between Northern Airlines and Southeast Airlines.

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FAR EASTERN The Graph 1 shows the scatter plot with trend line of airframe cost and average age in Northern Airlines in blue and in Southeast Airlines in orange. It shows that the airframe cost and average age are linearly correlated.

Regression analyses were performed to verify the relationship between airframe cost and average age for North and South Airlines.

Below is the regression analysis of Southeast Airline airframe cost versus age data. Based on the analysis results, there is no enough evidence to say that airframe cost and average age are linearly correlated (P-value = 0.1335 > 0.05).

Standard Error

Intercept

Coefficients 4.59663389 2

13.30988022

Average age

0.00320387

0.001790205

t Stat 0.34535501 6 1.78966679 7

P-value 0.743882244 0.133522281

Below is the regression analysis of Northern Airline airframe cost versus age data. Based on the analysis results, there is significant linear relationship between airframe cost and average age (P-value = 0.0095 < 0.05). A regression equation, Airframe cost = 0.0026*Average age + 36.097; (R2 = 0.769) According to the linear model above, airframe cost increases by 0.0026 USD per aircraft for every increase in average age of aircraft by 1 hour.

Intercept

Coefficients 36.0968244

Standard Error 8.044289891

t Stat 4.48726051

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P-value 0.006475151

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X Variable 1

2 0.00259879 7

0.000636259

7 4.08449246 1

0.009497929

Engine Cost versus Average Age

It seems that Engine Cost and Average Age are linearly correlated based on the graphs.

Regression analyses were performed to verify the relationship between engine cost and average age for North and South Airlines.

Below is the regression analysis of Southeast Airline engine cost versus age data. Based on the analysis results, there is no enough evidence to say that airframe cost and average age are linearly correlated (P-value = 0.094 > 0.05).

Intercept X Variable 1

Coefficients 0.67085414 4 0.00406536

Standard Error

14.64781113 0.001970159

t Stat 0.04579893 5 2.06347104

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P-value

0.965243416 0.094017105

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Below is the regression analysis of Northern Airline engine cost versus age data. Based on the analysis results, there is significant linear relationship between airframe cost and average age are linearly correlated (P-value = 0.0095 < 0.05). A regression equation, Engine cost = 0.0026*Average age + 20.5712; (R2 = 0.612) According to the linear model above, engine cost increases by 0.0026 USD per aircraft for every increase in average age of aircraft by 1 hour.

Intercept X Variable 1

Coefficients 20.5712255 8 0.00264335 5

Standard Error 11.88917257 0.000940369

t Stat 1.73024871 7 2.81097754 4

P-value 0.144145226 0.037505005

VIII. Alternative Courses of Action (at least 4) ACA 1. Manage exposure/utilization of different aircrafts

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ADVANTAGES:

1. Condition of aging/older aircrafts will be supported 2. Utilization of newer aircrafts will be maximized

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FAR EASTERN 3. Maintenance cost of newer aircrafts will not be affected if utilization is increased 4. No added maintenance cost will occur in in aging/older aircrafts

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DISADVANTAGE: 1. All aircrafts will experience wear and tear in the long run

ACA 2. Standardized inhouse maintenance team

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ADVANTAGES:

1. might get lower price in maintenance cost 2. Familiarity of the mechanics to the aircrafts 3. Continuity of care of the aircrafts from the same maintenance team

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DISADVANTAGES: 1. Hiring of additional employees 2. Labor issues

ACA 3. Change older aircrafts to newer aircrafts

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ADVANTAGES:

1. assures safety of the passengers 2. better aircraft performance 3. less maintenance cost 4. bigger savings in the long run

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DISADVANTAGE:

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FAR EASTERN 1. will spend a large amount of money in purchasing new aircrafts 2. Aircraft procurement takes a long time

ACA 4. Advantages: Disadvantages:

IX. Action Plans A. Manage the exposure/utilization of the different aircrafts

ACTIVITY

RESPONSIBLE PERSON/S, OR DEPARTMENT/S, TEAM/S, ETC.

TIMELINE

Make a clear descriptions of old or aging aircrafts

Operations

Immediate

Differentiate and identify the old and new aircrafts

Operations

Immediate

Allot the utilization of the different aircrafts (same or shorter utilization for older aircrafts; longer for newer aircrafts)

Operations, Marketing

Immediate

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B. Standardized Inhouse Maintenance Team

ACTIVITY

RESPONSIBLE PERSON/S, OR DEPARTMENT/S, TEAM/S, ETC.

TIMELINE

Knowing all credible aircraft maintenance company

Operations

Immediate

Comparing all the prices/cost from all the aircraft maintenance company

Operations

Immediate

Choosing the best aircraft maintenance company who could offer best services at best price

Operations

Immediate

Continuous communication and continuous mutual relationship with the chosen aircraft maintenance company

Operations, Finance

Immediate- Indefinite

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X. Recommendation

Increasing the utilization of the newer aircrafts will not increase the maintenance cost both in engine and airframe of each aircrafts per year as seen in our statistics. However, if we utilize the older aircrafts more, it will take a negative effect in the North-South Airlines’ maintenance cost. As seen in our regression analysis for Northern Airlines’ airframe cost (Airframe cost = 0.0026 * Average Age + 36.097), it means that airframe cost increases by 0.0026 USD per aircraft in every 1 hour increased from 8.7 hours. In addition, the engine cost ( Engine cost = 0.0026 * Average Age + 20.5712), will increase 0.0026 USD per aircraft in every 1 hour increased from 8.7 hours.

We also recommend to have a further analysis/investigation on the other factors that could affect the maintenance cost of the Northern airlines. In our analysis, the aircraft age of the Northern airlines has a big impact in the maintenance cost. The coefficient of correlation in airframe cost and age is 0.769 and the coefficient of correlation in engine cost and age is 0.612. It means that in airframe cost, there is 24% that contributes to high cost other than age. Moreover, in engine cost, there is 39% that contributes to high cost of maintenance other than age.

Through the statistical data presented, we recommend that managing the exposure or utilization of the different aircrafts is the most ideal solution at present time. Utilization will be increased in newer aircrafts , while the utilization in older aircrafts will be decreased or maintained to serve its purpose in generating income without affecting its wear and tear. The newer aircrafts can be use for long haul flights while the older aircrafts can be used in shorter flights or same destinations as it used to be.

To keep all aircrafts at its best condition, standardized inhouse

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FAR EASTERN maintenance team is also needed. Through standardized inhouse maintenance team, familiarity with each aircraft by the mechanic will be kept and the utmost and continuity of care of the mechanics will be given to each aircrafts.

XI. Conclusion In conclusion, the common knowledge in aviation industry that maintenance costs rise with age of the aircraft is true with the Northern Airlines but not with Southeast Airlines (as supported by our statistics).

Proper management and utilization of the North-South Airlines’ different aircrafts could help them maximize their profits while minimizing maintenance costs.

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